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https://www.courtlistener.com/api/rest/v3/opinions/9350365/ | Appeal Reinstated; Motion Granted; Appeal Dismissed and Memorandum
Majority and Concurring and Dissenting Opinions filed December 22, 2022.
In The
Fourteenth Court of Appeals
NO. 14-21-00413-CV
34TH S&S, LLC D/B/A CONCRETE COWBOY AND DANIEL JOSEPH
WIERCK, Appellants
V.
KACY CLEMENS AND CONNER CAPEL, Appellees
On Appeal from the 113 District Court
Harris County, Texas
Trial Court Cause No. 2019-07278
MAJORITY MEMORANDUM OPINION
This is an appeal from a final judgment signed April 26, 2021. We abated
the appeal on September 15, 2022 to allow the parties an opportunity to resolve
their dispute. On December 6, 2022, appellants filed an unopposed motion to
dismiss the appeal and specified that costs on appeal should be taxed against the
party who incurred the same. See Tex. R. App. P. 42.1(a), (d). The appeal is
reinstated, and the motion is granted.
We dismiss the appeal.
PER CURIAM
Panel consists of Chief Justice Christopher and Justices Spain and Wilson (Spain,
J., concurring and dissenting).
2 | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350371/ | Dismissed and Memorandum Opinion filed December 20, 2022.
In The
Fourteenth Court of Appeals
NO. 14-22-00744-CV
JOSHUA VAN PETERSON, Appellant
V.
MORRISON SUPPLY COMPANY, LLC D/B/A EXPRESSIONS HOME
GALLERY, Appellee
On Appeal from the 190th District Court
Harris County, Texas
Trial Court Cause No. 2018-10093
MEMORANDUM OPINION
This is an appeal from an order signed March 24, 2022. The notice of appeal
was filed October 7, 2022. To date, our records show that appellant has not paid
the appellate filing fee. See Tex. R. App. P. 5 (requiring payment of fees in civil
cases unless party is excused by statute or by appellate rules from paying costs).
Tex. Gov’t Code § 51.207 (appellate fees and costs).
On November 17, 2022, this court ordered appellant to pay the appellate
filing fee on or before November 28, 2022 or the appeal would be dismissed.
Appellant has not paid the appellate filing fee or otherwise responded to the court’s
order. Accordingly, we dismiss the appeal. See Tex. R. App. P. 42.3(c) (allowing
involuntary dismissal of case because appellant has failed to comply with notice
from clerk requiring response or other action within specified time).
PER CURIAM
Panel consists of Chief Justice Christopher and Justices Bourliot and Wilson
2 | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488033/ | People v Williams (2022 NY Slip Op 06594)
People v Williams
2022 NY Slip Op 06594
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., LINDLEY, CURRAN, BANNISTER, AND MONTOUR, JJ.
834 KA 18-00699
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vLOVELL M. WILLIAMS, DEFENDANT-APPELLANT.
MARK D. FUNK, CONFLICT DEFENDER, ROCHESTER (KATHLEEN P. REARDON OF COUNSEL), FOR DEFENDANT-APPELLANT.
SANDRA DOORLEY, DISTRICT ATTORNEY, ROCHESTER (KAYLAN C. PORTER OF COUNSEL), FOR RESPONDENT.
Appeal from a judgment of the Monroe County Court (Vincent M. Dinolfo, J.), rendered December 21, 2017. The judgment convicted defendant upon his plea of guilty of attempted robbery in the first degree.
It is hereby ORDERED that the judgment so appealed from is unanimously affirmed.
Memorandum: On appeal from a judgment convicting him upon his plea of guilty of attempted robbery in the first degree (Penal Law §§ 110.00, 160.15 [2]), defendant contends that County Court erred in failing to conduct the requisite minimal inquiry into his request for substitution of counsel. We reject that contention because even assuming, arguendo, that defendant's contention "is not foreclosed by his guilty plea because it implicates the voluntariness of the plea . . . ," we conclude that defendant "abandoned his request for new counsel when he decid[ed] . . . to plead guilty while still being represented by the same attorney" (People v Clemons, 201 AD3d 1355, 1355 [4th Dept 2022], lv denied 38 NY3d 1032 [2022] [internal quotation marks omitted]; see People v Jeffords, 185 AD3d 1417, 1418 [4th Dept 2020], lv denied 35 NY3d 1095 [2020]; People v Harris, 182 AD3d 992, 994 [4th Dept 2020], lv denied 35 NY3d 1066 [2020]). During the plea colloquy, defendant "expressed no concerns with [his] attorney and instead confirmed that he was satisfied with [his] attorney's advice and representation" (People v Seymore, 188 AD3d 1767, 1769 [4th Dept 2020], lv denied 36 NY3d 1100 [2021]; see People v Lewicki, 118 AD3d 1328, 1328-1329 [4th Dept 2014], lv denied 23 NY3d 1064 [2014]).
We reject defendant's further contention that he was denied effective assistance of counsel due to defense counsel's failure to seek suppression of statements that defendant made to law enforcement personnel without the benefit of Miranda warnings while he was incarcerated on an unrelated parole violation. Defendant's contention does not survive his guilty plea because defendant has not "demonstrate[d] that the plea bargaining process was infected by [the] allegedly ineffective assistance or that [he] entered the plea because of [his] attorney['s] allegedly poor performance" (People v Jackson, 202 AD3d 1447, 1449 [4th Dept 2022], lv denied 38 NY3d 951 [2022] [internal quotation marks omitted]; see People v Coleman, 178 AD3d 1377, 1378 [4th Dept 2019], lv denied 35 NY3d 1026 [2020]). Defendant received an advantageous plea deal and there is no reasonable probability that, but for defense counsel's alleged error, defendant would not have pleaded guilty and would have insisted on going to trial (see Coleman, 178 AD3d at 1378).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488034/ | People v Soto (2022 NY Slip Op 06589)
People v Soto
2022 NY Slip Op 06589
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: LINDLEY, J.P., NEMOYER, WINSLOW, BANNISTER, AND MONTOUR, JJ.
778 KA 17-00567
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vJEREMY B. SOTO, DEFENDANT-APPELLANT.
JILL L. PAPERNO, ACTING PUBLIC DEFENDER, ROCHESTER (CATHERINE A. MENIKOTZ OF COUNSEL), FOR DEFENDANT-APPELLANT.
SANDRA DOORLEY, DISTRICT ATTORNEY, ROCHESTER (SCOTT MYLES OF COUNSEL), FOR RESPONDENT.
Appeal from a judgment of the Supreme Court, Monroe County (Thomas E. Moran, J.), rendered October 3, 2016. The judgment convicted defendant, upon a jury verdict, of criminal possession of a weapon in the second degree (four counts).
It is hereby ORDERED that the judgment so appealed from is unanimously modified as a matter of discretion in the interest of justice and on the law by reversing those parts convicting defendant of criminal possession of a weapon in the second degree under counts one and two of the superseding indictment and as modified the judgment is affirmed and a new trial is granted on those counts.
Memorandum: Defendant appeals from a judgment convicting him upon a jury verdict of four counts of criminal possession of a weapon in the second degree (Penal Law § 265.03 [1] [b]; [3]) arising from defendant's alleged possession of two separate firearms. Contrary to defendant's contentions, we conclude that the conviction is supported by legally sufficient evidence (see generally People v Bleakley, 69 NY2d 490, 495 [1987]) and that the verdict, viewed in light of the elements of the crimes as charged to the jury (see People v Danielson, 9 NY3d 342, 349 [2007]), is not against the weight of the evidence (see generally Bleakley, 69 NY2d at 495). We agree with defendant, however, that Supreme Court erred in failing to give a circumstantial evidence instruction. The evidence against defendant with respect to his possession of the .22 caliber revolver was entirely circumstantial, and the court's jury instructions "failed to convey to the jury in substance that it must appear that the inference of guilt is the only one that can fairly and reasonably be drawn from the facts, and that the evidence excludes beyond a reasonable doubt every reasonable hypothesis of innocence" (People v Burnett, 41 AD3d 1201, 1202 [4th Dept 2007] [internal quotation marks omitted]; see People v Sanchez, 61 NY2d 1022, 1024 [1984]). Inasmuch as the proof of defendant's guilt is not overwhelming, the inadequacy of the charge was prejudicial error requiring reversal of those parts of the judgment convicting defendant under counts one and two of the superseding indictment and a new trial with respect thereto, notwithstanding defendant's failure to request such a charge or to except to the charge as given (see Burnett, 41 AD3d at 1202; People v Marsalis, 189 AD2d 897, 897-898 [2d Dept 1993]; People v Isidore, 158 AD2d 933, 933-934 [4th Dept 1990]). We therefore modify the judgment accordingly.
We have reviewed defendant's remaining contentions and conclude that none warrants further modification or reversal of the judgment.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488041/ | People v Johnson (2022 NY Slip Op 06601)
People v Johnson
2022 NY Slip Op 06601
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, LINDLEY, WINSLOW, AND BANNISTER, JJ.
870 KA 19-02268
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vTREVON JOHNSON, ALSO KNOWN AS JOHN DOE, DEFENDANT-APPELLANT.
THE SAGE LAW FIRM GROUP PLLC, BUFFALO (KATHRYN FRIEDMAN OF COUNSEL), FOR DEFENDANT-APPELLANT.
SANDRA DOORLEY, DISTRICT ATTORNEY, ROCHESTER (MERIDETH H. SMITH OF COUNSEL), FOR RESPONDENT.
Appeal from a judgment of the Supreme Court, Monroe County (Judith A. Sinclair, J.), rendered April 15, 2019. The judgment convicted defendant upon a plea of guilty of robbery in the first degree.
It is hereby ORDERED that the judgment so appealed from is unanimously affirmed.
Memorandum: Defendant appeals from a judgment convicting him upon his plea of guilty of robbery in the first degree (Penal Law § 160.15 [4]). As an initial matter, we agree with defendant that he did not validly waive his right to appeal because Supreme Court's oral colloquy and the written waiver of the right to appeal provided defendant with erroneous information about the scope of the waiver and failed to identify that certain rights would survive the waiver (see People v Thomas, 34 NY3d 545, 565-566 [2019], cert denied — US &mdash, 140 S Ct 2634 [2020]; People v Clark, 191 AD3d 1471, 1472 [4th Dept 2021], lv denied 36 NY3d 1118 [2021]). However, his further contention that he was denied effective assistance of counsel survives his plea "only insofar as he demonstrates that the plea bargaining process was infected by [the] allegedly ineffective assistance or that defendant entered the plea because of [his] attorney['s] allegedly poor performance" (People v Miller, 161 AD3d 1579, 1580 [4th Dept 2018], lv denied 31 NY3d 1119 [2018] [internal quotation marks omitted]). To the extent that defendant's contention involves matters outside of the record on appeal, including the frequency and content of his conversations with his attorney, it must be raised by way of a motion pursuant to CPL article 440 (see People v Graham, 171 AD3d 1559, 1560 [4th Dept 2019], lv denied 33 NY3d 1069 [2019]; People v Spencer, 170 AD3d 1614, 1615 [4th Dept 2019], lv denied 37 NY3d 974 [2021]). To the extent that defendant's contention is reviewable on direct appeal, we conclude that it is without merit (see generally People v Baldi, 54 NY2d 137, 147 [1981]; People v Kosmetatos, 178 AD3d 1433, 1434 [4th Dept 2019], lv denied 35 NY3d 994 [2020]). Indeed, defense counsel secured an advantageous plea offer on defendant's behalf, and nothing in the record before us casts doubt on defense counsel's performance (see People v Goodwin, 159 AD3d 1433, 1435 [4th Dept 2018]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488037/ | People v Roots (2022 NY Slip Op 06617)
People v Roots
2022 NY Slip Op 06617
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, NEMOYER, CURRAN, AND BANNISTER, JJ.
896 KA 18-00337
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vWILLIE G. ROOTS, DEFENDANT-APPELLANT.
JILL L. PAPERNO, ACTING PUBLIC DEFENDER, ROCHESTER (PAUL SKIP LAISURE OF COUNSEL), FOR DEFENDANT-APPELLANT.
WILLIE G. ROOTS, DEFENDANT-APPELLANT PRO SE.
SANDRA DOORLEY, DISTRICT ATTORNEY, ROCHESTER (MERIDETH H. SMITH OF COUNSEL), FOR RESPONDENT.
Appeal from a judgment of the Monroe County Court (Victoria M. Argento, J.), rendered January 10, 2017. The judgment convicted defendant upon a plea of guilty of burglary in the first degree.
It is hereby ORDERED that the judgment so appealed from is unanimously reversed on the law, the plea is vacated, and the matter is remitted to Monroe County Court for further proceedings on the indictment.
Memorandum: Defendant appeals from a judgment convicting him upon his plea of guilty of burglary in the first degree (Penal Law § 140.30 [2]). As defendant contends in his main and pro se supplemental briefs, and as the People correctly concede, he did not validly waive his right to appeal because County Court's oral colloquy and the written waiver of the right to appeal provided defendant with erroneous information about the scope of that waiver and failed to identify that certain rights would survive the waiver (see People v Thomas, 34 NY3d 545, 565-566 [2019], cert denied — US &mdash, 140 S Ct 2634 [2020]; People v McLaughlin, 193 AD3d 1338, 1339 [4th Dept 2021], lv denied 37 NY3d 973 [2021]).
Defendant failed to move to withdraw his plea or to vacate the judgment of conviction, and thus he failed to preserve for our review his further contention in his main and pro se supplemental briefs that his plea was coerced by the court (see People v Williams, 198 AD3d 1308, 1309 [4th Dept 2021], lv denied 37 NY3d 1149 [2021]; People v Pitcher, 126 AD3d 1471, 1472 [4th Dept 2015], lv denied 25 NY3d 1169 [2015]). We decline to exercise our power to address that contention as a matter of discretion in the interest of justice (see CPL 470.15 [3] [c]).
Defendant further contends in his main and pro se supplemental briefs that he received ineffective assistance of counsel based on multiple alleged shortcomings. Specifically, defendant contends in those briefs that defense counsel was ineffective in failing to challenge certain show-up identification procedures utilized after his arrest and contends in his pro se supplemental brief that defense counsel was ineffective in failing to take certain action related to the grand jury proceedings and in failing to seek severance of certain counts. Those contentions do not survive defendant's guilty plea because he failed to demonstrate that " 'the plea bargaining process was infected by [the] allegedly ineffective assistance or that defendant entered the plea because of his attorney['s] allegedly poor performance' " (People v Grandin, 63 AD3d 1604, 1604 [4th Dept 2009], lv denied 13 NY3d 744 [2009]).
Defendant also contends in his main and pro se supplemental briefs, however, that defense counsel was ineffective by failing to move to suppress evidence against him on the [*2]ground that the police unlawfully seized him without reasonable suspicion (see generally People v De Bour, 40 NY2d 210, 223 [1976]). We agree.
To prevail on his claim of ineffective assistance of counsel, defendant "must demonstrate the absence of strategic or other legitimate explanations for [defense] counsel's failure to pursue colorable claims," and "[o]nly in the rare case will it be possible, based on the trial record alone, to deem [defense] counsel ineffective for failure to pursue a suppression motion" (People v Carver, 27 NY3d 418, 420 [2016] [internal quotation marks omitted]). Initially, we conclude that the record establishes that defense counsel could have presented a colorable argument that defendant's detention was illegal and thus that any evidence obtained as a result thereof should have been suppressed as the fruit of the poisonous tree. One of the officers who initially detained defendant testified at a Huntley/Wade hearing that, prior to defendant's arrest, one of the victims of a home invasion had described the suspects as two black men in their twenties, one of whom was wearing a hoodie "with some kind of emblem on the front." About a half-hour later, the officer heard a broadcast of a tip from an unidentified retired police officer. The tip, as testified to at the hearing, reported "two [black] males [in their twenties] inside [a] corner store that possibly looked suspicious" with one that "might" have had "a handgun on his side" and another that was wearing a "teddy bear type hoodie," which was later described as a hoodie with a teddy bear on the front. Based on that tip, officers responded to the corner store, entered with weapons drawn, and immediately ordered the two men, one of whom was defendant, to raise their hands. The officer testified, however, that the men were not acting suspiciously nor did she observe a weapon when she and her partner entered the store. While handcuffing defendant, the officer for the first time observed a handgun in defendant's waistband, saw blood on defendant's hoodie, and obtained statements from defendant. Defendant was thereafter taken for show-up identifications, during which the victims of the prior home invasion identified him as one of the men involved in that incident.
Given those facts, it cannot be said that a motion seeking suppression on the ground that defendant was unlawfully detained would have had "little or no chance of success" (People v Clark, 191 AD3d 1471, 1473 [4th Dept 2021], lv denied 36 NY3d 1118 [2021]; see generally People v Carter, 142 AD3d 1342, 1343 [4th Dept 2016]), and instead those facts demonstrate that defense counsel failed to pursue a "colorable claim[]" that could have led to suppression (Carver, 27 NY3d at 420 [internal quotation marks omitted]). The vague description of the perpetrators of the home invasion obtained from one of the victims of that incident matched defendant only as to his general age and skin color. The victim's description of the clothing of one of the perpetrators—a hoodie with an emblem—did not on its face match the description provided by the unidentified tipster of the clothing worn by one of the people observed in the corner store—a "teddy bear type hoodie" (see generally People v Thorne, 207 AD3d 73, 77-78 [1st Dept 2022]; People v Noah, 107 AD3d 1411, 1412-1413 [4th Dept 2013]; People v Ross, 251 AD2d 1020, 1021 [4th Dept 1998], lv denied 92 NY2d 882 [1998]). The report from the unidentified tipster likewise did not provide the officers with reasonable suspicion inasmuch as it merely reported "possibl[e]" activity that the men "might" have been engaged in, and the officers did not observe any suspicious, much less criminal, activity before detaining defendant at gunpoint (see generally People v Moore, 6 NY3d 496, 499-500 [2006]).
Based on the record before us, we further conclude that defense counsel's failure to move to suppress evidence on the basis of defendant's allegedly unlawful detention was not part of a legitimate pretrial strategy. The record demonstrates that defense counsel prepared such a motion to suppress evidence on that basis, indicated an intent to make that motion, and simply failed to file the motion despite having been twice informed by the court of the need to do so given the People's refusal to consent to a hearing regarding the legality of the detention without such a motion. Further, because the court held a more limited suppression hearing, i.e., the Huntley/Wade hearing, there is no discernable reason why the scope of that hearing, and the court's resulting decision, could not have been expanded had defense counsel properly filed the prepared motion papers. Thus, this is not a case where defense counsel opted to pursue a more favorable plea deal in lieu of pretrial motions and hearings (cf. People v Davis, 119 AD3d 1383, 1383-1384 [4th Dept 2014], lv denied 24 NY3d 960 [2014]).
We further conclude that defendant's contention survives his guilty plea inasmuch as the error in failing to seek suppression on that basis infected the plea bargaining process because suppression of the challenged evidence would have resulted in dismissal of at least some of the [*3]indictment (see Carter, 142 AD3d at 1343).
In light of our determination, we do not address defendant's remaining contentions raised in his pro se supplemental brief.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488036/ | People v Schlifke (2022 NY Slip Op 06603)
People v Schlifke
2022 NY Slip Op 06603
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, LINDLEY, WINSLOW, AND BANNISTER, JJ.
874 KA 19-02106
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vDEREK SCHLIFKE, DEFENDANT-APPELLANT. (APPEAL NO. 1.)
THE LEGAL AID BUREAU OF BUFFALO, INC., BUFFALO (NICHOLAS P. DIFONZO OF COUNSEL), FOR DEFENDANT-APPELLANT.
JOHN J. FLYNN, DISTRICT ATTORNEY, BUFFALO (MICHAEL J. HILLERY OF COUNSEL), FOR RESPONDENT.
Appeal from a judgment of the Supreme Court, Erie County (M. William Boller, A.J.), rendered April 22, 2019. The judgment convicted defendant, upon his plea of guilty, of unauthorized use of a vehicle in the second degree, grand larceny in the fourth degree (six counts) and petit larceny.
It is hereby ORDERED that the judgment so appealed from is unanimously affirmed.
Memorandum: In appeal No. 1, defendant appeals from a judgment convicting him upon his plea of guilty of one count of unauthorized use of a vehicle in the second degree (Penal Law § 165.06), six counts of grand larceny in the fourth degree (§ 155.30 [4], [7]), and one count of petit larceny (§ 155.25) and, in appeal No. 2, he appeals from a judgment convicting him upon his plea of guilty of one count each of criminal possession of a forged instrument in the second degree (§ 170.25) and criminal possession of stolen property in the fourth degree (§ 165.45 [2]). As defendant contends and the People correctly concede in each appeal, defendant did not validly waive his right to appeal. Although no "particular litany" is required for a waiver of the right to appeal to be valid (People v Lopez, 6 NY3d 248, 256 [2006]), defendant's waivers of the right to appeal were invalid because Supreme Court's oral colloquies mischaracterized the waivers as absolute bars to the taking of an appeal (see People v Thomas, 34 NY3d 545, 565-566 [2019], cert denied — US &mdash, 140 S Ct 2634 [2020]; People v Davis, 188 AD3d 1731, 1731 [4th Dept 2020], lv denied 37 NY3d 991 [2021]). Although the record establishes that defendant executed a written waiver of the right to appeal in each appeal, the written waivers did not cure the deficient oral colloquies because the court did not inquire of defendant whether he understood the written waivers or whether he had read the waivers before signing them (see People v Sanford, 138 AD3d 1435, 1436 [4th Dept 2016]).
Defendant contends in both appeals that he was denied due process at sentencing by the court's consideration of an email from a police detective who had prior dealings with defendant (see generally People v Naranjo, 89 NY2d 1047, 1049 [1997]). That contention is not preserved for our review because defendant made no objection at sentencing (see People v Houston, 142 AD3d 1397, 1399 [4th Dept 2016], lv denied 28 NY3d 1146 [2017]; People v Colome-Rodriguez, 120 AD3d 1525, 1525-1526 [4th Dept 2014], lv denied 25 NY3d 1161 [2015]), and we decline to exercise our power to review it as a matter of discretion in the interest of justice (see CPL 470.15 [3] [c]).
Contrary to defendant's further contention in both appeals, the sentences are not unduly harsh or severe. We note with respect to appeal No. 1, however, that the certificate of conviction contains several errors regarding the counts in the superior court information to which defendant pleaded guilty, and the certificate of conviction must therefore be amended to reflect that, under count four, defendant pleaded guilty to grand larceny in the fourth degree in violation of Penal [*2]Law § 155.30 (7); under count seven, he pleaded guilty to petit larceny; and under count eight, he pleaded guilty to grand larceny in the fourth degree in violation of section 155.30 (4) (see generally People v Morrow, 167 AD3d 1516, 1518 [4th Dept 2018], lv denied 33 NY3d 951 [2019]; People v Kowal, 159 AD3d 1346, 1347 [4th Dept 2018]; People v Roots, 48 AD3d 1031, 1032 [4th Dept 2008]). Finally, with respect to appeal No. 2, we note that the certificate of conviction does not reflect defendant's status as a second felony offender, and it must be amended accordingly (see People v Southard, 163 AD3d 1461, 1462 [4th Dept 2018]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488038/ | People v Romaine (2022 NY Slip Op 06595)
People v Romaine
2022 NY Slip Op 06595
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., PERADOTTO, CURRAN, WINSLOW, AND MONTOUR, JJ.
850 KA 20-00225
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vTYRONE ROMAINE, DEFENDANT-APPELLANT.
THE LEGAL AID BUREAU OF BUFFALO, INC., BUFFALO (NICHOLAS P. DIFONZO OF COUNSEL), FOR DEFENDANT-APPELLANT.
JOHN J. FLYNN, DISTRICT ATTORNEY, BUFFALO (MINDY F. VANLEUVAN OF COUNSEL), FOR RESPONDENT.
Appeal from a judgment of the Supreme Court, Erie County (Christopher J. Burns, J.), rendered December 18, 2018. The judgment convicted defendant, upon a plea of guilty, of attempted criminal possession of a weapon in the second degree and criminal possession of a weapon in the second degree (two counts).
It is hereby ORDERED that the judgment so appealed from is unanimously affirmed.
Memorandum: On appeal from a judgment convicting him, upon his plea of guilty, of one count of attempted criminal possession of a weapon in the second degree (Penal Law §§ 110.00, 265.03 [3]) and two counts of criminal possession of a weapon in the second degree (§ 265.03 [3]), defendant contends that his waiver of the right to appeal is invalid and that his sentence is unduly harsh and severe. Even assuming, arguendo, that defendant's waiver of the right to appeal is invalid and therefore does not preclude our review of his challenge to the severity of his sentence (see People v Lopez, 196 AD3d 1157, 1157 [4th Dept 2021], lv denied 37 NY3d 1028 [2021]), we conclude that the sentence is not unduly harsh or severe.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488079/ | Burns v Grandjean (2022 NY Slip Op 06581)
Burns v Grandjean
2022 NY Slip Op 06581
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., CENTRA, LINDLEY, CURRAN, AND WINSLOW, JJ.
640 CA 21-01756
[*1]MATTHEW A. BURNS, PLAINTIFF-RESPONDENT-APPELLANT,
vJENNIFER A. GRANDJEAN, DEFENDANT-APPELLANT-RESPONDENT. WALTER BURKARD, ESQ., ATTORNEY FOR THE CHILDREN, APPELLANT. (APPEAL NO. 5.)
MICHAEL STEINBERG, ROCHESTER, FOR DEFENDANT-APPELLANT-RESPONDENT.
WALTER BURKARD, MANLIUS, ATTORNEY FOR THE CHILDREN, APPELLANT PRO SE.
Appeals and cross appeal from an order of the Supreme Court, Monroe County (Richard A. Dollinger, A.J.), entered December 8, 2021. The order, inter alia, found defendant in contempt for violating a judgment of divorce and other orders.
It is hereby ORDERED that the order so appealed from is unanimously modified on the law and in the exercise of discretion by denying in part those portions of plaintiff's February 14, 2020 amended order to show cause, March 16, 2020 order to show cause, June 18, 2020 order to show cause, August 31, 2020 order to show cause, and March 10, 2021 cross motion seeking to hold defendant in contempt or to modify the custody and visitation provisions of the amended judgment of divorce, vacating the first, second, fourth through eleventh, thirteenth through seventeenth and nineteenth ordering paragraphs in their entirety, vacating subparagraphs C, D, and E of the eighteenth ordering paragraph, and reducing the penalty to a total fine of $250 and counsel fees of $1,000, and as modified the order is affirmed without costs.
Same memorandum as in Burns v Grandjean ([appeal No. 1] — AD3d — [Nov. 18, 2022] [4th Dept 2022]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488053/ | Matter of Weinstein (2022 NY Slip Op 06627)
Matter of Weinstein
2022 NY Slip Op 06627
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., LINDLEY, CURRAN, AND BANNISTER, JJ. (Filed Nov. 3, 2022.)
&em;
[*1]MATTER OF SCOTT ALAN WEINSTEIN, AN ATTORNEY, RESIGNOR.
MEMORANDUM AND ORDER
Application to resign for non-disciplinary reasons accepted and name removed from roll of attorneys. | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488051/ | People v Anderson (2022 NY Slip Op 06575)
People v Anderson
2022 NY Slip Op 06575
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., CENTRA, LINDLEY, CURRAN, AND WINSLOW, JJ.
621 KA 18-00847
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vGAELEN S. ANDERSON, DEFENDANT-APPELLANT.
KIMBERLY J. CZAPRANSKI, SCOTTSVILLE, FOR DEFENDANT-APPELLANT.
SANDRA DOORLEY, DISTRICT ATTORNEY, ROCHESTER (MERIDETH H. SMITH OF COUNSEL), FOR RESPONDENT.
Appeal from a judgment of the Supreme Court, Monroe County (Thomas E. Moran, J.), rendered February 13, 2018. The judgment convicted defendant upon his plea of guilty of criminal possession of a weapon in the second degree.
It is hereby ORDERED that the case is held, the decision is reserved and the matter is remitted to Supreme Court, Monroe County, for further proceedings in accordance with the following memorandum: On appeal from a judgment convicting him upon a plea of guilty of criminal possession of a weapon in the second degree (Penal Law § 265.03 [3]), defendant correctly contends that his waiver of the right to appeal is invalid. Even assuming, arguendo, that the initial misstatements of Supreme Court regarding the sentence did not invalidate defendant's appeal waiver (see People v Carpenter, 176 AD2d 890, 891 [2d Dept 1991]), we conclude that the waiver is nevertheless invalid because "the rights encompassed by [the] appeal waiver were mischaracterized during the oral colloquy and in [the] written form[] executed by defendant[], which indicated the waiver was an absolute bar to direct appeal, failed to signal that any issues survived the waiver and . . . advised that the waiver encompassed 'collateral relief on certain nonwaivable issues in both state and federal courts' " (People v Bisono, 36 NY3d 1013, 1017-1018 [2020], quoting People v Thomas, 34 NY3d 545, 566 [2019], cert denied — US &mdash, 140 S Ct 2634 [2020]; see People v Fontanez-Baez, 195 AD3d 1448, 1449 [4th Dept 2021], lv denied 37 NY3d 971 [2021]).
Defendant further contends that his plea was not knowingly, voluntarily or intelligently entered due to the court's misstatements regarding sentencing. That contention, however, is unpreserved for our review inasmuch as defendant did not move to withdraw his plea or to vacate the judgment of conviction (see People v Shanley, 189 AD3d 2108, 2108 [4th Dept 2020], lv denied 36 NY3d 1100 [2021]), and the narrow exception to the preservation requirement set forth in People v Lopez (71 NY2d 662, 666 [1988]) does not apply.
Defendant contends that the court erred in denying that part of his omnibus motion seeking to preclude identification testimony based on an error in the CPL 710.30 notice. We conclude, however, that, "[b]y pleading guilty, defendant forfeited his right to appellate review of his contention regarding the People's alleged failure to comply with the notice requirements of CPL 710.30" (People v La Bar, 16 AD3d 1084, 1084 [4th Dept 2005], lv denied 5 NY3d 764 [2005]; see People v Taylor, 65 NY2d 1, 6-7 [1985]; People v Rodgers, 162 AD3d 1500, 1501 [4th Dept 2018], lv denied 32 NY3d 940 [2018]).
Defendant further contends that the court should have suppressed identification evidence and physical evidence. In his omnibus motion, defendant contended, as relevant here, that he "was not engaged in any conduct creating a reasonable suspicion that he had committed a crime or was armed or dangerous" and that "[n]o other circumstances existed to create probable cause or reasonable suspicion." At the suppression hearing, the People presented evidence that on the night in question, a police officer was flagged down by an unnamed citizen, who stated that shots [*2]had been fired in that area. During that conversation, the officer himself heard a gunshot. He went immediately to the location and observed several people hiding or running into a nearby store. One man took flight, grabbing his waistband with both hands. According to the officer, such a gesture was indicative of a person "holding a very heavy object or a handgun." That individual was the only person not attempting to hide or seek cover. At that point, the officer began his pursuit, but lost sight of the individual. The officer broadcast a description of the suspect, including specifics of his clothing, over the radio, at which point other officers in the area observed a man fitting that description and pursued him, eventually arresting him at a residence and bringing him to the location of the shooting, where he was identified by two eyewitnesses as the person who had fired the shots. Surveillance video from the store and body camera footage from the officers involved confirms the sequence of events. Following the hearing, the court ruled, inter alia, that there was "more than adequate probable cause." However, the court did not explain when probable cause existed or rule on whether the officer who initially observed the suspect had reasonable suspicion to pursue him.
On appeal, defendant contends that the police lacked reasonable suspicion for the initial pursuit of the suspect and that, given the fact that the initial officer lost sight of the suspect, the police lacked probable cause to arrest defendant at the residence.
It is well settled that this Court lacks the power to review issues that were either decided in an appellant's favor, or were not ruled upon, by the trial court (see People v Concepcion, 17 NY3d 192, 195 [2011]). Inasmuch as the court did not rule on the threshold issue whether the police had the requisite reasonable suspicion to justify the initial pursuit, we cannot rule on that issue in the first instance and we therefore hold the case, reserve decision, and remit the matter to Supreme Court to rule on that issue based on the evidence presented at the suppression hearing (see People v Rainey, 110 AD3d 1464, 1466 [4th Dept 2013]).
We have reviewed defendant's remaining contentions and conclude that none warrants modification or reversal of the judgment.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488045/ | People v Hahn (2022 NY Slip Op 06616)
People v Hahn
2022 NY Slip Op 06616
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, NEMOYER, CURRAN, AND BANNISTER, JJ.
893 KA 17-02230
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vLEONARD E. HAHN, IV, DEFENDANT-APPELLANT.
NORMAN P. EFFMAN, PUBLIC DEFENDER, WARSAW (FARES A. RUMI OF COUNSEL), FOR DEFENDANT-APPELLANT.
JOHN J. FLYNN, DISTRICT ATTORNEY, BUFFALO, NEW YORK PROSECUTORS TRAINING INSTITUTE, INC., ALBANY (DAWN CATERA LUPI OF COUNSEL), FOR RESPONDENT.
Appeal from a judgment of the Wyoming County Court (Michael M. Mohun, J.), rendered May 15, 2017. The judgment convicted defendant upon his plea of guilty of rape in the first degree.
It is hereby ORDERED that the judgment so appealed from is unanimously affirmed.
Memorandum: On appeal from a judgment convicting him upon his plea of guilty of rape in the first degree (Penal Law § 130.35 [3]), defendant contends that County Court erred in failing to determine on the record whether he should be afforded youthful offender status. We reject that contention. Pursuant to CPL 720.10 (2) (a) (iii), a youth who is convicted of, inter alia, rape in the first degree is ineligible for a youthful offender adjudication unless the court concludes that there are "mitigating circumstances that bear directly upon the manner in which the crime was committed" or, "where defendant was not the sole participant in the crime, [that] the defendant's participation was relatively minor" (CPL 720.10 [3]). Contrary to defendant's contention, the record establishes that the court properly recognized that defendant, who was 17 years old at the time of the commission of the crime, was eligible for youthful offender treatment if he met "either or both of the criteria provided in CPL 720.10 (3)" (People v Middlebrooks, 25 NY3d 516, 526 [2015]). The court offered defense counsel and defendant an opportunity to set forth any mitigating factors, but both declined (see People v Pulvino, 115 AD3d 1220, 1223 [4th Dept 2014], lv denied 23 NY3d 1024 [2014]). The court then properly placed its determination on the record that defendant was not eligible for youthful offender status because he was the sole participant in the crime and there were no mitigating factors bearing directly on the manner in which the crime was committed (cf. People v Williams, 185 AD3d 1456, 1457 [4th Dept 2020]; see generally Middlebrooks, 25 NY3d at 526-527; People v Carlson, 184 AD3d 1139, 1143 [4th Dept 2020], lv denied 35 NY3d 1064 [2020]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488048/ | People v Couser (2022 NY Slip Op 06599)
People v Couser
2022 NY Slip Op 06599
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., PERADOTTO, CURRAN, WINSLOW, AND MONTOUR, JJ.
859 KA 19-00086
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vKNOWLEDGE COUSER, DEFENDANT-APPELLANT.
CAMBARERI & BRENNECK, SYRACUSE (MELISSA K. SWARTZ OF COUNSEL), FOR DEFENDANT-APPELLANT.
MICHAEL D. CALARCO, DISTRICT ATTORNEY, LYONS (CATHERINE A. MENIKOTZ OF COUNSEL), FOR RESPONDENT.
Appeal from a judgment of the Wayne County Court (Daniel G. Barrett, J.), rendered October 18, 2018. The judgment convicted defendant, upon his plea of guilty, of murder in the second degree.
It is hereby ORDERED that the judgment so appealed from is unanimously affirmed.
Memorandum: Defendant appeals from a judgment convicting him, upon his plea of guilty, of murder in the second degree (Penal Law § 125.25 [1]). We affirm.
Initially, as defendant contends and the People correctly concede, the "purported waiver of the right to appeal is not enforceable inasmuch as the totality of the circumstances fails to reveal that defendant 'understood the nature of the appellate rights being waived' " (People v Youngs, 183 AD3d 1228, 1228 [4th Dept 2020], lv denied 35 NY3d 1050 [2020], quoting People v Thomas, 34 NY3d 545, 559 [2019], cert denied — US &mdash, 140 S Ct 2634 [2020]). Here, "[t]he written waiver of the right to appeal signed by defendant [at the time of the plea] and the verbal waiver colloquy conducted by [County Court] together improperly characterized the waiver as 'an absolute bar to the taking of a direct appeal and the loss of attendant rights to counsel and poor person relief' " (People v McMillian, 185 AD3d 1420, 1421 [4th Dept 2020], lv denied 35 NY3d 1096 [2020], quoting Thomas, 34 NY3d at 565; see People v Harlee, 187 AD3d 1586, 1587 [4th Dept 2020], lv denied 36 NY3d 929 [2020]).
We reject defendant's contention that the court erred in failing to address his request to proceed pro se. The record establishes that defendant "did not make that request clearly and unequivocally in his letter to the court or at any other time," and we thus conclude that the court "did not err in failing to address that alleged request" (People v Russell, 55 AD3d 1314, 1315 [4th Dept 2008], lv denied 11 NY3d 930 [2009] [internal quotation marks omitted]). Indeed, defendant's letter " 'd[id] not reflect a definitive commitment to self-representation' that would trigger a searching inquiry by the trial court" (People v Duarte, 37 NY3d 1218, 1219 [2022], cert denied — US — [Oct. 3, 2022], quoting People v LaValle, 3 NY3d 88, 106 [2004]); rather, defendant's alleged request to proceed pro se " 'was made in the context of a claim expressing his dissatisfaction with his attorney,' " and defendant further expressed, equivocally, an openness to proceeding with a new attorney from a different area (People v White, 114 AD3d 1256, 1257 [4th Dept 2014], lv denied 23 NY3d 1026 [2014]; see Matter of Kathleen K. [Steven K.], 17 NY3d 380, 387 [2011]; People v Gillian, 8 NY3d 85, 88 [2006]; LaValle, 3 NY3d at 106-107). In any event, defendant abandoned any request to proceed pro se inasmuch as he "acquiesced to continued representation by counsel at subsequent proceedings," including the appointment of his third assigned counsel, following which defendant acted in a manner indicating his satisfaction with counsel (People v Berrian, 154 AD3d 486, 487 [1st Dept 2017], lv denied 30 NY3d 1103 [2018]; see People v Alexander, 109 AD3d 1083, 1084 [4th Dept 2013]; People v [*2]Ramsey, 201 AD2d 915, 915 [4th Dept 1994], lv denied 83 NY2d 875 [1994]). We conclude on this record that, "[u]pon the appointment of his third assigned counsel, '[t]he issue of self-representation was closed,' with defendant seemingly satisfied with that appointment" (Gillian, 8 NY3d at 88, quoting LaValle, 3 NY3d at 107).
Defendant next contends that his plea was not knowingly, voluntarily, and intelligently entered because, during the plea colloquy, the court failed to advise him of all the rights he would be forfeiting upon pleading guilty, including his right against self-incrimination (see generally Boykin v Alabama, 395 US 238, 243 [1969]; People v Tyrell, 22 NY3d 359, 361 [2013]). Defendant's contention is not preserved for our review (see People v Barnes, 206 AD3d 1713, 1714-1715 [4th Dept 2022], lv denied 38 NY3d 1132 [2022]; People v Hampton, 142 AD3d 1305, 1306 [4th Dept 2016], lv denied 28 NY3d 1124 [2016]; see generally People v Conceicao, 26 NY3d 375, 381-382 [2015]), and the narrow exception to the preservation rule does not apply under the circumstances of this case (see People v Gause, 133 AD3d 1367, 1367 [4th Dept 2015], lv denied 27 NY3d 997 [2016]; cf. Conceicao, 26 NY3d at 382; Tyrell, 22 NY3d at 364). In any event, defendant's contention lacks merit (see Conceicao, 26 NY3d at 383-384; Barnes, 206 AD3d at 1715).
Finally, contrary to defendant's contention, we conclude that the sentence is not unduly harsh or severe, and we decline defendant's request to exercise our power to reduce the sentence as a matter of discretion in the interest of justice (see CPL 470.15 [6] [b]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488052/ | Meagan R. v Mansour (2022 NY Slip Op 06612)
Meagan R. v Mansour
2022 NY Slip Op 06612
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, LINDLEY, WINSLOW, AND BANNISTER, JJ.
888 CA 21-01322
[*1]MEAGAN R., INDIVIDUALLY AND AS ADMINISTRATOR OF THE ESTATE OF K.R., DECEASED, PLAINTIFF-RESPONDENT,
vAHMED MANSOUR, M.D., DEFENDANT-APPELLANT, ET AL., DEFENDANTS.
SUGARMAN LAW FIRM, LLP, SYRACUSE (ADAM P. CAREY OF COUNSEL), FOR DEFENDANT-APPELLANT.
THE FITZGERALD LAW FIRM, PC, YONKERS (MITCHELL GITTIN OF COUNSEL), AND LAW OFFICE OF JOHN M. DALY, FOR PLAINTIFF-RESPONDENT.
Appeal from an order of the Supreme Court, Oneida County (Bernadette T. Clark, J.), entered August 17, 2021. The order, among other things, denied the motion of defendant Ahmed Mansour, M.D. to dismiss the complaint against him.
It is hereby ORDERED that the order so appealed from is unanimously affirmed without costs.
Memorandum: Plaintiff, individually and as administrator of decedent's estate, commenced this action seeking to recover damages arising from the alleged negligence of defendants in managing plaintiff's pregnancy, labor, and delivery. Ahmed Mansour, M.D. (defendant) appeals from an order that denied his motion to dismiss the complaint against him for lack of proper service and granted plaintiff's cross motion insofar as it sought an order extending the time in which to serve defendant and authorizing an alternative method of service. We affirm.
"On a motion to dismiss based on lack of proper service, the court may, upon good cause shown or in the interest of justice, extend the time for service" (Pierce v Village of Horseheads Police Dept., 107 AD3d 1354, 1356 [3d Dept 2013] [internal quotation marks omitted]). "It is well settled that the determination to grant [a]n extension of time for service is a matter within the court's discretion" (Moss v Bathurst, 87 AD3d 1373, 1374 [4th Dept 2011] [internal quotation marks omitted]; see generally Matter of Delaware Operations Assoc. LLC v New York State Dept. of Health, 187 AD3d 1560, 1561 [4th Dept 2020]; Bradley v Rexcoat, 187 AD3d 1576, 1576 [4th Dept 2020]). After weighing the relevant factors, including the "expiration of the [s]tatute of [l]imitations, the meritorious nature of the cause of action, the length of delay in service, the promptness of . . . plaintiff's request for the extension of time, and prejudice to defendant" (Leader v Maroney, Ponzini & Spencer, 97 NY2d 95, 105-106 [2001]), and noting that "no one factor is more important than the others" (Moss, 87 AD3d at 1374), we reject defendant's contention that Supreme Court abused its discretion in denying his motion and granting plaintiff's cross motion insofar as it sought an extension of time to serve defendant (see generally id.).
We similarly reject defendant's contention that the court abused its discretion in granting plaintiff's cross motion insofar as it sought authorization for an alternative method of service. "CPLR 308 (5) vests a court with the discretion to direct an alternative method for service of process when it has determined that the methods set forth in CPLR 308 (1), (2), and (4) are 'impracticable' " (Astrologo v Serra, 240 AD2d 606, 606 [2d Dept 1997]; see Safadjou v [*2]Mohammadi [appeal No. 3], 105 AD3d 1423, 1424 [4th Dept 2013]). "Although the impracticability standard is not capable of easy definition . . . , [a] showing of impracticability under CPLR 308 (5) does not require proof of actual prior attempts to serve a party under the methods outlined pursuant to subdivisions (1), (2) or (4)" (Safadjou, 105 AD3d at 1424 [internal quotation marks omitted]; see Richards v Hedman Resources Ltd., 204 AD3d 1407, 1409 [4th Dept 2022], appeal dismissed — NY3d — [Oct. 20, 2022]; David v Total Identity Corp., 50 AD3d 1484, 1485 [4th Dept 2008]). Here, we conclude that plaintiff established that service upon defendant pursuant to CPLR 308 (1), (2), or (4) would be impracticable (see Safadjou, 105 AD3d at 1424; State St. Bank & Trust Co. v Coakley, 16 AD3d 403, 403 [2d Dept 2005], lv dismissed 5 NY3d 746 [2005]). Specifically, plaintiff established that defendant had left the United States and declared his intention to remain in Saudi Arabia, where he worked for the Saudi Arabian government (see Safadjou, 105 AD3d at 1424; Astrologo, 240 AD2d at 606-607). Further, plaintiff established that Saudi Arabia is not a signatory to the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (20 UST 361, TIAS No. 6638 [1965]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488050/ | People v Campbell (2022 NY Slip Op 06597)
People v Campbell
2022 NY Slip Op 06597
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., PERADOTTO, CURRAN, WINSLOW, AND MONTOUR, JJ.
853 KA 17-00743
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vKAMRON J. CAMPBELL, DEFENDANT-APPELLANT.
MARK D. FUNK, CONFLICT DEFENDER, ROCHESTER (KATHLEEN P. REARDON OF COUNSEL), FOR DEFENDANT-APPELLANT.
SANDRA DOORLEY, DISTRICT ATTORNEY, ROCHESTER (HELEN A. SYME OF COUNSEL), FOR RESPONDENT.
Appeal from a judgment of the Supreme Court, Monroe County (Alex R. Renzi, J.), rendered October 12, 2016. The judgment convicted defendant upon his plea of guilty of murder in the second degree, attempted robbery in the first degree and criminal possession of a weapon in the second degree (two counts).
It is hereby ORDERED that the judgment so appealed from is unanimously affirmed.
Memorandum: Defendant appeals from a judgment convicting him upon his plea of guilty of one count each of murder in the second degree (Penal Law § 125.25 [3]) and attempted robbery in the first degree (§§ 110.00, 160.15 [2]), and two counts of criminal possession of a weapon in the second degree (§ 265.03 [1] [b]; [3]). We affirm.
Defendant contends that Supreme Court did not make an appropriate inquiry into his request for substitution of counsel. "Assuming, arguendo, that [defendant's] contention is not foreclosed by his guilty plea" (People v Jeffords, 185 AD3d 1417, 1418 [4th Dept 2020], lv denied 35 NY3d 1095 [2020]), we conclude that defendant "abandoned his request for new counsel when he decid[ed] . . . to plead guilty while still being represented by the same attorney" (People v Clemons, 201 AD3d 1355, 1355 [4th Dept 2022], lv denied 38 NY3d 1032 [2022] [internal quotation marks omitted]; see People v Dolison, 200 AD3d 1632, 1633 [4th Dept 2021], lv denied 38 NY3d 949 [2022]; People v Lewicki, 118 AD3d 1328, 1328-1329 [4th Dept 2014], lv denied 23 NY3d 1064 [2014]).
Defendant further contends that his plea was coerced by statements made by the court. As defendant correctly concedes, he did not move to withdraw his plea or to vacate the judgment of conviction and thereby failed to preserve that contention for our review (see People v Williams, 198 AD3d 1308, 1309 [4th Dept 2021], lv denied 37 NY3d 1149 [2021]; People v Love, 179 AD3d 1541, 1542 [4th Dept 2020], lv denied 35 NY3d 994 [2020]; People v Juarbe, 162 AD3d 1625, 1625-1626 [4th Dept 2018]). We decline to exercise our power to review that contention as a matter of discretion in the interest of justice (see CPL 470.15 [3] [c]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488044/ | People v Hettig (2022 NY Slip Op 06596)
People v Hettig
2022 NY Slip Op 06596
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., PERADOTTO, CURRAN, WINSLOW, AND MONTOUR, JJ.
852 KA 18-02402
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vADAM J. HETTIG, DEFENDANT-APPELLANT.
JILL L. PAPERNO, ACTING PUBLIC DEFENDER, ROCHESTER (JANET C. SOMES OF COUNSEL), FOR DEFENDANT-APPELLANT.
SANDRA DOORLEY, DISTRICT ATTORNEY, ROCHESTER (SCOTT MYLES OF COUNSEL), FOR RESPONDENT.
Appeal from a judgment of the Monroe County Court (Vincent M. Dinolfo, J.), rendered October 11, 2018. The judgment convicted defendant upon a plea of guilty of robbery in the first degree.
It is hereby ORDERED that the judgment so appealed from is unanimously affirmed.
Memorandum: On appeal from a judgment convicting him upon his plea of guilty of robbery in the first degree (Penal Law § 160.15 [3]), defendant contends that his waiver of the right to appeal is invalid and that his sentence is unduly harsh and severe. As the People correctly concede, defendant's waiver of the right to appeal is invalid (see People v Thomas, 34 NY3d 545, 564-566 [2019], cert denied — US &mdash, 140 S Ct 2634 [2020]).
The People, relying on People v McGovern (265 AD2d 881 [4th Dept 1999], lv denied 94 NY2d 882 [2000]), assert that, because defendant was sentenced in accordance with the plea agreement, he should be bound by its terms and "not later be heard to complain that he received what he bargained for" (People v Dixon, 38 AD3d 1242, 1242 [4th Dept 2007] [internal quotation marks omitted]). The fact that defendant "received the bargained-for sentence[, however,] does not preclude him from seeking our discretionary review of his sentence pursuant to CPL 470.15 (6) (b)" (People v Garcia-Gual, 67 AD3d 1356, 1356 [4th Dept 2009], lv denied 14 NY3d 771 [2010]; see generally People v Pollenz, 67 NY2d 264, 267-268 [1986]; People v Thompson, 60 NY2d 513, 519-520 [1983]). We stated in Garcia-Gual that McGovern and other prior decisions of this Court "are not to be followed" to the extent that "they suggest a rule to the contrary" (Garcia-Gual, 67 AD3d at 1356). Nevertheless, we conclude that the sentence is not unduly harsh or severe.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488054/ | Matter of Sullivan (2022 NY Slip Op 06626)
Matter of Sullivan
2022 NY Slip Op 06626
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., LINDLEY, CURRAN, AND BANNISTER, JJ. (Filed Oct. 7, 2022.)
&em;
[*1]MATTER OF MAUREEN WELLMAN SULLIVAN, AN ATTORNEY, RESIGNOR.
MEMORANDUM AND ORDER
Application to resign for non-disciplinary reasons accepted and name removed from roll of attorneys. | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488058/ | Matter of Sell v Yehl (2022 NY Slip Op 06590)
Matter of Sell v Yehl
2022 NY Slip Op 06590
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: LINDLEY, J.P., NEMOYER, WINSLOW, BANNISTER, AND MONTOUR, JJ.
780 TP 22-00825
[*1]IN THE MATTER OF DAVID SELL, PETITIONER,
vC. YEHL, SUPERINTENDENT, WENDE CORRECTIONAL FACILITY, RESPONDENT.
LOU FOX, BROOKLYN, FOR PETITIONER.
LETITIA JAMES, ATTORNEY GENERAL, ALBANY (KEVIN C. HU OF COUNSEL), FOR RESPONDENT.
Proceeding pursuant to CPLR article 78 (transferred to the Appellate Division of the Supreme Court in the Fourth Judicial Department by order of the Supreme Court, Erie County [Paul Wojtaszek, J.], entered May 17, 2022) to review a determination of respondent. The determination found after a tier II hearing that petitioner had violated a disciplinary rule.
It is hereby ORDERED that the determination is unanimously confirmed without costs and the petition is dismissed.
Memorandum: Petitioner commenced this CPLR article 78 proceeding seeking to annul the determination, following a tier II disciplinary hearing, that he violated inmate rule 113.31 (7 NYCRR 270.2 [B] [14] [xxi] [alcohol use]). We reject petitioner's contention that the determination is not supported by substantial evidence. Petitioner's differing version of events and his assertion that the officer's testimony was inconsistent "created credibility issues for the Hearing Officer to resolve" (Matter of Sherman v Annucci, 142 AD3d 1196, 1197 [3d Dept 2016]; see generally Matter of Foster v Coughlin, 76 NY2d 964, 966 [1990]).
Contrary to petitioner's contention, he "was not entitled to a copy of the instruction manual for the testing equipment" used to process his urine sample (Matter of Matthews v Annucci, 162 AD3d 1432, 1433 [3d Dept 2018]; see Matter of Morrishill v Prack, 120 AD3d 1474, 1474 [3d Dept 2014], lv granted 24 NY3d 914 [2015], appeal withdrawn 25 NY3d 948 [2015]; Matter of Cureton v Goord, 262 AD2d 1031, 1031 [4th Dept 1999]). Contrary to petitioner's further contention, the documents he requested from the independent testing laboratory "were either unavailable, irrelevant, or duplicative of other evidence in the record" (Matter of Rincon v Selsky, 28 AD3d 565, 566 [2d Dept 2006]), and thus "the record establishes that petitioner received all the relevant and available documents to which he was entitled" (Matter of Farrington v Annucci, 148 AD3d 1810, 1811 [4th Dept 2017] [internal quotation marks omitted]).
We have reviewed petitioner's remaining contentions and conclude that none warrants a different result.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488060/ | Matter of Miller v New York State Div. of Human Rights (2022 NY Slip Op 06613)
Matter of Miller v New York State Div. of Human Rights
2022 NY Slip Op 06613
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, NEMOYER, CURRAN, AND BANNISTER, JJ.
889 TP 22-00512
[*1]IN THE MATTER OF WILLIAM I. MILLER AND BLIND FAITH W-C, INC., PETITIONERS-RESPONDENTS,
vNEW YORK STATE DIVISION OF HUMAN RIGHTS, RESPONDENT-PETITIONER, AND DEIRDRE CHESSON, RESPONDENT.
CAROLINE J. DOWNEY, GENERAL COUNSEL, STATE DIVISION OF HUMAN RIGHTS, BRONX (TONI ANN HOLLIFIELD OF COUNSEL), FOR RESPONDENT-PETITIONER.
Proceeding pursuant to CPLR article 78 (transferred to the Appellate Division of the Supreme Court in the Fourth Judicial Department by order of the Supreme Court, Erie County [Henry J. Nowak, J.], entered October 13, 2021) to enforce a determination of the New York State Division of Human Rights. The determination, among other things, found petitioners in violation of the Human Rights Law.
It is hereby ORDERED that the determination is unanimously confirmed without costs, the cross petition is granted, and petitioners-respondents are directed to pay respondent Deirdre Chesson the sum of $7,000 as compensatory damages with interest at the rate of 9% per annum commencing March 29, 2021, and to pay the Comptroller of the State of New York the sum of $3,000 for a civil fine and penalty with interest at the rate of 9% per annum commencing March 29, 2021.
Memorandum: Respondent-petitioner New York State Division of Human Rights (SDHR), as relevant to this proceeding, filed a cross petition pursuant to Executive Law § 298 seeking to enforce the final order of its Commissioner, which in turn substantially adopted the "recommended findings of fact, opinion and decision, and order" of an Administrative Law Judge (ALJ). The ALJ concluded, following a public hearing, that petitioners-respondents (petitioners) had engaged in an unlawful racial discriminatory practice relating to a public accommodation and awarded respondent Deirdre Chesson $7,000 in compensatory damages for mental anguish and humiliation, and imposed a $3,000 civil fine and penalty on petitioners.
We conclude that the determination of the Commissioner is supported by substantial evidence (see Matter of Wal-Mart Stores E., L.P. v New York State Div. of Human Rights, 71 AD3d 1452, 1453 [4th Dept 2010]; see generally 300 Gramatan Ave. Assoc. v State Div. of Human Rights, 45 NY2d 176, 179-181 [1978]). We further conclude that the award of compensatory damages to Chesson is "reasonably related to the wrongdoing, supported by substantial evidence, and comparable to other awards for similar injuries" (Matter of State Div. of Human Rights v Lucky Joy Rest., Inc., 131 AD3d 536, 538 [2d Dept 2015]; see Matter of New York State Div. of Human Rights v Caprarella, 82 AD3d 773, 775 [2d Dept 2011]; see e.g. Wal-Mart Stores E., L.P., 71 AD3d at 1452), and that SDHR properly imposed the civil fine and penalty upon its determination that petitioners "committed an unlawful discriminatory act" (Executive Law § 297 [4] [c] [vi]; see generally Matter of New York State Div. of Human Rights v Hawk, 195 AD3d 1395, 1397-1398 [4th Dept 2021]). Finally, because the unopposed cross petition for enforcement demonstrates that petitioners have failed to comply with the order, enforcement is granted (see generally Executive Law § 298).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488055/ | Matter of Sloma v Saya (2022 NY Slip Op 06587)
Matter of Sloma v Saya
2022 NY Slip Op 06587
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., CENTRA, PERADOTTO, LINDLEY, AND NEMOYER, JJ.
748 CAF 21-01162
[*1]IN THE MATTER OF ERIC M. SLOMA, PETITIONER-RESPONDENT,
vMICHELE A. SAYA, RESPONDENT-RESPONDENT. SUSAN B. MARRIS, ESQ., ATTORNEY FOR THE CHILD, APPELLANT.
SUSAN B. MARRIS, MANLIUS, ATTORNEY FOR THE CHILD, APPELLANT PRO SE.
Appeal from an order of the Family Court, Onondaga County (Robert E. Antonacci, II, J.), entered July 9, 2021 in a proceeding pursuant to Family Court Act article 6. The order, insofar as appealed from, dismissed the petition for a modification of custody.
It is hereby ORDERED that the order insofar as appealed from is unanimously reversed on the law without costs, the petition is reinstated, and the matter is remitted to Family Court, Onondaga County, for further proceedings in accordance with the following memorandum: In this proceeding pursuant to Family Court Act article 6, the Attorney for the Child (AFC), as limited by her brief, appeals from an order insofar as it dismissed petitioner father's petition seeking to modify the parties' custody arrangement. Family Court determined at the conclusion of the father's presentation of evidence at a trial that he failed to establish a change in circumstances and granted respondent mother's motion to dismiss the father's petition. Initially, we agree with the AFC that, under the circumstances of this case, she has standing to appeal the order (see Matter of Newton v McFarlane, 174 AD3d 67, 71-74 [2d Dept 2019]; cf. Matter of Lawrence v Lawrence, 151 AD3d 1879, 1879 [4th Dept 2017]; Matter of Kessler v Fancher, 112 AD3d 1323, 1323 [4th Dept 2013]).
We agree with the AFC that the child received ineffective assistance of counsel. We therefore reverse the order insofar as appealed from, reinstate the petition, and remit the matter to Family Court for a new trial. Section 7.2 of the Rules of the Chief Judge provides that, in proceedings such as an article 6 custody proceeding where the child is the subject and an AFC has been appointed pursuant to Family Court Act § 249, the AFC "must zealously advocate the child's position" (22 NYCRR 7.2 [d]). "[I]n ascertaining the child's position, the [AFC] must consult with and advise the child to the extent of and in a manner consistent with the child's capacities, and have a thorough knowledge of the child's circumstances" (22 NYCRR 7.2 [d] [1]). "[I]f the child is capable of knowing, voluntary and considered judgment, the [AFC] should be directed by the wishes of the child, even if the [AFC] believes that what the child wants is not in the child's best interests" (22 NYCRR 7.2 [d] [2]). There are two exceptions, not relevant here, where the child lacks the capacity for knowing, voluntary and considered judgment, or following the child's wishes is likely to result in a substantial risk of imminent, serious harm to the child (see 22 NYCRR 7.2 [d] [3]). In those instances, the AFC is justified in advocating for a position that is contrary to the child's wishes (see id.).
Moreover, a child in an article 6 custody proceeding is entitled to effective assistance of counsel (see Matter of Rivera v Fowler, 112 AD3d 835, 837 [2d Dept 2013]; Matter of Sharyn PP. v Richard QQ., 83 AD3d 1140, 1143 [3d Dept 2011]; Matter of Ferguson v Skelly, 80 AD3d 903, 906 [3d Dept 2011], lv denied 16 NY3d 710 [2011]), which requires the AFC to take an active role in the proceeding (see Matter of Payne v Montano, 166 AD3d 1342, 1343-1345 [3d Dept 2018]; Rivera, 112 AD3d at 837).
Here, the AFC at trial made his client's wish that there be a change in custody known to the court, but he did not "zealously advocate the child's position" (22 NYCRR 7.2 [d]; see Payne, 166 AD3d at 1345; see also Matter of Brian S. [Tanya S.], 141 AD3d 1145, 1147 [4th Dept 2016]). He did not cross-examine the mother, the police officers, or the school social worker called by the father, and we agree with the AFC on appeal that the trial AFC's cross-examination of the father was designed to elicit unfavorable testimony related to the father, thus undermining the child's position (see Silverman v Silverman, 186 AD3d 123, 127-128 [2d Dept 2020]; Brian S., 141 AD3d at 1147-1148). His questioning also seemed designed to show that there was no change in circumstances since the entry of the last order. Further, he submitted an email to the court in response to the mother's motion to dismiss in which he stated his opinion that there had been no change in circumstances, which again went against his client's wishes (see generally Brian S., 141 AD3d at 1147). While we conclude that the AFC's actions may have been the result of good intentions, we further conclude that he did not "zealously advocate the child's position" (22 NYCRR 7.2 [d]), and thus the child was denied effective assistance of counsel (see Silverman, 186 AD3d at 127-129; Payne, 166 AD3d at 1345; cf. Rivera, 112 AD3d at 837; Matter of Venus v Brennan, 103 AD3d 1115, 1116-1117 [4th Dept 2013]).
In light of our determination, we see no need to address the AFC's further contention on appeal that the father established a change in circumstances.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488056/ | Matter of Sharon (2022 NY Slip Op 06622)
Matter of Sharon
2022 NY Slip Op 06622
Decided on November 18, 2022
Appellate Division, Fourth Department
Per Curiam
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., CENTRA, LINDLEY, CURRAN, AND BANNISTER, JJ. (Filed Nov. 18, 2022.)
&em;
[*1]MATTER OF JOHN W. SHARON, AN ATTORNEY, RESPONDENT. GRIEVANCE COMMITTEE OF THE FIFTH JUDICIAL DISTRICT, PETITIONER.
OPINION AND ORDER
Order of censure entered.Per Curiam
Opinion: Respondent was admitted to the practice of law by this Court on June 25, 1992, and he maintains an office in Tully. In January 2022, the Grievance Committee filed a petition asserting against respondent a sole charge of professional misconduct, which alleges that he engaged in certain acts of professional misconduct in relation to the maintenance and administration of his attorney trust account. Although respondent filed an answer denying material allegations of the petition, the parties have since filed a joint motion for discipline on consent wherein respondent conditionally admits that he has engaged in certain acts of professional misconduct and the parties request that the Court enter a final order imposing the sanction of public censure.
Respondent conditionally admits that, between June 2019 and February 2020, he deposited personal funds into his attorney trust account, failed to maintain a balance in the account sufficient to satisfy his trust account obligations to certain clients, deposited cash into the account on five occasions without making and keeping records sufficient to identify the source of the funds or the party entitled thereto, and disbursed funds to himself from the account in payment of legal fees using a check that did not bear the title "attorney trust account" or an equivalent title. Respondent also admits that he transferred funds from his trust account to his operating account on four occasions without making or keeping records sufficient to show the purpose of each transfer. Respondent further admits that, between January and March 2020, his legal secretary issued to herself 12 trust account checks in the total amount of $1,010 by forging respondent's signature on each check and that he did not immediately discover the thefts because, during the relevant time period, he failed to supervise the work of his legal secretary or review banking statements and other trust account records. Finally, respondent admits that he failed to produce to the Grievance Committee in a timely manner copies of various trust account records that were requested by the Committee during its investigation.
We grant the joint motion of the parties, find respondent guilty of professional misconduct, and conclude that respondent's admissions establish that he has violated the following provisions of the Rules of Professional Conduct (22 NYCRR 1200.0):
rule 1.15 (a)—misappropriating funds belonging to another that came into his possession incident to his practice of law and commingling personal funds with such funds;
rule 1.15 (b) (2)—failing to identify his trust account as an "attorney special account," "attorney trust account," or "attorney escrow account" or to obtain checks and deposit slips that bear such title;
rule 1.15 (d) (1)—failing to maintain required bookkeeping and other records concerning transactions involving his attorney trust account;
rule 5.3 (a)—failing to supervise adequately the work of a nonlawyer who works for the lawyer; and
rule 8.4 (d)—engaging in conduct that is prejudicial to the administration of justice.
We note that our conclusion that respondent violated rule 1.15 (a) is based, at least in part, on his legal secretary's misappropriation or theft of funds from respondent's trust account. The Rules of Professional Conduct provide that, under certain circumstances, a lawyer with supervisory authority over a nonlawyer shall be responsible for misconduct of the nonlawyer (Rules of Professional Conduct [22 NYCRR 1200.0] rule 5.3 [b] [2] [ii]). In this case, we conclude that the consequences of the legal secretary's misconduct could have been avoided or mitigated had respondent exercised reasonable supervisory authority over the legal secretary with respect to the administration of respondent's trust account and funds held therein (see id.; see also Matter of Galasso, 19 NY3d 688, 694-695 [2012]).
In determining an appropriate sanction, we have considered respondent's statement that [*2]no client was prejudiced by his admitted misconduct and that he has taken steps to improve the administration of his trust account by engaging a certified public accountant, enrolling in an attorney mentoring program with a focus on best practices for trust account transactions, and completing additional continuing legal education concerning the management of his trust account. Accordingly, after consideration of all of the factors in this matter, we conclude that respondent should be censured. | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488040/ | People v Nelson (2022 NY Slip Op 06605)
People v Nelson
2022 NY Slip Op 06605
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, LINDLEY, WINSLOW, AND BANNISTER, JJ.
876 KA 17-00459
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vKAHLIL J. NELSON, DEFENDANT-APPELLANT.
JEFFREY WICKS, PLLC, ROCHESTER (JEFFREY WICKS OF COUNSEL), FOR DEFENDANT-APPELLANT.
SANDRA DOORLEY, DISTRICT ATTORNEY, ROCHESTER (HELEN A. SYME OF COUNSEL), FOR RESPONDENT.
Appeal from a judgment of the Supreme Court, Monroe County (Alex R. Renzi, J.), rendered September 14, 2016. The judgment convicted defendant upon a plea of guilty of murder in the second degree.
It is hereby ORDERED that the judgment so appealed from is unanimously affirmed.
Memorandum: On appeal from a judgment convicting him upon his plea of guilty of murder in the second degree (Penal Law § 125.25 [3]), defendant contends that Supreme Court erred in failing sua sponte to order a competency examination pursuant to CPL 730.30 (1). "It is well settled that the decision to order a competency examination under CPL 730.30 (1) lies within the sound discretion of the trial court" (People v Williams, 35 AD3d 1273, 1274 [4th Dept 2006], lv denied 8 NY3d 928 [2007]; see People v Morgan, 87 NY2d 878, 879-880 [1995]). "A defendant is presumed competent . . . , and the court is under no obligation to issue an order of examination . . . unless it has 'reasonable ground . . . to believe that the defendant was an incapacitated person' " (Morgan, 87 NY2d at 880). Based on the record before us, we conclude that the court did not abuse its discretion in failing sua sponte to order a competency examination (see id. at 879-880).
Defendant's further contention that his plea was not entered knowingly and voluntarily is not preserved for our review because he did not move to withdraw his plea or to vacate the judgment of conviction on that ground, and this case does not fall within the rare exception to the preservation requirement (see People v Lopez, 71 NY2d 662, 665-666 [1988]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488081/ | Burns v Grandjean (2022 NY Slip Op 06579)
Burns v Grandjean
2022 NY Slip Op 06579
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., CENTRA, LINDLEY, CURRAN, AND WINSLOW, JJ.
638 CA 21-00414
[*1]MATTHEW A. BURNS, PLAINTIFF-RESPONDENT,
vJENNIFER A. GRANDJEAN, DEFENDANT-APPELLANT. (APPEAL NO. 3.)
MICHAEL STEINBERG, ROCHESTER, FOR DEFENDANT-APPELLANT.
AFFRONTI, LLC, ROCHESTER (FRANCIS C. AFFRONTI OF COUNSEL), FOR PLAINTIFF-RESPONDENT.
WALTER BURKARD, MANLIUS, ATTORNEY FOR THE CHILDREN.
Appeal from an order of the Supreme Court, Monroe County (Richard A. Dollinger, A.J.), entered March 12, 2021. The order, inter alia, appointed a family reunification therapist and directed defendant to pay the first $7,500 in family reunification therapy costs.
It is hereby ORDERED that the order so appealed from is unanimously reversed on the law without costs and plaintiff's January 13, 2021 motion is denied in its entirety.
Same memorandum as in Burns v Grandjean ([appeal No. 1] — AD3d — [Nov. 18, 2022] [4th Dept 2022]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488071/ | Matter of Attorneys In Violation of Judiciary Law § 468-a (2022 NY Slip Op 06621)
Matter of Attorneys In Violation of Judiciary Law § 468-a
2022 NY Slip Op 06621
Decided on November 18, 2022
Appellate Division, Fourth Department
Per Curiam
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, NEMOYER, WINSLOW, AND MONTOUR, JJ. (Filed Nov. 18, 2022.)
&em;
[*1]MATTER OF ATTORNEYS IN VIOLATION OF JUDICIARY LAW § 468-a AND 22 NYCRR 118.1, RESPONDENTS. ATTORNEY GRIEVANCE COMMITTEES FOR THE FOURTH JUDICIAL DEPARTMENT, PETITIONER.
OPINION AND ORDER
Order of suspension entered.Per Curiam
Opinion: In March 2022, the Grievance Committees applied to this Court for an order directing the respondents named on the attached list to show cause why they should not be suspended from the practice of law on the grounds that they violated Judiciary Law § 468-a and 22 NYCRR 118.1 by failing to comply with attorney registration requirements, and that they failed to respond to numerous written inquiries from the Office of Court Administration and the Grievance Committees concerning their registration delinquency. By order entered April 28, 2022, this Court directed respondents to show cause in writing on or before August 1, 2022, why they should not be suspended for failing to comply with attorney registration requirements. Respondents either failed to respond to the show cause order or otherwise failed to show cause why they should not be suspended.
The failure to comply with attorney registration requirements violates Judiciary Law § 468-a and 22 NYCRR 118.1 and constitutes conduct prejudicial to the administration of justice warranting the imposition of discipline (see Matter of Attorneys in Violation of Judiciary Law § 468-a, 54 AD3d 9, 10 [4th Dept 2008]). Accordingly, we conclude that the respondents named on the attached list should be suspended, effective immediately, and until further order of this Court.Name Registration IDYear Admitted
Adiutori, Candace Marie3954278 2001
Ames, Sr., Peter A. 1879576 1983
Assefa, Yohannes 4064408 2002
Bains, Sachpreet Singh5304100 2015
Benigno, Anthony Michael1859222 1983
Cadin, Luke James 4980314 2012
Clarke, Hillary Gardiner2505006 1992
Cohen, Michelle Ruth2649416 1995
Colabufo, Paul John 4274197 2005
Collins, Thomas George1692052 1978
Douglas, David Colin1341122 1976
Dudeck, Joshua Lawrence4808457 2010
Dutcher, Jay Frederick2886281 1998
Feger, Karen Beth 4111456 2003
Frood, Neil Stewart 3009040 2000
Greenhouse, Andrew Alan4123766 2003
Gucciardo, John 1742170 1981
Heald, Timothy P. 2049161 1986
Herzbrun, Yonatan Shai5362025 2015
Kerwick, Ann Marie 1898543 1977
Klein, Pamela Jeanne2424166 1991
Knauf, Katharine Ruth4387049 2006
Kouwe, Robert E. 1779701 1982
Lamitie, William John2552602 1993
Lehouillier, Patric Jaymes 2259711 1975
Marzullo, Thomas G. 1842798 1983
McElroy, Melinda L. 2938298 1999
Murray, Nicola Rosemarie 4233532 2004
Odojewski (Mical),
Alison Lorraine 3055308 2000
Primo, Steven James 2003481 1985
Readling, John Anthony4206637 2004
Remmling, Marc Erik 2645778 1995
Rodriguez, Angela L.2604742 1994
Schaller, Pamela Susan4812152 2010
Tuppen, James Lawrence1603752 1978
Young, Therese A. 5360680 2015 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488067/ | Matter of Civil Serv. Empls. Assn., Inc., Local 1000, AFSCME, AFL-CIO, Erie County Unit of Erie County Local 815 (County of Erie) (2022 NY Slip Op 06619)
Matter of Civil Serv. Empls. Assn., Inc., Local 1000, AFSCME, AFL-CIO, Erie County Unit of Erie County Local 815 (County of Erie)
2022 NY Slip Op 06619
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, NEMOYER, CURRAN, AND BANNISTER, JJ.
907 CA 21-01743
[*1]IN THE MATTER OF ARBITRATION BETWEEN CIVIL SERVICE EMPLOYEES ASSOCIATION, INC., LOCAL 1000, AFSCME, AFL-CIO, ERIE COUNTY UNIT OF ERIE COUNTY LOCAL 815, PETITIONER-RESPONDENT-APPELLANT, AND COUNTY OF ERIE, RESPONDENT-PETITIONER-RESPONDENT.
DAREN J. RYLEWICZ, CIVIL SERVICE EMPLOYEES ASSOCIATION, INC., ALBANY (JENNIFER C. ZEGARELLI OF COUNSEL), FOR PETITIONER-RESPONDENT-APPELLANT.
BARCLAY DAMON LLP, BUFFALO (ARIANNA KWIATKOWSKI OF COUNSEL), FOR RESPONDENT-PETITIONER-RESPONDENT.
Appeal from an order of the Supreme Court, Erie County (Donna M. Siwek, J.), entered October 13, 2021 in a proceeding pursuant to CPLR article 75. The order, among other things, denied the petition to vacate an arbitration opinion and award.
It is hereby ORDERED that the order so appealed from is unanimously affirmed without costs.
Memorandum: Petitioner-respondent (petitioner) commenced this proceeding pursuant to CPLR article 75 seeking to vacate an arbitration opinion and award determining that the termination of one of its members was in accordance with the parties' collective bargaining agreement (CBA). On appeal from an order denying the petition and granting the cross petition of respondent-petitioner seeking to confirm the opinion and award, petitioner contends that Supreme Court erred in its determination inasmuch as the opinion and award was irrational and the arbitrator exceeded his authority.
"An arbitration award may be vacated on three narrow grounds: 'it violates a strong public policy, is irrational, or clearly exceeds a specifically enumerated limitation on the arbitrator's power' " (Matter of United Fedn. of Teachers, Local 2, AFT, AFL-CIO v Board of Educ. of City School Dist. of City of N.Y., 1 NY3d 72, 79 [2003], quoting Matter of Board of Educ. of Arlington Cent. School Dist. v Arlington Teachers Assn., 78 NY2d 33, 37 [1991]). We reject petitioner's contention that the opinion and award was irrational.
" 'An award is irrational if there is no proof whatever to justify the award' " (Matter of Town of Greece Guardians' Club, Local 1170, Communication Workers of Am. [Town of Greece], 167 AD3d 1452, 1455 [4th Dept 2018]), and here the arbitrator's award was justified by the language of the CBA, the CBA's reference to the rules for the Classified Civil Service of the County of Erie, and the parties' past practices. Contrary to petitioner's contention, Matter of County of Greene (Civil Serv. Empls. Assn., Inc., Local 1000, AFSCME, AFL-CIO, Greene County Unit 7000, Greene County Local 820) (129 AD3d 1181 [3d Dept 2015], lv denied 26 NY3d 908 [2015]) does not require a different conclusion.
Contrary to petitioner's further contention, the arbitrator did not exceed his authority by effectively rewriting the CBA or ignoring its terms, and instead interpreted the existing terms of the CBA after finding the language of the CBA to be ambiguous (see generally Matter of Niagara Frontier Transp. Auth. [NFTA Police Benevolent Assn.], 192 AD3d 1551, 1551-1552 [*2][4th Dept 2021], lv denied 37 NY3d 914 [2021]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488068/ | Matter of Bukowski v Florentino (2022 NY Slip Op 06607)
Matter of Bukowski v Florentino
2022 NY Slip Op 06607
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, LINDLEY, WINSLOW, AND BANNISTER, JJ.
878 CAF 21-01686
[*1]IN THE MATTER OF JENNIFER A. BUKOWSKI, PETITIONER-APPELLANT,
vBECKY FLORENTINO, RESPONDENT-RESPONDENT. (APPEAL NO. 2.)
MARGARET A. MURPHY, P.C., HAMBURG (MARGARET A. MURPHY OF COUNSEL), FOR PETITIONER-APPELLANT.
THE LAW OFFICE OF RACHEL K. MARRERO, ESQ., BUFFALO (RACHEL K. MARRERO OF COUNSEL), FOR RESPONDENT-RESPONDENT.
DAVID C. SCHOPP, THE LEGAL AID BUREAU OF BUFFALO, INC., BUFFALO (RUSSELL E. FOX OF COUNSEL), ATTORNEY FOR THE CHILD.
Appeal from an order of the Family Court, Erie County (Sharon M. LoVallo, J.), entered January 9, 2020 in a proceeding pursuant to Family Court Act article 6. The order dismissed the petition.
It is hereby ORDERED that the order so appealed from is unanimously affirmed without costs.
Same memorandum as in Matter of Bukowski v Florentino ([appeal No. 1] — AD3d — [Nov. 18, 2022] [4th Dept 2022]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488065/ | Matter of County of Ontario v Gibbs (2022 NY Slip Op 06610)
Matter of County of Ontario v Gibbs
2022 NY Slip Op 06610
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, LINDLEY, WINSLOW, AND BANNISTER, JJ.
883 CA 22-00013
[*1]OF THE REAL PROPERTY TAX LAW BY COUNTY OF ONTARIO, PETITIONER-APPELLANT,
vJEFFREY D. GIBBS, RESPONDENT-RESPONDENT.
JASON S. DIPONZIO, ROCHESTER, FOR PETITIONER-APPELLANT.
LAW FIRM OF AARON M. GAVENDA, ROCHESTER (AARON M. GAVENDA OF COUNSEL), FOR RESPONDENT-RESPONDENT.
Appeal from an order of the Supreme Court, Ontario County (Charles A. Schiano, Jr., J.), entered May 27, 2021. The order, inter alia, vacated a default judgment of foreclosure.
It is hereby ORDERED that the order so appealed from is unanimously affirmed without costs.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488070/ | Matter of Bistany v City of Buffalo (2022 NY Slip Op 06618)
Matter of Bistany v City of Buffalo
2022 NY Slip Op 06618
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: PERADOTTO, J.P., NEMOYER, CURRAN, AND BANNISTER, JJ.
902 CA 22-00495
[*1]IN THE MATTER OF UNDINE BISTANY, RUTHELLEN BUNIS, EDWARD HANDMAN, GERMAIN HARNDEN, ANDREE LIPPES, JOEL LIPPES, ANNE MURPHY, DANIEL SACK, WILLIAM WISNIEWSKI, PETITIONERS-PLAINTIFFS-APPELLANTS, ET AL., PETITIONER-PLAINTIFF,
vCITY OF BUFFALO, COMMON COUNCIL OF CITY OF BUFFALO, BUFFALO CITY CLERK, CITY OF BUFFALO PLANNING BOARD, AND ELMWOOD CROSSING, LLC, RESPONDENTS-DEFENDANTS-RESPONDENTS.
THE LAW OFFICE OF STEPHANIE ADAMS, PLLC, BUFFALO (STEPHANIE A. ADAMS OF COUNSEL), FOR PETITIONERS-PLAINTIFFS-APPELLANTS.
CARIN S. GORDON, CORPORATION COUNSEL, BUFFALO, FOR RESPONDENTS- DEFENDANTS-RESPONDENTS CITY OF BUFFALO, COMMON COUNCIL OF CITY OF BUFFALO, BUFFALO CITY CLERK, AND CITY OF BUFFALO PLANNING BOARD.
RUPP BAASE PFALZGRAF CUNNINGHAM LLC, BUFFALO (MARC A. ROMANOWSKI OF COUNSEL), FOR RESPONDENT-DEFENDANT-RESPONDENT ELMWOOD CROSSING, LLC.
Appeal from a judgment (denominated order) of the Supreme Court, Erie County (Daniel Furlong, J.), entered August 16, 2021 in a proceeding pursuant to CPLR article 78 and declaratory judgment action. The judgment denied and dismissed the petition-complaint.
It is hereby ORDERED that the judgment so appealed from is unanimously modified on the law by vacating the provision dismissing that part of the petition-complaint seeking a declaration and granting judgment in favor of respondents-defendants as follows:
It is ADJUDGED and DECLARED that the Planned Unit Development is valid, and as modified the judgment is affirmed without costs.
Memorandum: In 2019, respondent-defendant Elmwood Crossing, LLC filed an application for a Planned Unit Development (PUD), a type of mixed-use zone, within respondent-defendant City of Buffalo (City) at the site of the former Women and Children's Hospital of Buffalo. Respondent-defendant Common Council of the City of Buffalo (Common Council) voted to send the PUD application to respondent-defendant City of Buffalo Planning Board (Planning Board), which in turn considered it at a subsequent meeting and ultimately recommended that it be approved. The Common Council then considered the proposed zoning amendments required for the PUD, conducted a public hearing, and approved the PUD. Two days later, however, the Common Council reconsidered the PUD at a special session in order to approve the PUD with certain amendments that had not been considered at its prior session.
Petitioners-plaintiffs, who own property near the project, thereafter commenced this hybrid CPLR article 78 proceeding and declaratory judgment action. As relevant, petitioners alleged that the Common Council illegally adopted the PUD with amendments because it was [*2]inconsistent with the City's Comprehensive Plan and that the adoption of the PUD with amendments was improper because the amended PUD was not reviewed by the Planning Board. Supreme Court denied and dismissed the petition-complaint. Petitioners-plaintiffs-appellants (petitioners) appeal.
As an initial matter, and contrary to the assertion of certain respondents-defendants, we conclude that petitioners established their standing to bring the instant claims (see Matter of O'Donnell v Town of Schoharie, 291 AD2d 739, 740-741 [3d Dept 2002]; see also Matter of West 58th St. Coalition, Inc. v City of New York, 188 AD3d 1, 7-8 [1st Dept 2020], mod on other grounds 37 NY3d 949 [2021]; Matter of Committee to Preserve Brighton Beach & Manhattan Beach v Planning Commn. of City of N.Y., 259 AD2d 26, 31-32 [1st Dept 1999]). Contrary to petitioners' contention, however, they failed to meet their burden of establishing that the PUD was inconsistent with the City's Comprehensive Plan (see generally Restuccio v City of Oswego, 114 AD3d 1191, 1191-1192 [4th Dept 2014]; Matter of VTR FV, LLC v Town of Guilderland, 101 AD3d 1532, 1534 [3d Dept 2012]; Matter of Ferraro v Town Bd. of Town of Amherst, 79 AD3d 1691, 1694 [4th Dept 2010], lv denied 16 NY3d 711 [2011]). We likewise reject petitioners' contention that the procedure used to adopt the PUD was unlawful on the ground that certain amendments were not considered by the Planning Board. Here, the Planning Board properly reviewed the PUD, recommended that it be approved, and the Common Council lawfully exercised its discretion to "waive, modify, or supplement the standards of the underlying zone" (City of Buffalo Unified Development Ordinance § 11.3.8.E). Thus, this is not a case where the Common Council failed to first refer the matter to the Planning Board (see generally Matter of Fichera v New York State Dept. of Envtl. Conservation, 159 AD3d 1493, 1495 [4th Dept 2018]).
To the extent that petitioners further contend that the court's decision lacked sufficient detail, we reject that contention (see generally CPLR 2219 [a]). We agree with petitioners, however, that the court erred in dismissing that part of the petition-complaint seeking a declaration rather than declaring the rights of the parties (see Matter of Kester v Nolan, 48 AD3d 1113, 1115 [4th Dept 2008]), and we modify the judgment accordingly.
In light of the above, as petitioners acknowledge, their remaining contention is moot.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488069/ | Matter of Bukowski v Florentino (2022 NY Slip Op 06606)
Matter of Bukowski v Florentino
2022 NY Slip Op 06606
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, LINDLEY, WINSLOW, AND BANNISTER, JJ.
877 CAF 21-01684
[*1]IN THE MATTER OF JENNIFER A. BUKOWSKI, PETITIONER-APPELLANT,
vGENE FLORENTINO, RESPONDENT-RESPONDENT. (APPEAL NO. 1.)
MARGARET A. MURPHY, P.C., HAMBURG (MARGARET A. MURPHY OF COUNSEL), FOR PETITIONER-APPELLANT.
THE LAW OFFICE OF RACHEL K. MARRERO, ESQ., BUFFALO (RACHEL K. MARRERO OF COUNSEL), FOR RESPONDENT-RESPONDENT.
DAVID C. SCHOPP, THE LEGAL AID BUREAU OF BUFFALO, INC., BUFFALO (RUSSELL E. FOX OF COUNSEL), ATTORNEY FOR THE CHILD.
Appeal from an order of the Family Court, Erie County (Sharon M. LoVallo, J.), entered January 9, 2020 in a proceeding pursuant to Family Court Act article 6. The order dismissed the petition.
It is hereby ORDERED that the order so appealed from is unanimously affirmed without costs.
Memorandum: In these proceedings pursuant to Family Court Act article 6, petitioner-respondent grandmother appeals, in appeal Nos. 1 and 2, from two orders granting the motions of respondent-petitioner parents, made at the close of the grandmother's proof at a hearing, to dismiss the grandmother's petitions, which had sought to modify a prior stipulated order of visitation with respect to the subject child. In appeal No. 3, the grandmother appeals from an order granting the cross petitions of the parents seeking termination of the grandmother's visitation. We affirm in each appeal.
As a preliminary matter, we reject the contention of the parents and the Attorney for the Child that appeal Nos. 1 and 2 should be dismissed as untimely, and the contention of the parents that appeal No. 3 should be dismissed as untimely. Inasmuch as the orders in appeal Nos. 1 and 2 indicate that the grandmother may have been served the orders by the court via email only, which is not a method of service provided for in Family Court Act § 1113, and the record does not otherwise demonstrate that she was served by any of the methods authorized by the statute, we cannot determine on this record when, if ever, the time to take the appeals began to run, and thus it cannot be said that the grandmother's appeals in appeal Nos. 1 and 2 are untimely (see Matter of Grayson S. [Thomas S.], — AD3d &mdash, &mdash, 2022 NY Slip Op 05649, *1-2 [4th Dept 2022]; Matter of Batts v Muhammad, 198 AD3d 750, 751 [2d Dept 2021]; Matter of Tynell S., 43 AD3d 1171, 1172 [2d Dept 2007]). Similarly, it cannot be said that the grandmother's appeal in appeal No. 3 is untimely inasmuch as "[t]here is no evidence in the record that the [grandmother] was served with the order . . . by a party or the child's attorney, that [she] received the order in court, or that the Family Court mailed the order to the [grandmother]" (Batts, 198 AD3d at 751; see Family Ct Act § 1113; Grayson S., — AD3d at &mdash, 2022 NY Slip Op 05649, *2; Tynell S., 43 AD3d at 1172).
Contrary to the grandmother's contention in appeal Nos. 1 and 2, we conclude that the court properly granted the parents' motions to dismiss, made at the close of the grandmother's [*2]proof at the hearing, upon determining that the grandmother failed to establish a change in circumstances sufficient to warrant an inquiry into whether modifying the prior stipulated order by increasing her visitation would be in the child's best interests (see Matter of Kashif II. v Lataya KK., 99 AD3d 1075, 1077 [3d Dept 2012]; Matter of Gridley v Syrko, 50 AD3d 1560, 1561 [4th Dept 2008]; Matter of Schwitzer v Plank, 8 AD3d 1077, 1078 [4th Dept 2004]). Contrary to the grandmother's contention in appeal No. 3, we conclude that the court properly granted the parents' cross petitions inasmuch as the record supports the court's determination that the parents presented evidence establishing that a change in circumstances had occurred and that it was in the best interests of the child to terminate the grandmother's visitation (see Matter of Wilson v McGlinchey, 2 NY3d 375, 382 [2004]; Matter of Macri v Brown, 133 AD3d 1333, 1333-1334 [4th Dept 2015]; Matter of Ordona v Campbell, 132 AD3d 1246, 1247-1248 [4th Dept 2015]). The grandmother's "important interest in having a relationship with the child 'must yield . . . where[, as here,] the circumstances of the child's family—including the worsening relations between the litigants and the strenuous objection to grandparent visitation by both parents—render the continuation of visitation with the grandparent[] not in the child's best interest[s]' " (Macri, 133 AD3d at 1334, quoting Wilson, 2 NY3d at 382).
We have considered the grandmother's remaining contentions in these appeals and conclude that none warrants reversal or modification of the orders.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494284/ | MEMORANDUM OPINION ON MOTIONS OF DEBTORS AND KIN-SELLA AND DIAMOND TO DISMISS (Docket Nos. 509 & 510) THIRD-PARTY COMPLAINT FOR EQUITABLE SUBORDINATION
JACQUELINE P. COX, Bankruptcy Judge.
On November 1, 2007, the debtors, consisting of J.S. II, L.L.C. (“JS II”); River Village I, L.L.C. (“River Village”); and River Village West, L.L.C. (“River Village West”) (collectively referred to herein as the “Debtors”),1 filed their objection to the claim of Thomas A. Snitzer and Snitzer Family L.L.C. (“SFLLC”) (collectively, “Snitzer”) and filed a three-count counterclaim for breach of fiduciary duty, breach of contract, and equitable subordination of any Snitzer interests. In response, on December 14, 2007, Snitzer filed an Answer to the counterclaim and a third-party complaint against John Kinsella, Sid Diamond, Kinsella Investments L.P., and Diamond Family, L.L.C. (collectively referred to herein as “Kinsella and Diamond”) seeking equitable subordination of their interests. The Debtors and Kinsella and Diamond, *574each move to dismiss Snitzer’s third-party complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) (made applicable by Federal Rule of Bankruptcy Procedure 7012). Kinsella and Diamond also move to dismiss Snitzer’s third-party complaint under Federal Rule of Civil Procedure 14(a) (made applicable by Federal Rule of Bankruptcy Procedure 7014). For the following reasons, both motions to dismiss Snitzer’s third-party complaint pursuant to Fed. R.Civ.P. 12(b)(6) are denied; the motion of Kinsella and Diamond to dismiss Snitzer’s third-party complaint pursuant to Fed. R.Civ.P. 14(a) is granted.
I. Jurisdiction
The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This matter is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (B), (C), and (0).
II. Background
The Debtors are a group of Illinois limited liability companies established to develop Bridgeport Village, a residential real estate project along the Chicago River in the Bridgeport neighborhood of Chicago, Illinois. The role of JS II in the project was to act as the owner of the project as well as nearby parcels of land held for future development. River Village was set up to develop Bridgeport Village, while River Village West acted as the rental agent for the parcels held by JS II for future development. Snitzer and SFLLC, of which Snitzer is the managing member, own a 50% interest in each of the Debtor companies. However, the Debtors dispute that SFLLC has any membership interest in JS II. Until he was removed by order of a Cook County, Illinois Chancery Court in June 2005, Snitzer also acted as the Debtors’ manager and agent. Kinsella and Diamond are members and principals of JS II and have membership interests in River Village and River Village West.
The Bridgeport Village development project was the first phase in a multiphase residential real estate development project with a goal of developing over 400 residences on approximately thirty-one acres of property. Phase I of the project, Bridgeport Village, consisted of 115 single-family homes on eleven acres of land. Bridgeport Village was the only phase of the development project completed before the project went awry, leaving approximately twenty acres of undeveloped commercially zoned land that has not yet been rezoned for residential use.
The development project became inundated with serious problems. In May 2005, a dispute between Snitzer and both Kinsella and Diamond arose regarding Snitzer’s management of the Debtors. Snitzer filed suit in the Circuit Court of Cook County seeking an injunction against Kinsella and Diamond to bar them from interfering with his management of the project. In response, Kinsella and Diamond filed a counterclaim seeking removal of Snitzer as manager and agent of the Debtors. In June 2005, the circuit court ruled for Kinsella and Diamond and removed Snitzer from management of the project, finding that Snitzer’s conduct placed the integrity of the project in jeopardy. Kinsella and Diamond were subsequently appointed by the circuit court to take over management of the project. Snitzer kept his membership interests in the Debtors. Unfortunately, the Debtors could not overcome the project’s problems and filed for relief under chapter 11 of the bankruptcy code on March 5, 2007. The Debtors, along with Kinsella and Diamond, blame Snitzer for the project’s downfall. On the other hand, Snitzer argues that *575commingling, undercapitalization and mismanagement of the Debtors by Kinsella and Diamond after Snitzer’s removal as manager and agent of the Debtors precipitated the bankruptcy.
A. Allegations Against Snitzer
The Debtors allege that gross misconduct and breach of fiduciary duty by Snit-zer caused the project to go bankrupt. First, the Debtors argue that Snitzer, as manager, violated several City of Chicago ordinances regarding building code, permit, and customary construction requirements. These violations concern approximately ninety homes built during Snitzer’s tenure as manager. During construction of these homes, the Debtors allege that Snitzer visited the construction site only once or twice a week for a few hours at a time. They also complain that Snitzer constructed the homes without registering as a general contractor or using a properly licensed general contractor. It is also alleged that Snitzer failed to hire an architect or engineer to oversee construction of the project, and that many of the homes were built without providing contractors and subcontractors architectural drawings, detailed plans, and specifications. Also at issue is whether Snitzer changed many plans and specifications on the homes causing them to significantly differ from the plans submitted to obtain the building permits, resulting in several building code violations. The violations include homes built with lateral load shear walls that differed from the plans, homes that exceed height restrictions, porches built with combustible materials too close to adjacent structures, homes with third floors that exceed maximum square footage allowed under fire safety regulations, third floors without a required secondary means of egress, homes built lacking proper fire insulation, homes with unpermitted basements, garages with unpermitted roof-top decks, homes that encroach on properties owned by neighboring landowners, and homes that violate setback requirements of the City of Chicago. In sum, the Debtors assert that the City of Chicago found multiple violations in each of the ninety homes built, sold and occupied under Snitzer’s stewardship. The Debtors also state that Snitzer is responsible for various punch-list repair items made on homes to remedy various defects. According to the Debtors, the total cost to remedy the violations and the punch-list items exceeds $3 million.
The Debtors also allege that Snitzer concealed building code violations and obstructed enforcement by the City of Chicago. This may have begun in 2003 when a disgruntled subcontractor began a public crusade challenging the project’s construction practices. Snitzer is alleged to have represented to the other members of the Debtors, as well as the project’s lender and the City of Chicago, that no material problems existed and that the homes were constructed according to the plans submitted to the City of Chicago. In an attempt to rebut the claims of the disgruntled subcontractor, Snitzer hired an architect to inspect the plans submitted to the City of Chicago. At issue is whether the architect ever physically visited the homes and whether Snitzer told the architect that the homes differed significantly from the plans. Did the architect improperly opine that the plans complied with the requirements of the City of Chicago?
Did Snitzer obstruct the City’s enforcement efforts regarding the violations? Seventy-eight stop work orders were issued against the project between May 2002 and November 2004, mostly for work done contrary to permits issued by the City. The problems crescendoed on November 5, 2004 after the City inspected the homes and issued a stop work order on the entire project. As a result of the *576number of violations found, Stanley Kader-beck, head of the City’s Building Department and a structural engineer, became personally involved in the project to resolve the construction issues. Snitzer met with Kaderbeck, promising to resolve the violations. Based upon Snitzer’s promises, the City allowed construction to resume on the project. At issue is whether Snitzer failed to remedy the violations and, after repeated requests, failed to meet with Ka-derbeck again. In January 2005, the City again inspected homes in Bridgeport Village and shut down the entire project. As a result of the shut down, the project’s lender called in its loan.
The Debtors also allege other conduct on Snitzer’s behalf amounting to recklessness, negligence and breaches of fiduciary duty. They allege poor accounting practices by Snitzer. Snitzer, although not an accountant, kept the project’s books and records on a personal computer at his home. Did Snitzer have an independent accountant audit the project’s books? Additionally, the Debtors allege that Snitzer used Debtors’ assets for personal purposes. First, the Debtors allege Snitzer used Debtors’ assets and a subcontractor working on the Bridgeport Village project to construct an addition to the home of Snitzer’s brother-in-law. Snitzer was involved in actions in the Circuit Court of Cook County concerning Dearborn Park, a real estate development project in which the Debtors have no interest. Allegedly Snitzer directed the Debtors’ attorney to represent him personally in the suits. At issue is whether Snitzer used $24,000 of the Debtors’ funds for litigation expenses in connection with these cases.
The Debtors also allege additional breaches of fiduciary duty against Snitzer regarding an insider deal with a former long-time associate of Snitzer’s named Michael Kennedy. Snitzer hired Kennedy to supervise construction work for the project. However, Kennedy was not licensed by the City of Chicago as a contractor. Additionally, in September 2001, Snitzer executed a contract with Banyan Distribution and Building Supplies, Inc. (“Banyan”), a company owned by Kennedy. The contract granted Banyan the exclusive right to provide all windows, millwork, hardware, and cabinetry to 414 homes of the project and designated Snitzer and Kennedy as the only persons authorized to act on the Debtors’ behalf in regards to the contract.2 Under the Debtors’ operating agreement, according to Kinsella and Diamond, this type of contract required the consent of the non-managing members as well. According to the Debtors, none of the other members were aware of the contract. After its execution, both Snitzer and Kennedy began ordering materials under the contract well in advance of when the materials were needed, contrary to the customary business practice of just-in-time delivery of supplies practiced by the Debtors.3 The materials were then deposited into a warehouse where they remained until they were needed. Subsequent design changes may have rendered these materials obsolete requiring the Debtors to purchase replacement materials. Additionally, warranties on many of the supplies began to run when they were shipped to the warehouse. By the time the materials were used, the warranties expired be*577fore sales on the residences closed. This made the subsequent homeowners look to the Debtors to remedy defects that should have been covered under the manufacturer’s warranty.
The Debtors also allege that Snitzer violated his fiduciary duty to the Debtors by establishing an unauthorized deferred compensation agreement between River West and Kennedy, along with two other associates. These agreements may have required the vote of the non-managing members. Allegedly Kinsella and Diamond were not aware of this agreement. In May 2005, when Snitzer was involved in the litigation with Kinsella and Diamond in the circuit court, did Snitzer direct the custodian of the deferred compensation account to liquidate it? On the day Snitzer was removed from the Bridgeport Project, did the custodian wire funds from the account, totaling $395,000, to an account belonging to Kennedy? Did Snitzer transfer this money without seeking authority to do so from either Kinsella or Diamond or the circuit court?
The Debtors allege Snitzer committed them to another insider deal. It is alleged that without obtaining authorization from the other members as was required by the operating agreement, Snitzer gave Arthur Hershkowitz, a long-time associate of Snit-zer’s, an open-ended listing contract to sell industrial properties in Bridgeport Village. Did Snitzer then conceal this agreement from Kinsella and Diamond, even though Snitzer was involved in selecting a different agent to market the property? Hersh-kowitz has since filed a claim for $1 million against the Debtors for the agreement he made with Snitzer.
B. Allegations Against Kinsella and Diamond
Snitzer disputes much of the Debtors’ allegations and blames Kinsella and Diamond for the project’s downfall, stating that the project and the Debtors became bankrupt due to the actions of Kinsella and Diamond after Snitzer was removed as manager and agent for the Debtor companies.
According to Snitzer, the project was highly successful under his management. Supporting this, Snitzer states that the average selling price of a home in Bridgeport Village more than doubled between 2002 and early 2005, increasing from $469,000 to $963,000 and that approximately $16 million of debt was reduced to approximately $1 million, allowing Snitzer to return capital contributions of $2.5 million each to Kinsella and Diamond. Snitzer also points to several awards the project received while he was manager.4 He also points to several parcels of real estate that he caused River Village West, through JS II, to acquire at favorable terms for future development. Included in these properties were the “Iron Street Property,” “Holsum Property,” and the “Gray Property.” Snitzer contends that the project fell apart and entered bankruptcy protection due to mismanagement by Kinsella and Diamond after Snitzer was removed as manager.
According to Snitzer, he operated the Debtor companies as separate and distinct entities, following the formalities required by the Illinois Limited Liability Company Act and Illinois law generally.5 Snitzer maintains that there was never any improper commingling of funds and assets *578while he controlled the accounting of the Debtors. Also, Snitzer alleges in detail the separate roles anticipated for each Debtor company. River Village was set up to function as the operating entity for the development and sale of the homes in Phase I. River Village West was formed to act as the operating entity for the acquisition and management of several industrial rental properties. JS II was formed in connection with a prior development, Dearborn Village, that was managed by Dearborn Village, LLC. Snitzer, Kinsella, and Diamond each had membership interests in Dearborn Village, LLC, either individually or through entities they controlled. Snitzer contends that JS II was a “nominee for the benefit of Dearborn Village,” holding legal title to Dearborn Village property. Were the Debtors’ assets, liabilities, profits, and losses filed on the tax returns for Dearborn Village, not JS II? In connection with River Village and River Village West, JS II was allegedly also a nominee6, holding title to properties owned by River Village and River Village West, with both those LLCs being the real parties in interest. According to Snitzer, Kinsella and Diamond were completely aware of this structure, as well as of the day-to-day management of the project by Snitzer.
After Snitzer was removed as manager of the Debtors in 2005, did Kinsella and Diamond disregard the formalities that Snitzer claims that he observed while managing the companies? Specifically, Snitzer contends that Kinsella and Diamond improperly used funds from one LLC to pay for the expenditures and liabilities of another. If so, was this done without seeking a majority vote of the members of each affected LLC?
Snitzer also states that undercapitalization led to the project’s downfall. Under the River Village operating agreement, Kinsella and Diamond, and their related entities, were to contribute “an amount not to exceed [$8.5 million].” However, Snit-zer states that the most they ever contributed was $2.5 million each, which Snitzer later returned when the project was more prosperous and its chances of success were brighter. According to Snitzer, any money Kinsella and Diamond contributed thereafter has been classified as loans, even though the operating agreement for River Village requires at least $8.5 million in capital contributions before future contributions could be classified as loans. In order to disregard this requirement, did Kinsella and Diamond need to obtain Snit-zer’s vote to classify these cash flows as loans? Snitzer claims he was never approached regarding classifying contributions as loans. According to Snitzer, had the project been properly funded through the required capital contributions, the project would not have descended into bankruptcy.
Snitzer also complains of additional mismanagement by Kinsella and Diamond. First, Snitzer notes that when the project was shutdown in 2005, there was an inventory of homes valued at approximately $6 million and that they could have been sold to bring money into the project, which could have avoided the subsequent financial problems. Second, Snitzer questions hiring and firing decisions Kinsella and Diamond made, particularly the hiring and subsequent termination of a new construction superintendent in 2006. To replace the construction superintendent, Kinsella and Diamond hired FCL Construction, who Snitzer contends is experienced primarily in commercial construction, not residential. Snitzer states that the fees for FCL Construction were three to four *579times higher than the previous superintendent’s fees or any superintendent that Snitzer had hired. Third, Snitzer states Kinsella and Diamond made unreasonably excessive payments to subcontractors for work and materials. Fourth, Snitzer complains that Kinsella and Diamond spent too much money repairing warranty and punch-list items on completed homes. Fifth, Snitzer disagrees with the installation of the structural gates. The gates were required by the City of Chicago to remedy building code violations. Snitzer believes the Debtors should contest the gates requirement or seek reimbursement from the design professionals who were responsible for designing the homes with the defect that now requires installation of the gates. Finally, Snitzer blames Kinsel-la and Diamond for the lagging sales of homes in the project since he was removed as manager and agent in June 2005.
Snitzer filed a third-party complaint in response to the Debtors’ counterclaim seeking equitable subordination of the interests of Kinsella and Diamond under § 510(c) of the Bankruptcy Code. Both the Debtors and Kinsella and Diamond subsequently filed motions to dismiss.7 The Debtors argue that Snitzer’s claims are derivative claims belonging to the estate depriving Snitzer of standing to pursue such claims and that since Snitzer lacks standing, he is violating the automatic stay by pursuing the claims. The Debtors also argue that Snitzer’s claims that relate to post-petition management of the Debtors by Kinsella and Diamond violate the Barton doctrine. There is also a res judicata issue because Snitzer raised similar capitalization allegations at a prior hearing. This Court overruled these objections in authorizing the sale of property. Kinsella and Diamond adopt the Debtors’ arguments but add a procedural objection to the third-party complaint as improper under Fed.R.Civ.P. 14(a), made applicable by Fed.RJBankr.P. 7014.
III. Discussion
A Motion to Dismiss under Fed.R.Civ.P. 12(b)(6), made applicable by Fed. R.Bankr.P. 7012, tests the sufficiency of the complaint, not the merits. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir.1990). Well-pleaded allegations contained in the complaint are regarded as true and are to be read in a light most favorable to the plaintiff. United Independent Flight Officers v. United Air Lines, 756 F.2d 1262, 1264 (7th Cir.1985). If the complaint contains allegations of evidence from which a trier of fact may reasonably infer necessary elements of proof that will be addressed at trial, dismissal is improper. Sidney S. Arst Co. v. Pipefitters Welfare Educ. Fund, 25 F.3d 417, 421 (7th Cir.1994).
A. Snitzer’s Standing to Assert a Claim for Equitable Subordination Pursuant to 11 U.S.C. § 510(c)
8
The Debtors first attack Snitzer’s third-party complaint arguing that he *580lacks standing to bring such a claim. According to the Debtors, Snitzer’s allegations of commingling, undercapitalization, and mismanagement are derivative claims of the estate that may be brought only by them, acting as debtors-in-possession and that any attempt by Snitzer to bring these claims violates the automatic stay imposed when the case was initially filed. Consequently, the Debtors seek sanctions against Snitzer for violating the automatic stay.
Creditors generally have no standing to bring derivative claims such as un-dercapitalization or breach of fiduciary duty against directors, principals, or officers of a debtor corporation without prior court approval as these claims belong to the debtor. See Chrysler Rail Transp. Corp. v. Indiana Hi-Rail Corp., 1996 WL 238788 at *3 (N.D.Ill.1996) (dismissing claim by creditor seeking damages for un-dercapitalization of debtor corporation as claim properly belonged to the trustee); see also Koch Ref. v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1346 (7th Cir.1987), cert. denied, 485 U.S. 906, 108 S.Ct. 1077, 99 L.Ed.2d 237 (1988) (recognizing that claims against officers, directors, and shareholders are claims of the bankruptcy estate). However, the Seventh Circuit has held that creditors have direct standing to pursue an equitable subordination claim under § 510. Matter of Vitreous Steel Products Co., 911 F.2d 1223, 1231 (7th Cir.1990); In re SRJ Enterprises, Inc., 151 B.R. 189, 196-97 (Bankr.N.D.Ill.1993). As Vitreous Steel stated:
Equitable subordination is not a benefit to all unsecured creditors equally, at least where the creditor whose claim is objected to is at least partially unsecured; it is a detriment to the creditor whose debt is subordinated. Thus, when a party seeks equitable subordination, it is not acting in the interests of all the unsecured creditors. While the Trustee [or debtor-in-possession] may find that it is in the best interests of the estate to seek equitable subordination, individual creditors have an interest in subordination separate and apart from the interests of the estate as a whole. The individual creditor should have an opportunity to pursue its separate interest.
Vitreous Steel, 911 F.2d at 1231 (emphasis added).
To equitably subordinate a claim under § 510, the three-prong balancing test first enunciated in Matter of Mobile Steel Co., 563 F.2d 692, 700 is utilized. Vitreous Steel, 911 F.2d at 1237. When applying the test, the court must consider whether “(1) the claimant creditor has engaged in some sort of inequitable misconduct; (2) the misconduct has resulted in injury to the other creditors or in unfair advantage to the miscreant; and (3) subordination of the debt is consistent with other provisions of the bankruptcy code.” Id. This inquiry must be applied on a case-by-case basis focused on fairness to the other creditors with the court considering all relevant circumstances in deciding whether to subordinate a claim. Id.
In his third-party complaint, Snitzer alleges that Kinsella and Diamond engaged in inequitable conduct by disregarding corporate formalities with regard to the Debt- or LLCs, undercapitalization by failing to capitalize the project as required under the operating agreements of the LLCs, and gross mismanagement, citing several examples. Taken as true for the purposes of this motion under Fed.R.Civ.P. 12(b)(6), these allegations support a finding that the *581first prong of the Mobile Steel test, that the creditor has engaged in equitable misconduct, has been satisfied. Snitzer further alleges that this inequitable conduct led to the Debtors’ descent into bankruptcy, thereby injuring Snitzer as a member of the Debtor LLCs, satisfying the second prong of the test that the alleged misconduct results in injury to the other creditors. Further, if Snitzer succeeds in asserting his subordination claim, it would be consistent with the Code’s general good faith requirements, meeting the third prong. He would be placed ahead of Kin-sella and Diamond when distributions, if any, are made as a matter of fairness. Since Snitzer has standing to pursue a claim for equitable subordination under § 510 of the bankruptcy code as indicated in Vitreous Steel and has pled an adequate claim, the motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) for lack of standing is denied.
Since Snitzer has standing to bring his claim for equitable subordination, he has not violated the automatic stay in seeking this relief. As such, sanctions against Snitzer are inappropriate and will not be granted.
B. The Barton Doctrine
The Debtors next argue that Snitzer’s third-party complaint violates the Barton doctrine by bringing an action against Kin-sella and Diamond for acts related to their post-petition management of the Debtors. To support this contention, the Debtors point to paragraphs 41 — 15, 67, 72, 78, and 87(f)-(I) of Snitzer’s third-party complaint. These paragraphs state:
41.Since taking over management from Snitzer in June 2005, Kinsella and Diamond have not been observing corporate formalities and have improperly commingled (and have stated that they intend to continue commingling) funds and assets of the separate LLCs.
42. In particular, Kinsella and Diamond have used revenues from River Village West’s industrial properties to pay for expenditures of River Village to perform work on Bridgeport Village Phase I.
43. Additionally, Kinsella and Diamond used the equity from River [Village] West’s industrial properties as collateral for loans whose proceeds were used to pay for expenditures of River Village to perform work on Bridgeport Village Phase I.
44. Kinsella and Diamond also started using JS II as an operating company and have purported to have that company assume liabilities of River Village, without the consent of Snitzer.
45. Additionally, Kinsella and Diamond are proposing that the Court approve a substantive consolidation of the Debtors, pursuant to which proceeds of the sale of River Village West’s (or, in their view, JS II’s) industrial properties would generate cash to pay for or reimburse expenditures on Bridgeport Village for the benefit of River Village.
[•••]
67. Despite River Village’s requirement for capital to complete Bridgeport Village from 2005 to the present, Kinsel-la and Diamond have repeatedly refused to restore their previous capital contributions or to make additional capital contributions. Instead, upon information and belief, they have made what they characterize as “loans,” in an aggregate amount that is substantially less than their prior capital contributions.
[...]
72. If Kinsella and Diamond had contributed capital to River Village pursuant to their obligations to do so, they could have avoided placing the Debtors *582into bankruptcy, which would have avoided the expenditure of several million dollars in administrative expenses, as well as the recent sale of the “Iron Street Property” at a distressed, as-zoned price of $12.50 per square foot.
[•••]
78. Based on their own repeated declarations of financial crisis and statements to the Bankruptcy Court of a need for cash for the operations of Bridgeport Village, Kinsella and Diamond have admitted that River Village “requires additional capital contributions” and that such capital is “reasonably necessary to meet the expenses and obligations of the Company.”
[...]
87. Based on the incomplete disclosures and discovery he has received to date, Snitzer is informed and believes that Kinsella and Diamond made several serious and material management errors that have diminished the profitability of River Village. Full discovery and an accounting are required to determine the scope and extent of their errors and their impact. He [Snitzer] presently believes that the errors include, without limitation, the following:
[...]
f.Spending unnecessarily large sums on “warranty” or “punch list” work. Based on Snitzer’s experience as a developer, the sums reported by Kin-sella and Diamond may reflect that they have agreed to repair certain alleged problems in sold homes that were out of warranty or that were maintenance issues' rather than construction defects for which River Village was responsible and/or they grossly overpaid for legitimate punch list or warranty work. Discovery is required to determine what these funds were spent on and whether such expenditures were proper. Alternatively, Kinsella and Diamond should be seeking reimbursement from the design professionals, contractors or material suppliers (and their insurers) who were responsible for the alleged problem.
g. Agreeing, upon information and belief, to the costly installation of “structural gates” to remedy an alleged structural issue raised by the City of Chicago. Kinsella and Diamond should either have contested the gates requirement as unreasonable (since the City is imposing the requirement at Bridgeport Village but not on approximately thirty thousand other similarly constructed homes in the City, and the City has admitted that the alleged structural problem poses no life or safety issues), or, alternatively, should be seeking reimbursement from the design professionals (and their insurers) who were responsible for the structural condition giving rise to the alleged problem.
h. Kinsella and Diamond were grossly negligent with respect to the very slow pace with which River Village completed and sold homes after June 2005. Under Snitzer’s management, River Village completed and sold homes at a much more rapid rate. Kinsella and Diamond’s very slow progress, combined with the excessive expenditures to complete and build homes, unnecessarily exacerbated the liquidity problems of River Village.
I. Kinsella and Diamond were grossly negligent with respect to their failure for over two years to sell undeveloped lots at Bridgeport Village to generate revenue for River Village.
By bringing these claims, the Debtors contend that Snitzer violated the Barton doctrine and should face sanctions for doing so.
*583The Barton doctrine, first announced by the Supreme Court in Barton v. Barbour, provides that a trustee of a bankruptcy estate is a statutory successor to the equity receiver and that a receiver cannot be sued without leave of the court appointing him. Barton v. Barbour, 104 U.S. 126, 128-29, 26 L.Ed. 672 (1881). Since the bankruptcy court appoints the trustee that administers property of the estate that is under the control of the bankruptcy court pursuant to the bankruptcy code, the trustee is essentially an agent of the court. Matter of Linton, 136 F.3d 544, 545 (7th Cir.1998). Therefore, under the Barton doctrine, leave from the appointing court is required before filing suit against a trustee for acts done within the trustee’s administrative capacity. Id. Further, the Barton doctrine bars suits against the trustee in the appointing court as well as a foreign forum, such as a state court. In re marchFIRST, Inc., 378 B.R. 563, 566-67 (Bankr.N.D.Ill.2007) (Schwartz, J.). A debtor-in-possession enjoys the same rights and protections as a bankruptcy trustee. 11 U.S.C. § 1107(a); Precision Industries v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 545 (7th Cir.2003). Without prior court approval for suits against a trustee (or a debtor-in-possession, as in this ease), a trustee would face the burden of defending the suit and the threat of distraction, raising the concern that it would be more difficult to appoint a trustee because the appointment would be less appealing or more costly. See marchFIRST, 378 B.R. at 567 (addressing these same concerns that were raised in Linton).
Snitzer makes three arguments disputing the Debtors’ contention that the Barton doctrine has been violated. First, he argues that marchFIRST was wrongly decided and urges that the Barton doctrine only applies to suits in a foreign forum, not a suit brought in the appointing court. Second, Snitzer distinguishes Linton since equitable subordination, and not damages against the trustee (or debtor-in-possession), is being sought in this case. Finally, he argues that the Barton doctrine does not apply in this case because he is seeking relief from Kinsella and Diamond for pre-petition acts.
In his first argument against application of the Barton doctrine, Snitzer contends marchFIRST ignored the “concern with the integrity of the bankruptcy jurisdiction” that a suit against a trustee in another forum would threaten, as stated in Linton. Linton, 136 F.3d at 546. He asserts that there would be no threat to the “integrity of the bankruptcy jurisdiction” by allowing his claim because the appointing court would be deciding the matter. Snit-zer further urges that the holding in marchFIRST is dicta, since the case was actually decided on a statute of limitations issue and is therefore not binding on this Court. However, the policy concerns recognized by both Linton and marchFIRST against allowing suits against a trustee without prior court approval are involved here. Even a suit against a trustee in the appointing court subjects a trustee to the burden of defending a suit (or multiple suits) at a cost to a trustee and to the estate. This could affect effective administration of a bankruptcy estate. Therefore, this Court respectfully declines to disregard marchFIRST.
The remedy distinction Snitzer argues carries some weight. Whether facing a suit for damages or equitable subordination, the same burdens would exist for a trustee in defending the suit, except that equitable subordination targets other creditors, not the trustee. The Debtors have not been sued in the third-party complaint. They have not been named as defendants therein and no relief as to them is sought there.
*584Snitzer’s strongest argument is that the Barton doctrine is inapplicable because the events underlying the undercapitalization claims occurred pre-petition and not during the administration of the bankruptcy estate. Therefore, the Barton doctrine would be inapplicable for events occurring during that time. Snitzer would be barred, however, from asserting claims against Kinsella and Diamond for acts occurring after March 5, 2007 without prior approval of this Court. The issue of potential sanctions for a Barton doctrine violation is premature. The Barton doctrine does not defeat Snitzer’s equitable subordination claim.
C. Res Judicata and Collateral Estoppel
The Debtors next argue that Snitzer’s claims regarding undercapitalization are barred under the doctrine of res judicata. Under res judicata, “[a] final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action.” SECA Leasing Ltd. Partnership v. Nat’l Canada Finance Corp., 159 B.R. 522, 523 (N.D.Ill. 1993) (quoting Federated Dep’t Stores, Inc. v. Moitie, 452 U.S. 394, 398, 101 S.Ct. 2424, 69 L.Ed.2d 103 (1981)). Three essential elements must be satisfied in order for res judicata to apply. La Preferida, Inc. v. Cerveceria Modelo, S.A de C. V., 914 F.2d 900, 907 (7th Cir.1990). These elements are “1) a final judgment on the merits in an earlier action; 2) an identity of the cause of action in both the earlier and later suit; and 3) an identity of parties or privies in the two suits.” Id. A bankruptcy sale order is considered a final judgment on the merits for purposes of res judicata. Matter of Met-L-Wood Corp., 861 F.2d 1012, 1016 (7th Cir.1988). In the Seventh Circuit, identity of a cause of action is determined under the “same transaction” test. Alexander v. Chicago Park Dist., 773 F.2d 850, 854 (7th Cir.1985), cert. denied, 475 U.S. 1095, 106 S.Ct. 1492, 89 L.Ed.2d 894 (1986). Under this test, identity of a cause of action consists of a “single core of operative facts which give rise to a remedy.” Id.
The Debtors argue Snitzer’s undercapi-talization allegations were decided when this Court entered an order approving the sale of the “Iron Street” property on December 10, 2007. The sale was precipitated by the fact that a $5 million payment was due to a secured lender in early 2008. Snitzer objected to the sale, specifically the amount of funds the sale would bring into the estate. The objection centered on Snitzer’s assertion that the failure of Kin-sella and Diamond to contribute capital as provided by the River Village operating agreement required the Debtors to sell the property as zoned for a much lower price than it would sell for if it was rezoned as was planned for the project. Had the capital contributions been made, Snitzer argues, the estate would not have been forced to sell the property in what Snitzer characterized as a fire sale. Snitzer argues that the lender could be paid from the required $8.5 million contribution from Kinsella and Diamond instead of selling the “Iron Street” property as zoned, at a lower value. Snitzer’s objections were overruled in the December 10, 2007 sale order.
Snitzer argues that res judicata is inapplicable in this case for several reasons. First, Snitzer argues Precision Industries bars the application of res judicata in cases where the issue is before the court that issued the sale order in the same bankruptcy proceeding. Snitzer notes that the cases cited by the Debtors involved cases of an attack on the sale order itself. Snitzer distinguishes the present case by noting that he is seeking equitable subordination based on failure to contribute cap*585ital and is not attacking the sale order. Snitzer’s reliance on Precision Industries is mistaken. In Precision Industries, the plaintiff leased a warehouse from the defendant. Precision Industries, 327 F.3d at 540. The defendant lessor filed for chapter 11 bankruptcy during the term of the lease. Id. As part of the bankruptcy, the defendant obtained a sale order authorizing the sale of the warehouse to another company affiliated with the debtor free and clear of any interests pursuant to 11 U.S.C. § 363(f). Id. at 540-41. Although present at the sale hearing, the plaintiff lessee did not raise any objections to the sale itself. Id. After the sale order was entered, the plaintiff lessee vacated the warehouse well before the lease term expired. Id. at 541. The defendant lessor then changed the locks and sealed off access from the plaintiff lessee who subsequently tried to reenter the property. Id. The plaintiff lessee filed suit in a district court alleging, inter alia, wrongful eviction and breach of contract. Id. The defendant lessor argued that § 363(f) extinguished any rights or interests the plaintiff had in the property. Id. Conversely, the plaintiff argued that § 363(f) did not apply; instead § 365(h) applied. Id. The language in § 365(h) indicates that a sale of real property pursuant to § 363 did not eliminate a lessee’s possessory interest in property subject to a sale order, thus setting up a confrontation between the two statutes. Id. Both the plaintiff and defendant requested that the district court remand the matter back to the bankruptcy court in order to clarify the order by determining which provision prevailed. Id. On remand, the bankruptcy court held, inter alia, that the sale order eliminated any possessory interest the plaintiff had in the property, including the remaining term of its lease. Id. Further, the bankruptcy court held that the plaintiff was barred by res judica-ta from further proceeding in the action since the plaintiff had an opportunity to object to the sale but failed to do so. Id. at 541-42. On appeal, the Seventh Circuit held res judicata did not apply since both parties asked the bankruptcy court to clarify a previous order and the bankruptcy judge rendered a decision on the merits that the sale order eliminated the plaintiffs possessory interest. Id. at 543. Basically, Precision Industries dealt with a dispute regarding property interests resulting from the sale order, not issues attacking the sale order itself. Therefore, Snitzer’s broad reading of Precision Industries that res judicata is inapplicable when the issue is heard before the same judge who issued the sale order is not persuasive.
Snitzer also argues that res judicata does not apply because the claims raised in the third-party complaint and the objection to the sale of the “Iron Street” property are different. Although he acknowledges that both claims assert a common fact in that both involve the failure to contribute capital by Kinsella and Diamond pursuant to the River Village operating agreement, there are additional facts rendering res judicata inapplicable. In the “Iron Street” property objection, Snitzer maintains that his argument was that the capital contribution requirement under the operating agreement was triggered when the loan payment became due and was a better financial alternative than selling property as zoned in 2007. Snitzer now argues in his third-party complaint that undercapi-talization led to financial problems resulting from the failure of Kinsella and Diamond to contribute necessary capital after they were appointed as managers in 2005. Under Snitzer’s argument, both claims are based on different evidence and facts, mainly that the objection to the sale of the “Iron Street” property involved financial issues in late 2007; the third-party com*586plaint relates to the financial condition of the project in 2005 and 2006.
Applying the elements for res ju-dicata in this case, the first and third elements are not in issue. Snitzer concedes that the December 10, 2007 sale order of the “Iron Street” property was a final decision on the merits. The parties do not dispute that the parties involved in the objection to the sale of the “Iron Street” property are the parties currently before the Court in the third-party action.9 At issue is whether Snitzer’s third-party complaint, as it alleges undercapitalization by Kinsella and Diamond, is based upon the same core of operating facts involved in the “Iron Street” property sale objection.
In this case, Snitzer’s argument, that the undercapitalization issues raised in the “Iron Street” property sale are different than the undercapitalization issues in the present motion, is persuasive. The applicable argument in Snitzer’s objection to the sale of the “Iron Street” property was:
Rather than engage in a fire sale, Messrs. Kinsella and Diamond should honor their contractual obligation to contribute capital. Under the River Village I LLC Operating Agreement, Messrs. Kinsella and Diamond are obligated to contribute up to $8.5 million in capital when the LLC “requires” it ... If they were to honor their capital contribution obligation, they could contribute either the $5 million needed for the DIP financing pay-down in January, or the amount needed for increased monthly payments, which would be paid back upon a resale subject to zoning.
(Snitzer’s Objections to Proposed Sale of Commercial Properties, and Motion to Compel Debtors to Make Full Disclosure Regarding Sale of Debtors’ Commercial Real Estate and to Enlarge Scope of Rule 2004 Examinations, attached as Ex. B to Third-Party Defendants Kinsella and Diamond’s Motion to Dismiss Snitzer’s Third-Party Complaint, pgs. 14-15) [Dkt. 510] (emphasis added). Snitzer’s contention that this objection suggested an alternative to the sale seems likely. The language from the applicable language from the objection suggests this. Further, Snitzer alleges that the undercapitalization that occurred in 2005 and 2006 concerns issues different from those raised in the sale objection. The language in the objection to the sale does not involve capitalization relating to those years but to a different period of time, from March 5, 2007 to when the objection was before the Court in December 2007. However, Snitzer is not seeking to disturb the sale order but is seeking a different remedy, equitable subordination. There is no attack on the sale order. Since the third-party complaint is not based on the same core of operative facts which give rise to a remedy, there is no identity of causes of action. Snitzer did not seek to enforce the obligation in December at the sale hearing; therefore, his effort to rely on it in the third-party complaint is fresh, it is not an effort to reliti-gate. Snitzer should not have been required to seek equitable subordination in December because equitable subordination must proceed via an adversary proceeding, as required under Fed.R.Bankr.P. 3007(b) and 7001(8), making it impractical to delay a sale until trial of an adversary proceeding which takes longer to resolve because *587it entails discovery and motion practice. The Debtors’ motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) Snitzer’s third-party complaint due to the undercapitalization claim as barred by res judicata is denied.
Kinsella and Diamond also urge that Snitzer’s undercapitalization allegations are barred by collateral estoppel. Collateral estoppel bars litigation of an issue of law or fact where the issue was actually litigated and decided in a prior action. La Preferida, 914 F.2d at 905 n. 7. Four elements must be met for collateral estoppel to apply: “1) the issue sought to be precluded must be the same as that invoked in the prior action, 2) the issue must have been actually litigated, 3) the determination of the issue must have been essential to the final judgment, and 4) the party against whom estoppel is invoked must be fully represented in the prior action.” Id. at 906.
In this case, the test cannot be met for the same reasons the applicability of res judicata was rejected. The issues in the objection and the third-party complaint regarding undercapitalization do not cover the same period of time. The second requirement that the issue must have been actually litigated cannot be satisfied herein either. The capitalization issue was not litigated; it was asserted in a summary fashion but not actually plead and proven, which should be the standard as to whether an issue has been previously litigated. Further, the third element is not met either. Granting the sale motion only required a determination that “a good, sufficient, and sound business purpose and justification and compelling circumstances” existed in order to approve the sale. (Order Under 11 U.S.C. §§ 105, 363, and 365 and Fed.R.Bankr.P. 6004 and 6006, (A) Approving Purchase and Sale Agreement, (B) Authorizing Sale of Real Property Free and Clear of Liens, Claims, Encumbrances, and Interests, and (C) Granting Related Relief, attached as Ex. C to Third-Party Defendants Kinsella and Diamond’s Motion to Dismiss Snitzer’s Third-Party Complaint, 1ÍI, pg. 4). Deciding and specifically ruling on the capitalization issue was not necessary to make this determination. The Court’s order merely overruled the objections without determining the issue of capitalization requirements. The sale motion was granted because it was clear that the proposed sale had a valid business justification. The sale order, however, did not eliminate future consideration of the undercapitali-zation concerns. The equitable subordination effort and other remedies such as breach of fiduciary duty, etc. are available to address this issue. Therefore, Kinsella and Diamond’s motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) Snitzer’s underca-pitalization claims on collateral estoppel grounds is denied.
D. Federal Rule of Bankruptcy Procedure 7011
Kinsella and Diamond additionally move to dismiss Snitzer’s third-party complaint arguing that it is procedurally improper. They urge that a claim for equitable subordination cannot be filed as a third-party claim under Fed.R.Bankr.P. 7014(a).
Kinsella and Diamond also argue that because Snitzer does not allege that they are liable to him for all or a part of the claim against them, that he can not use Fed.R.Civ.P. 14 to combine all controversies having a common relationship into one action. Because there are no allegations that Kinsella and Diamond are liable to Snitzer or SFLLC for all or part of a claim against them, the third-party complaint fails for this reason too.
Fed.R.Bankr.P. 7001(8) requires that claims for equitable subordination be pursued via an adversary proceeding. See *588Fed.R.Bank.P. 7001 (“The following are adversary proceedings: ... (8) a proceeding to subordinate any allowed claim or interest, except when a chapter 9, chapter 11, chapter 12, or chapter 13 plan provides for subordination!]]”); see also In re Protarga, Inc., 2004 WL 1906145 at *3 (Bankr. D.Del.2004) (“Claims for equitable subordination must be brought as a separate adversary proceeding pursuant to Rule 7001(8) of the Federal Rules of Bankruptcy Procedure.”).
Snitzer concedes that his third-party complaint is improper under Rule 7014, but that the improper filing is a technicality. Although a technicality, it is improper under the Federal Rules of Bankruptcy Procedure and must be dismissed. However, this does not preclude Snitzer from filing a complaint in an adversary proceeding. Therefore, Kinsella and Diamond’s motion to dismiss Snitzer’s third-party complaint pursuant to Fed. R.Bankr.P. 7014 is granted without prejudice to Snitzer bringing a separate adversary proceeding relating to these matters within thirty days.10
IV. Conclusion
For the reasons set forth above, the Debtors’ and Third-Party Defendants’ Motions to Dismiss Third-Party Complaint (Dkt. Nos. 509 and 510) pursuant to Federal Rule of Civil Procedure 12(b)(6) (made applicable by Federal Rule of Bankruptcy Procedure 7012) are denied. Third-Party Defendants’ Motion to Dismiss Third-Party Complaint (Docket No. 510) pursuant to Federal Rule of Civil Procedure 14(a) is granted without prejudice.
. An additional Debtor LLC, KND Investments, LLC, did not join the motions to dismiss.
. At the time the contract was executed, only Phase I of the project had commenced. Phase I consisted of only 115 homes.
. Just-in-time delivery involves ordering supplies so they arrive as needed for a particular project. This avoids storage costs and allows the warranty to transfer to the homeowners rather than allow the warranty to expire while the supplies sit in storage.
. These awards were: Best City of Chicago Project, Chicago Association of Homebuilders (2002, 2003, and 2004); Best City Development, Chicago Sun Times (2003); Best City Development, New Homes Magazine (2003).
. The Illinois Limited Liability Company Act is 805 III. Comp. Stat. §§ 180/1-1, et seq.
. The Debtors contend “alter-ego” is a more apt term.
. Kinsella and Diamond are jointly represented by Tabet, DiVito & Rothstein, LLC ("TDR"). TDR was counsel for Kinsella and Diamond before the bankruptcy and was authorized by this Court on May 30, 2007 to continue to pursue claims against Snitzer in state court. Kinsella and Diamond are suing Snitzer therein on the Debtors’ behalf.
. Section 510(c) states:
Not withstanding subsections (a) and (b) of this section, after notice and a hearing, the court may-
(1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest; or
*580(2) order that any lien securing such a subordinated claim be transferred to the estate. 11 U.S.C. § 510(c).
. There may be an issue as to whether Kinsel-la and Diamond were parties to the sale order hearing since that hearing involved Snitzer's objections to the Debtor’s motion to approve sale, a proceeding where Kinsella and Diamond were not named parties. In any event, Kinsella and Diamond are in privity with the Debtors as they are the Debtors' current managers.
. The Debtors' counterclaim to the objection should have been pursued as an adversary proceeding. Fed.R.Bankr.P. 3007(b). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494288/ | MEMORANDUM OF DECISION
EUGENE R. WEDOFF, Bankruptcy Judge.
This adversary proceeding, arising in the Chapter 11 bankruptcy case of United Air Lines, Inc. (referred to as “United”), was brought to enforce an asserted contractual right to operate turboprop aircraft from the central terminal of Los Angeles International Airport (“LAX”). The defendants are the City of Los Angeles and the city department in charge of its airports, Los Angeles World Airports (referred to collectively as “the City”), which contend that prohibiting turboprop operations from the central terminal is an appropriate exercise of their regulatory au-
thority. United also contends the City’s action regarding United’s turboprop operations violated the automatic stay imposed by § 362(a) of the Bankruptcy Code (Title 11, U.S.C.) and is a discrimination prohibited by § 525(a) of the Code.
The proceeding is now before the court, following the reopening of evidence, on United’s motion to reconsider a judgment entered in favor of the City. As discussed below — and as determined originally — the evidence does not establish either a violation of the automatic stay or a discrimination prohibited by § 525. However, contrary to the original judgment, the evidence does establish that under a lease with the City, United was given the right to operate commercial aircraft, including turboprops, at one of the central terminal buildings at LAX and that a permanent injunction is the appropriate remedy for the City’s threatened violation of this right. Additionally, the jurisdictional basis for the entry of judgment requires amendment. Accordingly, United’s motion for reconsideration will be granted, and a revised judgment order entered.
Jurisdiction
District courts have exclusive jurisdiction over bankruptcy cases, pursuant to 28 U.S.C. § 1334(a), and they have concurrent jurisdiction over all civil proceedings “arising under title 11, or arising in or related to cases under title 11,” pursuant to 28 U.S.C. § 1334(b). A proceeding to determine whether action by a creditor violates the automatic stay imposed by § 362 of the Bankruptcy Code “arises under” the Code, and so is within the district court’s jurisdiction. See Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir.1987) (“Congress used the phrase ‘arising under title 11’ to describe those proceedings that involve a cause of action created or deter*795mined by a statutory provision of title 11.”). Similarly, a proceeding to determine whether action by a creditor is a discrimination prohibited by 11 U.S.C. § 525(a) “arises under” the Code. Proceedings that “arise under” the Code — invoking a substantive right that it provides— are core proceedings. Barnett v. Stern, 909 F.2d 973, 981 (7th Cir.1990).
Pursuant to 28 U.S.C. § 157(a) and its own Internal Operating Procedure 15(a), the District Court for the Northern District of Illinois has referred its bankruptcy cases to the bankruptcy court of this district. When presiding over a referred case, the bankruptcy court has jurisdiction under 28 U.S.C. § 157(b)(1) to enter appropriate orders and judgments in core proceedings within the case. This court accordingly may enter a final judgment in this proceeding as to United’s claims arising under § § 362 and 525.
However, an action to enforce a contract right belonging to a bankruptcy estate does not arise under the Code; rather, it is “related to” the underlying bankruptcy case because its outcome may affect the property that the estate has available for payment to creditors. In re Xonies, Inc., 813 F.2d 127, 131 (7th Cir.1987). Contract claims of an estate that are only within the “related-to” jurisdiction are not core proceedings. Home Ins. Co. v. Cooper & Cooper, Ltd., 889 F.2d 746, 749 (7th Cir.1989); Sokol v. Mass. Mut. Life Ins. Co. (In re Sokol), 60 B.R. 294 (Bankr.N.D.Ill.1986).1 Thus, as to United’s claim for breach of contract, this court may not issue a final judgment, but rather is limited to making proposed findings of fact and conclusions of law, subject to entry of judgment by the district court, pursuant to 28 U.S.C. § 157(c)(1).
Both United and the City disagree with this determination. The City argues that the court should decline to its exercise any jurisdiction, under the doctrine of primary jurisdiction. “Primary jurisdiction,” as the Supreme Court explained in United States v. Western Pac. R.R. Co., 352 U.S. 59, 63-64, 77 S.Ct. 161, 1 L.Ed.2d 126 (1956), “applies where a claim is originally cognizable in the courts, and comes into play whenever enforcement of the claim requires the resolution of issues which, under a regulatory scheme, have been placed within the special competence of an administrative body.” The doctrine has no application here. United does not argue in this proceeding that the City lacks authority under applicable administrative regulations to determine aircraft use and placement at LAX; nor does the City argue that it is required by any administrative regulation to prohibit United from operating turboprop aircraft from the central terminal at LAX. Rather, United asserts that the City contractually obligated itself to allow United to use certain central terminal gates for whatever commercial aircraft it could properly land at the airport, and the City denies that it undertook such a contractual obligation. No regulation of the Secretary of Transportation or the Federal Aviation Administration has any bearing on this contract *796dispute, and the decisions cited by City— which did involve governing administrative regulations — are plainly inapplicable.2
United, on the other hand, argues that the court has core jurisdiction over all the matters involved in its complaint, including its breach of contract claim. First, United asserts that the breach of contract it alleges would also violate the automatic stay, and hence that the court may determine these “intertwined” issues together. In granting a preliminary injunction in favor of United and in issuing an initial judgment against United, the court accepted this argument. However, as discussed below, even a material breach of a contract with a debtor in bankruptcy does not, in itself, violate the automatic stay, and United has proven no additional action by the City that would constitute such a violation.
Second, United argues that by failing to object immediately to this court’s statement regarding jurisdiction when the preliminary injunction was issued, the City implicitly consented to the court’s exercise of core jurisdiction. However, well before the entry of that injunction, the City had answered United’s complaint by stating that it “admits ... that certain claims as alleged are core proceedings and that the Court has non-core concurrent jurisdiction over other claims asserted herein....” (Adversary Docket No. 17 at ¶ 17.) Thus, the City denied, at its first opportunity, that United’s entire complaint was within the court’s core jurisdiction. The City took no action thereafter to indicate consent to the bankruptcy court of a final judgment on the merits of the entire complaint, and it asserted that the breach of contract claim was noncore in its post-trial brief. (Adversary Docket No. 140 at 15-17.) Whether a party’s failure to object can allow a bankruptcy court to enter judgment in a noncore matter is an unsettled question. See In re Sheridan, 362 F.3d 96, 100, 103 n. 5 (1st Cir.2004) (collecting conflicting authorities). Here, however, where the City denied core jurisdiction throughout the proceeding, there is no basis for any finding of consent, express or implied.
Accordingly, the findings and conclusions set out in this decision are final only as to United’s claims under § § 362 and 525 and are proposed for the district court’s consideration as to United’s claim for breach of contract.
Findings of Fact
The facilities at Los Angeles International Airport include a large central terminal area composed of nine separate terminals or “satellite buildings.” Three of these terminals, designated T1 through T3, are on the north side of the central terminal area. One, the Tom Bradley International Terminal, is on the west end, and the remaining five, T4 through T8, are on the south end. (Tr. Vol. I at 181-83; Tr. Vol. IV at 37-38; United Ex. 120; City Supp. Ex. 31.)3 In addition to the central *797terminal area, there are three remote terminals, separate from the central terminal area. (Tr. Vol. I at 184.)
United’s current operations at LAX are conducted exclusively from gates at T6, T7, and T8. (Tr. Vol. I at 185.) However, until June 2005, United conducted substantial commuter operations, using smaller, turboprop aircraft, from a remote terminal east of the central terminal area. United’s right to use its terminal space is governed by leases entered into with the City (United Ex. 1-3), and its use of non-terminal airport property (runways, taxiways, etc.) is governed by an Air Carrier Operating Permit or “ACOP” (City Ex. 8). United’s lease for T8 has a term expiring on with a January 1, 2022. (United Ex. 1, § 5.)
In early 2005, United informed City officials that it intended to move its commuter operations from the remote facility to T8. On June 3, 2005, the Executive Director of LAX issued a letter (United Ex. 28) stating that this action by United would violate a 1997 policy adopted by the City’s Board of Airport Commissioners, which, according to the letter, “authorized the-Executive Director to prohibit commuter aircraft from operating at gates in the Central Terminal Area.” The letter formally notified United that “turboprop commuter aircraft operated by or on behalf of United are prohibited from operating at gates in the Central Terminal Area.” The letter went on to state that United could lose its right to operate from gates at T6 if the aircraft using those gates could be accommodated at other terminal gates to which United had access without “unreasonable operational inefficiencies.” The City stated it would consider any of United’s T8 gates that were being used by aircraft with fewer than 100 seats available for this accommodation. All of United’s commuter aircraft have fewer than 100 seats. (Tr. Vol.I, 79.) The letter concluded with the statement that the City would be willing to consider United’s proposed use of T8 for commuter operations “in exchange for United’s relinquishment of its preferential gate access rights in Terminal 6.”
Four days after issuing this letter, the City changed its position. In a letter of June 7, 2005 (United Ex. 26), the Executive Director stated: “We appreciate United’s attention to ensuring a safe operation of the turboprop activities for passengers and employees. As mentioned in my letter of June 3, the Board specifically authorized the Executive Director to prohibit commuter aircraft from operating at gates in the Central Terminal Area. However, the turboprop operation at Terminal 8, as you were advised yesterday morning, is formally approved. This approval is subject to revocation on six months notice.” United thereafter moved its entire commuter operation to T8, where they continue to be carried on.
On November 15, 2005, United filed a notice that it would reject the lease on the remote terminal that it had previously used for commuter operations. (Case Docket No. 13533.) On November 22, 2005, a new Executive Director issued a letter to United stating: “Please consider this letter as Notice that the approval granted in the June 7, 2005, letter, is hereby revoked. Accordingly, United Airlines shall cease such turboprop operations in Terminal 8 on or before May 24, 2006.” (United Ex. 36.) United thereafter brought this adversary proceeding, seeking an injunction against any action by the City to prevent turboprop operations from being conducted at T8.
*798A temporary restraining order, prohibiting the enforcement of the ban on T8 turboprop operations, was entered by this court and continued by consent of the parties pending a hearing on a preliminary injunction, conducted on July 27 and 28, 2006. The court entered a preliminary injunction on August 11, again prohibiting the City from enforcing its ban on United’s T8 turboprop operations.
A trial on the merits of United’s complaint was conducted on March 15, 2007, and on June 20, the court entered a judgment in favor of the City on all counts of the complaint. United filed a timely motion for reconsideration under Rule 9023 of the Federal Rules of Bankruptcy Procedure. In considering this motion, the court requested additional briefing on several matters and reopened the evidence.
Other facts relevant to the determination of this adversary proceeding are discussed in connection with legal conclusions set out below.
Conclusions of Law
United’s complaint in this matter is in seven counts.4 However, it raises only three substantive grounds for relief. For two of those grounds — violation of the automatic stay and discrimination under § 525(a) — United failed to establish a right to relief, but United did establish that the City is threatening in a contractual breach as to which United is entitled to relief.
A. Breach of Contract
1. The language of the lease. Although the documents governing United’s operations at LAX are complex, United’s claim for breach of contract is relatively straightforward. Under Section 23 of the lease governing its use of T8 (United Ex. 1 at 77), the City agreed that the “rules, regulations and directives” adopted for LAX “shall provide for the preferential, but not exclusive, assignment of gate positions and loading ramps” to United, that this assignment of gate positions and loading ramps must “take into account [United’s] needs and requirements” for then-use, and that “gate positions and loading ramps are to be used for the loading and unloading of aircraft in passenger service in keeping with industry practice at the Airport.”5 Section 22 of the lease states that United’s preferential use of gate positions and aircraft loading ramps is a right that “shall vest” in United. (Id. at 76.)6 *799And Section 30 of the lease (id. at 84) protects the rights granted to United from contradictory airport regulations by providing that such regulations “shall ... not ... contravene the rights granted to Lessee under this Lease.”7
United’s claim is that the City, by banning United’s turboprops from T8, violates United’s right to use T8 gate positions and loading ramps in preference to other carriers.8 The City has responded by arguing that “gate positions” and “loading ramps” are not part of the surface outside of the terminals, on which aircraft park during loading and unloading, and that use of the paved surface outside the terminal is not governed by the T8 lease, but by the ACOP. Thus, in one of its trial briefs (Docket No. 119 at 15), the City states:
[T]he ACOP and the Terminal Lease govern different substantive aspects of the relationship between LAWA and UAL, with the ACOP permitting UAL (in consideration of the payment of landing fees) to use the runways, taxiways, aprons and similar areas for aircraft landings and departures, and the Terminal Lease permitting UAL to use terminal assets (in consideration of rent). The portions of LAX governed by each instrument are entirely separate, with no substantial portion of the “demised premises” described in the Terminal Lease overlapping with the permission granted in the ACOP.
Consistent with this argument, the City presented testimony that “gate positions” and “loading ramps” are part of the terminal building covered by the lease, rather than the paved surface outside the terminal building. Specifically, the City’s presented the affidavit of Michael DiGirolamo, the Deputy Executive Director of Airport Operations at LAWA stating that a “gate position” is a “hole in the terminal wall approximately 20 feet above the apron (the part of the airfield on which, airplanes sit when they load and unload passengers)” and that a “loading ramp” is a “large *800concrete ramp[] that descended from a terminal gate position ... down to the apron.” (City Supp. Ex. 53 at ¶ 16.) During a subsequent hearing, Mr. DiGirolamo expanded these definitions somewhat. His trial testimony was (1) that a “gate position” was either a “numerical designation for where an aircraft is parked on the apron” or “the numerical area inside the satellite where a ... door is to either use a ramp or a jet way” (Tr. Vol. IV at 32-33) and (2) that a “loading ramp” is any “conveyance which passengers [can use to] get from the satellite public area down to the apron,” thus including stairways in addition to sloping concrete ramps (id. at 29).
In this way, the City argues that the preferential assignment of “gate positions” and “loading ramps” accorded by the T8 lease gives United only a right to use certain portions of the terminal building, reserving to the City — free of any limitations imposed by the lease — the right to regulate the paved surface outside the terminal building, so that a regulation limiting the types of aircraft that may load and unload on that surface could not be a breach of the lease.
The language of the lease itself, however, contradicts the City’s argument, pointing instead to a definition of “gate positions and loading ramps” that necessarily includes pavement outside the terminal.
• Throughout the lease, “gate positions and loading ramps” are described as being “adjacent” to the demised premises treated by the lease. See, e.g., Sections 7G (United Ex. 1 at 29), 22 (id. at 76), and 23 (id. at 77). The lease (in Section 3) defines portions of the terminal “demised” to United. (Id. at 3-12.) If “gate positions and loading ramps” were part of the terminal, they would not be “adjacent to” the demised premises, but part of them.
• Section 22 (id. at 76) of the lease deals directly with the paved surfaces of the airport outside the terminals. It states:
City is providing as a means of access for aircraft between the Satellite [Terminal} Buildings and the taxiway and runway system of the Airport, large areas of apron pavement, gate positions and aircraft loading ramps in the area immediately adjacent to and surrounding the Satellite Buildings.
Thus, “gate positions and ... loading ramps” are described as part of the access to taxiways and runways that “surround” the terminal buildings, not part of the buildings themselves.
• Section 23 of the lease (id. at 77) concludes with an agreement that United will not “use the gate positions and loading ramps for long-term aircraft parking or aircraft maintenance purposes.” Obviously, aircraft cannot park on parts of the terminal building, but only on the paved surface outside the building.
• Section 24 of the lease (id.) provides that the City “reserves the right to regulate the use of vehicles and automotive equipment upon, over and across the apron and loading ramps around the passenger terminals.” Again, this reservation only is meaningful if loading ramps are part of the pavement surrounding the terminals rather than a means of vertical movement within the terminal itself.
The ACOP itself is consistent with these lease terms. The second recital of its preamble (City Ex. 8 at 1, LA 00190) states that the permit governs “Airport landing facilities,” which the ACOP defines as “common use areas of the airfield, which include the runways, taxiways, service roads, and common use ramps” (id. at 4, LA 00193). As discussed above (n.3), “common use” areas are distinct from those over which a carrier has been given preferential use. Thus, the ACOP distin*801guishes between common use ramps (paved surfaces that it regulates as part of the landing facilities) and preferential use ramps (paved surfaces that it does not regulate).
These provisions make it clear that the gate positions and loading ramps for which United is given preferential use under the T8 lease indeed include the paved surfaces adjacent to its terminal space. The lease thus requires the City to allow United to use this pavement for loading and unloading its aircraft, in preference to other carriers, taking into account United’s needs and requirements, and in keeping with industry practice at the Airport. Industry practice at LAX has included substantial operation of turboprop aircraft from the central terminal area (Stipulation of July 27, Tr. Vol. I at 8-9; City Ex. 27), and so the prohibition of turboprop aircraft from T8 contradicts the preferential use provision of the lease.9
Similarly, the City has no basis for its position that it may deprive United of gate positions and loading ramps at T6 if United does not operate aircraft with at least 100 passengers at its T8 gates. The T6 lease covers certain space in Terminal 6 at LAX and expires on Nov. 15, 2021. (United Ex. 2, § 4). The lease is introduced by a set of findings (id. at 3) which explain that, under the lease, the City “will manage ... four gates in Terminal No. 6, subject to United’s preferential rights, and may schedule international flights of other air carriers in those gates when they are not needed for United’s flights.” The lease grants United preferential use of the four specified T6 gates with conditions consistent with the findings: first priority is given to United’s international flights, second priority to the international flights of other carriers, and third priority “to domestic flights of United and other airlines ... when the gates are not needed for international flights.” (Id., § 5(b)(10) at 18-20.) The only minimum use requirement imposed on United is that it conduct at least 8 total flights per day among the four preferential use gates in order to *802retain its rights to the gates. (Id. at 25-29.) The entirety of Section 5 of the lease, dealing with preferential use, can be modified only by “mutual written agreement.” (Id., § 5(h) at 31.)
2. Reserved powers and unmistakably. As an alternative to its argument regarding interpretation of the T8 lease, the City asserts that because its prohibition on turboprop operations was made pursuant to its regulatory authority, the “reserved powers” and “unmistakability” doctrines operate to bar United’s claim that the City breached the lease. These doctrines, however, do not bar United’s claim.
As a general rule, contracts involving governmental units are enforced under generally applicable contract law. See United States v. Winstar Corp., 518 U.S. 839, 895, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996) (quoting Lynch v. United States, 292 U.S. 571, 579, 54 S.Ct. 840, 78 L.Ed. 1434 (1934) for the rule that “[w]hen the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals”); Hall v. Wisconsin, 103 U.S. 5,11, 26 L.Ed. 302 (1880) (“When a State descends from the plane of its sovereignty, and contracts with private persons, it is regarded pro hac vice as a private person itself, and is bound accordingly.”). Indeed, as applied to state and local governments, this principle is embodied in the Contract Clause of the Constitution: “No state shall ... pass any ... Law impairing the obligation of Contracts.... ” U.S. Const, art. I, s. 10 cl. I.10
However, the general rule of enforcement of governmental contracts is subject to limitations designed to assure that a government “continues to possess authority to safeguard the vital interests of its people.” Home Building & Loan Assn. v. Blaisdell, 290 U.S. 398, 434-35, 54 S.Ct. 231, 78 L.Ed. 413 (1934). One of these limitations, the “reserved powers’ doctrine,” provides that certain powers of sovereignty of a government — “essential attribute[s] of its sovereignty” — may not be contracted away and that the government cannot be compelled to adhere to a contract that purports to do so. U.S. Trust Co. v. New Jersey, 431 U.S. 1, 23-24, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977); Matsuda v. City and County of Honolulu, 512 F.3d 1148, 1153 (9th Cir.2008) (identifying the police power and eminent domain as protected attributes of sovereignty) At the same time, governmental contracts that are essentially financial transactions are not subject to the reserved power doctrine. See U.S. Trust, 431 U.S. at 24, 97 S.Ct. 1505 (“Whatever the propriety of a State’s binding itself to a future course of conduct in other contexts, the power to enter into effective financial contracts cannot be questioned.”). Thus, the Matsuda decision noted that “most contracts in which a state agrees to limit its power to act in the future will not be subject to prohibition”. Id. Moreover, “when a state is itself a party to a contract, courts must scrutinize the state’s asserted purpose with an extra measure of vigilance,” McGrath v. Rhode Island Retirement Bd., 88 F.3d 12, 16 (1st Cir.1996). “The government-as-contractor cannot exercise the power of its twin, the government-as-sovereign, for the purpose of altering, modifying, obstructing, or violating the particular contracts into which it had entered with private parties.” Yankee Atomic Elec. Co. v. United States, 112 F.3d 1569, 1575 (Fed.Cir.1997).
*803A second limitation on governmental contract enforcement is the “unmistakability” doctrine, a canon of construction disfavoring implied governmental obligations in public contracts. This doctrine provides that: “ ‘sovereign power ... governs all contracts subject to the sovereign’s jurisdiction, and will remain intact unless surrendered in unmistakable terms.’ ” Bowen v. Public Agencies Opposed to Social Security Entrapment, 477 U.S. 41, 52, 106 S.Ct. 2390, 91 L.Ed.2d 35 (1986). Accordingly, “a contract with a sovereign government will not be read to include an unstated term exempting the other contracting party from the application of a subsequent sovereign act, nor will an ambiguous term of a grant or contract be construed as a conveyance or surrender of sovereign power.” Winstar, 518 U.S. at 878, 116 S.Ct. 2432. Again, though, this doctrine is itself limited. The plurality opinion in Winstar cautioned against: “adopting] any rule of construction that would weaken the Government’s capacity to do business by converting every contract it makes into an arena for unmistakability litigation.” Id. at 886, 116 S.Ct. 2432.
The City contends both that its ban of turboprop aircraft from T8 is essential to protect public safety and convenience and that it has not surrendered its right to regulate use of T8 in unmistakable terms. Neither contention is supported by the evidence.
The use of turboprops in the central terminal area of LAX was not shown to present any significant risk to public safety. Turboprops have safely operated from the central terminal area continuously and in large numbers, since the mid-90s. Moreover, the safety of turboprop operations was confirmed by the manager of LAX and the chief of its operations, with overall responsibility for airport safety during the relevant period. (Tr. Yol. I at 177; Vol. II at 4-5, 10, 15-18.) It was the conclusion of the Executive Director, expressed in the letter of June 7, 2005 (United Ex. 29). And it is reflected in an internal staff memorandum addressing the subject. (United Ex. 111.) The major evidence of a potentially unsafe operation was provided in the testimony of Michael DiGirolamo. (Tr. Vol. II at 43-44.) However, these safety concerns were based on observations made in 1996-97 that did not involve T8 and were made without knowledge of safety measures employed by United. (Tr. Vol. II at 79-80.)
The evidence indicates that, rather than being concerned with safety, the City’s decision to prohibit turboprop operations from the central terminal facility was based on a desire to increase passenger capacity at LAX. Airport officials indicated both in writing (United Ex. 28) and orally (Tr. Vol. I at 128 — 29) that they would be willing to allow United to continue to use T8 for turboprop operations if United gave up its preferential right to terminals on T6. But maximizing airport efficiency in connection with air carrier contracts is essentially a financial transaction. The T8 lease itself, as reflected in its preamble (United Ex. 1 at 1-2) was negotiated in connection with “the construction of expanded passenger terminal facilities” with United undertaking the financial responsibility for the construction.11 The grant of preferential gate access at T8 was a necessary component of the overall transaction: United could not have been expected to agree to finance construction of a terminal without assurance that it would be able to use the terminal in the ordinary course of *804its business. That the City now believes that there could be a more efficient use of the terminal does not provide a basis for allowing a regulatory rewriting of the parties’ agreement under the reserved powers doctrine.12
The unmistakability doctrine is also inapplicable here. Even if the T8 lease, as an essentially financial transaction, is subject to the doctrine, the lease does in fact restrict future regulation in unmistakable terms. As discussed above, Section 23 of the lease clearly accords United preferential use of the gate positions and loading ramps needed to operate its business from T8, and Section 30 explicitly states that the “rules, regulations, orders, directives, laws, ordinances and statutes of City (including Board and General Manager) shall ... not ... contravene the rights granted to Lessee under this Lease.”
United, then, is entitled to enforcement of its preferential use rights as against the City’s announced ban of turboprop use at T8.
3. Form of relief. In addition to being supported by a finding that United was likely to prevail on the merits of its contract claim, the preliminary injunction previously entered in this case was grounded in findings that the balance of harms and the public interest favored that relief.13 Now that United has established a breach of contract, the question of appropriate relief is that of specific performance — whether damages would be an inadequate remedy. Walgreen Co. v. Sara Creek Property Co., 966 F.2d 273, 275 (7th Cir.1992) (“[Djamages are the norm, so the plaintiff must show why his case is abnormal ... [W]hen ... the issue is whether to grant a permanent injunction, not whether to grant a temporary one, the burden is to show that damages are inadequate.... ”).
United has established the inadequacy of damages. A forced return to the re*805mote facility would disrupt its schedules and cause a decline in convenience and comfort for passengers, who would have to be bused from the central terminal area to the less pleasant remote facility, with a 5-15 minute increase in connection time. (Tr. Vol. I at 38-40, 56-58.) The resulting loss of goodwill would be a significant harm to United that cannot be quantified. See American Food & Vending Corp. v. United Parcel Service Oasis Supply Corp., 2003 WL 256865 at *12 (N.D.Ill. Jan 31, 2003) (“Because of the difficulty in assessing the damages associated with a loss of company’s goodwill, such damages to goodwill can constitute an inadequate remedy at law.”) Indeed, because of differences in location and non-quantifiable qualities of real estate, contracts involving real estate are routinely subject to specific performance. See Walgreen, 966 F.2d at 278 (noting that “[b]ecause of the absence of a fully liquid market in real property and the frequent presence of subjective values ... the calculation of damages is difficult”). Thus, a permanent injunction enforcing United’s preferential use rights at T8 and T6 is the appropriate relief.
United has requested damages in addition to injunctive relief, based on its continuing to pay rent for the remote terminal that it has not been using since 2005. United’s theory is that, but for the City’s announced ban on turboprop operations at T8, United would have been able to avoid paying this rent by rejecting the remote facility lease pursuant to § 365(a) of the Bankruptcy Code. The difficulty with this theory is that United has requested — and obtained — enforcement of its right to preferential use at T8. Although the City threatened to prevent turboprop operations at T8, that threat has never been carried out. The damages United seeks, therefore, are not a result of any breach by the City, but rather a result of United’s actions to protect itself against the denial of its request for injunctive relief. Having succeeded in that request, United cannot claim damages. See BD Inns v. Pooley, 218 Cal.App.3d 289, 298-99, 266 Cal.Rptr. 815 (1990) (holding that a plaintiff must elect between damages and specific performance, and if granted specific performance may only receive damages resulting from a failure of the defendant to perform in the time .required by the contract). A permanent injunction is the limit of the appropriate relief here.
B. Discrimination under § 525(a)
Section 525(a) of the Bankruptcy Code provides in relevant part that “a governmental unit may not ... revoke ... a ... permit ... or other similar grant to ... a person that is or has been a debtor under this title ... solely because such ... debtor is or has been a debtor under this title ... or has not paid a debt that is dischargeable.... ” United contends that the City revoked permission to operate turboprops at T8 solely because United attempted to discharge a portion of the debt it owed for rent on the remote terminal by giving notice of termination of the lease on that terminal. There is legal support for such a claim. For example, In re Valentin, 309 B.R. 715, 722 (Bankr.E.D.Pa.2004), found a potential for discrimination prohibited by § 525(a) in a public housing authority’s termination of a lease during bankruptcy based on the tenant’s failure to pay prepetition rent; to avoid a finding of discrimination, the authority was required to consider the debt- or for a future lease without regard to the bankruptcy filing or discharge of the debt from the prior lease. Similarly, here, if United could show that the City terminated permission to use turboprops at T8 because United sought to avoid payment on the remote terminal lease, there would be a prohibited discrimination.
*806However, United presented no persuasive evidence that the City acted from such a purpose. United cites only the short time between its notice of rejection of the remote terminal lease (November 15, 2005) and the City’s revocation of turboprop access to T8 (November 22, 2005). But the City initially determined to deny United’s commuter operation at T8 in June, well before the lease rejection, while United was still paying rent under the remote terminal lease. And, as noted above, the evidence indicates that the City’s principal motivation has long been to open the central terminal area to larger aircraft, as reflected in its willingness to allow United to continue turboprop operation at T8 in exchange for surrendering preferential gate use at T6. A desire to obtain the use of airport gates for larger aircraft is a concern separate from United’s bankruptcy filing or rejection of the remote facility lease and negates a finding of discrimination under § 525(a).
C. The automatic stay.
United’s remaining legal claim is that by seeking to ban turboprop operations at T8, the City violated the automatic stay imposed by § 362(a). To the extent that this claim is based on the theory that the City took action with respect to T8 in order to collect payments from United under the remote terminal lease — a violation of § 362(a)(6) — the claim fails for want of proof. As discussed in connection with the § 525(a) claim, there is no evidence that the City took its action because of a concern regarding remote terminal rent; rather, the evidence indicates that the City asserted the authority to bar turboprops from T8 before United gave notice of rejection of the remote terminal lease and that it did so for reasons of airport utilization unconnected to the remote terminal lease.
Nor can it be argued that because United has a contractual right to operate turboprops at T8, the City violated § 362(a)(3) by denying that right so as to “exercise control” over property of United’s bankruptcy estate. Breaching a debt- or’s contract right does not take control of the right from the estate; the estate fully retains the right and may enforce it in an appropriate legal action. If breach of a contract were a violation of the automatic stay, then every contract right of a debtor in bankruptcy would be subject to specific performance and adjudication by the bankruptcy court without a jury — a proposition completely at odds with both contract law and the jurisdictional limitations of the Supreme Court’s Marathon decision, discussed in the jurisdictional section of this opinion. See Benz v. Dtric Ins. Co. (In re Benz), 368 B.R. 861, 865, 868 n. 5 (9th Cir. BAP 2007) (holding that an insurer does not violate the automatic stay by denying coverage under a policy, even if violates its obligations under the policy, unless “it files suit or performs another act specifically identified in section 362(a)”).
Conclusion
For the reasons set out above, judgment will be entered, by separate order, in favor of the City of Los Angeles and Los Ange-les World Airports on Counts II and V (automatic stay) and IV and VTI (violation of § 525(a)). As to remaining Counts I, III, and VI (declaratory judgment and breach of contract), this opinion shall constitute this court’s proposed findings of fact and conclusions of law, recommending entry of a permanent injunction in favor of United Air Lines, Inc. In order to maintain the status quo pending consideration by the district court, a temporary injunction will be entered pursuant to 11 U.S.C. § 105(a). See Celotex Corp. v. Edwards, 514 U.S. 300, 307-08, 115 S.Ct. 1493, 131 *807L.Ed.2d 403 (1995) (upholding the jurisdiction of a bankruptcy court to enter an injunction under § 105(a) as to a matter related to a bankruptcy case).
. Indeed, as Sokol points out, 60 B.R. at 296-97, the core/noncore distinction was adopted by Congress to address the Supreme Court’s Marathon decision, which held that bankruptcy judges, lacking life tenure under Article III of the Constitution, could not render a final judgment in a case involving the contract claim of a bankruptcy estate. Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 84, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (‘‘[T]he cases before us ... center upon [a] claim for damages for breach of contract and misrepresentation ... a right created by state law ... independent of and antecedent to the reorganization petition that conferred jurisdiction upon the Bankruptcy Court.”)
. In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir.1983), involved the allocation of “landing slots” created by FAA regulations; the question was the authority of the FAA to make the allocation and no airline contract was involved. Air Transp. Assoc. of America v. City of Los Angeles, 844 F.Supp. 550 (C.D.Cal.1994), dealt with the proper forum for pursuing a challenge to landing fees under the Anti-Head Tax Act, a federal law with an administrative enforcement mechanism that the court held excluded an implied private right of action; again, there was no claim of breach of contract.
. "Tr. Vol. I” refers to the transcript of the first day of the hearing on preliminary injunc-tive relief, July 27, 2006, stipulated by parties to constitute evidence in the trial on the merits of the complaint. "Tr. Vol. II” refers to the transcript of the second day of that hearing, July 28, 2006. "Tr. Vol. III” refers to the transcript of the additional evidence on the *797merits of the complaint presented on March 15, 2007, and “Tr. Vol. IV” refers to the evidence presented upon reopening, on January 11, 2008.
. Count I seeks a declaratory judgment, and the next six counts assert claims for violation of the automatic stay, breach of contract, and discrimination prohibited by § 525(a) of the Bankruptcy Code against the City of Los An-geles and LAWA, respectively.
. Section 23, in full, provides as follows:
Assignment of Gate Positions and Loading Ramps. All assignments of gate positions and aircraft loading ramps shall be made in strict accordance with rules, regulation and directives adopted and promulgated by the Board and/or General Manager to facilitate the entry of new air carriers and to maximize the utilization of facilities at the Airport. Such rules, regulations and directives shall provide for the preferential, but not exclusive, assignment by the General Manager of gate positions and loading ramps to the Lessee of the demised premises next adjacent to each gate position and loading ramp, taking into account said Lessee’s needs and requirements for the use thereof. It is further understood that the gate positions and loading ramps are to be used for the loading and unloading of aircraft in passenger service in keeping with industry practice at the Airport. To facilitate the entry of new air carriers and to maximize the utilization of facilities at the Airport, at the direction of the General Manager, Lessee agrees not to use the gate positions and loading ramps for long-term aircraft parking or aircraft maintenance purposes.
.Section 23, in relevant part, provides as follows:
No special possessory, exclusive or vested rights whatsoever, save and except a use in *799common with other airlines, and Lessee’s preferential but nonexclusive use of gate positions and aircraft loading ramps adjacent to Lessee’s demised premises, pursuant to Section 23, shall vest in Lessee by reason of the proximity of such demised premises to said gate positions and aircraft loading ramps.
. Section 30, in relevant part, provides as follows:
Rules and Regulations. The leasehold estate herein created shall be subject to any and all applicable rules, regulations, orders and directives governing Lessee's use and occupancy of the demised premises in effect at the commencement of this Lease or thereafter promulgated during the term hereof, laws, ordinances, statutes or orders of any governmental authority, federal, state or municipal, lawfully exercising authority over Airport or Lessee's operations hereunder, provided that the rules, regulations, orders, directives, laws, ordinances and statutes of City (including Board and General Manager) shall be reasonable and not inconsistent with or contravene the rights granted to Lessee under this Lease. Nothing herein contained, however, shall be deemed to impair Lessee’s right to contest any such rules, regulations, laws, ordinances, statutes or orders or the reasonableness thereof.
. Preferential gate use contrasts with the other two forms of gate use employed in the air transportation business: .exclusive use and common use. Exclusive use, as the term implies, grants an airline complete control over the use of a gate for its flights or those of its assignees. Common use, on the other hand, places control of the gate in the airport authorities, with no fixed rights of any airline. Preferential use is an intermediate form of control, in which one airline has the right to use the gate but can be required to allow use by other airlines under defined conditions. (Tr. Vol. I at 71-72.) See also Section 2 of the lease (United Ex. 1 at 3), defining "Preferential Use Gates” as those for which United "shall have the first right of use during the term of this Lease” pursuant to Section 23.
. If there were any ambiguity on this point, it would be resolved by the parties’ performance under the lease, which supports the understanding that turboprop operation in the central terminal is within the rights of an air carrier with preferential gate use. See Oceanside 84, Ltd. v. Fidelity Federal Bank, 56 Cal. App.4th 1441, 1448, 66 Cal.Rptr.2d 487 (1997) (post-contract conduct of the parties can be used to construe ambiguous contractual provisions).
The most significant indication in this respect is the City’s conduct in 1997. During that year, the airport staff determined that the airport could operate more efficiently if all of the commuter aircraft then using the central terminal area were relocated to remote terminal facilities. This conclusion followed an FAA study that recommended such a relocation to promote efficiency. (City Ex. 9.) The staff recommended to the Board of Airport Commissioners that it "authorize the Executive Director to initiate, develop and implement a plan to relocate commuter aircraft operations away from the Central Terminal Area” and that it "authorize the Executive Director to prohibit any additional commuter airline from operating at gates within the Central Terminal Area.” (City Ex. 11.) By limiting the recommended prohibition to "additional commuter airlines” the staff appears to have recognized that existing commuter airline operations were not subject to forced removal from the central terminal, but could only be relocated pursuant to a voluntary plan. As it happened, the Commissioners declined even to authorize the implementation of such a plan, requiring that it be presented to them for later approval once negotiated with the existing airlines. (City Ex. 10, a Board resolution authorizing "the Executive Director to negotiate, but not implement a plan”). Indeed, carriers with preferential use rights were allowed to operate turboprops from the central terminal throughout 1997-2005 period, and no carrier with preferential rights was ever notified during that period that use of turboprop aircraft in the central terminal area was prohibited. (Tr. Vol. II at 66-67, 72.)
. The Contract Clause is fully applicable to municipal governments. Catawba Indian Tribe v. City of Rock Hill, 501 F.3d 368, 371 n. 3 (4th Cir.2007), citing N. Pac. Ry. Co. v. Minnesota, 208 U.S. 583, 590, 28 S.Ct. 341, 52 L.Ed. 630 (1908).
. As reflected in other litigation in United’s bankruptcy, the T8 lease was part of a complex arrangement to support over $75 million in financing for new terminal construction. See In re UAL Corp., 374 B.R. 625, 627-28 (Bankr.N.D.Ill.2007).
. The situation here is much like the one considered by the Supreme Court in City of Detroit v. Detroit Citizens’ Street Ry. Co., 184 U.S. 368, 22 S.Ct. 410, 46 L.Ed. 592 (1902). That case involved a contract between the city of Detroit and street rail companies that had invested substantial sums to develop a street rail infrastructure, under the rates of fare allowed by contracts with the city. Id. at 369-71, 22 S.Ct. 410. By later ordinance, the City of Detroit ordered fares reduced. Reduced fares would presumably have resulted in greater use of the street car system. Nevertheless, the Supreme Court struck down the ordinance, stating that where "binding agreements were made and entered into between the city on one side and the companies on the other relating to rates of fare ... such agreements could not be altered without the consent of both sides.” Id. at 385, 22 S.Ct. 410. In so doing, the Court noted the financial reality underlying the companies' investment: “It would hardly be credible that capitalists about to invest money in what was then a somewhat uncertain venture, while procuring the consent of the city to lay its rails and operate its road through the streets in language which ... gave the company a right to charge a rate then deemed essential for the financial success of the enterprise, would at the same time consent that such rate then agreed upon should be subject to change from time to time by the sole decision of the common council.” Id. at 384, 22 S.Ct. 410.
. United presented surveys of customers showing that the traveling public prefers commuter flights being operated from the central terminal by a significant measure, and that this operation allows for shorter, more pleasant connections. (United Ex. 77, Tr. Vol. I at 57-58.) Although the 1997 FAA study (City Ex. 9) indicated that overall airport operations would be more efficient if commuter flights were operated from remote terminals, that study reflected a different operating environment than the one currently in place at the airport. The appropriateness of using the central terminal for turboprop operations at the current time is reflected the current airport Master Plan (United Ex. 88 at 2-32 and following), which calls for elimination of all remote terminal facilities and for all turboprop operations to be conducted from the central terminal. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494289/ | DECISION & ORDER
JOHN C. NINFO, II, U.S. Bankruptcy Judge.
BACKGROUND
On February 29, 2008, Brenda L. DuFoe (the “Debtor”) filed a petition initiating a Chapter 7 case, and Kenneth W. Gordon, Esq. (the “Trustee”) was appointed as her Chapter 7 Trustee.
The Schedules and Statements required to be filed by Section 521 and Rule 1007 indicated that: (1) she had unsecured nonpriority debts of in excess of $125,300.00, which included $8,000.00 for a Yellow Book advertisement and in excess of $91,600.00 in credit card debt on seventeen separate credit card accounts; (2) she was indebted for an unknown amount to Sal Arcidiacano (“Arcidiacano”) in connection with a July 2007 lawsuit (the “Arcidia-cano Lawsuit”); and (3) she was the owner of: a 2006 Dodge Viper (the “Viper”), valued at $58,520.00; a 2006 Ford Freestar van (the “Freestar”), valued at $11,010.00; a 2006 RX1 Snowmobile (the “Snowmobile”), valued at $5,345.00; a 2005 Raptor Four-Wheeler (the “Four-Wheeler”), valued at $3,040.00; and a lawn mower (the “Lawn Mower”), valued at $3,200.00 (collectively, the “Disputed Assets”).
On April 1, 2008, the Trustee commenced an Adversary Proceeding (the “Turnover Proceeding”) against Arcidiaca-no and Tom Bronnel (“Bronnel”) (collectively, the “Defendants”) after: (1) the Trustee learned at a Section 341 Meeting that the titles to the Viper and Freestar were solely in the name of the Debtor; (2) Arcidiacano had taken sole possession of the Disputed Assets; (3) the Debtor advised the Trustee that Arcidiacano had attempted to obtain duplicate titles for the Viper and the Freestar; and (4) Arcidiaca-no had failed to respond to a written demand by the Trustee that he turn over the Disputed Assets.
On April 1, 2008, the Trustee also filed a Motion for a Preliminary Injunction to enjoin the Defendants from transferring the Disputed Assets (the “Application for Preliminary Injunction”). On April 1, 2008, the Court entered an “Order to Show Cause” in connection with the Application for Preliminary Injunction, made returnable on April 2, 2008, and after the Defendants failed to appear at the hearing on the Application for Preliminary Injunction, the Court granted the preliminary injunction (the “Preliminary Injunction”), which enjoined the Defendants from selling, transferring, using, transporting or removing from the State of New York any of the Disputed Assets.
On April 14, 2008, Arcidiacano filed a Motion for a Rehearing on the Preliminary Injunction (the “Motion for a Rehearing”), which asserted that Arcidiacano: (1) was the beneficial owner of all of the Disputed *536Assets under the terms of an express trust and/or because he had paid all of the down payment consideration for the purchase of the Assets, as well as all of the loan payments, insurance and maintenance costs for the Assets; (2) had maintained the exclusive use and possession of the Assets with the acquiescence of the Debtor; (3) did not appear at the hearing on the Application for Preliminary Injunction because he was never served with the Order to Show Cause and believed the only relief the Trustee was requesting was to prevent the transfer of the Viper and Freestar; (4) on or about April 9, 2008, provided the Trustee with documentary proof that he had paid the entire consideration for the Viper and Freestar; (5) was using the Freestar, which was insured, as his sole method of transportation; and (6) had previously disposed of the Snowmobile, Four-Wheeler and Lawn Mower.
Attached as an exhibit to the Motion for a Rehearing was an April 14, 2008 Affidavit by Areidiacano, which alleged that: (1) the Debtor and Areidiacano had cohabited from May 2003 to November 2006; (2) on February 8, 2006, Areidiacano purchased the Freestar for $19,831.04 with a $14,500.00 down payment effected by a combination of cash and the trade-in of his 2002 Pontiac Grand Prix, but he titled the Freestar in the name of the Debtor because he could not qualify to obtain a favorable loan for the $5,331.04 balance due, and, thereafter, he paid all of the loan payments, insurance and maintenance costs on the Freestar until January 15, 2008, when he paid off the loan on the Freestar that had been obtained in the Debtor’s name; (3) on or about August 28, 2006, Areidiacano purchased the Viper for $72,074.03, with a $45,314.00 down payment effected by a combination of cash and the trade-in of a 2004 Corvette convertible (the “Corvette”), but he titled the Viper in the name of the Debtor so that she could, once again, obtain a loan for the $27,760.03 balance due, and, once again, he thereafter paid all of the loan payments, insurance and maintenance costs; (4) prior to the filing of the Debtor’s petition, he had commenced the Areidiacano Lawsuit in New York State Supreme Court to compel the Debtor to sign over to him the titles to the Viper and Freestar; (5) the untitled Four-Wheeler was: (a) paid for by Areidiacano; (b) always registered in his name; and (c) sold in 2007 for approximately $4,500.00, with the proceeds being retained by him because the Debtor never made any claim of ownership to the Four-Wheeler; (6) the Snowmobile was purchased and paid for by Areidiacano, although like the Freestar and the Viper, it was titled in the Debtor’s name so she could obtain a loan for the balance due and the Snowmobile was sold in August 2006 for approximately $6,100.00, with the proceeds being deposited into his business account at a time when the parties were still cohabitating; and (7) the Lawn Mower was purchased by the Debtor on her Home Depot credit card in 2006, was given to him as a gift, and was sold by him in the Summer of 2007 for approximately $2,700.00, with the proceeds retained by him because the Debtor never made any claim of ownership to the Lawn Mower.
On April 16, 2008, the Trustee interposed a Response to the Motion for a Rehearing, which asserted that: (1) the Debtor had advised the Trustee that: (a) Areidiacano had obtained duplicate titles to the Viper and the Freestar by forging the Debtor’s signature on the required applications; and (b) Areidiacano had sold the Freestar to Bronnel, who was a friend; (2) as alleged in an April 9, 2008 letter from Arcidiacano’s counsel, Section 2108 of the New York Vehicle and Traffic Law (“NY VTL § 2108”), the Second Circuit Court of Appeals in the New Windsor Ambulance *537Corps v. Meyers, 442 F.3d 101, 112 (2nd.Cir.2008) (“New Windsor”) and the United States District Court for the Western District of New York (the “District Court”) in In re Craig and Charlotte Smith, 99-cv06137 (March 28, 2000) (“Charlotte Smith”) confirmed that a certificate of title issued by the New York State Department of Motor Vehicles is prima facie evidence of the ownership of the vehicle in question, but that such evidence of ownership is rebuttable; (3) although not discussed in either New Windsor, which was not a bankruptcy case, or Charlotte Smith, the Trustee believed that in a bankruptcy case, the rights of a trustee as the “perfect lien creditor” under Section 5441 of the Bankruptcy Code su-perceded the rights of any third party to rebut the presumption of ownership under N.Y. VTL § 2108; and (4) the Arcidiacano Lawsuit was never prosecuted to judgment, and any rights to now obtain that judgment were inferior to the rights of the Trustee under Section 544.
On April 23, 2008, Arcidiacano filed a Memorandum of Law in support of the Motion for a Rehearing, which asserted that: (1) Section 541(d)2 of the Bankruptcy Code excluded from property of the estate any equitable interest in property where the debtor held only bare legal title, so that the Viper and Freestar were not property of the Debtor’s estate because Arcidiacano was the beneficial and equitable owner of those Disputed Assets; (2) as recently as July 7, 2006, the District Court in United States v. One 2001 Infiniti QX4 Automobile, 2006 WL 1888633 (W.D.N.Y.2006) once again confirmed that the presumption of ownership in N.Y. VTL § 2108 was not conclusive, but could be rebutted by evidence which demonstrated that another individual owned the vehicle in question; and (3) in In re Garberding, 338 B.R. 463 (Bankr.D.Colo.2005) (“Garberding”) the Bankruptcy Court for the District of Colorado in reconciling the apparent conflict between Section 541(d) and Sections 544(a)(1) and (a)(2), determined in that case where there was a Colorado statute very similar to N.Y. VTL § 2108, that the inquiry was whether the defendant, who was not a lienholder, would prevail under State Law as having a beneficial ownership or equitable lien in the vehicle in question.
*538When the parties were unable to arrive at a settlement, the Court conducted an Evidentiary Hearing on July 24, 2008, at which the Debtor and Arcidiacano testified.
DISCUSSION
I. Testimony at Trial
The often conflicting testimony of the Debtor and Arcidiacano can be summarized as follows: (1) prior to his cohabitation with the Debtor, Arcidiacano had experienced substantial financial problems, had judgments and tax liens entered against him and had withdrawn a bankruptcy case; (2) during the parties’ cohabitation, Arcidiacano operated a business, legally owned by the Debtor as a d/b/a, known as American Aqua Treatment Systems (“Aqua”); (3) the only bank account maintained for the Aqua business, owned by the Debtor, was a checking account in the name of the Debtor and Aqua (the “Aqua Account”); (4) throughout her cohabitation with Arcidiacano, the Debtor was receiving salary or buy-out checks from Valeo Corporation, and she claimed that at times she deposited some of that income into the Aqua Account, which Arci-diacano disputed, asserting that she never deposited money into the Account; (5) the Debtor’s ownership of the Aqua business permitted it to obtain favorable financing or payment terms from vendors and other suppliers, and to establish major credit card company accounts, so that customers could pay by credit card, advantages that had real economic value and which Arcidia-cano could not have obtained himself because of his credit history and the liens and judgments entered against him; (6) during the parties’ cohabitation, the Debt- or and Arcidiacano purchased and sold a number of vehicles that were titled in the Debtor’s name in order to obtain favorable financing and insurance rates that Arcidia-cano could not obtain, which financing and lower carrying costs provided real economic value, since it increased the net return from the resale or trade-in of those vehicles as they were traded in to obtain new vehicles to ultimately be resold for a profit; (7) many, if not all, of the loan payments which Arcidiacano asserts he made on the various vehicles titled to the Debtor, including the Freestar, the Corvette traded in to purchase the Viper, and the Viper itself, were made from the monies in the Aqua Account, the proceeds of a business solely owned by the Debtor that she was otherwise also providing economic value to, even though Arcidiacano may have done substantially all of the day-to-day work in operating the business, other than the paying of bills and completing necessary paperwork, which the parties acknowledged the Debtor sometimes performed; (8) during the parties’ cohabitation, the Debtor incurred substantial credit card debt, which directly or indirectly benefitted Ar-cidiacano, who testified that approximately $15,000.00 of the debt was directly for his benefit, whereas the Debtor estimated that it was in excess of $100,000.00, and Arci-diacano admitted that he did use the proceeds of some convenience checks tied into one or more of the Debtor’s credit card accounts; and (9) the Debtor acknowledged that Arcidiacano had selected the various vehicles that the parties had purchased in the Debtor’s name, on which she had obtained the financing and insurance, that were ultimately resold or traded-in as down payments against the Viper and Freestar, and that for the most part she did not drive those vehicles, never driving the Viper, but that she considered the Viper and the Freestar to be “their vehicles.”
II. Section 544
Following the decision of the District Court in Charlotte Smith, this Court *539finds that the Trustee’s rights under Section 544 do not supercede the rights of a party to rebut the presumption of ownership under N.Y. VTL § 2108.
This Court acknowledges that: (1) the District Court in its decision on appeal of a decision of this Court in Charlotte Smith did not specifically address the “perfect lien creditor” status of a trustee under Section 544 when it determined that the debtor in that case, who held title to a vehicle, had not met her burden under N.Y. VTL § 2108 to rebut the presumption of ownership, when she asserted and provided evidence that the vehicle had been purchased by her parents for her daughter; and (2) the Section 544 issue was not specifically argued in this Court.
Nevertheless, this Court does not assume that the District Court in Charlotte Smith was not aware of the Section 544 issue, or that it did not consider it in its decision on whether the N.Y. VTL § 2108 presumption had been rebutted by a debt- or holding title in a bankruptcy case.3
Furthermore, there is a very persuasive analysis, as set forth in Garberding, that the rights of a trustee under Section 544 do not supercede the right of a party to demonstrate that they are the beneficial and equitable owner of a vehicle, as permitted by a State Law such as N.Y. VTL § 2108 or Colorado Law in that case.
III. New York Vehicle and Traffic Law Section 2108
It is clear from the decisions of the New York State and Federal Courts that have addressed the rebuttable presumption of N.Y. VTL § 2108, that a third-party not appearing on the title can nevertheless demonstrate that they are “the” beneficial or equitable owner of a vehicle on which another party appears on the title as the owner.
This Court is not aware of any decision of a New York State or Federal Court in connection with N.Y. VTL § 2108, which has held that the presumption can be rebutted by a party who does not demonstrate that it is “the” beneficial or equitable owner. All of the cases this Court has reviewed conclude that the party has or has not demonstrated that they are “the” sole beneficial or equitable owner of the vehicle in question, notwithstanding the state of the title.
From all of the pleadings and proceedings in the Turnover Proceeding, including the admittedly contradictory testimony of the Debtor and Arcidiacano at trial, this Court concludes that Arcidiacano has failed to meet his burden to demonstrate that he is “the” sole beneficial and/or equitable owner of the Viper and the Freestar for the following reasons:
1. while the Debtor and Arcidiacano were cohabitating, in addition to their romantic relationship, they were an “economic enterprise,” far different from the fictional “economic partnership” ascribed to married couples in New York State in connection with matrimonial actions;
2. the “economic enterprise” was involved in running the Aqua business, in connection with which the Debtor, as owner, was supplying valuable economic services in the nature of a credit status that allowed the business to obtain favorable terms from vendors and suppliers and enter into agreements with major credit card companies, as well as to maintain the Aqua Account, economic advantages that Arcidiacano, because of *540his credit history, judgments and liens, could not obtain;
3. the economic services that the Debt- or was supplying in connection with the operation of the Aqua business increased the return from the operation of that business, which increased return was a component of the payments that were made from the Aqua Account by the economic enterprise to also engage in the business of buying, maintaining, reselling and trading up for ultimate resale various vehicles for a profit;
4. as with the Aqua business, the Debt- or’s credit was being used by Arci-diacano and the economic enterprise to obtain favorable financing and insurance rates that helped make the vehicle component of the enterprise ultimately profitable;
5. the economic advantages that the Debtor was bringing to the economic enterprise, by supplying her credit, assuming business liability for purchases by the Aqua business ($8,000.00 of her scheduled debts are for a Yellow Book advertisement), and incurring debt for the purchase of the enterprise’s vehicles, in this Court’s opinion gave her a very real economic interest in the fruits of the enterprise, including the Viper and the Freestar;
6. during the parties’ cohabitation, the Debtor was incurring substantial unsecured credit card debt, which the economic enterprise and Arcidia-cano were benefitting from in that it allowed monies from the Aqua business to be used in connection with the vehicle component of the enterprise, which monies might otherwise have had to have been diverted to the parties’ living expenses;
7.when the Debtor testified that these vehicles were “theirs,” this Court believes that she was correct, because the Viper and the Freestar were very much assets of the economic enterprise that she and Arci-diacano were both engaged in and contributing to.
IV. Section 541(d)
Although this Court has determined that Arcidiacano did not meet his burden to demonstrate that he is “the” sole beneficial and/or equitable owner of the Viper and the Freestar, as a principal in the economic enterprise that the Debtor and Arcidiacano were engaged in, he has some beneficial or equitable interest in the vehicles, because of the substantial economic contributions he made by running the day-to-day operations of the Aqua business and otherwise.4
This Court will provide the Trustee and Arcidiacano an opportunity to see if they can agree on a split of the value of the equity in these vehicles as of the date of the filing of the Debtor’s petition, as well as what interest the estate may have in the proceeds of the sale of the other Disputed Assets. Arcidiacano could then pay the Trustee the value of the estate’s interest in order to avoid the vehicles being sold and this Court determining the relative interests of the parties in the proceeds.
CONCLUSION
The Defendant, Arcidiacano, has failed to meet his burden to demonstrate that he is the sole beneficial owner of the Viper and the Freestar.
*541The terms of the Preliminary Injunction shall remain in effect, except that Arcidia-cano shall not be required to deliver the vehicles to the Trustee at this time.
This Turnover Proceeding is scheduled for a report by the parties at the Court’s Evidentiary Hearing Calendar scheduled for September 17, 2008 at 9:00 a.m.
IT IS SO ORDERED.
. Section 544(a)(1) and (a)(2) provide that:
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists!.]
11 U.S.C. § 544 (2008).
. Section 541(d) provides that:
(d) Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such a mortgage, sold by the debtor but as to which the debtor retains legal title to service or supervise the servicing of such mortgage or interest, becomes property of the estate under subsection (a)(1) or (2) of this section only to the extent of the debtor’s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.
11 U.S.C. § 541 (2008).
. If the District Court believed that the Trustee’s Section 544 position was correct, it would not have made a detailed analysis of the evidence presented.
. Absent this Court's finding of an economic enterprise, it would follow the direction of the District Court in Charlotte Smith that N.Y. VTL § 2108 is otherwise an all or nothing proposition. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494290/ | AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW
1
MICHAEL G. WILLIAMSON, Bankruptcy Judge.
Introduction
The parties to this adversary proceeding entered into a contract for the sale of the business and assets of Biddiscombe Laboratories, Inc. (“Biddiscombe”) in October 2004. Stephen Gayheart (“Gayheart”) was the manager and sole shareholder of Bid-discombe (together, “the Seller” or “the Defendants”). John Melville (“Melville”) is the principal of the Plaintiff, Biddis-combe International, L.L.C. (“the Buyer”) and personally negotiated the purchase of Biddiscombe with Gayheart. The Buyer brought this suit alleging, among other *913counts, fraudulent inducement into contract.
The Buyer alleges that during the negotiations leading up to the sale, the Defendants fraudulently misrepresented that Biddiseombe was a drug manufacturing business substantially in compliance with Food and Drug Administration (“FDA”) regulations. These representations were made in affirmative statements during the contract negotiations and by holding Bid-discombe out to the world as a drug manufacturing business — registering as a drug manufacturing facility with the FDA and advertising itself as a drug manufacturing facility. Biddiseombe, the Plaintiff asserts, was not able to manufacture drugs in compliance with FDA regulations, and this fact was known by the Seller, who withheld that information in order to induce the Buyer into the sale. The Defendants deny ever representing that Biddis-eombe could manufacture drug products and pled various affirmative defenses. The Court herein concludes that the elements of fraudulent inducement into contract have been proven in this case, and that the Buyer has suffered damages as a result, for which the Seller will be held liable.
Findings of Fact
After two days of trial at which the testimony of seven witnesses was heard and thirteen exhibits were entered into evidence, the Court announced its findings in open court. The transcript of the Court’s findings of fact is contained in the record and incorporated herein by reference. (Doc. No. 75.) The following is a summary of those findings.
Biddiseombe
Gayheart was the manager and sole shareholder of Biddiseombe, a company whose business was to manufacture tanning and skin care products. Biddiseombe was registered with the FDA as a drug manufacturing facility (Pl.’s Ex. 4), although the facility only manufactured cosmetics, not drugs, as those products are defined by the FDA. Drug manufacturing facilities are regulated under federal law by 21 C.F.R. part 211 (“Part 211”), which establishes Good Manufacturing Practices for drug-producing facilities. Gayheart is a sophisticated businessperson who has spent many years in the cosmetic and drug manufacturing industries and is familiar with the structure of FDA regulations.
In March 2003, the FDA inspected the Biddiseombe facilities and issued an Establishment Inspection Report from March 26 and 28, 2003 (“2003 FDA Report”). (Pl.’s Ex. 9.) In this report, the inspector described Biddiseombe as a cosmetics and “OTC” or over-the-counter drug manufacturer and enumerated twelve objectionable conditions, which constitute significant deviations from the Good Manufacturing Practices under Part 211. (PL’s Ex. 9, 2, 7-9.)
Prior to the sale, Biddiseombe produced and released an advertisement that represented that it was able to manufacture drugs and that it was in compliance with Part 211. (PL’s Ex. 6.) Gayheart at first testified during trial that he had not authorized the release of this advertisement, but upon questioning by the Court, admitted that perhaps it had been discussed, that they were conducting a “fishing expedition” — which the Court took to mean that Biddiseombe was trying to determine whether it would be economically worthwhile to make the changes necessary to be able to manufacture drugs.
According to the expert testimony of Dr. Blume, the Plaintiffs expert witness, and Mr. Lieberman, the Defendant’s expert witness, as well as Gayheart’s own testimony at trial, it is clear that despite these representations, Biddiscome was not able *914to manufacture drugs. Gayheart admitted that the facility could not manufacture drug products “without investment to do so” and that the facility “didn’t comply with all parts of 211.” (Trial Tr. vol. 2, 18:4, 45:9, Oct. 23, 2007.)
Pre-Contract Representations
In late June 2004, Gayheart entered into discussions with a group of potential buyers, including Melville, regarding the possible sale of the business and assets of Biddiscombe. During the trial, Melville testified that during these discussions, he and Gayheart specifically discussed the business’s compliance with Part 211. Gayheart refuted this allegation, but admitted upon further questioning that they may have discussed the facility’s compliance with Part 211 in general terms. (Trial Tr. vol. 2, 8:16-9:1.) It is the Court’s conclusion that Gayheart’s testimony on this point was not credible, and that as part of the pre-contract negotiations the parties did indeed discuss and Gayheart affirmatively represented that Biddis-combe was in compliance with Part 211. Also prior to the sale, Melville saw the advertisement issued by Biddiscombe (PL’s Ex. 6) that indicated Biddiscombe could manufacture drug products.
The discussions culminated in the signing of the Asset Purchase Agreement (“APA”) (PL’s Ex. 2) for the sale of the business and substantially all of the assets of Biddiscombe on October 25, 2004, to Biddiscombe International, L.L.C., an entity created for this purpose by Melville and other persons. The parties were represented by counsel and negotiated the specific terms of the contract. The APA contained two provisions, Section 2.7(b) and (d), that asserted the compliance of the facility with FDA regulations, its registration with the FDA and all other appropriate authorities, and that the “facilities ... comply in substantial part with Good Manufacturing Practices requirements set forth in 21 C.F.R. Part 211.” (PL’s Ex. 2, 11-12, § 2.7(b), (d).)
At trial, the Court accepted testimony of two expert witnesses on the question of FDA regulations and what it means for a business or facility to be compliant with Part 211. It was the testimony of these witnesses, which the Court accepts, that Part 211 applies exclusively to facilities that manufacture drugs. Although there was some discussion at trial that perhaps the facilities themselves complied with Part 211 although the business did not, Gayheart’s own expert, Mr. Lieberman, testified that there was no separate registration for facilities under Part 211&emdash;that a business was either in compliance or was not. (Trial Tr. vol. 2, 231:11-232:19.) Furthermore, it was clear from the testimony of these experts that the facilities themselves were not in compliance with the relevant sections of Part 211. Only after the closing of the sale was Melville provided a copy of the 2003 FDA Report listing Biddiscombe’s significant deviations from Part 211.
The parties agreed to a selling price of $3,005,000. At closing, $2,300,000 was transferred to Gayheart along with a note for $705,000. Only one payment of $32,000 was made under this note, bringing the total paid to Gayheart up to $2,332,000, with $673,000 outstanding.
Conclusions of Law
The Court has jurisdiction over this proceeding under 28 U.S.C. § 1334, and the parties have consented to the entry of a final judgment in this adversary proceeding pursuant to 28 U.S.C. § 157.
Fraudulent Inducement into Contract
This case, boiled down from its several counts, is, in essence, a fraud action. Under Florida law, in an action for fraudulent inducement, the plaintiff must *915show (1) a false statement of a material fact; (2) that the defendant knew or should have known was false; (3) that was made to induce the plaintiff to enter into a contract; and (4) that proximately caused injury to the plaintiff when acting in reliance on the misrepresentation. Bradley Factor, Inc. v. United States, 86 F.Supp.2d 1140, 1146 (M.D.Fla.2000) (citing Florida law); see also Thompkins v. Lil' Joe Records, Inc., 476 F.3d 1294, 1315 (11th Cir.2007) (citing Florida law); Biscayne Boulevard Props., Inc. v. Graham, 65 So.2d 858, 859 (Fla.1953) (quoting Wheeler v. Baars, 33 Fla. 696, 15 So. 584, 588 (1894)) (“A false representation of material fact, made with knowledge of its falsity, to a person ignorant thereof, with intention that it shall be acted upon, followed by reliance upon and by action thereon amounting to substantial change of position, is a fraud of which the law will take cognizance.”). Fraud must be established by “a preponderance or greater weight of the evidence.” Wieczoreck v. H & H Builders, Inc., 475 So.2d 227, 228 (Fla.1985).
All four elements of fraudulent inducement have been established in this case.2 First, there was a false statement of material fact. Based on the oral statements and pre-contract discussions between the parties in addition to the language of the contract, the Court concludes that there was an affirmative representation by the Seller that the business was licensed to manufacture drugs in compliance with Part 211. This finding is supported by the circumstances surrounding the sale, including the Biddiscombe advertisement, which indicates that Biddiscombe was holding itself out as a drug manufacturing facility. Furthermore, the Court concludes based on the expert testimony presented and Gayheart’s admissions at trial that Biddiscombe could not manufacture drug products in compliance with Part 211.
Second, the Court concludes, based on the clear evidence, that the statements were knowingly false when made. At trial, it was Gayheart’s testimony that Biddis-combe could not manufacture drugs and was not substantially in compliance with Part 211. Therefore, it is clear that Gayh-eart’s representation that Biddiscombe was licensed to manufacture drug products and was in compliance with Part 211 was knowingly false.
Third, the Court concludes that the statements were made with the intent of inducing the Buyer to enter into the contract for sale. It is significant that Gayh-eart did not provide the 2003 FDA Report, which listed Biddiscombe’s significant deviations from Part 211, to the Buyer until after the sale.
Finally, the Court concludes that the Buyer reasonably relied on these false representations and, in so doing, was harmed by paying substantially more for the business and assets of Biddiscombe than it would have done had it known that the business could not manufacture drug products. The tort of fraudulent inducement protects “a plaintiffs right to justifiably rely on the truth of a defendant’s factual representation in a situation where an intentional lie would result in loss to the plaintiff.” HTP, Ltd. v. Lineas Aereas Costarricenses, S.A., 685 So.2d 1238, 1240 (Fla.1996) (quoting Woodson v. Martin, *916663 So.2d 1327, 1330 (Fla. 2d DCA 1995) (en banc) (Altenbernd, J., dissenting)). The Buyer’s “ability to negotiate and make informed decisions as to the eontract[,]” in this case, was undermined by the Seller’s misrepresentations that Biddiscombe was able to manufacture drug products. Bradley Factor, 86 F.Supp.2d at 1145.
Affirmative Defenses
The Court has considered all of the affirmative defenses asserted by the Defendants and concludes that each defense fails as a matter of law based on the Court’s findings of fact. The first affirmative defense of standing, which alleged that a receiver lacked standing to bring the Complaint in state court, is no longer at issue in this adversary proceeding in bankruptcy between the debtor Buyer and the Seller. The second affirmative defense of truth fails because the Court has concluded that not all of the representations of fact made by the Defendants were true.
The third affirmative defense of estoppel by merger fails because of the “well-established rule that alleged fraudulent misrepresentations may be introduced into evidence to prove fraud notwithstanding a merger clause in a related contract.” Wilson v. Equitable Life Assurance Soc’y of the U.S., 622 So.2d 25, 27 (Fla. 2d DCA 1993) (citing Nobles v. Citizens Mortgage Corp., 479 So.2d 822, 822 (Fla. 2d DCA 1985)). The tort of fraudulent inducement into a contract necessarily requires the establishment of fraudulent pre-contract statements and representations. See HTP, Ltd., 685 So.2d at 1239-40.
The fourth affirmative defense of estoppel and waiver does not apply. Justifiable reliance is necessary to have an actionable fraud. Hillcrest Pac. Corp. v. Yamamura, 727 So.2d 1053, 1057 (Fla. 4th DCA 1999). It is part of the Court’s conclusions that the Buyer reasonably relied on the Seller’s misrepresentations, and therefore there was no waiver. The Florida Supreme Court has held that “a recipient may rely on the truth of a representation, even though its falsity could have been ascertained had he made an investigation, unless he knows the representation to be false or its falsity is obvious to him.” Besett v. Basnett, 389 So.2d 995, 997-98 (Fla.1980) (reasoning that someone “guilty of fraudulent misrepresentation should not be permitted to hide behind the doctrine of caveat emptor”).
The fifth affirmative defense asserting the economic loss rule also fails, because Florida’s economic loss rule does not bar the tort of fraudulent inducement. HTP, Ltd., 685 So.2d at 1240. The Florida Supreme Court has described the economic loss rule as a “judicially created doctrine that sets forth the circumstances under which a tort action is prohibited if the only damages suffered are economic losses.” Indemnity Ins. Co. of N. Am. v. Am. Aviation, Inc., 891 So.2d 532, 536 (Fla.2004). The contractual privity arm of the economic loss rule prohibits “tort actions to recover solely economic damages for those in contractual privity....” Id. The doctrine attempts to prevent parties from circumventing contractual agreements in order to achieve a better bargain than originally made. Id. Thus, tort actions are barred where the defendant has committed no breach of duty apart from the breach of contract. Id. at 537; see also HTP, Ltd., 685 So.2d at 1239.
The economic loss rule does not, however, bar “torts committed independently of the contract breach, such as fraud in the inducement.” Indemnity Ins., 891 So.2d at 537; see also HTP, Ltd., 685 So.2d at 1239-40. The Florida Supreme Court has made clear that it “never intended to bar well-established common *917law causes of action” through the economic loss rule. Moransais v. Heathman, 744 So.2d 973, 983 (Fla.1999). However, a party will not be allowed to bypass the economic loss rule by “disguis[ing]” a breach of contract action through the label of fraudulent inducement. Int’l Star Registry of Ill. v. Omnipoint Mktg., L.L.C., 510 F.Supp.2d 1015, 1026 (S.D.Fla.2007). A claim of fraudulent inducement may be barred “where the alleged fraud contradicts a subsequent written contract” or when the “misrepresentations relat[e] to the breaching party’s performance under a contract ..., because such misrepresentations are interwoven and indistinct from the heart of the contractual agreement.” N. Am. Clearing, Inc. v. Brokerage Computer Sys., Inc., No. 07-1503, 2008 WL 341309, at *3 (M.D.Fla. Feb. 5, 2008) (slip-op.).
The Court has concluded that in the months leading up to the sale of Bid-discombe, Gayheart made affirmative representations to Melville that Biddiscombe could manufacture drug products. These representations were false, and Melville relied upon them to his detriment. The written contract does not contradict these pre-contract misrepresentations of the Seller, which are at the heart of the fraudulent inducement into contract claim and are not interwoven and indistinct from the subsequent contract. Therefore, the economic loss rule does not bar this valid claim based on the common law tort of fraudulent inducement.
The sixth affirmative defense of negligence of the Plaintiff does not apply because the Plaintiffs allegedly negligent post-sale actions have no bearing on the pre-sale tort of fraudulent misrepresentation. The damages as calculated are based on the actual value of Biddiscombe on the date of the sale, before such negligence allegedly caused devaluation of the business.
The seventh affirmative defense of laches also does not bar this action. Lach-es is an equitable doctrine that is applied to bar a claim at equity based not upon the number of years that have lapsed, but “upon unreasonable delay in enforcing a right, coupled with a disadvantage to the person against whom the right is sought to be asserted.” Peacock v. Firman, 177 So.2d 560, 562 (Fla. 3d DCA 1965); see also In re Olde Fla. Invs., Ltd., 293 B.R. 531, 544 (Bankr.M.D.Fla.2003).
The sale of Biddiscombe was completed on October 25, 2004. This action was commenced on July 28, 2006. This Court cannot conclude that a delay of less than two years from the date of sale to the date of the filing of this lawsuit is unreasonable. Moreover, the doctrine of unclean hands would likely bar the Defendants from relying on the equitable defense of laches. See Martin v. Brevard County Pub. Sch., No. 6:05-CV-971, 2007 WL 496777, *21 (M.D.Fla. Feb. 13, 2007) (slip-op.) (holding that a defendant could not rely on the equitable defense of estoppel because he came to the court with unclean hands); Williamson v. Williamson, 367 So.2d 1016, 1018 (Fla.1979).
Under Florida law, the statutes of limitations for actions at law also will apply to the same subject matters at equity. Fla. Stat. § 95.11(6) (2007). The statute of limitations for a legal or equitable action founded upon fraud is four years. Fla. Stat. § 95.11(3)(j). A cause of action founded upon fraud accrues when the facts giving rise to the cause of action “were discovered or should have been discovered with the exercise of due diligence ...” but must commence within 12 years of the date of commission of the fraud. Fla. Stat. § 95.031(2). The fraud in this case was discovered at some time after the *918sale on October 25, 2004. This action was commenced on July 28, 2006, well within four years of discovery. Therefore, neither laches nor the statute of limitations bar this action.
Damages
Damages in tort cases are compensatory — the goal is “to restore the injured party to the position it would have been in had the wrong not been committed.” Nordyne, Inc. v. Fla. Mobile Home Supply, Inc., 625 So.2d 1283, 1286 (Fla. 1st DCA 1993). Florida courts apply a two-pronged flexibility theory to damages in fraud, which allows courts to use either the out-of-pocket or the benefit-of-the-bargain rule, “depending upon which is more likely to fully compensate the injured party.” Id.; see also Morgan Stanley & Co., Inc. v. Coleman (Parent) Holdings, Inc., 955 So.2d 1124, 1128 (Fla. 4th DCA 2007). The out-of-pocket rule would have the court calculate damages as the difference between the purchase price and the actual value of the property. Kind v. Gittman, 889 So.2d 87, 90 (Fla. 4th DCA 2004). If this measure of damages does not fully compensate the injured party, the court may use the benefit-of-the-bargain rule, under which damages are calculated as the difference between the value of the property as represented and the actual value of the property. Morgan Stanley, 955 So.2d at 1128. In this case, the Plaintiff has employed the out-of-pocket rule in its calculation of damages, and the Court agrees that is the appropriate measure of damages.
To determine damages under either measure, the Court must calculate the actual value of the property at the time of sale. Id. There are several ways to value a business, just as there are several ways to value real property. Businesses are generally not valued based on a cost approach, because the whole operating concern is considered to have greater value than its separate pieces. The most common measure of the value of a business is the cash flow approach, which measures value based on how much income the business will produce to provide a return on the investment. The value is determined by multiplying the business’s earnings before interest, taxes, depreciation and amortization, or “EBITDA,” by a certain number that is determined based on the type of industry. Generally, a higher multiplier indicates a riskier and potentially more profitable industry.
The Court heard testimony from several witnesses regarding the question of value. The Plaintiffs expert witness, Mr. Granger, valued the business based on a cash flow analysis, using a multiplier of 3.3, which he calculated based on the sale price. Mr. Granger adjusted his numbers by subtracting $269,000, the cost of increased expenses necessary to be able to manufacture drug products, and by reducing the EBITDA. By this method, Mr. Granger determined that the value of the business was $1,090,000. The Court finds Mr. Granger’s calculations problematic. For instance, he provided no justification for both reducing the EBITDA and increasing expenses, and, while Mr. Granger subtracted anticipated increased expenses, there is no evaluation of projected concomitant increased income.
The Court also heard testimony from Melville on the question of the value of Biddiscombe at the time of sale. Melville testified that he would have paid $1.2 million for the business had he known the relevant facts, a calculation based on an EBITDA multiplier of 2.5 to 3. (Trial Tr. vol. 1, 90:7-92:13.) While Melville is not an expert, he is a sophisticated businessperson and the owner of Biddiscombe. His testimony is admissible under Federal *919Rule of Evidence 701. While Federal Rule of Evidence 702 and Daubert changed the standards regarding the admittance of expert opinion testimony based on specialized knowledge, Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993), the admittance of lay testimony is governed by Rule 701, which has been interpreted to allow traditional forms of lay witness testimony, including the traditional practice of allowing an owner of property to testify as to its value. Fed.R.Evid. 701 advisory committee’s note (noting that most courts allow an owner or officer of a business to testify as to its value or projected profits without the need to qualify the owner as an expert because such lay opinion testimony is based on a type of personal knowledge — the “particularized knowledge that the witness has by virtue of his or her position in the business”); Asplundh Mfg. Div. v. Benton Harbor Eng’g, 57 F.3d 1190, 1196-98 (3d Cir.1995) (listing testimony as to the value of one’s property as “quintessential Rule 701 opinion testimony”); In re Levitt & Sons, L.L.C., 384 B.R. 630, 646 (Bankr.S.D.Fla.2008) (allowing the admission of testimony by a chief restructuring officer as to the corporate debtors’ value because “the owner of personal property is qualified by [ ] ownership alone to testify as to its value”); In re Brown, 244 B.R. 603, 611 (Bankr.W.D.Va.2000) (holding that the owner of property may testify as to its value “without demonstrating any additional qualifications to give opinion evidence”). Melville’s testimony falls squarely in this traditional category of lay opinion. While it is unclear to the Court what EBITDA number Melville was using to calculate the $1.2 million amount, it is relevant that he testified that a 2.5 to 3 EBITDA multiplier would be appropriate for a cosmetic manufacturing business.
Finally, the Court heard testimony from Gayheart that several years before the sale an offer had been made for the business for $1.4 million, and that the business increased in value due to higher earnings after that time.
In calculating the value of Biddiscombe based on the evidence, the Court finds that it is reasonable to use the actual EBITDA the business earned in 2003, the year prior to the sale, which is $824,000. Using that EBITDA and the purchase price of $3,005,000, mathematically, the calculation calls for an EBITDA multiplier of 3.65. It is clear to the Court that an EBITDA multiplier is industry-specific. ■ A cosmetic manufacturing business may not have the same EBITDA multiplier as a drug manufacturing business. Based on Mr. Melville’s testimony, the Court concludes that a 2.5 EBITDA multiplier would have been the proper multiplier to apply to a cosmetics manufacturing business. Therefore, multiplying the 2003 EBITDA by the 2.5 multiplier, the Court finds that the actual value of the business on the date of sale was $2,060,000. The amount actually paid under the contract was $2,332,000. Therefore, using the out-of-pocket rule, the Court concludes that the damages of the Plaintiff are $272,000. In calculating damages in this way, the Court has taken into account as a setoff the Defendants’ counterclaim for the remaining amount unpaid under the contract for sale.
Conclusion
The Court will separately enter an amended judgment in favor of Biddis-combe International, L.L.C., against Stephen Gayheart, 3030 Hargett Lane, Safety Harbor, Florida 34695-5249, and Biddis-combe Laboratories, Inc., 3030 Hargett Lane, Safety Harbor, Florida 34695-5249, for $272,000 plus post-judgment interest. This Court will retain jurisdiction to enforce the amended judgment and to deter*920mine right, entitlement and amount of attorneys’ fees and costs and to enter a separate judgment if necessary.
. The Court hereby amends its previous Findings of Fact and Conclusions of Law to reflect a recalculation of damages pursuant to the Court’s ruling on the Defendant’s motion to amend the judgment (Doc. No. 87), which came on for hearing on July 14, 2008. At the hearing, the Court also granted the Plaintiff’s motion for an award of pre-judgment interest, on which the Court has already entered a separate Order (Doc. No. 94).
. In holding for the Plaintiff under the claim for fraudulent inducement into contract, the Court does not find it necessary to address the third count of the Complaint for breach of contract. The second and fifth counts were voluntarily dismissed before trial (Doc. No. 58). The Court indicated that it would hear any motions for attorneys' fees after the conclusion of the trial, which is the gravamen of the fourth count of the Complaint. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494292/ | MEMORANDUM OF OPINION
ALLAN L. GROPPER, Bankruptcy Judge.
This is an objection by the above-captioned reorganized debtors (the “Debtors”) to proofs of claim (collectively, the “Claims”) filed by ALG DC-9 L.L.C. (“ALG”), as lessor of two McDonnell Douglas DC-9-32 aircraft (collectively, the “Aircraft”). The Claims arise in connection with the Debtors’ rejection of the leases. ALG claims damages of $7.5 million on each lease, relying for its calculation of damages on a liquidated damages clause that bases damages on a fixed Stipulated Loss Value (“SLV”) for the planes. The Debtors have objected to the Claims, and the issue before the Court is whether a damages clause based on a fixed and non-declining SLV is an enforceable liquidated damages provision or whether it is a penalty that is unenforceable under applicable law. For the reasons set forth below, the Court finds that the clause is unenforceable and sustains the Debtors’ objection.
Background
The Debtors first leased the Aircraft in 1987. In 1996, JetStream II, L.P. (“Jet-Stream”) became successor-in-interest to the first owner and executed new leases with one of the Debtors. The leases, dated September 1,1996 and August 21,1996, respectively (collectively, the “Leases”), provided for a $35,000 monthly rent and had an expiration date of January 31, 2007. It appears that at the time the new Leases were negotiated, the Aircraft had to be upgraded, and the parties agreed that the Debtors would perform this work, estimated to cost $2.95 million per plane. In return, the Leases contained the rent and term provisions set forth above and, ALG alleges, the following residual sharing provision: (1) at the expiration of the Leases the Debtors would receive one-half of the •value of each Aircraft or one-half of the proceeds of sale, less in each case amounts necessary to cure any default; or (2) if the Leases did not extend to their termination date, one-half SLV. SLV is a liquidated damages provision common in aircraft *355leases that sets the amount for which the lessee must insure the plane and is also used to calculate damages after a default. See In re Delta Air Lines, 870 B.R. 552, 555 (Bankr.S.D.N.Y.2007); see also Mentor Ins. Co. (UK) Ltd. v. Brannkasse, 996 F.2d 506, 507 (2d Cir.1993); Interface-Group Nevada, Inc. v. Trans World Airlines, Inc. (In re TWA), 145 F.3d 124, 134 (3d Cir.1998); Atel Fin. Corp. v. Quaker Coal Co., 132 F.Supp.2d 1233, 1241 (N.D.Cal.2001); In re U.S. Airways, 2002 WL 31829093, at *5 (Bankr.E.D.Va. Dec. 16, 2002).1 Typically SLV declines over the course of the lease term, recognizing depreciation and the payment of rent over time. See, e.g., In re Grubbs Constr. Co., 319 B.R. 698, 708 (Bankr.M.D.Fla.2005). In this case, it is ALG’s contention (which the Debtors do not dispute) that the parties stipulated that SLV would not decline because a static value for the Aircraft of $7.3 million and a residual sharing provision, giving the Debtors half of this value, would permit the Debtors to recover their investment in the cost of the overhaul.2
ALG purchased the Aircraft and succeeded to JetStream’s interests under the Leases in April, 2000. On September 14, 2005, the Petition Date, the Debtors filed a motion to reject the Leases and abandon the Aircraft. On October 13, 2005, the Court entered an order granting the rejection motion, with an effective rejection date of October 7, 2005, and ALG took possession of the Aircraft. On June 16, 2006, ALG sold the Aircraft for an aggregate of $230,000, or $115,000 for each aircraft.
ALG filed proofs of claim, dated July 31, 2006. Each Claim was for $7,500,000, representing $7.3 million SLV, plus $315,000 in unpaid rent as of June 16, 2006 (the date of the foreclosure sale), less $115,000 in sale proceeds.3 The Debtors objected to ALG’s claim on the ground that the total amount payable on the Leases, if they had remained in effect for the remaining 16-Hi months of their term, was $1.36 million in face amount (not present-valued) and thus the damages claimed were an unenforceable penalty that was more than 10 times the amount they would have paid under the Leases if they had not been rejected. In the alternative, the Debtors contended that even if the damages clause is enforceable, ALG’s claims should be subordinated by the terms of the Debtors’ Plan of Reorganization because the damages claimed do not represent actual pecuniary loss. The Court held a hearing on the Objection on July 16, 2008. Neither party requested an evidentiary hearing, and the enforceability of a liquidated damages provision is ordinarily “a *356legal issue not requiring an evidentiary showing.” Wells Fargo Bank Northwest, N.A. v. Taca Int’l Airlines, S.A., 315 F.Supp.2d 347, 350 (S.D.N.Y.2003).
Decision
The issue before the Court is whether the liquidated damages clauses in the Leases are enforceable. There is no dispute that this question should be decided by reference to Minnesota law, as the Leases provide that the law of Minnesota governs all matters of construction, validity, and performance. (Leases, § 22.5.) Moreover, both parties have cited and relied on general provisions of Minnesota law rather than cases under Article 2A of the Uniform Commercial Code, which applies to “any transaction ... that creates a lease.” Minn.Stat. Ann. § 336.2A-102. Minnesota has adopted Article 2A, but there do not appear to be any reported Minnesota decisions on the section on liquidated damages, and as will be seen below, this provision basically restates the law on liquidated damages in general terms. Minn.Stat. Ann. § 336.2A-504(1) simply provides that damages “may be liquidated in the lease agreement but only at an amount or by a formula that is reasonable in light of the then anticipated harm caused by the default or other act or omission.”
In the leading case on the issue of liquidated damages in Minnesota, the Minnesota Supreme Court held that a liquidated damages clause is enforceable when “(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and (b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.” Gorco Constr. Co. v. Stein, 256 Minn. 476, 482, 99 N.W.2d 69, 74-75 (1959). As the Minnesota Supreme Court held in that case, “the controlling factor, rather than intent, is whether the amount agreed upon is reasonable or unreasonable in the light of the contract as a whole, the nature of the damages contemplated, and the surrounding circumstances.” Id. See also Costello v. Johnson, 265 Minn. 204, 209-10, 121 N.W.2d 70, 75 (1963) (citing Gorco); Tenant Constr. Inc. v. Mason, 2008 WL 314515, at *5 (Minn.App. Feb. 5, 2008) (same); Bellboy Seafood Corp. v. Nathanson, 410 N.W.2d 349, 352 (Minn.App.1987) (same). In determining the fundamental issue of reasonableness, Minnesota presumes that a liquidated damages provision is valid unless the party disputing the clause rebuts the presumption. See, e.g., 606 Vandalia P’ship v. JLT Mobil Bldg. Ltd. P’ship, 2000 WL 462988, at *5 (Minn.App. Apr. 25, 2000).
In this case the Debtors have easily rebutted the presumption of validity. The unreasonable nature of the clause is well illustrated by the fact that the Debtors’ cash cost of performing under the Leases would have been $560,000 remaining rent for one plane and $571,667 remaining rent for the other (without even present-valuing those sums). By contrast, the liquidated damages clause in the Leases based damages on a static SLV of $7.3 million. Even one-half of $7.3 million (reflecting the fact that the Debtors are entitled to one-half SLY) bears no relationship to actual damages. This is a principal hallmark of an unreasonable penalty — that the liquidated damages bear no relationship to actual damages.
As the Gorco case also holds, “[WJhen the measure of damages is susceptible of definite measurement, we have uniformly held an amount greatly disproportionate to be a penalty.” Gorco, 256 Minn. at 483, 99 N.W.2d at 75. See also Western Oil & Fuel Co. v. Kemp, 245 F.2d 633, 644-45 (8th Cir.1957); 606 Vandalia P’ship, 2000 WL 462988, at *5. In this case *357damages were not difficult to calculate when the Leases were entered into. The Debtors calculated the present value of rent payments of $35,000 for ten years at $2.4 million in 1996. (Memo, dated Feb. 5, 1996, ALG’s Response, Exh. D.) This is not to state that damages had to be calculated in this fashion. Even if SLV had been used as a template for the calculation of damages, an amount for SLV that declined as the Debtors performed under the Leases and as the value of the Aircraft depreciated would easily have provided a reasonable basis for fixing liquidated damages. In Wells Fargo Bank Northwest, N.A. v. Taca Int’l Airlines, S.A., 315 F.Supp.2d at 349-350, the District Court enforced a liquidated damages provision that set damages as a function of unpaid rent, interest, and the present value of a fair market rental value for each airplane.4
Here, however, damages never declined at all. The Minnesota courts have held that this is a clear indication that a liquidated damages clause is an unreasonable penalty — where damages are the same whether the obligor misses the last installment payment or whether it fails to make any payment on the entire obligation. See Goodell v. Accumulative Income Corp., 185 Minn. 213, 217, 240 N.W. 534, 536 (1932); Walsh v. Curtis, 73 Minn. 254, 258-59, 76 N.W. 52, 52-53 (1898). In Walsh, for example, the Court found the damages clause to be an unreasonable penalty because “the consequences of default in the payment of one installment vary so much from the consequences of default in the payment of another installment.” Walsh, 73 Minn. at 259, 76 N.W. at 53.
As the Minnesota courts also recognize, liquidated damages clauses are most clearly appropriate when actual damages are difficult to calculate in advance, such as damages for lost profits or goodwill. See Meuwissen v. H.E. Westerman Lumber Co., 218 Minn. 477, 484, 16 N.W.2d 546, 550 (1944). There was never a question in this case of calculating lost profits or goodwill. The principal elements of damages in this matter are loss of the value of the Aircraft and loss of a stream of rent payments. The cost of replacing the Aircraft may not have been susceptible to precise measurement in 1996, but it did not remain static, and the payments due under the Leases were easily calculated. “It is well established that when the breached contract involves only the payment of money, the damages are susceptible of definite measurement.” LeFavor v. Stuebner, 2004 WL 2283538, at *2 (Minn.App. Oct. 12, 2004), citing McGuckin v. Harvey, 177 Minn. 208, 210, 225 N.W. 19 (1929) and Maudlin v. Am. Sav. & Loan Ass’n, 63 Minn. 358, 367, 65 N.W. 645, 649 (1896).
ALG supports the damages clause by stating there was a reason for the unusual and fixed provision — the Debtors insisted that if there were a loss of the Aircraft during the Lease term, the amount of damages should be high enough to reimburse them for the costs of refur*358bishing the planes. According to ALG, as of 1996 when the Leases were signed, the present value of full performance from 1996 until the termination date was $2.4 million per aircraft. If that amount is added to $1.95 million in refurbishing costs, the total is $3,595,000. (ALG’s Response, Exh. E.) Since one-half of the liquidated damages amount was payable to the Debtors, it is ALG’s contention that a damages amount fixed at one-half of $7.3 million, or $3,650,000, was a reasonable sum. However, the fact that there is some reason for a damages provision as an initial calculation of damages does not mean it is reasonable to engrave this amount in stone for all time. It is obvious that in setting the liquidated damages provision the parties considered only a total loss of the plane and never contemplated the implications of a lease default much later in the term. That does not, however, make the clause a reasonable one. The Minnesota courts take into account the totality of the circumstances, not just the ex ante expectations and calculations of the parties, especially in cases where damages are readily discernable at all times. Gorco, 256 Minn. at 483, 99 N.W.2d at 75.
ALG finally argues that the Court should take into account the sophistication of the parties in judging the reasonableness of the liquidated damages clause, implying that a large and sophisticated airline like Northwest should be held to its bargain, no matter how unreasonable. In this case the Debtors have confirmed a Chapter 11 Plan of Reorganization in which all unsecured creditors share in a single recovery, so it is the Debtors’ creditors, not the Debtors, who would suffer if ALG’s claim is unreasonably large. Beyond that, there is no principle that a sophisticated party should be bound by a patently unreasonable liquidated damages provision. In In re TWA, an airline that was as sophisticated (or unsophisticated) as Northwest agreed to a liquidated damages clause that was similar to the one at bar.5 In that case the lessor of two planes sought to enforce a liquidated damages clause after rejection that awarded a “termination value” of $13,500,000, less either the fair market rental value ($5,314,116) or fair market resale value of each plane ($7,000,000). TWA 145 F.3d at 134. The termination value did not change over the course of the lease, and the Third Circuit found that the liquidated damages clause was an unenforceable penalty that bore little relationship to actual damages (e.g., if TWA breached in the last month of the lease, the lessor could claim damages that were much higher than the approximate $100,000 in monthly rent it lost). The lessor contended that the clause should be enforced because TWA had explicitly warranted that the provision was valid as a liquidated damages amount and because TWA was a sophisticated party with bargaining power equal to that of the lessor. The Circuit Court rejected this argument, noting that the lessor had cited no authority to the effect that the sophistication of a party renders an otherwise unreasonable penalty enforceable. Id. at 135.
ALG attempts to distinguish TWA on the ground that in that case the parties did not provide an explanation as to why the termination value did not decline over time, whereas in this case a reason has been provided. In fact, the lessor in TWA did put forth a reason for the clause — that the constant termination value shifted the risk of a drop in airline resale prices during the lease’s term from the lessor to the lessee. TWA 145 F.3d at 135. The existence of a reason did not save that clause, *359nor does it save the liquidated damages provision in these Leases.
Conclusion
In conclusion, the liquidated damages provision in this case constitutes an unreasonable penalty under the applicable law of Minnesota and is unenforceable. ALG’s claim must be limited to its reasonable damages. The parties are directed to set the matter down for further proceedings if they cannot agree on a damages amount. In view of the holding herein, the Court need not reach the Debtors’ further argument that enforcement of the liquidated damages provision would be considered a penalty under the Debtors’ Plan of Reorganization and be subject to subordination as such.
The Debtors are directed to settle an appropriate order on five days’ notice.
. In this case the Leases provide that SLV is the amount for which the lessee must insure the equipment (Leases, §§ 11.1, 11.2) and is the amount used to calculate damages after a lease default (Leases, § 14).
. The Leases thus provided that the Debtors would be entitled to one-half SLV should the Leases terminate, provided that the Debtors also complied with the lessor’s remedies as set forth in § 14 of the Leases (Leases, § 9.24(b).) Pursuant to §§ 14(c) and (d), the lessor could claim either SLV less resale value, or, if the Aircraft had already been sold after an event of default, SLV less the sales price.
.There appears to be no dispute that under the liquidated damages clause, ALG would be liable to pay over to the Debtors one-half of SLV, less the resale price, although there is a dispute as to the measure of actual damages should the clause not be enforced. If the liquidated damages clause is not enforceable, ALG asserts that the Debtors are liable for additional damages because they failed to provide adequate records as to the history of the Aircraft and thus the Aircraft were sold for a depressed price on the market.
. The Wells Fargo Court applied New York law, which is very similar to Minnesota law on liquidated damages. Compare Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420, 424, 361 N.E.2d 1015, 1018, 393 N.Y.S.2d 365, 369 (1977) ("A clause which provides for an amount plainly disproportionate to real damage is not intended to provide fair compensation but to secure performance by the compulsion of the very disproportion.”) with Gorco, 256 Minn, at 482, 99 N.W.2d at 74 ("Punishment of a promisor for breach, without regard to the extent of the harm that he has caused, is an unjust and unnecessary remedy and a provision having an impact that is punitive rather than compensatory will not be enforced."). New York has also adopted Article 2A of the Uniform Commercial Code.
. The TWA contract was governed by New York law, but, as noted above, Minnesota's law on liquidated damages is very similar to New York's. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494293/ | HAINES, Bankruptcy Judge.
The bankruptcy court entered a $20,000 preference recovery judgment against National Lumber Company (“National”). National appeals, principally asserting that the property it received from the chapter 7 debtor was not “an interest of the debtor in property” within the meaning of Bankruptcy Code § 547(b),1 and, therefore, not a transfer avoidable by the trustee as a preference. We conclude that, because the debtor had, at minimum, an equitable interest in the property National received and that, because the property would have *824been property of the chapter 7 estate had the transfer not occurred, the bankruptcy court correctly entered judgment for the trustee.
We also conclude that neither the earmarking doctrine nor the “contemporaneous exchange for new value” defense applies and that the bankruptcy judge, who took over the case from a resigning judge after trial, properly followed pertinent procedures in reviewing the record and reaching his decision. Thus, we affirm.
Background
1. The State Court Actions
Richard Reale, Jr., eo-owned WSI Contracting, Inc., with Matthew Johnson. They, together with Sheryl Dumas, Johnson’s wife, personally guaranteed WSI’s trade account with National. When WSI defaulted in 2004, National commenced collection efforts, including placing a mechanic’s lien against the property of a WSI customer and, later, bringing two state court actions against WSI, Reale, Johnson, and Dumas. In the first (the “Dedham Action”), seeking recovery of $11,691.87, it also sought to foreclose its lien on the WSI customer’s property. In the second (the “Norfolk Action”), seeking recovery of $51,166.17, it obtained an attachment lien against Dumas’s real estate.
The state court litigation settled, with Reale, Johnson and Dumas agreeing to pay National $50,000. Reale’s initial contribution to the settlement was $20,000.2
On September 26, 2005, Reale tendered a $20,000 treasurer’s check to National. Johnson and Dumas paid National their share of the settlement in December of that year. National released its mechanic’s lien on September 30, 2005; voluntarily dismissed the Norfolk Action on November 30, 2005; and released its attachment against Dumas on December 5, 2005.
2. Bankruptcy Proceedings
Reale filed a voluntary chapter 7 petition on December 23, 2005. The trustee sued National to recover Reale’s $20,000 payment as a preference.3 The parties stipulated that all elements of a voidable § 547(b) preference existed, except the threshold requirement that National received a transfer of “an interest of the debtor in property.” The trustee was put to her proof on that point.
The bankruptcy judge took the case under submission following trial, but resigned from the bench before a decision was issued. The matter was transferred to another bankruptcy judge. The second judge issued a Fed. R. Bankr.P. 9028 certification that he had reviewed the docket, pleadings, and trial transcript and that he had determined the matter could proceed to decision without prejudice to the parties. In the absence of objection, the judge entered judgment for the trustee. This appeal ensued.
Jurisdiction
A bankruptcy appellate panel may hear appeals from “final judgments, orders and decrees [pursuant to 28 U.S.C. § 158(a)(1) ] or with leave of the court, from interlocutory orders and decrees [pursuant to 28 U.S.C. § 158(a)(3)].” Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998). “A decision is final if it ‘ends the litigation on the *825merits and leaves nothing for the court to do but execute the judgment.’ ” Id. at 646 (citations omitted). A preference recovery judgment is a final, appealable order. Gray v. Travelers Ins. Co. (In re Neponset River Paper Co.), 231 B.R. 829, 830 (1st Cir. BAP 1999).
Standard of Review
We review the bankruptcy court’s findings of fact for clear error and its conclusions of law de novo.4 See T.I. Fed. Credit Union v. DelBonis, 72 F.3d 921, 928 (1st Cir.1995); Western Auto Supply Co. v. Savage Arms, Inc. (In re Savage Indus., Inc.), 43 F.3d 714, 719-20 n. 8 (1st Cir.1994). A finding is clearly erroneous when, although there is evidence to support it, the Panel is left with the definite impression that a mistake has been made. In re Neponset River, 231 B.R. at 830-31.
As for that hybrid-the mixed question of law and fact, our review is but slightly more nuanced. The bankruptcy court’s determination that Reale had an interest in the transferred property presents such a question. Advanced Testing Techs., Inc. v. Desmond (In re Computer Eng’g Assocs., Inc.), 337 F.3d 38, 45 (1st Cir.2003); In re Neponset River, 231 B.R. at 831. We review for clear error “unless the bankruptcy court’s analysis was based on a mistaken view of the legal principles involved.” Arch Wireless, Inc. v. Nationwide Paging, Inc. (In re Arch Wireless, Inc.), 534 F.3d 76, 82 n. 2 (1st Cir.2008) (quoting In re Carp, 340 F.3d 15, 22 (1st Cir.2003)).
We review a successor judge’s decision to decide a case after a trial conducted by another judge for abuse of discretion. See Fed. R. Bankr.P. 9028 (stating that if judge conducting trial is unable to proceed, any other judge may proceed upon satisfaction of certain requirements); Schubert v. Nissan Motor Corp. in U.S.A., 148 F.3d 25, 30 (1st Cir.1998) (explaining that judicial action taken in discretionary matters is reviewed for abuse of discretion); 11 Wright & Miller, Federal Practice & Procedure, Civ.2d § 2922 (2008) (explaining that replacement judge may proceed with matter if he feels he can do so on the record); 3 Moore, et al., Moore’s Manual-Federal Practice and Procedure, § 23.37[4] (2008) (explaining that decision whether to hold new trial is left to discretion of successor judge); see also Canseco v. United States, 97 F.3d 1224, 1227 (9th Cir.1996) (concluding that successor judge must comply with Fed.R.Civ.P. 63 before deciding motion for new trial and explaining that successor judge would then have discretion to grant or deny motion). Abuse occurs when a material factor deserving significant weight is ignored, when an improper factor is relied upon, or when all proper and no improper factors are assessed, but the court makes a serious mistake in weighing them. Latin Am. Music Co. v. Archdiocese of San Juan of the Roman Catholic & Apostolic Church, 499 F.3d 32, 43-44 (1st Cir.2007).
Discussion
1. The “Successor Judge” Issue:
National argues that the bankruptcy court abused its discretion in proceeding to decision on the record without recalling witnesses. The problem is particularly egregious here, National asserts, because the court expressly stated that it considered, inter alia, the “demeanor and credibility” of witnesses. We disagree.
*826Federal Rule of Civil Procedure 63 (“Rule 63”), made applicable to bankruptcy cases by Federal Rule of Bankruptcy Procedure 9028, provides that:
If a judge conducting a hearing or trial is unable to proceed, any other judge may proceed upon certifying familiarity with the record and determining that the case may be completed without prejudice to the parties. In a hearing or a nonjury trial, the successor judge must, at a party’s request, recall any witness whose testimony is material and disputed and who is available to testify again without undue burden. The successor judge may also recall any other witness.
Fed.R.Civ.P. 63.
The requirements are straightforward: the successor judge in a nonjury trial may proceed with a matter if he (1) certifies his familiarity with the case and his determination that the case may proceed without prejudice to the parties, and (2) recalls any witness whose testimony is material and disputed if so requested. See Fed. R. Bankr.P. 9028; Hoult v. Hoult, 57 F.3d 1, 8-9 (1st Cir.1995) (concluding that successor judge satisfied requirements of Rule 63 where he certified familiarity with record and neither party objected to his proceeding on record).
The successor judge fulfilled Bankruptcy Rule 9028’s requirements. He issued the requisite certification. He had no duty to recall witnesses as neither party asked him to do so. National does not complain that it was given inadequate notice or insufficient time to react to the certification. Indeed, counsel conceded at oral argument that he considered he had a “good case on the documents” and made a “judgment call” to let the matter proceed without requesting that witnesses be recalled.5
2. The “Property of the Debtor” Issue:
As explained above, National stipulated to all elements of an avoidable preference except the fundamental requirement that the transfer in question was of property of the debtor. It contends that, because the funds with which Reale paid it were drawn from bank accounts titled in his mother’s name “in trust for Richard A. Reale,” and bearing the Social Security number of his father, Richard A. Reale, Sr., Reale had no interest in or control over those funds and, thus, their transfer involved no interest in his property.
Although the accounts were formally denominated as though they were held for Reale’s father’s benefit, abundant evidence, including Reale’s testimony,6 his mother’s deposition testimony,7 the cir-*827eumstances of the accounts’ creation, and, ultimately, Reale’s ability to withdraw the funds to pay National,8 supports the bankruptcy court’s conclusion that the funds were legally, or equitably, his. That is enough to sustain the judgment.
Section 547 allows a trustee to avoid preferential transfers to insure the orderly and fair distribution of the debtor’s assets, and to prevent pre-petition dismantling of the debtor’s estate. In re Neponset River, 231 B.R. at 882. A transfer is avoidable where the trustee proves that the debtor’s interest in property was transferred to or for the benefit of a creditor, for or on account of an antecedent debt, while the debtor was insolvent on or within 90 days before the date of filing bankruptcy, and such transfer enables the creditor to receive more than it would in a chapter 7 liquidation. 11 U.S.C. § 547. A debtor has interest in property that would have been property of the estate had it not been transferred before the commencement of the bankruptcy proceeding. Begier v. I.R.S., 496 U.S. 53, 60, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990); In re Neponset River, 231 B.R. at 832. Subject to certain exceptions that do not apply here, the estate includes all legal and equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. § 541(a)(1).
The bankruptcy judge correctly interpreted the facts in light of applicable law and concluded that the $20,000 National received was Reale’s money. To put it another way, had Reale not paid National the money, his bankruptcy trustee would have been entitled to the funds, notwithstanding the way in which the accounts were titled.
3. The “Earmarking” Issue:
Having determined that the funds were indeed Reale’s, we have effectively rebuffed National’s earmarking arguments. We will, however, explain briefly.
Where funds received by the debt- or from another are “earmarked” to be paid a third party, courts have held that the funds are not property of the debtor’s estate and thus the transfer to the third party is not a preference under § 547. Collins v. Greater Atl. Mortgage Corp. (In re Lazarus), 478 F.3d 12, 15 (1st Cir.2007); see also Kapela v. Newman, 649 F.2d 887, 892 (1st Cir.1981); Branch v. Hill, Holliday, Connors, Cosmopoulos, Inc. (In re Bank of New England Corp.), 165 B.R. 972, 977 (Bankr.D.Mass.1994). The classic example of earmarking is where a debtor receives funds from a guarantor for the purpose of paying off a creditor, and the debtor does so but then goes bankrupt shortly thereafter. In re Lazarus, 478 F.3d at 15. The funds are, therefore, transferred from the guarantor to the creditor through, rather than by, the debt- or. Id. The doctrine has been applied where a non-guarantor funds a payment to a debtor’s creditor via the debtor, thereby stepping into the first (paid) creditor’s shoes. Id. In such instances, the debtor functions as a “mere conduit” and exercises no control over the funds’ disposition. In re Neponset River Paper, 231 B.R. at 834; Andreini & Co. v. Pony Express Delivery Servs., Inc. (In re Pony Express Delivery Servs., Inc.), 440 F.3d 1296, 1300 (11th Cir.2006); 5 Collier on Bankruptcy ¶ 550.02[4] (15th Ed. Rev.2008).
*828As the money paid by Reale to National was his own, the earmarking doctrine simply does not apply.
Jh The “Contemporaneous Exchange” Issue:
National urges that the court erred in rejecting its contemporaneous exchange defense. It asserts that, in exchange for the $20,000 payment, it released its mechanic’s lien (against WSI’s customer’s property), dismissed the Ded-ham Action and dismissed Reale as a defendant in the Norfolk Action. In its view, these events established a contemporaneous exchange for new value, insulating the transfer from preference attack.
Section 547(c)(1) sets forth the new value defense:
The trustee may not avoid under this section a transfer—
to the extent that such transfer was—
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange.
11 U.S.C. § 547(c)(1). “New value” means:
money or money’s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation.
11 U.S.C. § 547(a)(2). The burden is on the creditor to prove that the new value exception applies. 11 U.S.C. § 547(g); In re Computer Eng’g, 337 F.3d at 44; Ralar Distribs., Inc. v. Rubbermaid, Inc. (In re Ralar Distribs., Inc.), 4 F.3d 62, 68 n. 5 (1st Cir.1993); 5 Collier on Bankruptcy ¶ 547.04 (15th Ed. Rev.2008).
“New value” is something of tangible economic value that “actually and in real terms enhance[s] the worth of the debtor’s estate so as to offset the reduction in the estate that the transfer caused.” Aero-Fastener, Inc. v. Sierracin Corp. (In re Aero-Fastener, Inc.), 177 B.R. 120, 137-38 (Bankr.D.Mass.1994). The value given in a contemporaneous exchange must be the approximate worth of the asset transferred. Id. at 138. As such, the creditor must provide a specific dollar valuation of the “new value” that the debtor received in exchange. Id.
National’s arguments fail. To begin, there is no evidence that National and Reale intended the purported exchange to be contemporaneous for new value, an essential element of the defense. See 11 U.S.C. § 547(c)(1)(A). Moreover, National presented no evidence of the value to Reale of what it released, a second fatal shortcoming. See id.; In re Aero-Fastener, Inc., 177 B.R. at 137-38. The bankruptcy court properly rejected the § 547(c)(1) defense.
5. The Avoidance of Statutory Lien Issue:
Finally, National argues that Reale’s $20,000 payment was not a preference because it was made, in part to dissolve a statutory lien that the trustee could not have avoided. We reject this argument, because the lien in question did not encumber Reale’s property.
Section 547(c)(6) states that a trustee may not avoid a transfer that is the fixing of a statutory lien that is not avoidable under § 545. Section 545 specifies circumstances in which a trustee can avoid a statutory lien on property of the debtor. See In re Neponset River, 231 B.R. at 832. Assets that are not property of the estate *829are irrelevant to the § 547(c)(6) inquiry. The mechanic’s lien National released encumbered a third party’s property, not Reale’s. No more need be said.
Conclusion
For the foregoing reasons, the bankruptcy court’s entry of judgment for the trustee is AFFIRMED.
. Unless otherwise indicated, all statutory references are to Title 11 of the United States Code, 11 U.S.C. § 101, et seq., as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8.
. Reale agreed that, after consummating the settlement, he would owe Johnson and Dumas a total of $5,000.
. Where factual findings are based on determinations regarding the credibility of witnesses, we generally accord even greater deference to the trial court’s findings. Fed. R. Bankr.P. 8013; Rodriguez-Morales v. Veterans Admin., 931 F.2d 980, 982 (1st Cir.1991). We decline to do so in this case, however, as the court did not have the opportunity to observe witness testimony first hand, but instead based its findings on review of the record.
. The judge did state that his analysis included consideration of the witnesses' demeanor and credibility. We concede that, although credibility can be assayed in this case by considering the witnesses’ words and motives, observing their demeanor from the cold record would be impossible. We consider the judge’s use of the term "demeanor” unfortunate in this case, but far from fatal to his findings. It was probably included inadvertently—and harmlessly. As discussed below, the record is replete with evidence supporting the judgment.
. Reale (who had nothing to gain by the testimony) stated that he knew he had the funds on deposit. He was aware that the funds had been given him by his late grandmother, in two annual installments, before her death and that he had asked his parents to hold them for him so he could eventually use them to buy a house. National points to Reale’s contradictory deposition testimony, but the judge, as fact finder, could reasonably have accepted Reale's trial testimony.
. Helen DiCarlo-Reale confirmed the source of the funds. She explained that Reale’s brother had received identical gifts from her mother at the same time. She also testified, in so many words, that even if the accounts in which they were held were awkwardly titled, the money was her son's—all he had to do was ask for it and he could put it to any use.
. Although one bank employee testified that, under applicable bank policies, Reale could not access the funds without his mother’s signature, a bank manager who knew the family well permitted Reale to withdraw the funds without that signature. Funds from the two accounts supplied the $20,000 paid to National. A small surplus was transferred to a personal checking account that Reale used to pay his bills. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494295/ | OPINION
1
BRENDAN LINEHAN SHANNON, Bankruptcy Judge.
Before the Court is a motion (the “Motion”) [Docket No. 58] filed by several alleged transferees (the “Movants”)2 seeking partial summary judgment on two fraudulent transfer claims asserted by George L. Miller (the “Trustee”). The Movants assert that 11 U.S.C. § 546(e) operates to prevent the Trustee from avoiding the alleged transfers under 11 U.S.C. § 548(a)(1)(B). The Trustee opposes the Motion, arguing that § 546(e) does not provide a safe harbor for payments made in exchange for privately traded securities. For the following reasons, the Court concludes otherwise and will grant the Motion.
I. BACKGROUND
A. Factual Background
Prior to April 2005, the Elrods owned one-hundred percent of Jack K. Elrod Company, Inc. (“JKE”). JKE was a family-owned and operated business that provided its customers with design, fabrication, installation, maintenance, and safety inspection services for spectator seating arrangements. On April 15, 2005, the El-rods reached an agreement (the “Stock Purchase Agreement”) with Champlain Capital Partners, L.P. (“Champlain”), pursuant to which the Elrods would sell their entire interest in JKE to Champlain.
The relevant facts are not in dispute. On April 15, 2005, Elrod Acquisitions Corp. (“Acquisitions”), which was a wholly owned subsidiary of Elrod Holdings Corp. (“Holdings”) and which Champlain had formed to acquire JKE, was involved in three transfers pursuant to the Stock Purchase Agreement: (I) it paid the Elrods cash totaling $18,189,923 via wire transfer (the “2005 Wire Transfer”); (ii) it issued secured notes (the “Secured Notes”) totaling $5.8 million to the Elrods; and (iii) it received one-hundred percent of the El-rods’ stock in JKE. Upon the completion *762of this transaction, JKE became a wholly owned subsidiary of Holdings.
On August 18, 2006, JKE paid Elway $3.5 million via wire transfer (the “2006 Wire Transfer”) in partial satisfaction of the Secured Notes. Both parties acknowledge that the 2005 and 2006 Wire Transfers were made through “financial institutions” as that term is used in § 546(e). (Objection 4 [Docket No. 71].)
On October 16, 2006 (the “Petition Date”), JKE and Holdings (collectively, the “Debtors”) filed petitions for relief under Chapter 7 of the Bankruptcy Code (the “Code”). The Court subsequently ordered the consolidation and joint administration of the Debtors’ cases pursuant to Federal Rule of Bankruptcy Procedure 1015 and Local Rule 1015-1. The Trustee was appointed as the Chapter 7 trustee to the Debtors’ estates.
B. Procedural History and the Parties’ Positions
On September 7, 2007, Elway commenced this adversary proceeding by filing a complaint (the “Elway Complaint”) [Docket No. 1], seeking (I) a determination of the validity, extent, and priority of its liens, if any, and (ii) an allowance of its claims against the Debtors’ estates.
On December 5, 2007, the Trustee filed an answer (the “Answer”) [Docket No. 10], which included twenty-one counterclaims against Elway and other defendants, including the Elrods. Subsequently, on April 24, 2008, the Trustee filed an amended answer (the “Amended Answer”) [Docket No. 47]. The Amended Answer also included twenty-one counterclaims (the “Trustee’s Amended Counterclaims”), which are substantially the same as those asserted with the Answer. In the Eleventh and Twelfth Claims of the Trustee’s Amended Counterclaims, the Trustee alleges, among other things, that the 2005 and 2006 Wire Transfers constitute fraudulent transfers. As such, he seeks to avoid them.
The Movants filed the Motion on May 8, 2008, requesting partial summary judgment on the Eleventh and Twelfth Claims. They argue that the Trustee may not avoid the 2005 and 2006 Wire Transfers because they constitute “settlement payments” made by or to “financial institutions” and § 546(e) of the Code specifically prohibits the avoidance of such transfers. Accordingly, they ask the Court to grant the Motion and thereby prohibit the Trustee from avoiding said transfers.
On June 3, 2008, the Trustee filed an objection (the “Objection”) [Docket No. 71] in response to the Motion. In the Objection, the Trustee argues that the plain language of § 546(e) restricts its application to payments made for publicly-traded securities. He also contends that the legislative history of § 546(e) confirms that the statute was intended to apply only to publicly-traded securities and that no authority binds the Court to hold otherwise.
On June 10, 2008, the Movants filed a reply [Docket No. 74], in which they assert that the Third Circuit has adopted a broad definition of the term “settlement payment” as used in § 546(e) and that this expansive definition encompasses payments made for privately-held securities.
The matter has been fully briefed and is ripe for decision.
II. JURISDICTION
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a) and (b)(1). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Consideration of this matter constitutes a “core proceeding” under 28 U.S.C. § 157(b)(2)(H).
*763III. DISCUSSION
A. Summary Judgment Standard
Federal Rule of Civil Procedure 56, which Federal Rule of Bankruptcy Procedure 7056 makes applicable to adversary proceedings, provides that a court shall grant summary judgment if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.CivP. 56(c). The moving party bears the burden of proving that no genuine issue of material issue of fact exists. See, e.g., Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 n. 10, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). “Facts that could alter the outcome are ‘material’, and disputes are ‘genuine’ if evidence exists from which a rational person could conclude that the position of the person with the burden of proof on the disputed issue is correct.” Horowitz v. Fed. Kemper Life Assurance Co., 57 F.3d 300, 302 n. 1 (3d Cir.1995) (internal citations omitted). In addition, a court will “view the underlying facts and all reasonable inferences therefrom in the light most favorable to the party opposing the motion.” Pa. Coal Ass’n v. Babbitt, 63 F.3d 231, 236 (3d Cir.1995).
B. The 2005 and 2006 Wire Transfers are Settlement Payments, Not Subject to Avoidance
The Trustee seeks to avoid the 2005 and 2006 Wire Transfers pursuant to § 544 and §§ 548(a)(1)(A) and (B) of the Code.3 The Movants oppose avoidance on the ground that the transfers are “settlement payments” made by “financial institutions” and thus excepted from avoidance by § 546(e). The Trustee does not dispute that the transfers were made by “financial institutions” within the meaning of § 546(e) or that they were made as payment for JKE’s stock. Instead, he argues that the term “settlement payment” as used in § 546(e) applies only to payments for publicly traded securities, unlike those that were made in this case. The Court disagrees.
First, the Trustee argues that the plain language of § 546(e) restricts its application to payments with respect to publicly traded securities. Section 741(8) of the Code defines “settlement payment” to include “a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade.” 11 U.S.C. § 741(8) (emphasis added). Put simply, “a settlement payment is generally the transfer of cash or securities made to complete a securities transaction.” Lowenschuss v. Resorts Int’l, Inc. (In re Resorts Int'l Inc.), 181 F.3d 505, 515 (3d Cir.1999). The Trustee asserts that the above-emphasized final clause of § 741(8) limits § 546(e)’s application to the public securities market.
In making this argument, the Trustee states that the generally accepted definition of “trade” is “the buying and selling or bartering of commodities” and that “trade” is synonymous with “business” or “market.” Based on this definition and these synonyms, the Trustee concludes that the phrase “securities trade” only refers to “the business of buying and selling publicly-traded securities.” The Court finds this leap in logic to be unconvincing, since there does exist a robust trade or *764market for non-publiely traded securities. Most convincingly, the fact that the Elrods were able to privately market and sell their JKE stock indicates that there does exist a “trade” or “buying and selling” of securities other than publicly traded securities.
Second, the Trustee argues that the legislative history of § 546(e) confirms that it was intended to apply only to publicly traded securities. Specifically, the Trustee asserts that § 546(e) was enacted to protect the carefully regulated mechanisms for clearing trades in securities in public markets. He reasons, therefore, that § 546(e) was intended to be inapplicable to payments for non-publicly traded securities where the settlement and clearance system is not implicated. The United States Court of Appeals for the Third Circuit, however, expressly rejected this argument in Lowenschuss v. Resorts Int’l, Inc. (In re Resorts Int’l Inc.), 181 F.3d 505 (3d Cir.1999).
In Resorts, the court considered whether payments made pursuant to a leveraged buyout (“LBO”) were “settlement payments” even though “no clearing agency was involved in [the] transfer.” Id. at 515. It stated that, “[i]n the securities industry, a settlement payment is generally the transfer of cash or securities made to complete a securities transaction.” Id. It then held that the term is an expansive one:
[T]he term “settlement payment” is a broad one that includes almost all securities transactions. Including payments made during LB Os within the scope of the definition is consistent with the broad meaning.... A payment for shares during an LBO is obviously a common securities transaction, and we therefore hold that it is also a settlement payment for the purposes of section 546(e).
Id. at 515-16. The court therefore did not allow the Trustee to avoid the transfer at issue even though the transfer did not actually implicate a clearing agency. Id. at 516.
The Third Circuit’s holding in Resorts is not expressly limited to publicly traded securities and is of course binding upon this Court. Moreover, the Court notes that its holding today in this matter is consistent with case law applying the decision in Resorts. See Brandt v. B.A. Capital Co., LP (In re Plassein Int’l Corp.), 366 B.R. 318, 324 (Bankr.D.Del.2007), aff'd, 388 B.R. 46 (D.Del.2008) (“[T]he Trustee endeavors to limit the application of Resorts to publicly traded securities.... The Trustee’s argument, however, was expressly rejected by Resorts.”); Official Comm. of Unsecured Creditors of The IT Group v. Acres of Diamonds, L.P. (In re The IT Group, Inc.), 359 B.R. 97, 101 (Bankr. D.Del.2006) (“The Third Circuit ... did not consider dispositive whether the sale involved the securities clearance and settlement system. Additionally, the Third Circuit did not consider a worthy distinguishing factor that the stock was sold privately rather than on the public stock market.”).
D. The Trustee’s Claim for Avoidance Under § 518(a)(1)(A) Survives the Motion for Partial Summary Judgment
A trustee may avoid a transfer pursuant to § 548(a)(1) if the transfer satisfies the criteria set forth in either § 548(a)(1)(A) or (B). 11 U.S.C. § 548(a)(1). Section 546(e) operates to limit a trustee’s avoidance power under § 548(a)(1)(B). 11 U.S.C. § 546(e) (stating that the section applies “[notwithstanding sections ... 548(a)(1)(B)”). It does not, however, limit avoidance under § 548(a)(1)(A). Id. (providing that “the trustee may not avoid a transfer ... ex*765cept under section 548(a)(1)(A) of this title”). Thus, a court may not prohibit a trustee from avoiding a transfer under § 548(a)(1)(A) by finding that the circumstances of the transfer satisfy the criteria set forth in § 546(e).
In the instant case, the Trustee has alleged facts that, if true, would allow him to avoid the 2005 and 2006 Wire Transfers under both § 548(a)(1)(A) and (B). As discussed above, § 546(e) only allows the Court to grant summary judgment to the Movants with respect to the Trustee’s claim for avoidance under § 548(a)(1)(B). Accordingly, the Trustee’s claim for avoidance under § 548(a)(1)(A) survives the Court’s ruling today.
IV. CONCLUSION
For the foregoing reasons, the Court finds that no material fact is in dispute and that § 546(e) protects certain transfers made to complete securities transactions regardless of whether the securities are publicly or non-publicly traded. Accordingly, the 2005 and 2006 Wire Transfers are exempt from avoidance under § 548(a)(1)(B). The Court will grant the Motion.
An appropriate Order follows.
ORDER
AND NOW, this 30th day of September, 2008, upon consideration of the motion (the “Motion”) [Docket No. 58] seeking partial summary judgment filed by Jeffrey L. El-rod, Dale K. Elrod, Maryann Waymire, and Elway Company, LLP (collectively, the “Movants”), the objection [Docket No. 71] of George L. Miller (the “Trustee”), and the Movants’ reply; for the reasons set forth in the accompanying Opinion, it is hereby
ORDERED that the Motion is GRANTED with respect to the Eleventh and Twelfth Claim of the Trustee’s Amended Counterclaims [Docket No. 47] to the extent that he seeks to avoid the 2005 and 2006 Wire Transfers under either 11 U.S.C. § 544 or 11 U.S.C. § 548(a)(1)(B).
. This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to Federal Rule of Bankruptcy Procedure 7052.
. The Movants are Jeffrey L. Elrod, Dale K. Elrod, Maryann Waymire (collectively, the "Elrods”), and Elway Company, LLP ("Elway”). Elway is a company that is owned and controlled by the Elrods.
. The Trustee does not specifically state which sections of the Code he is seeking to recover under. The Court, however, infers this from the substance of his pleadings. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494296/ | MEMORANDUM and ORDER
TOWNES, District Judge.
This case arises from the recent dire financial quagmire of U.S. Airways, Inc. (“US Airways”). Since 2002, U.S. Airways has filed for bankruptcy protection on two separate occasions, and has been in constant financial turmoil. During the first reorganization, begun in August 2002, the United States Bankruptcy Court for the Eastern District of Virginia approved the termination of U.S. Airways’ then-effective pilot pension plan, a defined benefit plan, and the implementation of a replacement defined contribution plan. US Airways once again filed for bankruptcy protection in September 2004, and during this second reorganization, the defined contribution plan was modified to ensure the company avoided liquidation. With each change to the pilot pension plan, pilots were promised significantly fewer retirement benefits, which has led to the instant action.
Plaintiffs, who number nearly 300 individuals, are pilots presently or formerly employed by U.S. Airways and U.S. Airways Group, Inc. (collectively, “US Airways”) who have either reached their sixtieth birthday or are close to doing so.1 Some of the plaintiffs have already retired, but they remain involved in this dispute because of significant losses to their pension plans. They commenced this action against defendants U.S. Airways, Air Line Pilots Association, International (“ALPA”), Duane Woerth, as President of ALPA, Retirement Systems of Alabama (“RSA”), and Retirement Systems of Alabama Holdings LLC (“RSA Holdings”). Through the Fourth Amended and Supplemental Complaint (the “FAC”), plaintiffs assert several claims against defendants: (1) that ALPA and Woerth allegedly breached their duty *529of fair representation, engaged in discrimination based upon age in violation of the Age Discrimination in Employment Act (“ADEA”), and violated the Racketeering Influenced and Corrupt Organizations Act (“RICO”); (2) that U.S. Airways discriminated against plaintiffs based upon age in violation of the ADEA, breached its fiduciary duties and conducted “prohibited transactions” under the Employment Retirement Income Security Act (“ERISA”), and violated RICO; and (3) that RSA and RSA Holdings violated RICO.
On or about November 22, 2006, plaintiffs voluntarily dismissed all of their claims against U.S. Airways, and now ALPA and Woerth (collectively, “ALPA”) and RSA and RSA Holdings (collectively, “RSA”) separately move to dismiss the FAC. For the reasons set forth below, both ALPA’s and RSA’s motions are granted.
BACKGROUND2
A. US Airways’ Financial Problems and the First Concession
In 2001, U.S. Airways was the seventh largest airline in the United States and employed nearly 49,000 active employees, including 6,200 pilots. Following corporate moves that decreased its stock price, including an approximately $1.9 billion stock buyback, and the terrorist attacks of September 11, 2001, U.S. Airways began experiencing significant financial problems. US Airways’ financial predicament was exacerbated by the company’s significant underfunding of its employees’ four pension plans. In February 2002, U.S. Airways reported that the pilots’ pension plan, a defined benefit plan (the “DB Plan”)— which was the costliest of the four pension plans — was only funded at 64% of the required level, which obligated U.S. Airways to immediately and significantly contribute to the DB Plan.3 In March 2002, David Siegel was appointed president and CEO of U.S. Airways. Soon thereafter, the company publicly announced that its financial position required immediate improvement.
Claiming that employee concessions were necessary to stave off bankruptcy, in mid-2002, prior to filing its first petition for bankruptcy protection, U.S. Airways *530sought substantial cuts to employee wages and benefits from all of the unions representing its employees. ALPA, the pilots’ exclusive negotiating agent, was the only employee union to agree to the substantial cuts at that time, but did not negotiate to have the savings earmarked to correct the DB Plan’s funding deficit (the “First Concession”).4 The other unions eventually agreed to the substantial cuts requested by U.S. Airways approximately one month after the company filed its first petition for bankruptcy protection.
In August 2002, shortly before U.S. Airways filed for bankruptcy protection, it managed to obtain tentative approval of a $1 billion loan package guaranteed by the Air Transportation Stabilization Board (“ATSB”). The ATSB loan guarantee, however, was conditioned on U.S. Airways demonstrating that it could achieve certain revenue and cost reduction targets in accordance with a seven-year business plan.
B. US Airways’ First Bankruptcy and Termination of the DB Plan
On or about August 11, 2002, U.S. Airways filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia (the “2002 Bankruptcy”). To maintain its cash liquidity during the reorganization, as the ATSB guarantee was substantially a form of exit financing, U.S. Airways obtained $500 million from RSA through a debtor-in-possession loan. RSA also agreed to become a “plan sponsor,” whereby it agreed to invest $240 million in U.S. Airways once it exited bankruptcy in exchange for a 37% interest in the company. RSA’s investments enabled U.S. Airways to pursue a “fast track” reorganization and to emerge from Chapter 11 during the first quarter of the next year.
However, two substantial problems arose during the bankruptcy case that threatened the business plan upon which the ATSB-guaranteed loan and RSA investments were conditioned. First, U.S. Airways determined that it could not meet the revenue targets outlined in the business plan because of reduced passenger revenue and increased fuel costs. Although U.S. Airways agreed during the First Concession not to seek any additional relief regarding its obligations to the pilots pursuant to any provision in the Bankruptcy Code — which the pilots understood to mean that U.S. Airways would not seek any additional concessions from them — US Airways attempted to negotiate further with ALPA. In December 2002, U.S. Airways and ALPA engaged in a second round of negotiations to further reduce pilot wages and benefits. At the conclusion of these negotiations, ALPA agreed to a significant amount in annual wage and benefits concessions, including modifications to the DB Plan (the “Second Concession”). These concessions were memorialized in two documents referred to as Letter of Agreement (“LOA”) No. 83 and LOA No. 84.
During the Second Concession’s negotiations, ALPA did not audit the DB Plan to determine the accuracy of U.S. Airways’ statements regarding the financial health of the DB Plan despite having the express power to do so pursuant to LOA No. 9. *531When confronted by its members regarding this failure, ALPA erroneously stated that it could not compel the company to disclose the financial condition of the DB Plan. ALPA eventually hired an actuarial firm to perform an audit of the DB Plan, but this analysis — which confirmed the accuracy of U.S. Airways’ calculations — was not reported until after the Bankruptcy Court had approved the DB Plan’s termination. Another concern for ALPA’s members during this time was the fact that ALPA was the only employee union to agree to the full amount of U.S. Airways’ requested concessions.
The Second Concession, however, did not address the second problem threatening U.S. Airways’ business plan — a serious funding shortfall for the company’s four defined benefit plans, including the pilots’ plan, over the seven-year period of the business plan. This shortfall was the result of both poor stock market performance that reduced the value of plan assets and historically-low interest rates that increased the plan’s liabilities. Under the terms of the DB Plan, U.S. Airways was obligated to regularly contribute funds to ensure that each pilot would receive his or her guaranteed benefit upon retirement. Although the contributed funds were invested and subject to gains and losses, each pilot’s promised benefits remained constant, and U.S. Airways was responsible for ensuring that each pilot’s pension was sufficiently funded. Given the significant funding deficit, U.S. Airways’ responsibility to maintain a specific funding level for the DB Plan had substantially increased.
Both U.S. Arways and ALPA attempted to. find a solution to the shortfall in the DB Plan, which was projected to be nearly $1.7 billion during the term of U.S. Airways’ seven-year business plan. They pursued various solutions — including petitioning for funding waivers from the Internal Revenue Service (“IRS”); requesting restoration funding from the Pension Benefit Guaranty Corporation (“PBGC”); and seeking Congressional legislation that would provide funding relief — but each of these efforts failed. Given the failure of these solutions, the DB Plan’s termination appeared imminent.
In December 2002, around the same time U.S. Airways and ALPA negotiated the Second Concession, they also conducted confidential negotiations. These negotiations produced an agreement in which U.S. Airways agreed to negotiate and create a follow-up pension plan if the varied funding solutions failed and caused the DB Plan to be terminated (the “Side Letter Agreement”). The Side Letter Agreement was meant to remain confidential if and until the DB Plan was terminated, but ALPA’s members soon learned of the agreement and questioned whether the agreement represented ALPA’s consent to the DB Plan’s termination. ALPA, in defending its decision to enter into the Side Letter Agreement, stated that the agreement was intended to provide the pilots with protection in the event that the DB Plan was terminated, and did not constitute consent to the plan’s termination.5
On or about January 30, 2003, U.S. Airways sent to ALPA members and the PBGC a sixty-day notice of its intention to terminate the DB Plan, and also moved *532the Bankruptcy Court to terminate the DB Plan under the “distress termination” provisions of ERISA. The PBGC, the entity responsible for paying the insured benefits under the terminated plan, neither supported nor opposed the DB Plan’s termination. ALPA opposed the motion, primarily arguing that such a termination would violate the collective bargaining agreement that required U.S. Airways to maintain the DB Plan. After a four-day hearing on U.S. Airways’ motion, on March 1, 2003, Bankruptcy Judge Mitchell ruled from the bench that U.S. Airways met the requirements for a distress termination, and allowed it to terminate the DB Plan. On March 7, 2003, the Bankruptcy Court issued a Memorandum Opinion both memorializing that decision, and explaining that U.S. Airways’ ability to meet the conditions outlined in the ATSB-guaranteed loan was dependent upon resolving the DB Plan’s funding deficit. See In re U.S. Airways Group, Inc., 296 B.R. 734 (Bankr. E.D.Va.2003). According to the Bankruptcy Court, the DB Plan had to be terminated because there were no other realistic options for resolving the funding deficit. The Bankruptcy Court also ruled that it was not deciding whether the DB Plan’s termination violated the collective bargaining agreement between U.S. Airways and ALPA because that issue could only be determined through the dispute mechanisms established by the Railway Labor Act, 45 U.S.C. § 151, et seq.
Prior to the Bankruptcy Court’s oral decision approving the DB Plan’s termination, ALPA refused to negotiate the creation of a follow-up pension plan, and instead sought to save the DB Plan, which the union repeatedly led its members to believe could be saved. Contradistinctively, following the Bankruptcy Court’s decision, ALPA and U.S. Airways began negotiating the termination of the DB Plan and the creation of a follow-up pension plan. During these negotiations, a number of ALPA’s members received two separate letters from two union officials assuring the pilots that they would have an opportunity to ratify or reject proposals to terminate the DB Plan and implement a replacement plan. On March 22, 2003, without any membership vote, U.S. Airways and ALPA agreed to implement a defined contribution plan (“DC Plan I”) to replace the terminated DB Plan. The agreement creating DC Plan I was memorialized in LOA No. 85, and approved by the Bankruptcy Court on March 28, 2003. Three days later, on March 31, 2003, U.S. Airways emerged from bankruptcy.
The new pilot pension plan, DC Plan I — • in contrast to the original DB Plan — required U.S. Airways to make promised contributions to the plan based upon each pilot’s unique contribution rate, but the company was not obligated to ensure that the plan maintained a sufficient level of assets so that each pilot would receive a guaranteed amount of money upon retirement. The company’s contribution rate for each pilot was calculated through a complex formula designed to help pilots achieve a target benefit upon retirement.6 In large part, the target benefit was calculated by projecting a pilot’s earnings during the end of his or her career less the projected amount of annuities from the PBGC. Under DC Plan I, U.S. Airways was required to provide greater contributions to pilots approaching the mandatory retirement age of 60 than to younger pilots *533who had a longer time period in which to accumulate contributions and achieve their target benefits. The higher contributions, however, were limited to 100% of a pilot’s salary, with the result that older pilots were still unlikely to achieve their target benefits upon retirement.7 Both U.S. Airways and the PBGC indicated a willingness to correct the inequities that would affect pilots close to retirement age, but ALPA did not renegotiate any portion of DC Plan I. ALPA’s members nearing retirement were further dissatisfied with ALPA’s actions when they later learned from an investment document associated with DC Plan I that the union was to serve as a manager of the funds contributed to DC Plan I.
C. US Airways’ Second Bankruptcy and Modifications to DC Plan I
Despite the substantial cost-saving measures achieved immediately before and during U.S. Airways’ first bankruptcy, the company soon found itself again facing serious financial difficulties. On or about September 12, 2004, U.S. Airways filed its second petition for bankruptcy protection under Chapter 11 (the “2004 Bankruptcy”), in the Eastern District of Virginia. During the second reorganization, ALPA and U.S. Airways agreed to further reduce costs associated with the pilot’s pension plan by amending DC Plan I. The amended plan (“DC Plan-II”) eliminated the target benefit concept and instead required U.S. Airways to make contributions to each pilot’s individual account at the same rate — at 10% of the pilot’s salary — regardless of age, seniority, or any other factor. Under DC Plan II, however, pilots nearing retirement age had less time to accumulate contributions and would likely receive fewer benefits upon retirement than younger pilots.
On or about January 11, 2005, several pilots received a Summary Annual Report regarding the funding levels of the original DB Plan for the year 2002 which was attached to the 2003 Summary Annual Report. The report revealed that the DB Plan, as of December 31, 2002, was funded to the ERISA minimum, which directly conflicted with numerous statements made by U.S. Airways and ALPA regarding the DB Plan’s severe underfunding. In addition, the report was provided outside the ERISA-required time frame for publishing the status of pension plans, and it was not provided to every plan participant. The FAC fails to indicate whether, and to what extent, these issues were raised with ALPA or during U.S. Airways’ 2004 Bankruptcy. In July 2005, U.S. Airways’ second reorganization plan was confirmed by the Bankruptcy Court.
D. Commencement of This Action
On September 22, 2003, a number of current and retired pilots commenced this action against ALPA and various ALPA officials.8 The initial complaint alleged *534only that ALPA violated the duty of fair representation (“DFR”) because of the manner in which it negotiated the termination of the DB Plan and created DC Plan I. Subsequently, plaintiffs filed three more versions of the complaint before filing, on June 22, 2006, the current version of their complaint, the FAC, which consumes nearly 100 pages and over 700 paragraphs. With each amendment to the complaint, plaintiffs made various changes, such as adding more plaintiffs, removing the ALPA officials as defendants (with the exception of Woerth), naming new defendants (ie., U.S. Airways and RSA), and asserting new claims under the ADEA, ERISA, and RICO. However, the FAC is essentially the same as the immediately-preceding complaint, with a DFR claim against ALPA; ADEA claims against ALPA and U.S. Airways; and RICO claims — which were first raised in the immediately-preceding complaint — against ALPA, U.S. Airways, and RSA. The only substantive change is that plaintiffs have asserted a new ADEA claim against ALPA and U.S. Airways, arising from the creation of DC Plan II.
On August 11, 2006, the Court held a pre-motion conference regarding ALPA’s and RSA’s proposed motions to dismiss, during which separate briefing schedules for the respective motions were set. Due to differing briefing schedules and delay caused by plaintiffs’ decision to change counsel, RSA’s motion was filed on November 6, 2006, and ALPA’s motion was not filed until May 31, 2007. On November 24, 2006, plaintiffs voluntarily dismissed all of their claims against U.S. Airways. Thereafter, on January 4, 2008, the Court held argument on both of defendants’ motions.9
DISCUSSION
A. Rule 12(b)(6) Legal Standard
In considering a motion to dismiss pursuant to Rule 12(b)(6), a court must accept all of the factual allegations in the complaint as true and must draw all reasonable inferences in the plaintiffs favor. See Erickson v. Pardus, — U.S. -, 127 S.Ct. 2197, 2200, 167 L.Ed.2d 1081 (2007); Ofori-Tenkorang v. Am. Int’l Group, Inc., 460 F.3d 296, 298 (2d Cir.2006). At this stage, “[t]he Court’s task is ‘not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient.’ ” In re Refco, Inc. Sec. Litig., 503 F.Supp.2d 611, 623 (S.D.N.Y.2007) (quoting Goldman *535v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985)). In conducting this inquiry, the Court must determine whether plaintiffs have stated “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, — U.S.-, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007).
While a complaint “does not need detailed factual allegations,” id. at 1964, it nonetheless must give the defendant(s) “fair notice of what the ... claim is and the grounds upon which it rests.” Erickson, 127 S.Ct. at 2200. “[A] plaintiffs obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atlantic, 127 S.Ct. at 1964-65 (citing Papasan v. Attain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986)); see also Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir.1996) (holding that bald assertions and conclusions of law are inadequate to survive a motion to dismiss). As the Second Circuit recently stated, the “flexible ‘plausibility standard’ ” enunciated in Bell Atlantic “obliges a pleader to amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible. ” Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir.2007).
As aforementioned, this Court will consider documents outside the complaint that may properly be considered in connection with a motion under Rule 12(b)(6), see Roth, 489 F.3d at 509; Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002), and “[i]f these documents contradict the allegations of the [FAC], the documents control and this Court need not accept as true the allegations in the [FAC].” Rapoport v. Asia Electronics Holding Co., Inc., 88 F.Supp.2d 179, 184 (S.D.N.Y.2000). However, “the bottom-line principle is that ‘once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint.’ ” Roth, 489 F.3d at 510 (quoting Bell Atlantic, 127 S.Ct. at 1969).
B. ALPA’s Motion to Dismiss
ALPA moves to dismiss all three claims asserted against it: (1) the DFR claims; (2) the ADEA claims; and (3) the RICO claims. As set forth below, ALPA’s motion is granted in its entirety.
1. Plaintiffs’ Duty of Fair Representation Claims
It is well established that a union “has a duty to represent fairly all employees subject to the collective bargaining agreement.” Spellacy v. Airline Pilots Ass’n-Int’l, 156 F.3d 120, 126 (2d Cir.1998) (citing Air Line Pilots Ass’n v. O’Neill, 499 U.S. 65, 74, 111 S.Ct. 1127, 113 L.Ed.2d 51 (1991)), cert. denied, 526 U.S. 1017, 119 S.Ct. 1251, 143 L.Ed.2d 348 (1999). “Under this doctrine, the exclusive agent’s statutory authority [under the National Labor Relations Act] to represent all members of a designated unit includes a statutory obligation to serve the interests of all members without hostility or discrimination toward any, and to exercise its discretion with complete good faith and honesty, and to avoid arbitrary conduct.” United Steelworkers of Am., AFL-CIO-CLC v. Rawson, 495 U.S. 362, 372, 110 S.Ct. 1904, 109 L.Ed.2d 362 (1990) (quoting Vaca v. Sipes, 386 U.S. 171, 177, 87 S.Ct. 903, 17 L.Ed.2d 842 (1967)). The Supreme Court has described the duty of fair representation as “akin to the duty owed by other fiduciaries to their beneficiaries.” O’Neill, 499 U.S. at 78, 111 S.Ct. 1127. Although courts are permitted to review union conduct, they must not substitute their own view for that of the union, *536and they “must be highly deferential, recognizing the wide latitude that [unions] need for the effective performance of their bargaining responsibilities.” Id.
To prove that a union has breached its duty of fair representation, the challenging members must establish two elements. First, they must prove that the union’s actions or inactions “are either ‘arbitrary, discriminatory, or in bad faith.’ ” O’Neill, 499 U.S. at 67, 111 S.Ct. 1127; see also Marquez v. Screen Actors Guild, Inc., 525 U.S. 33, 44, 119 S.Ct. 292, 142 L.Ed.2d 242 (1998). A union’s actions are “arbitrary only if, in light of the factual and legal landscape at the time of the union’s actions, the union’s behavior is so far outside a wide range of reasonableness as to be irrational.” O’Neill, 499 U.S. at 67, 111 S.Ct. 1127 (internal citation and quotation marks omitted). “This ‘wide range of reasonableness’ gives the union room to make discretionary decisions and choices, even if those judgments are ultimately wrong.” Marquez, 525 U.S. at 45-46, 119 S.Ct. 292. Moreover, “[t]actical errors are insufficient to show a breach of the duty of fair representation; even negligence on the union’s part does not give rise to a breach.” Barr v. United Parcel Serv., Inc., 868 F.2d 36, 43 (2d Cir.1989). A union’s acts are discriminatory if they are “intentional, severe, and unrelated to legitimate union objectives.” Amalgamated Ass’n of St., Elec., Ry. & Motor Coach Employees of Am. v. Lockridge, 403 U.S. 274, 301, 91 S.Ct. 1909, 29 L.Ed.2d 473 (1971); see also Blossomgame v. New York’s Health and Human Serv. Union, No. CV 02-1594, 2004 WL 2030285, at *8 (E.D.N.Y. Sept. 10, 2004). Bad faith, which “encompasses fraud, dishonesty, and other intentionally misleading conduct,” requires proof that the union acted with “an improper intent, purpose, or motive.” Spellacy, 156 F.3d at 126 (internal citations omitted). Second, the challenging members must also “demonstrate a causal connection between the union’s wrongful conduct and their injuries.” Id.; see also Sim v. New York Mailers’ Union No. 6, 166 F.3d 465, 472-73 (2d Cir.1999).
Here, the FAC, through Counts I, II, and III, alleges that ALPA’s actions and inactions were arbitrary, discriminatory, and in bad faith. Count I of the FAC alleges that ALPA failed to audit the DB Plan prior to its termination and intentionally misrepresented its authority to compel an audit of the DB Plan when its members inquired. Count II alleges that ALPA reneged on its promise to permit members to vote on the possibility of terminating the DB Plan and implementing a new plan before any such action would be taken. Lastly, Count III alleges that ALPA discriminated against plaintiffs by agreeing to DC Plan I after the DB Plan was terminated and failed to negotiate for a nondiscriminatory plan. ALPA argues that its alleged conduct fails to fit any of the categories for a properly-pled DFR claim, and plaintiffs’ DFR claims should be dismissed. ALPA raises various theories for dismissing each Count of plaintiffs’ DFR claims, which the Court will now examine.
a. DFR Claims in Count I
In arguing that Count I should be dismissed, ALPA spends the entirety of its moving memorandum of law addressing a minor allegation in Count I, and addressing the major allegations of Count I in its reply. The thrust of Count I is that ALPA intentionally misrepresented its authority to scrutinize the financial health of the DB Plan and, for unexplained reasons, failed to conduct an audit until after negotiating the First Concession, the Second Concession, and the DB Plan’s termination. However, ALPA devotes much of its argument seeking dismissal of Count I *537by characterizing it as alleging that ALPA contested the DB Plan’s termination too long, thereby losing valuable time in negotiating adequate terms for DC Plan I. The inartfully drafted FAC includes language suggesting that ALPA did not forego its opposition to the DB Plan’s termination within enough time to negotiate an adequate follow-up plan. The Court, however, reads Count I as a challenge to the arbitrary or deliberately misleading nature of ALPA’s failure to perform an audit.
In construing Count I solely as a challenge to ALPA’s delay in negotiating DC Plan I, ALPA raises two arguments for its dismissal. It argues that (1) plaintiffs’ pleadings fail to sufficiently demonstrate that ALPA’s actions caused any injuries because the allegations in Count I incorrectly assume that DC Plan I treated plaintiffs unfairly; and (2) plaintiffs are attempting to second-guess ALPA’s negotiating strategy, which is not a basis for a properly-pled DFR claim. Both theories of dismissal have merit. First, the factual allegations in the FAC demonstrate that older pilots were treated more favorably than younger pilots because DC Plan I required U.S. Airways to contribute more to older pilots’ retirement accounts than to the accounts of younger pilots. Given the favorable nature of DC Plan I, as the FAC explicitly alleges, plaintiffs’ allegations faulting ALPA for failing to negotiate better terms is insufficient to assert a claim for breaching the duty of fair representation. See, e.g., Cooper v. TWA Airlines, LLC, 274 F.Supp.2d 231, 243-44 (E.D.N.Y.2003) (citing cases).
Second, ALPA argues that its strategic decision to oppose the DB Plan’s termination as long as possible to create some negotiating leverage in the event that it had to negotiate the terms of a follow-up pension plan cannot be the proper subject of a DFR claim. To the extent that Count I challenges the rationality of ALPA’s continued opposition to the DB Plan’s termination, it fails to sufficiently raise a proper DFR claim because ALPA’s tactical decisions, whether ultimately wise or not, are entitled to deference. See Nicholls v. Brookdale Univ. Hosp. and Med. Ctr., No. 05-CV-2666, 2005 WL 1661093, at *11-*12 (E.D.N.Y. July 14, 2005), aff'd, 204 Fed. Appx. 40, 42 (2d Cir.2006); see also O’Neill, 499 U.S. at 78-79, 111 S.Ct. 1127 (holding that union’s decision to enter into strike settlement agreement was not arbitrary since it was supported by rational reasons even though the settlement imposed terms that turned out to be worse for union members than if there was no settlement); Kavowras v. New York Times Co., No. 00 Civ. 5666, 2004 WL 1672473, at *7 (S.D.N.Y. July 26, 2004) (“the Union’s decision to pursue arbitration in lieu of litigation is best categorized as strategic in nature and cannot support [plaintiffs] breach of the duty of fair representation claim.”), aff'd, 132 Fed.Appx. 381 (2d Cir. 2005). Given this deference, plaintiffs’ allegations fail to assert a “plausible” duty of fair representation claim. Iqbal, 490 F.3d at 157-58; see also Nicholls, 2005 WL 1661093, at *7 (in granting the defendants’ motion to dismiss, noting the “enormous burden on plaintiff to establish that a union breached its duty of fair representation”).
Count I alleges that ALPA deliberately failed to examine the DB Plan’s financial state before agreeing to each of U.S. Airways’ requested concessions, including the termination of the DB Plan, and it intentionally misrepresented its authority to conduct an audit of the DB Plan. In addressing these allegations, ALPA also argues that it made a strategic decision that cannot be second-guessed. The Court agrees. Given the deference afforded ALPA in carrying out its duties under the collective bargaining agreement, see *538O’Neill, 499 U.S. at 78, 111 S.Ct. 1127, the allegations in the FAC fail to sufficiently support the conclusion that ALPA’s failure to conduct an audit of the DB Plan was so unreasonable as to constitute an action outside the requisite rationality. See Moore v. Roadway Express, Inc. and Local 707, No. 07-CV-977, 2008 WL 819049, at *6-*7 (E.D.N.Y. Mar. 25, 2008) (dismissing, on a motion to dismiss, plaintiffs duty of fair representation claim for failing to “allege any facts that elevate [the] allegations above the level of mere speculation.”); see also Marquez, 525 U.S. at 46, 119 S.Ct. 292 (“A union’s conduct can be classified as arbitrary only when it is irrational, when it is without a rational basis or explanation.”); Spellacy, 156 F.3d at 127 (“To uphold the union’s action ... it is not necessary that we find on the merits that such an interpretation was correct.”) (internal citations and quotation marks omitted). Although plaintiffs argue that ALPA’s decision to audit the DB Plan after it had been terminated “is almost an admission of its irrational behavior,” Opp. to ALPA, p. 11, plaintiffs have alleged nothing more to support their claim. Without more, ALPA’s after-the-fact audit demonstrates that it made an error, or even acted negligently, in failing to conduct an audit of the DB Plan prior to agreeing to the concessions on its members’ behalf, which is insufficient to prove that ALPA breached its duty of fair representation. See Marquez, 525 U.S. at 46, 119 S.Ct. 292; Rawson, 495 U.S. at 372-73, 110 S.Ct. 1904 (“mere negligence ... [does] not state a claim for breach of the duty of fair representation”); Nicholls, 204 Fed.Appx. at 42 (affirming lower court’s grant of defendants’ motion to dismiss, noting that “the Union may have committed a tactical (or even a negligent) error, [but] such an error, even if established, does not constitute a breach of the Union’s duty.”); see also Iqbal, 490 F.3d at 157-58 (holding that a claim must be supported by sufficient factual allegations to “render the claim plausible. ”). Accordingly, the Court finds that the allegations in Count I are insufficient to adequately support the claim that ALPA breached its duty of fair representation.10
b. DFR Claims in Count II
In seeking dismissal of Count II— which alleges that ALPA reneged on its promise to allow members to ratify the termination of the DB Plan and the implementation a new follow-up plan — ALPA raises various arguments, only one of which is fatal to plaintiffs’ claim and merits discussion here. ALPA argues that its failure to go through with the membership vote did not cause any harm to plaintiffs, and plaintiffs’ claims should be dismissed for lack of causation. Although plaintiffs largely ignore this argument in opposing ALPA’s motion to dismiss, the FAC alleges that the unfulfilled promise of a membership vote caused a series of events that led to the DB Plan’s termination and the implementation of DC Plan I. Simply stated, the FAC alleges that the promise of a vote caused plaintiffs to subdue their pressure on ALPA to take certain actions, especially with regard to formulating the terms of DC Plan I, and caused ALPA to forego grievances and appeals of the DB Plan’s termination. These allegations are simply insufficient to establish a causal *539connection between ALPA’s alleged misrepresentation of a membership vote and plaintiffs’ alleged injuries. See Sim, 166 F.3d at 472-73; Spellacy, 156 F.3d at 126. In fact, given ALPA’s- wide latitude in negotiating the DB Plan’s termination and DC Plan I’s implementation, and that ALPA was under no obligation to accede to its members’ preferences even if a vote had taken place, see White v. White Rose Food, 237 F.3d 174, 182 (2d Cir.2001), there is no reasonable basis to believe that a membership vote would have saved the DB Plan or altered the terms of DC Plan I. Accordingly, Count II of the FAC must be dismissed.
c. DFR Claims in Count III
The third, and final, claim of plaintiffs DFR claims is Count III, which alleges that ALPA discriminated against plaintiffs by agreeing to the terms of DC Plan I. ALPA argues that this claim is completely unsupported, and should be dismissed. The Court agrees. As discussed above, ALPA argues that DC Plan I actually discriminated in plaintiffs’ favor since older pilots received larger contributions to their plans than younger pilots, which renders plaintiffs’ discrimination claim untenable. In response, plaintiffs argue that ALPA has missed the point since plaintiffs were to receive fewer retirement benefits under DC Plan I than they would have received under the DB Plan, and will receive fewer benefits upon retirement than younger pilots. However, it is plaintiffs who have missed the point because the terms of DC Plan I directly contradict plaintiffs’ allegations that the implementation of DC Plan I discriminated against plaintiffs, and this Court need not accept these allegations as true. See Rapoport, 88 F.Supp.2d at 184. Although DC Plan I significantly reduced plaintiffs’ retirement benefits from what they were to receive under the DB Plan, the terms of the plan demonstrate that ALPA attempted to counter these harsh effects by requiring U.S. Airways to make larger contributions to older pilots’ plans. This fact explicitly contradicts plaintiffs’ theory that ALPA intended to discriminate against plaintiffs by agreeing to implement DC Plan I.
Moreover, “[t]he duty of fair representation does not require that a union achieve absolute equality among its members.” Ramey v. Dist. 141, Int’l Ass’n of Machinists and Aerospace Workers, No. 99-CV-4341, 2002 WL 32152292, at *9 (E.D.N.Y. Nov. 4, 2002). “Actions taken by a union that disadvantage one group of constituents as opposed to another are permissible provided there is a legitimate, rational reason for the union’s conduct.” Id. at *10; see also Ryan v. New York Newspaper Printing Pressmen’s Union No. 2, 590 F.2d 451, 457 (2d Cir.1979) (“The Union was trying to make the best out of a bad situation, and it was almost inevitable that the Union’s drawing of a line would hurt someone. Although it is unfortunate that in this case the ultimate harm fell on appellants, drawing the line elsewhere would, or reasonably could have been thought would, have caused harm to others.”). As the Bankruptcy Court’s decision in In re U.S. Airways Group, Inc., 296 B.R. at 737, demonstrates, U.S. Auways was facing a dire financial situation, and the Bankruptcy Court’s approval of the DB Plan’s termination was inevitable. Given these circumstances, as the FAC implicitly acknowledges, ALPA was forced to make concessions that would hurt all of its members, plaintiffs included, and the FAC offers insufficient evidence to even suggest that ALPA’s actions are not supported by a legitimate, rational reason. See Ramey, 2002 WL 32152292, at *9. Accordingly, *540Count III and the entirety of plaintiffs’ DFR claims are dismissed.
2. Plaintiffs’ ADEA Claims
ALPA also moves to dismiss plaintiffs’ ADEA claims. Although plaintiffs have imprecisely delineated their ADEA claims in the FAC, it appears to the Court that they assert two theories of discrimination against ALPA, under 29 U.S.C. §§ 623(c), 623(i).11 For both of these theories, plaintiffs essentially allege that ALPA discriminated against older pilots by helping create and failing to prevent the implementation of DC Plan I and DC Plan II.12 Each of these DC Plans, according to plaintiffs, provide older pilots, upon their retirement, with pensions considerably less than those that they would have received under the preceding pension plans, and enable younger pilots to receive more benefits upon retirement than plaintiffs. ALPA argues that plaintiffs ADEA claims should be dismissed in their entirety, and as discussed below, the Court agrees.
a. ADEA Claims Under § 623(c)
Section 623(c) “makes it unlawful for a labor union to ‘exclude or to expel from its membership, or otherwise discriminate against, any individual because of his age.’ ” Dimitropoulos v. Painters Union Dist. Council 9, 893 F.Supp. 297, 299 (S.D.N.Y.1995) (quoting 29 U.S.C. § 623(c)(1)). To prove a case of discrimination under the ADEA, plaintiffs must establish either a disparate impact or discriminatory treatment under the familiar standard announced in McDonnell Douglas Corp. v. Green, 411 U.S. 792, 802, 93 S.Ct. 1817, 36 L.Ed.2d 668 (1973).13 Although plaintiffs have not specified under which theory they intend to proceed, at this stage, plaintiffs need not prove their ease under either theory to survive a motion to dismiss; instead, they must provide enough support for their claims under “the ordinary rules for assessing the sufficiency of a complaint.” See Swierkiewicz v. Sorema N.A., 534 U.S. 506, 510-11, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002); see also Bell Atlantic, 127 S.Ct. at 1964-65.
To make out a prima facie case under a discriminatory treatment theory, plaintiffs must show that (1) they are members of a protected class; (2) they were qualified to receive the subject employee benefits; (3) they suffered an adverse employment action; and (4) the circumstances surrounding the challenged action gives rise to an inference of age discrimination. Abrahamson v. Bd. of Educ. of Wappingers Falls Cent. Sch. Dist., 374 *541F.3d 66, 71 (2d Cir.), cert. denied, 543 U.S. 984, 125 S.Ct. 605, 160 L.Ed.2d 368 (2004); see also Abdu-Brisson v. Delta Air Lines, Inc., 239 F.3d 456, 466-67 (2d Cir.), cert. denied, 534 U.S. 993, 122 S.Ct. 460, 151 L.Ed.2d 378 (2001); Swierkiewicz, 534 U.S. at 510, 122 S.Ct. 992. In contrast, a prima facie case under a disparate impact theory requires plaintiffs to (1) identify the specific employment practice that is being challenged; (2) show the existence of an age-based disparity; and (3) show that the disparity has adversely affected members of the protected class. See Smith v. City of Jackson, 544 U.S. 228, 241, 125 S.Ct. 1536, 161 L.Ed.2d 410 (2005); Maresco v. Evans Chemetics, Div. of W.R. Grace & Co., 964 F.2d 106, 115 (2d Cir.1992). Under both theories, once the prima facie case is proven, the well-known burden-shifting analysis comes into play, where ALPA would need to establish that it committed the challenged action based upon “reasonable” non-age reasons, see Meacham v. Knolls Atomic Power Lab., — U.S.-, 128 S.Ct. 2395, 2401, 171 L.Ed.2d 283 (2008); Smith, 544 U.S. at 228, 125 S.Ct. 1536, and, if sufficiently shown, plaintiffs must then satisfy the factfinder that ALPA’s reasons are pre-textual. See Stratton v. Dep’t for the Aging, 132 F.3d 869, 879 (2d Cir.1997).
Although plaintiffs have not definitively conveyed whether they intend to prove the existence of discriminatory treatment or disparate impact,14 there is no dispute that plaintiffs have alleged the requisite elements under both theories.15 However, ALPA disputes whether plaintiffs’ allegations of adverse action, under both theories, are sufficient.16 Plaintiffs’ lone allegation of adverse action is that younger pilots will receive more retirement benefits than plaintiffs under both DC Plans. ALPA argues that this allegation is insufficient because plaintiffs’ harm is premised solely on the fact that older pilots will work fewer years than younger pilots and will ultimately accrue less in retirement benefits. According to ALPA, this allegation demonstrates that older pilots are negatively affected by the passage of time, not any age discrimination. In support of this argument, ALPA relies upon several cases, most notably Cooper v. IBM Pers. Pension Plan, 457 F.3d 636 (7th Cir.2006), cert. denied, — U.S.-, 127 S.Ct. 1143, 166 L.Ed.2d 907 (2007), which ruled that the implementation of a cash-balance plan in lieu of a traditional defined benefit plan does not constitute age discrimination when older employees receive fewer benefits upon retirement *542than younger employees.17 See, e.g., Bryertin v. Verizon Commc’ns, Inc., No. 06 Civ. 6672, 2007 WL 1120290, at *4 (S.D.N.Y. Apr. 17, 2007), aff'd, Hirt v. Equitable Ret. Plan For Employees, Managers and Agents, 533 F.3d 102 (2d Cir. 2008); Register v. PNC Fin. Serv. Group, Inc., 477 F.3d 56, 69 (3rd Cir.2007). Although Cooper and the other cases cited by ALPA involve the statutory interpretation of age discrimination under ERISA and raise issues that pertain more to plaintiffs’ § 623(i) claim, ALPA argues that the general principles from those cases are equally relevant to this claim because the “the only conceivable disparate impact” is that plaintiffs “will have, less time to earn investment income .... ” ALPA Reply Mem., p. 5.
Plaintiffs have asserted a single basis for adverse action, which is that the ultimate retirement benefits received by plaintiffs will be less than those received by younger pilots, and the principles and policies articulated in Cooper are relevant here. It is clear that the differences between older and younger pilots’ ultimate retirement benefits is the result of basic economics, specifically the time value of money, and is not related to the older pilots’ age. See Cooper, 457 F.3d at 642. As explained in Cooper, plaintiffs do not have their age to blame for the differing retirement benefits, but rather compound interest and the time value of money. Id. at 638; see also Bryertin, 2007 WL 1120290, at *4 (“the fact that a younger employee’s pay credits are eventually worth more than those paid to an older employee ... results not from discrimination, but from the fact that the younger employee has had more time to accumulate interest .... In other words, the discrepancy results from the time value of money.”) (internal citations omitted). This fact is clear from both DC Plans because DC Plan II was age-neutral and DC Plan I, which required greater contributions to older pilots’ pension plans, nonetheless resulted in older pilots receiving fewer benefits than younger pilots upon their retirement. Thus, plaintiffs’ lone allegation of adverse action is insufficient to support their claim of age discrimination.
Plaintiffs attempt to distinguish Cooper by correctly noting that courts in this Circuit have rejected its holding. See, e.g., In re J.P. Morgan Chase Cash Balance Litig., 460 F.Supp.2d 479, 488-89 (S.D.N.Y. 2006), In re Citigroup Pension Plan ERISA Litig., 470 F.Supp.2d 323, 342-43 (S.D.N.Y.2006). However, those cases disputed Cooper’s statutory interpretation of ERISA, and concluded that Cooper is not consistent with the Second Circuit’s holding in Esden v. Bank of Boston, 229 F.3d 154 (2d Cir.2000). To be clear, this Court is not relying upon Cooper’s statutory analysis of ERISA, but rather the policies and principles enunciated therein and followed by other courts in this Circuit. See Amara v. Cigna Corp., 534 F.Supp.2d 288, 318 (D.Conn.2008) (collecting cases); Bryertin, 2007 WL 1120290, at *4; Hirt v. Equitable Ret. Plan For Employees, Managers and Agents, 441 F.Supp.2d 516, 548-49 (S.D.N.Y.2006), aff'd, 533 F.3d 102, 2008 WL 2669346 (2d Cir. July 9, 2008); see also Kentucky Retirement Systems v. EEOC, — U.S.-, 128 S.Ct. 2361, 2367, 171 L.Ed.2d 322 (2008) (“[A]s a matter of *543pure logic, age and pension status remain analytically distinct concepts. That is to say, one can easily conceive of decisions that are actually made because of pension status and not age, even where pension status is itself based on age.”) (internal quotation marks and citation omitted); Lockheed Corp. v. Spink, 517 U.S. 882, 897, 116 S.Ct. 1783, 135 L.Ed.2d 153 (1996) (“A reduction in total benefits due is not the same thing as a reduction in the rate of benefit accrual; the former is the final outcome of the calculation, whereas the latter is one of the factors in the equation.”). Moreover, the Second Circuit has recently declared that it shares the view expressed in Cooper, and similar decisions issued by the Third and Sixth Circuit Courts of Appeals, that cash balance plans do not violate ERISA, effectively overruling district court decisions in this Circuit that failed to follow Cooper’s interpretation of ERISA. Hirt, 2008 WL 2669346, at *5.
ALPA also argues that, even if plaintiffs have established a prima facie case, the ADEA’s safe harbor provision, 29 U.S.C § 623(f), referred to as the “equal cost or equal benefits” principle, precludes plaintiffs’ claims under § 623(c). Section 623(f) provides, in relevant part:
It shall not be unlawful for ... [a] labor organization ...
(2) to take any action otherwise prohibited under subsection (a), (b), (c), or (e) of this section ...
(B) to observe the terms of a bona fide employee benefit plan—
(i) where, for each benefit or benefit package, the actual amount of payment made or cost incurred on behalf of an older worker is no less than that made or incurred on behalf of a younger worker, as permissible under section 1625. 10, title 29, Code of Federal Regulations (as in effect on June 22, 1989);
29 U.S.C § 623(f) (emphasis added). Thus, “a benefit plan will be considered in compliance with the [ADEA] where the actual amount of payment made, or cost incurred, in behalf of an older worker is equal to that made or incurred in behalf of a younger worker, even though the older worker may thereby receive a lesser amount of benefits _” 29 C.F.R. § 1625.10(a)(1). Pursuant to the last sentence of § 623(f), a “labor organization acting under subparagraph (A), or under clause (i) or (ii) of subparagraph (B), shall have the burden of proving that such actions are lawful ....” Thus, the burden of proving the applicability of the safe harbor provision lies with ALPA. ALPA argues that it is clear from the FAC that both DC Plans incur costs and provide benefits to older pilots that are no less than those incurred and provided to younger pilots, and that plaintiffs’ ADEA claims should be dismissed.
In response, plaintiffs raise three unpersuasive arguments to dispute the applicability of the safe harbor provision. First, plaintiffs argue that the safe harbor provision is inapplicable here because both DC Plans are not “bona fide” plans under § 623(f). In so arguing, plaintiffs rely solely upon a decision outside of this Circuit, Casillas v. Fed. Exp. Corp., 140 F.Supp.2d 875 (W.D.Tenn.2001), which held that a seniority system was not bona fide under § 623(f)(2)(A) because it was “adopted ... [and] operated with discriminatory intent.” Id. at 885. In relying upon Casillas, plaintiffs argue that the FAC alleges that both DC Plans were implemented with a discriminatory intent, and therefore are not “bona fide” under § 623(f)(2)(B). However, plaintiffs’ argument fails, primarily because they believe the meaning ascribed to “bona fide” in Casillas is equivalent to the meaning of “bona fide” in a different subsection of the ADEA. Not only does Casillas reference a *544subsection dealing with seniority systems rather than the subsection regarding employee benefit plans — the only subsection with which this Court is concerned — but plaintiffs’ proffered meaning of “bona fide” in § 623(f)(2)(B) is inconsistent with the established meaning of that phrase. See 29 C.F.R. § 1625.10(b) (“A plan is considered ‘bona fide’ if its terms ... have been accurately described in writing to all employees and if it actually provides the benefits in accordance with the terms of the plan.”); see also Breitigan v. New Castle County, No. C.A.02-1333-GMS, 2005 WL 3544296, at *5 (D.Del. Dec.27, 2005) (noting that Supreme Court precedent has established that a “retirement plan is ‘bona fide’ within the meaning of the ADEA if it exists and pays benefits.”) (citation omitted); New York 10-13 Ass’n v. City of New York, No. 98 Civ. 1425, 1999 WL 177442, at *7 (S.D.N.Y. Mar. 30, 1999) (dismissing the plaintiffs ADEA claims under § 623(f) after quoting and relying upon 29 C.F.R. § 1625.10(b) to find that the subject pension plan was bona fide). Since the FAC established that the DC Plans were written and provided benefits according to the terms of the respective plan, the plans are “bona fide” for purposes of § 623(f).
Plaintiffs next argue that the facts necessary to determine whether the safe harbor defense is applicable — namely, the amount of costs incurred under the DC Plans — are not within the FAC and thus cannot be determined on a motion to dismiss. Plaintiffs are correct that there are no allegations in the FAC regarding the costs of either DC Plan, but the safe harbor provision also applies if the payments to older and younger workers are not disparate, which are facts explicitly alleged in the FAC and demonstrated by the terms of the plans. Under DC Plan II, older and younger pilots receive the same contribution rate so the safe harbor precludes plaintiffs’ ADEA action regarding that plan. See FAC ¶ 515 (“Under [DC Plan II], a pilot’s pension proceeds were to be a flat 10 percent of wages.”). As to DC Plan I, although older and younger pilots did not receive equal contribution rates, older pilots certainly received contributions that were “no less than that” received by younger pilots. 29 U.S.C. § 623(f)(2)(B)(i); see also Gen. Dynamics v. Cline, 540 U.S. 581, 600, 124 S.Ct. 1236, 157 L.Ed.2d 1094 (2004) (“We see the text, structure, purpose, and history of the ADEA, along with its relationship to other federal statutes, as showing that the statute does not mean to stop an employer from favoring an older employee over a younger one.”); Erie County Retirees Ass’n v. County of Erie, 220 F.3d 193, 216 (3rd Cir.2000) (“In order to take advantage of the safe harbor, an employer need not provide equal benefits to older and younger retirees, and it need not spend more on behalf of older retirees. It merely must spend equally.”), cert. denied, 532 U.S. 913, 121 S.Ct. 1247, 149 L.Ed.2d 153 (2001).
Finally, plaintiffs captiously argue that the safe harbor provision is inapplicable because it only applies to claims asserted under § 623(a), (b), (c), and (e), and plaintiffs’ ADEA claim is only under § 623(i). However, the FAC clearly asserts a claim under § 623(c) and ALPA has raised the safe harbor provision as a defense to plaintiffs’ claims under that particular subsection of the ADEA. Plaintiffs have been far from clear in articulating the exact nature, and statutory basis, of their ADEA claims — whether purposefully or inadvertently — which has confounded ALPA and this Court. Despite this lack of clarity, ALPA has established that the safe harbor provision applies, and plaintiffs’ ADEA claim under § 623(c) is dismissed pursuant to 29 U.S.C. § 623(f)(2)(B)(i).
*545
b. ADEA Claims Under § 623(i)
The FAC also asserts an ADEA claim under 29 U.S.C. § 623(i),18 which makes it unlawful to cease or reduce, on the basis of age, the rate at which benefits accrue or are contributed to an employee’s pension plan. ALPA argues that this claim should also be dismissed since the FAC demonstrates that the DC Plans did not reduce or discontinue contributions to plaintiffs’ plans based on age. As the Court previously noted, the FAC alleges that DC Plan I required U.S. Airways to make larger contributions to older pilots than younger pilots because they were so close to retirement, and DC Plan II removed consideration of age altogether by making every contribution to a pilot’s pension a flat rate, at 10% of his or her annual salary. Thus, as discussed at length above, neither DC Plan ceased or reduced the amount of contributions paid based on age. See Bryertin, 2007 WL 1120290, at *4; Hirt, 441 F.Supp.2d at 548-49; see also Lockheed Corp., 517 U.S. at 897, 116 S.Ct. 1783. Accordingly, plaintiffs’ ADEA claim under 29 U.S.C. § 623(i) is dismissed.
3. Plaintiffs’RICO Claims
The final claim asserted against ALPA is under RICO, which authorizes “any person injured in his business or property by reason of a violation of [18 U.S.C.] § 1962” to bring an action. 18 U.S.C. § 1964(c); see also Attick v. Valeria Assocs., L.P., 835 F.Supp. 103, 110 (S.D.N.Y.1992). Under § 1962(c),19 plaintiffs must show that ALPA was engaged in the “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Sedima S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985); see also First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 173 (2d Cir.2004) (“The RICO statute makes it unlawful ‘for any person employed by or associated with any enterprise ... to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity.’ ”) (quoting 18 U.S.C. § 1962(c)). “The requirements of section 1962(c) must be established as to each individual defendant.” DeFalco v. Bernas, 244 F.3d 286, 306 (2d Cir.), cert. denied, 534 U.S. 891, 122 S.Ct. 207, 151 L.Ed.2d 147 (2001). In addition, plaintiffs must prove that their injuries were “proximately caused” by the alleged pattern of racketeering activity. See Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 460-61, 126 S.Ct. 1991, 164 L.Ed.2d 720 (2006).
Plaintiffs attempt to satisfy this standard by essentially alleging that ALPA, along with U.S. Airways and RSA, formed an “association-in-fact for the purpose of devising and carrying out a scheme to defraud U.S. Airways’ pilots,” including plaintiffs, and through various acts over the course of four years, they “decimat[ed] the pilot’s pension plan” for their own “financial and monetary advantages.” FAC ¶¶ 541-44. This “enterprise,” according to the FAC, was managed, directed, and de*546vised by each defendant. Id. ¶¶ 545-48. In addition, each defendant participated in strategies that were devised or directed by the other defendants, and acted as an agent for the other defendants. Id. ¶¶ 549-50. The FAC finally alleges that the enterprise violated RICO because it engaged in the following racketeering activities (ie., predicate acts): wire fraud (18 U.S.C. § 1343) and mail fraud (18 U.S.C. § 1341); solicitation to influence operations of an employee benefit plan (18 U.S.C. § 1954); fraud in connection with a case under title 11 (ie., fraud in Bankruptcy Court); and financial transactions between a union and employer (29 U.S.C. § 186).
However, ALPA argues that plaintiffs’ RICO cause of action should be dismissed because they have failed to sufficiently state a RICO claim.20 In particular, ALPA argues that plaintiffs have failed to sufficiently allege (1) the existence of a RICO “enterprise”; (2) that ALPA committed the requisite two predicate acts; and (3) a “pattern” of racketeering activity.
a. RICO Enterprise
An “enterprise” is “a group of persons associated together for a common purpose of engaging in a course of conduct.” United States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 69 L.Ed.2d 246 (1981). Although enterprise is defined in terms of “persons,” it includes “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” 18 U.S.C. § 1961(4). To prove the existence of an enterprise, a plaintiff must provide “evidence of an ongoing organization, formal or informal, and ... that the various associates function as a continuing unit.” Turkette, 452 U.S. at 583, 101 S.Ct. 2524. In addition, the “enterprise must be separate from the pattern of racketeering activity, and distinct from the person conducting the affairs of the enterprise.”21 First Capital, 385 F.3d at 173 (internal quotation marks and citations omitted); see also Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir.1994) (“[A] corporate entity may not be both the RICO person and the RICO enterprise.”). Also, each “RICO defendant must have played some part in directing [the enterprise’s] affairs.” First Capital, 385 F.3d at 176.
*547Here, ALPA primarily argues that plaintiffs have failed to adequately show that the alleged association-in-fact enterprise between U.S. Airways, RSA, and ALPA had a common purpose or that ALPA exercised any control over the enterprise. When liberally read, the FAC alleges that defendants were intent on continually reducing pilots’ pensions, and the numerous facts alleged in the FAC sufficiently support the existence of a common purpose among defendants, multiple interactions between defendants, and an ascertainable structure of the enterprise. See Am. Med. Ass’n, 2006 WL 3833440, at *15. Moreover, when reading the FAC in the light most favorable to plaintiffs, the allegations demonstrate that the enterprise is distinct from the alleged predicate acts. ALPA’s unsupported argument that it had no reason to join in the alleged enterprise given the nature of its relationship with U.S. Airways is similarly unavailing because the Court is obliged to read the FAC in plaintiffs’ favor.
Regarding plaintiffs’ allegations concerning ALPA’s control over the enterprise, the Second Circuit has stated that this element is easily satisfied since it simply requires that the defendant “participated in the operation or management of the enterprise itself.” First Capital, 385 F.3d at 176; see also Reves v. Ernst & Young, 507 U.S. 170, 177-79, 113 S.Ct. 1163, 122 L.Ed.2d 525 (1993). Although the allegations in the FAC concerning ALPA pertain largely to what it failed to do in furtherance of the alleged enterprise — -such as failing to timely audit the DB Plan and giving in to each concession requested by U.S. Airways — plaintiffs have met the minimal threshold of “some” participation in the enterprise’s affairs. In support of plaintiffs’ conclusory allegation that each defendant “played a significant role in directing the affairs of the enterprise,” FAC ¶ 545, the FAC indicates that ALPA misrepresented various facts to its members and received fees for its role in the enterprise. ALPA primarily disputes the truth of certain allegations in the FAC, namely that it received any fees in connection with the DC Plans, but at this stage of the proceedings, the Court must accept the allegations as true. Thus, plaintiffs have sufficiently proven the existence of a RICO enterprise.
b. Predicate Acts of Racketeering Activity
ALPA also challenges the FAC’s allegations that the RICO enterprise committed five criminal acts delineated in § 1962, which constitute sufficient predicate acts of racketeering activity. ALPA argues that two of these alleged criminal acts, 18 U.S.C. § 1954 and 29 U.S.C. § 186, do not apply to labor unions such as ALPA, and violations of the remaining statutes, which relate to fraud, have not been sufficiently pled to satisfy Fed.R.Civ.P. 9(b).
Section 1954 makes it unlawful for an individual to receive or solicit “any fee, kickback, commission, ... or thing of value” in exchange for influencing an employee pension plan. 18 U.S.C. § 1954; see also United States v. Romano, 684 F.2d 1057, 1063-64 (2d Cir.), cert. denied, 459 U.S. 1016, 103 S.Ct. 375, 376, 74 L.Ed.2d 509 (1982). It is clear that the statute targets individual conduct, not any organization or union, and plaintiffs do not dispute this reading of § 1954. Plaintiffs instead argue that ALPA’s culpability is premised on its individual employees accepting benefits on behalf of ALPA. However, this allegation is not made clear in the FAC, and plaintiffs have offered no legal support for imputing ALPA’s employees’ alleged violations of § 1954 to ALPA. As a result, 18 U.S.C. § 1954 cannot serve as a predicate act for plaintiffs’ RICO claims against ALPA.
*548Similarly, 29 U.S.C. § 186, which makes certain financial transactions between a union and an employer unlawful, explicitly does not apply to employers and employees subject to the Railway Labor Act (“RLA”). See 29 U.S.C. §§ 152(2) and (3); see also United States v. Davidoff, 359 F.Supp. 545, 546 (E.D.N.Y.1973). The RLA “includes within its coverage ‘every common carrier by air engaged in interstate or foreign commerce ... and every air pilot or other person who performs any work as an employee or subordinate official of such carrier or carriers,’ ” Davidoff, 359 F.Supp. at 546 (quoting 18 U.S.C. § 181), and it is undisputed that the FAC alleges that ALPA and U.S. Airways are subject to the RLA. Plaintiffs seek to get around this barrier by requesting that the Court set aside this statutory bar because it would lead to an “absurd or inequitable result.” Opp. to ALPA, p. 30 n. 4. This Court declines plaintiffs’ invitation to set aside this long-standing exception, especially since plaintiffs have offered no legal basis for not applying the exception. Thus, § 186 also cannot serve as predicate act for plaintiffs’ RICO claims against ALPA.
The three remaining predicate acts all pertain to fraud—namely, mail fraud, wire fraud, and fraud in connection with a bankruptcy proceeding—and, in accordance with Fed.R.Civ.P. 9(b), must be alleged with specificity. ALPA primarily argues that plaintiffs’ allegations fail to comply with Rule 9(b) because they do not provide a strong inference of fraudulent intent and they do not specify the fraudulent conduct committed by ALPA that furthered the enterprise’s scheme.22
First, for predicate acts premised on fraud, scienter is an essential element that need not be specifically alleged to satisfy Rule 9(b). See Powers v. British Vita, 57 F.3d 176, 184 (2d Cir.1995); Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir.1994). However, “the relaxation of Rule 9(b)’s specificity requirement for scienter must not be mistaken for [a] license to base claims of fraud on speculation and conclusory allegations,” Shields, 25 F.3d at 1128 (internal quotation marks and citations omitted), because a plaintiff must still “allege facts that give rise to a strong inference of fraudulent intent.” Id.; see also First Capital, 385 F.3d at 179. A plaintiffs allegations can give rise to a strong inference of fraudulent intent in two ways. First, the plaintiff may allege “a motive for committing fraud and a clear opportunity for doing so.” Powers, 57 F.3d at 184 (internal quotations marks and citation omitted). Second, where no motive is apparent, the plaintiff may plead scienter by “identifying circumstances indicating conscious behavior by the defendant, though the strength of circumstantial allegations must be correspondingly greater.” Id.
Here, the only allegation of ALPA’s fraudulent intent is that it was promised substantial fees for managing the DC Plans—which ALPA has repeatedly denied, but must be accepted as true. From this sole allegation of ALPA’s motives, plaintiffs seek to establish that *549ALPA entered into the alleged enterprise with U.S. Airways and RSA to deplete plaintiffs’ pension plans and fill the other defendants’ pockets. Plaintiffs’ lone allegation of ALPA’s motives is wholly inadequate to create any inference of ALPA’s fraudulent intent, let alone a strong inference. See First Capital, 385 F.3d at 179. Although the FAC indicates that ALPA had opportunities to commit a fraud upon plaintiffs, the lack of adequate allegations regarding ALPA’s motives is insurmountable.
Similarly, plaintiffs have failed to raise a strong inference of ALPA’s fraudulent intent by demonstrating ALPA’s conscious behavior. In an effort to satisfy the conscious behavior test, plaintiffs point to (1) ALPA’s “secret negotiations” with U.S. Airways to terminate the DB Plan; (2) ALPA’s failure to timely perform an audit of the DB Plan; and (3) ALPA’s failure to follow-through with its promise to permit its members to ratify the DB Plan’s termination and the follow-up plan. However, none of these factual allegations are significant enough to strongly indicate that ALPA harbored a fraudulent intent to injure plaintiffs. First, as the Bankruptcy Court recognized, ALPA did not agree to terminate the DB Plan during the “secret negotiations.” Once the Bankruptcy Court held that U.S. Airways could pursue a distress termination of the DB Plan, ALPA reasonably agreed to terminate the DB Plan and implement DC Plan I. Second, the Court is unable to infer any fraudulent intent from ALPA’s failure to timely perform an audit of the DB Plan given that ALPA eventually did conduct an audit which verified U.S. Arways’ prior statements regarding the health of the DB Plan. Finally, the allegation that ALPA reneged on a promise to its members is simply insufficient. See Powers, 57 F.3d at 185 (“[t]he mere non-performance of promises is insufficient to create an inference of fraudulent intent”). Thus, the FAC fails to assert sufficient allegations that give rise to a strong inference of fraudulent intent.
Second, ALPA argues that the FAC fails to allege adequate acts to support their claim that ALPA committed mail and wire fraud.23 ALPA does not appear to challenge plaintiffs’ allegations regarding the details of the alleged fraudulent acts — “the contents of the communications, who was involved, where and when they took place,” Mills v. Polar Molecular Corp., 12 F.3d 1170, 1176 (2d Cir.1993)— but whether the FAC sufficiently explains how the acts were fraudulent. Since plaintiffs’ allegations of mail and wire fraud consist simply of the posting of defendants’ various false promises and statements on the respective websites of ALPA and U.S. Airways, ALPA argues that plaintiffs have failed to adequately show how the various statements were fraudulent. To the contrary, the FAC is quite detailed in its factual allegations, which enables the Court to easily infer plaintiffs’ allegations of fraud. The degree of detail ALPA seeks to hold plaintiffs accountable for is not required, by Rule 9(b). See Mills, 12 F.3d at 1175; Moore v. Paine-Webber, Inc., 189 F.3d 165, 173 (2d Cir. *5501999); see also Manning v. Utilities Mut Ins. Co., No. 98 Civ. 4790, 1999 WL 782569, at *4 (S.D.N.Y. Sept.30, 1999) (“To satisfy Rule 9(b), Plaintiffs pleadings must contain sufficient detail to give Defendants notice of the transactions intended to be proven and the elements of the claims.”) (internal quotation marks and citation omitted), rev’d on other grounds, 254 F.3d 387 (2d Cir.2001). Nonetheless, plaintiffs’ mail and fraud claims cannot serve as predicate acts since the FAC fails to allege facts that give rise to a strong inference of fraudulent intent.
c. Pattern of Racketeering Activity
With respect to the pattern requirement, the RICO statute states only that a “ ‘pattern of racketeering activity’ requires at least two acts of racketeering activity ....” 18 U.S.C. § 1961(5). The Supreme Court has determined that “to prove a pattern of racketeering activity a plaintiff ... must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity.” H.J., Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989). As to the proof necessary to show the existence of continued criminal activity, the Supreme Court held that a plaintiff “must prove [the] continuity of racketeering activity, or its threat.” Id. at 241, 109 S.Ct. 2893. Thus, to establish a “threat of continued criminal activity,” a plaintiff must show either “closed-ended continuity” or “open-ended continuity.” Cofacredit, S.A. v. Windsor Plumbing Supply Co., Inc., 187 F.3d 229, 242 (2d Cir.1999); see also H.J., Inc., 492 U.S. at 241-42, 109 S.Ct. 2893.
A plaintiff can prove “continuity over a closed period by proving a series of related predicates extending over a substantial period of time,” H.J., Inc., 492 U.S. at 242, 109 S.Ct. 2893, and a “substantial period of time” is considered greater than “a few weeks or months” and is certainly achieved within “a matter of years.” GICC Capital Corp. v. Tech. Fin. Group, Inc., 67 F.3d 463, 467 (2d Cir.1995) (citations omitted), cert. denied, 518 U.S. 1017, 116 S.Ct. 2547, 135 L.Ed.2d 1067 (1996). Open-ended continuity, on the other hand, requires proof “that there was a threat of continuing criminal activity beyond the period during which the predicate acts were performed.” First Capital, 385 F.3d at 180 (quoting Cofacredit, 187 F.3d at 242).
Here, ALPA argues that plaintiffs have not sufficiently alleged “continued criminal activity” by either closed-ended or open-ended continuity. In contending that plaintiffs have not sufficiently alleged closed-ended continuity, ALPA argues that they have failed to allege that the predicate acts continued for at least the requisite two years. There is no dispute that plaintiffs must allege acts that continued for at least two years, see First Capital, 385 F.3d at 181 (“this Court has never found a closed-ended pattern where the predicate acts spanned fewer than two years.”), but plaintiffs and ALPA dispute the alleged start and end date of the relevant acts. In arguing that closed-ended continuity is not satisfied, ALPA construes the objective of the alleged enterprise as solely to terminate the DB Plan, which occurred one year after the time period in which plaintiffs alleged the enterprise was formed. Plaintiffs, on the other hand, argue that the alleged objective of the enterprise was broader — namely, to continually reduce pilots’ pensions — which included acts after the DB Plan was terminated.24 *551Under plaintiffs’ theory, closed-ended continuity is satisfied because the first predicate act alleged (ie., wire fraud against ALPA for stating that the DB Plan was underfunded as of February 2002) occurred nearly three years before the last predicate act alleged (ie., mail fraud against U.S. Airways for mailing the 2002 DB Plan Summary, which states that the DB Plan was adequately funded). See Opp. to ALPA, p. 32.
However, because none of plaintiffs alleged predicate acts are sufficient, as the Court explained above, plaintiffs’ theory regarding closed-ended continuity is not feasible. Even if plaintiffs articulate the alleged enterprise’s objective broadly, the start and end date of the relevant acts cannot be premised upon inadequate predicate acts. See Spool v. World Child Int’l Adoption Agency, 520 F.3d 178, 184 (2d Cir.2008) (“The relevant period [for closed-ended continuity] ... is the time during which RICO predicate activity occurred, not the time during which the underlying scheme operated or the underlying dispute took place.”); De Falco, 244 F.3d at 321 (“The duration of a pattern of racketeering activity is measured by the RICO predicate acts the defendants commit.”). As such, plaintiffs cannot satisfy closed-ended continuity.
ALPA also claims that plaintiffs have failed to demonstrate open-ended continuity, which can be sufficiently pleaded in a number of ways. A plaintiff can show that “the racketeering acts themselves include a specific threat of repetition extending indefinitely into the future,” or that “the predicate acts or offenses are a part of an ongoing entity’s way of doing business,” whether or not that business exists primarily for criminal purposes. H.J., 492 U.S. at 242-43, 109 S.Ct. 2893. To show that the predicate acts are an entity’s way of doing business, a plaintiff must either allege that the entity exists for criminal purposes (as is the case with organized crime syndicates), or that “the predicates are a regular way of conducting defendant’s ongoing legitimate business.” Id. at 243, 109 S.Ct. 2893. When an enterprise’s objectives are primarily or inherently unlawful, the threat of continued criminal activity is presumed, but when the enterprise primarily conducts a legal business, there is no presumption of a continued threat. Spool, 520 F.3d at 185-86; Cofacredit, 187 F.3d at 243. Without the presumption of future criminal conduct, a plaintiff must provide “some evidence from which it may be inferred that the predicate acts were the regular way of operating that business, or that the nature of the predicate acts themselves implies a threat of continued criminal activity.” Spool, 520 F.3d at 185 (quoting Cofacredit, 187 F.3d at 243).
Here, plaintiffs have not alleged that ALPA’s primary business is unlawful so they must provide some strong evidence of continued criminal activity. Yet, plaintiffs only claim that there is still a risk of future criminal conduct by ALPA is the fact that ALPA continues to be plaintiffs’ exclusive bargaining representative. Plaintiffs do not indicate that this allegation is premised upon future predicate acts or the threat of any criminal activity. Rather, it appears that plaintiffs are relying on bald speculation as to the future acts of ALPA and the alleged “enterprise,” which is insufficient. See GICC Capital, 67 F.3d at 466. Moreover, plaintiffs have explicitly told the Court that they have no additional allegations to assert in support of their RICO claims even though it has been nearly two years since the FAC was filed.25 Thus, plaintiffs have failed to dem*552onstrate open-ended continuity. Accordingly, plaintiffs’ RICO claims against ALPA are dismissed.
Since all of plaintiffs’ claims against ALPA are dismissed, the final matter that this Court must address is plaintiffs’ request for leave to amend the complaint with respect to any of the claims that are dismissed. As the Court has demonstrated above, any further amendments to the complaint would be futile — especially since plaintiffs’ counsel declared at oral argument that plaintiffs have no additional facts to allege to this fourth amended complaint. See Caputo v. Pfizer, 267 F.3d 181, 191 (2d Cir.2001). As a result, plaintiffs are denied leave to further amend the complaint.
B. RSA’s Motion to Dismiss
The only claim asserted against RSA is a RICO claim, and RSA argues that this claim should be dismissed because it has been insufficiently pled.26 Specifically, RSA argues that the RICO claim fails to plead all the necessary elements to make out a viable RICO claim, and the fraud allegations in the claim are not pled with the necessary specificity, as required by Fed.R.Civ.P. 9(b). As discussed below, plaintiffs’ RICO claims against RSA are dismissed under Rule 12(b)(6) and Rule 9(b).
In describing plaintiffs’ allegations against RSA, the Court will not repeat the numerous allegations against all defendants since those are detailed above in the discussion of ALPA’s motion to dismiss. The FAC alleges that RSA was designated as the equity sponsor of U.S. Airways in the 2002 Bankruptcy, which required RSA to provide $500 million debtor-in-possession financing in exchange for nearly 37% ownership of U.S. Airways and super-voting rights once the bankruptcy proceedings had concluded. Thereafter, in early December 2002, while U.S. Airways was still in bankruptcy, U.S. Airways and RSA publicly declared that they needed to obtain “additional labor cost savings” and “ ‘resolve’ ... pension funding problems” to obtain a loan guarantee from the ATSB and emerge from bankruptcy. FAC ¶¶ 596, 601. Subsequently, ALPA began conducting “secret meetings” with U.S. Airways regarding the termination of the DB Plan, but there is no reference of RSA’s involvement in these meetings. In fact, the only reference to RSA, with respect to the termination of the DB Plan, is that it and U.S. Airways made “various threats of liquidation” during subsequent discussions with ALPA about terminating the DB Plan and implementing a DC Plan. Id. ¶¶ 643^4.
The FAC further alleges that once U.S. Airways emerged from the 2002 Bankruptcy, it repaid “nearly all of the expended debtor-in-possession facility” RSA had provided, and as a result, RSA acquired nearly 37% interest in U.S. Airways and super-voting rights. Id. ¶¶ 654-57. RSA’s CEO, David Bronner, was immediately *553named chairman of U.S. Airways’ board of directors, and while in that capacity, Bron-ner made various statements regarding liquidating the company if additional employee concessions were not obtained. These statements, the FAC alleges, indicate that RSA was focused on recouping its investment and doing so at the expense of plaintiffs’ pensions.
In its motion to dismiss, RSA claims that plaintiffs have failed to sufficiently allege (1) a “pattern” of racketeering activity; (2) the existence of any “racketeering activity”; and (3) all of the necessary elements as against both RSA and RSA Holdings. The FAC is deficient in all three respects, and plaintiffs’ opposition to the motion is devoid of any argument disputing RSA’s contention that the RICO claim must be dismissed.
First, the FAC alleges a single predicate act against RSA, which consists only of a conclusory allegation that RSA committed fraud in connection with a case under Title 11, which is identified as a predicate in 18 U.S.C. § 1961(1). As noted above, to sufficiently allege a “pattern” of racketeering activity, plaintiffs must allege “at least two acts of racketeering activity” that occurred within ten years of each other. 18 U.S.C. § 1961(5). Second, Plaintiffs’ conclusory statement that RSA committed bankruptcy fraud is insufficient to adequately state a predicate act because the FAC fails to submit facts to explain how RSA committed the alleged criminal act. See United States v. Private Sanitation Indus. Ass’n of Nassau/Suffolk, Inc., 793 F.Supp. 1114, 1129-30 (E.D.N.Y.1992). Additionally, plaintiffs’ allegation of fraud utterly fails to meet the specificity requirements of Rule 9(b). See Mills, 12 F.3d at 1175; Manning, 1999 WL 782569, at *4. Lastly, the FAC fails to allege that RSA and RSA Holdings individually violated § 1962(c). See DeFalco, 244 F.3d at 306 (“The requirements of section 1962(c) must be established as to each individual defendant.”); Jones v. Nat’l Commc’n and Surveillance Networks, 409 F.Supp.2d 456, 473 (S.D.N.Y.2006) (“The duration, frequency, and substance of the purported racketeering activity are measured independently for each individual defendant.”). Accordingly, plaintiffs’ RICO claims against RSA are dismissed.
As to plaintiffs’ request for leave to amend their complaint to correct the deficiencies in their claims against RSA, plaintiffs have failed to indicate what additional allegations, if any, they could assert to make out a proper RICO claim. In fact, at oral argument plaintiffs’ counsel declared that there are no additional facts to allege. Accordingly, plaintiffs are denied leave to amend the complaint. See Caputo, 267 F.3d at 191.
CONCLUSION
For the reasons set forth above, the motions of both Air Line Pilots Association, including Duane Woerth, and Retirement Systems of Alabama, including Retirement Systems of Alabama Holdings LLC, are granted, and plaintiffs’ claims are dismissed in their entirety. Therefore, the Clerk of Court is directed to close this case.
SO ORDERED.
. Pursuant to Federal Aviation Regulations, commercial pilots, upon reaching the age of sixty, can no longer serve as pilots-in-command or as first officer. See 14 CFR § 121.383(c). As a result, most pilots choose to retire at the age of sixty, effectively rendering the directive a mandatory retirement rule.
. For the purpose of these motions to dismiss, the following facts are drawn from the FAC, and are accepted as true. See Gregory v. Daly, 243 F.3d 687, 691 (2d Cir.2001). In addition to the FAC, the Court will consider several other documents that have been provided with the parties’ motion papers because they are explicitly referenced in the FAC, incorporated by reference, or within the purview of judicial notice, which include the transcript and decisions of the Bankruptcy Court in connection with the termination of the pilots’ defined benefit plan, see In re U.S. Airways Group, Inc., 296 B.R. 734 (Bankr. E.D.Va.2003), the terms of each iteration of the pilots' pension plan, certain communications from ALPA to its members, and an undated letter from U.S. Airways’ CEO to ALPA members. See Roth v. Jennings, 489 F.3d 499, 509 (2d Cir.2007) (noting that although a court deciding a Rule 12(b)(6) motion "is normally required to look only to the allegations on the face of the complaint ... [d]ocu-ments that are attached to the complaint or incorporated in it by reference are deemed part of the pleading and may be considered.”) (citing Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 71 (2d Cir.1998), cert. denied, 525 U.S. 1103, 119 S.Ct. 868, 142 L.Ed.2d 770 (1999)).
. As noted in plaintiffs' "Memorandum of Law in Opposition to [ALPA's] Motion to Dismiss” ("Opp. to ALPA”), "Pursuant to ERISA guidelines, the DB Plan was required to have sufficient funding to pay benefits to a minimum of eighty percent of the promised benefits. If the DB Plan’s funding dropped below eighty percent, U.S. Airways was required to make deficit reduction contributions to rapidly return the DB Plan funding level to ninety percent.” Opp. to ALPA, p. 2 (citing 29 U.S.C. §§ 1082, 1083).
. As noted by Bankruptcy Judge Stephen Mitchell, in In re U.S. Airways Group, this "first round” of concessions did not explicitly modify the terms of the pilots’ pension plan. 296 B.R. at 737. However, since the amount of each pilot's pension was calculated based upon that pilot's "age, years of service, and final average earnings,” the salary reductions in the First Concession had the "incidental effect of somewhat reducing the future obligations [of U.S. Airways] under the plan.” Id.
. The chairman of ALPA's negotiating committee even testified during the 2002 Bankruptcy that "the reference in the side letter to [the DB Plan's] ‘termination’ was intended to address the possibility of an involuntary ter-initiation by the PBGC and was not intended by ALPA as consent for [US Airways] to initiate a distress termination.” In re U.S. Airways Group, 296 B.R. at 739.
. According to the FAC, a pilot's contribution rate is determined by "the percentage of projected pay necessary to be contributed monthly to that pilot's DC Plan balance such that, with earnings assumed at eight percent, the balance at age 60 is equal to that pilot’s [target benefit upon retirement].” FAC ¶ 427.
. The FAC also alleges that, under DC Plan I, older pilots would receive significant amounts of their contributions in a "non-qualified plan” that would subject their pensions to immediate taxation whereas younger pilots would receive most of their contributions in a "qualified plan” that would enable them to delay the taxation of their pensions. FAC ¶¶ 462-63.
. Prior to this action, there have been have at least two other cases arising from the actions taken against pilots' pension plans during U.S. Airways' two bankruptcy proceedings— both of which have since been dismissed. The first involved a group of pilots, known as the “Soaring Eagles,” appealing the Bankruptcy Court's approval of the DB Plan’s termination to the district court, and then to the Fourth Circuit. See In re U.S. Airways Group, Inc., 369 F.3d 806 (4th Cir.2004). The Fourth Circuit affirmed the district court’s holding that the plaintiffs’ claims were equita*534bly moot since the DB Plan had already been terminated; DC Plan I had already been implemented; and, in reliance upon these actions, many other financial arrangements had been executed. Id.
The second action was brought by another group of pilots — some of whom have since been added to this action — in which the plaintiffs alleged many of the same claims raised herein. See Popper, et al. v. Air Line Pilots Ass’n, Int’l, et al., No. 03-CV-3408 (E.D.N.Y. filed July 11, 2003) (Bianco, J.). After initially moving to consolidate the Popper action with this action, on March 3, 2006, the plaintiffs and the remaining defendants, which only included U.S. Airways at that time, filed a stipulation of dismissal that was "so ordered” on March 9, 2006.
. Shortly after the Court held argument, counsel for plaintiffs filed an unsolicited letter supplementing and clarifying plaintiffs' positions at oral argument. Thereafter, counsel for ALPA filed a letter requesting that plaintiffs' letter be stricken, and addressing the arguments raised in plaintiffs’ letter. Given that these submissions were filed without leave of Court, and counsel for all parties were provided ample opportunity to establish their respective positions at oral argument, the Court will not consider these supplemental submissions. See Old Republic Ins. Co. v. Hansa World Cargo Serv., Inc., 170 F.R.D. 361, 369-70 (S.D.N.Y.1997).
. The FAC also alleges that ALPA acted in bad faith by intentionally misrepresenting that it had no authority to conduct an audit despite clear authority to do so. Other than plaintiffs' bare allegation, the FAC does not suggest, let alone allege, that there is "substantial evidence of fraud, deceitful action, or dishonest conduct" by ALPA. Lockridge, 403 U.S. at 299, 91 S.Ct. 1909 (internal citation and question marks omitted). Accordingly, this aspect of Count I is also dismissed.
. The FAC cites to 29 U.S.C. §§ 623(a) and (j) as the statutory basis for their ADEA claims — subsections that are clearly inapplicable here. However, given the nature of plaintiffs’ allegations, the Court finds that plaintiffs simply failed to cite to the correct subsections, § 623(c), which prohibits discrimination by a "labor organization,” and § 623(i), which pertains to non-discrimination in employee pension benefit plans. Where referenced herein, the proper and relevant ADEA statute is noted.
. Plaintiffs have not alleged that ALPA violated the ADEA by agreeing to the DB Plan’s termination, nor would such a claim survive the instant motion since it is clear from the FAC that the DB Plan was terminated for all pilots, not just plaintiffs.
. Since the FAC does not assert any direct evidence of discrimination, and plaintiffs have not indicated that they intend to provide any direct evidence of discrimination, proof of plaintiffs’ ADEA claim under § 636(c)(1) is limited to a discriminatory treatment or disparate impact theory. See Swierkiewicz, 534 U.S. 506, 511, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002) ("the McDonnell Douglas test is inapplicable where the plaintiff presents direct evidence of discrimination.”) (citing Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 121, 105 S.Ct. 613, 83 L.Ed.2d 523 (1985)).
. Plaintiffs add further confusion to the parsing of their age discrimination claims by citing to 29 U.S.C. § 623(i) in support of their amorphous discriminatory treatment/disparate impact claim. As stated above, see supra note 11, a disparate impact or discriminatory treatment claim can only be properly asserted under § 623(c), not subsection (i), which relates specifically to discrimination in the terms of an employee’s pension plan (i.e., the cessation or reduction of the rate at which benefits accrue or are contributed to the pension plan) — a claim that exists independently in the FAC.
. In addition, ALPA has not challenged the sufficiency of plaintiffs' allegations regarding: (1) as to discriminatory treatment, whether plaintiffs are members of a protected class or qualified to receive the employee benefits; or (2) as to disparate impact, whether plaintiffs have identified the specific action they are challenging.
.Although ALPA largely fails to discuss plaintiffs’ § 623(c) claim in its moving memorandum of law, it addresses the claim in its reply, attributing its initial failure to plaintiffs’ “shifting tactics.” Reply Memorandum of Law of [ALPA] ("ALPA Reply Mem.”), p. 5. Nonetheless, some of the same arguments raised in ALPA's moving memorandum of law apply to this claim, and ALPA itself raises some of these same theories of dismissal in its reply to attack this particular theory of age discrimination.
. A detailed analysis of the relevant differences between a cash balance plan, a defined contribution plan, and a defined benefit plan is provided in Drutis v. Rand McNally & Co., 499 F.3d 608, 612 (6th Cir.2007), but for this Court’s purposes, it is sufficient to note that cash balance plans "are structured to function like a defined contribution plan.” Id.; see also Hirt v. Equitable Ret. Plan For Employees, Managers and Agents, 533 F.3d 102, 104-06 (2d Cir.2008).
. Although plaintiffs have stated that the '‘gravamen” of their ADEA claim is ALPA’s conduct "in establishing and maintaining” the DC Plans, it nonetheless appears that plaintiffs have not withdrawn their ADEA claim related to the “terms of DC Plan I and DC Plan II .... ” Opp. to ALPA, p. 34. Accordingly, the Court will address that claim in the context of ALPA’s motion to dismiss.
. Although plaintiffs fail to specify the exact subsection of RICO that they rely upon, the most plausible source is § 1962(c) since the FAC does not assert facts related to any other subsection of § 1962, including conspiracy to violate any subsection of § 1962. See § 1962(d). Thus, the Court finds that the RICO cause of action is premised solely on § 1962(c).
. ALPA also argues that it should not be amenable to an action under RICO since its liability under that statute is intertwined with federal labor law. Given that the FAC fails to sufficiently state a RICO cause of action, the Court declines to address this alternative argument for dismissal.
. Although some courts in this Circuit have stated that the issue of whether a plaintiff must allege that an enterprise’s existence is distinct from the predicate acts it has engaged in is unsettled, see Am. Med. Ass’n v. United Healthcare Corp., No. 00 Civ. 2800, 2006 WL 3833440, at * 15 (S.D.N.Y. Dec. 29, 2006) (citing World Wrestling Entm’t, Inc. v. Jaldes Pac., Inc., 425 F.Supp.2d 484, 493-500 (S.D.N.Y.2006)), this Court disagrees. As Judge I. Leo Glasser recognized in United States v. Int'l Longshoremen’s Ass’n, 518 F.Supp.2d 422, 468-74 (E.D.N.Y.2007), following a well-reasoned analysis, this issue is settled because, contrary to the holding in World Wrestling Entm’t, there is no inconsistency between the Second Circuit’s decisions in United States v. Mazzei, 700 F.2d 85 (2d Cir.1983), and First Capital, 385 F.3d at 159. Accordingly, as Judge Glasser held, "it remains the law in this Circuit that a RICO plaintiff alleging the existence of an association-in-fact RICO enterprise must plead and prove the existence of a group of individuals or other legal entities operating as a continuing unit with a formal or informal structure and united by some common purpose in order to state a valid claim." Longshoremen’s Ass’n, 518 F.Supp.2d at 474. This Court will therefore apply the First Capital standard to plaintiffs' allegations of an enterprise.
. As to the alleged bankruptcy fraud, ALPA also argues that plaintiffs have completely failed to allege that ALPA committed bankruptcy fraud because they have not identified the statute that ALPA violated and have even conceded that the allegations of bankruptcy fraud were only asserted against U.S. Airways. Apart from the absence of any allegation of bankruptcy fraud asserted against ALPA in the FAC, the Court agrees that plaintiffs have conceded that there is no allegation of ALPA committing bankruptcy fraud. Thus, bankruptcy fraud cannot serve as a predicate act to support plaintiffs’ RICO claims against ALPA, and need not be further discussed.
. As an initial matter, both mail and wire fraud require the proof of "two elements — (1) having devised or intending to devise a scheme to defraud (or to perform specified fraudulent acts) and (2) use of the mail [or wires] for the purpose of executing, or attempting to execute, the scheme (or specified fraudulent acts).” Carter v. United States, 530 U.S. 255, 261, 120 S.Ct. 2159, 147 L.Ed.2d 203 (2000); see also Mathon v. Feldstein, 303 F.Supp.2d 317, 323 (E.D.N.Y.2004) (citing United States v. Lemire, 720 F.2d 1327 (D.C.Cir.1983), which noted that the requisite elements of wire and mail fraud are identical).
. Although the section of the FAC delineating the RICO-based facts does not include any reference to DC Plan II, the first paragraph of that section incorporates every previous paragraph, which does reference the issues surrounding DC Plan II.
. Also, plaintiffs’ inability to demonstrate any continued criminal activity by the alleged *552enterprise is also evident from their failure to add any new allegations to their RICO claims after amending the complaint approximately one year after first asserting their RICO claims.
. RSA also argues that plaintiffs’ RICO claims should be dismissed because it is entitled to sovereign immunity. However, because this Court finds that the RICO claims asserted against RSA should be dismissed under Rule 12(b)(6) and Rule 9(b), it declines to decide RSA’s constitutional argument. See Tory v. Cochran, 544 U.S. 734, 740, 125 S.Ct. 2108, 161 L.Ed.2d 1042 (2005) (Thomas, J„ dissenting) (“As a prudential matter, the better course is to avoid passing unnecessarily on the constitutional question.”) (citing Ashwander v. TVA, 297 U.S. 288, 345-48, 56 S.Ct. 466, 80 L.Ed. 688 (1936) (Brandeis, J., concurring)). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494301/ | OPINION
1
BRENDAN LINEHAN SHANNON, Bankruptcy Judge.
Before the Court is the motion (the “Motion”) [Docket No. 888] of Chevron Products Company, a division of Chevron USA, Inc. (“Chevron”) seeking relief from the automatic stay to effect a “triangular setoff’ of certain debts that are owed or owing between it and three separate debtors in these jointly administered cases. For the following reasons, the Court will deny the Motion.
I. BACKGROUND
On July 22, 2008 (the “Petition Date”), SemGroup, L.P. (“SemGroup”), and certain direct and indirect subsidiaries (each a “Debtor” and collectively referred to hereinafter as the “Debtors”), including SemCrude, L.P. (“SemCrude”), SemFuel, L.P. (“SemFuel”), and SemStream, L.P. (“SemStream”), each filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code (the “Code”). The Debtors’ Chapter 11 cases have been consolidated for procedural purposes only and are being jointly administered pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure.
SemGroup and its related companies provide goods and services to the energy industry, primarily to independent producers and refiners of petroleum products lo*391cated in North America and the United Kingdom. Each Debtor company engages in a separate line of business with its own distinct products and functions. For example, SemCrude gathers, transports, stores, blends, markets, and distributes crude oil in the United States to refiners and other resellers in various types of sale and exchange transactions. SemFuel’s business, by contrast, is focused on the transportation and distribution of refined petroleum products (gasoline, kerosene, and the like). SemStream operates similarly, but its product lines are limited to propane and other natural gas products. Other Debtor companies engage in similar transactions with different energy products or in different markets.
In the course of its business, Chevron entered into contracts with three of the Debtors: SemCrude, SemFuel, and SemStream. Chevron contracted with these entities for the sale or purchase of crude oil, regular unleaded gasoline, and/or butane, isobutene and propane, respectively.
The relevant contracts for the sale or purchase of crude oil with SemCrude (collectively referred to hereinafter as the “SemCrude Contraets”)are governed by either: (i) Chevron’s General Provisions for Crude Oil and Products — Exchanges and Purchase/Sales revised as of May 1, 1996 (the “CSAT Terms and Conditions”); or (ii) the Conoco General Provisions for Domestic Crude Oil Agreements, effective as of January 1, 1993 (the “Conoco Terms and Conditions”). The SemCrude Contracts are also governed by a certain Net Settlement Agreement, dated April 22, 2004 (the “Net Settlement Agreement”), between ChevronTexaco Global Trading (n/k/a Chevron Products Company) and SemCrude.
The relevant contracts for the delivery or purchase of gasoline with SemFuel (collectively referred to hereinafter as the “SemFuel Contracts”) also are governed by the CSAT Terms and Conditions. The relevant contracts for the delivery or purchase of butane, isobutene and/or propane with SemStream (collectively referred to hereinafter as the “SemStream Contracts”), meanwhile, are governed by Chevron’s General Terms and Conditions for Liquid Product Purchases and Sales Agreements, dated September 1, 2006 (the “LSAT Terms and Conditions”).2
Additionally, SemGroup executed a continuing parent guaranty of any indebtedness incurred by SemCrude, SemStream, SemMaterials, L.P., and SemFuel in favor of Chevron (the “Continuing Guaranty”). The Continuing Guaranty was amended to include SemGas, L.P. as an additional entity to which the guaranty applied on September 27, 2007.
The CSAT Terms and Conditions and the LSAT Terms and Conditions each contain identical netting provisions that provide that “in the event either party fails to make a timely payment of monies due and owing to the other party, or in the event either party fails to make timely delivery of product or crude oil due and owing to the other party, the other party may offset any deliveries or payments due under this or any other Agreement between the parties and their affiliates.” (CSAT Terms and Conditions at 2; LSAT Terms and Conditions at 3) (emphasis added). These documents define “affiliate” as “a corporation controlling, controlled by or under common control with either party.” *392(CSAT Terms and Conditions at 1; LSAT Terms and Conditions at 1). The parties do not dispute that SemCrude, SemFuel, and SemStream are “affiliates” of each other as that term is used in the relevant agreements.
Prior to the Debtors’ bankruptcy filings, Chevron and the Debtors entered into a number of transactions pursuant to these contracts. As of the Petition Date, these transactions resulted in Chevron owing a balance of $ 1,405,878.40 to SemCrude. Chevron is owed $ 10, 228, 439.34 by SemFuel, however, and is owed an additional $ 3,302,806.03 by SemStream.
Claiming that the amounts owed under these balances can be setoff against each other pursuant to the contract terms discussed above, Chevron filed the Motion on August 21, 2008 for the purpose of obtaining leave from the automatic stay so that it could effect such a setoff. The Debtors, the Official Committee of Unsecured Creditors appointed in this case, and a host of the Debtors’ creditors each filed timely objections to the Motion. In summary, these objections took issue with Chevron’s argument that the Code allows for parties to contract around the Code’s requirement in section 553 that debts be “mutual” in order to be setoff. The objectors contend that triangular setoff is impermissible, even if contemplated by a valid, pre-petition contract. Alternatively, the objectors argue that even if there is such a contract exception to the mutuality requirement, the contracts in the instant case fail to effect such a result.3
Chevron, in turn, filed a reply to these objections on September 5, 2008. The parties then filed a stipulation of uncontested facts pertaining to this dispute on October 7, 2008, and the Court heard oral argument on the Motion the next day, October 8, 2008, with the understanding that only legal arguments were to be discussed at oral argument. The parties agreed that the Court would hear evidence in connection with this matter at a later date should it prove necessary to determine whether to grant Chevron’s Motion.
The Court concludes that further factual development is not necessary in this case. The applicable law in this matter has been fully briefed and well argued. This matter is ripe for decision.
II. JURISDICTION AND VENUE
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a) and (b)(1). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Consideration of this adversary proceeding constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(A), (G), and (O).
III. DISCUSSION
Chevron asserts that the terms of its contracts with the Debtors permit it to setoff the debt it owes to one corporation, SemCrude, against the debt owed to it by two other corporations, SemFuel and SemStream, thus effecting a “triangular set-off.” The Court does not need to determine whether the specific terms of these various contracts grant SemCrude this right, however. Instead, the Court holds that Chevron is not permitted to effect such a setoff against the Debtors in this case because section 553 of the Code pro*393Mbits a triangular setoff of debts against one or more debtors in bankruptcy as a matter of law due to lack of mutuality.
Setoff “allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding ‘the absurdity of making A pay B when B owes A.’ ” Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995) (quoting Studley v. Boylston Nat. Bank, 229 U.S. 523, 528, 33 S.Ct. 806, 57 L.Ed. 1313, (1913)). The Code section that governs setoff in bankruptcy, section 553, does not create a right of setoff, however. Rather, section 553 “preserves for the creditor’s benefit any setoff right that it may have under applicable nonbankruptcy law,” and “imposes additional restrictions on a creditor seeking setoff’ that must be met to impose a setoff against a debtor in bankruptcy. Packaging Indus. Group Inc. v. Dennison Mfg. Co. Inc. (In re Sentinel Prod. Corp. Inc.), 192 B.R. 41, 45 (N.D.N.Y.1996). Thus, setoff is appropriate in bankruptcy only when a creditor both enjoys an independent right of setoff under applicable non-bankruptcy law, and meets the further Code-imposed requirements and limitations set forth in section 553. See, e.g., In re Tarbuck, 318 B.R. 78, 81 (Bankr. W.D.Pa.2004) (holding that courts must look to state law to determine whether a right to setoff exists, but that “the granting or denial of a right to setoff depends upon the terms of section 553, and not upon the terms of state statutes or laws.”); see also In re Garden Ridge Corp., 338 B.R. 627, 632 (Bankr.D.Del.2006).
The additional restrictions imposed by section 553 are well-settled. In order to effect a setoff in bankruptcy, courts construing the Code have long held that the debts to be offset must be mutual, prepetition debts. See, e.g., Scherling v. Heilman Elec. Corp. (In re Westchester Structures, Inc.), 181 B.R. 730, 738-39 (Bankr.S.D.N.Y.1995).
The authorities are also clear that debts are considered “mutual” only when “they are due to and from the same persons in the same capacity.” Westinghouse Credit Corp. v. D’Urso, 278 F.3d 138, 149 (2d Cir.2002)(citing Westchester, 181 B.R. at 740). Put another way, mutuality requires that “each party must own his claim in his own right severally, with the right to collect in his own name against the debtor in his own right and severally.” Garden Ridge, 338 B.R. at 633-34 (quoting Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 1036 (5th Cir.1987)). Because of the mutuality requirement in section 553(a), courts have routinely held that triangular setoffs are impermissible in bankruptcy. See, e.g., Matter of United Sciences of America, Inc., 893 F.2d 720, 723 (5th Cir.1990) (“The mutuality requirement is designed to protect against ‘triangular’ set-off; for example, where the creditor attempts to set off its debt to the debtor with the latter’s debt to a third party.”); In re Elcona Homes Corp. (Green Tree Acceptance, Inc.), 863 F.2d 483, 486 (7th Cir.1988) (holding that the Code speaks of a “mutual debt” and “therefore precludes ‘triangular’ set offs”). Moreover, because each corporation is a separate entity from its sister corporations absent a piercing of the corporate veil, “a subsidiary’s debt may not be set off against the credit of a parent or other subsidiary, or vice versa, because no mutuality exists under the circumstances.” Sentinel Products Corp., 192 B.R. at 46 (citing MNC Commercial Corp. v. Joseph T. Ryerson & Son, Inc., 882 F.2d 615, 618 n. 2 (2d Cir.1989)). Allowing a creditor to offset a debt it owes to one corporation against funds owed to it by another corporation — even a wholly-owned subsidiary— *394would thus constitute an improper triangular setoff under the Code.
Chevron asserts that an exception to the Code’s mutuality requirement exists. It contends that a valid, pre-petition contract — executed by a creditor, a debtor, and one or more third parties — either satisfies the mutuality requirement or allows the parties to contract around the mutuality requirement found in section 553(a) if the contract provides that one or more parties to the agreement can elect to setoff any debt it owes to one of the other parties against an amount owed to it by a different party to the agreement.
At first blush, Chevron’s position appears to enjoy a measure of support in the caselaw. Nearly a dozen cases decided in the last three decades under the Code, and a smaller number of cases decided under the statutory scheme it replaced, the Bankruptcy Act of 1898, have observed that an exception along the lines of that espoused by Chevron exists. Upon closer inspection, however, it becomes clear that not one of these cases has actually upheld or enforced an agreement that allows for a triangular setoff; each and every one of these decisions have simply recognized such an exception in the course of denying the requested setoff or finding mutuality independent of the agreement.4 Moreover, these decisions cite only to other cases that recognize this purported exception in dicta, or, in some of the more recent cases, to a short reference in Collier on Bankruptcy, which also relies on this same handful of decisions for authority. See 5 Collier on Bankruptcy ¶ 553.03[3][b][ii], at 553-31 (15th ed. rev. 2008).
Eventually, each of these cases directly or indirectly traces back to a single case, decided by the United States Court of Appeals for the Seventh Circuit in 1964 under the former Bankruptcy Act. This *395decision, In re Berger Steel Co., 327 F.2d 401 (7th Cir.1964), was the first case to raise the possibility that an exception to the Bankruptcy Act’s mutuality requirement, found in section 68 of the former Bankruptcy Act, might be found in a contract contemplating a triangular setoff.5
The court in Berger Steel was presented with a party attempting to effect a triangular setoff, and contending that an oral agreement between it and two other parties created sufficient mutuality of amounts owing and owed to make a triangular setoff proper between the parties under the Bankruptcy Act. Berger Steel, 327 F.2d at 404. The Seventh Circuit rejected this argument, upholding the finding of a bankruptcy referee that no such agreement existed. Id. at 404-05. After making this factual finding, the court proceeded to factually distinguish the case before it from the handful of cases cited by the party seeking to effect a triangular setoff in its arguments to the court. The court noted that some of these cases had allowed a triangular setoff to be taken pursuant to a valid contract. Each of these cases recognizing such a setoff, however, were decided under state law or the common law of equitable receivership, and none of these cases were decided under the more restrictive language of either the Bankruptcy Act or the Code. Id. at 405-06 (discussing a pair of cases decided under the common law of equitable receivership, Piedmont Print Works v. Receivers of People’s State Bank, 68 F.2d 110 (4th Cir. 1934), and Bromfield v. Trinidad Nat. Inv. Co., 36 F.2d 646 (10th Cir.1929), and a handful of cases decided under state law).
By simply distinguishing the facts before it from these prior cases, the Court in Berger Steel avoided addressing the broader question of whether a triangular setoff was permissible under the Bankruptcy Act if a contract signed by the parties to the proposed setoff contemplated such a remedy. Nevertheless, the court’s opinion in Berger Steel was subsequently read as recognizing an exception to the strict mutuality requirement found in the Bankruptcy Act. See Bloor, 32 B.R. at 1001-02 (citing Berger Steel and a common law receivership case for the so-called exception in an opinion about setoff under the Bankruptcy Act involving two guarantors, each of whom had mutuality because of their status as a guarantor); Depositors Trust, 590 F.2d at 379 (detailing the general rule against triangular setoff under the Bankruptcy Act, citing Berger Steel for the so-called exception, and finding the exception to be inapplicable). A few courts interpreting section 553 in the first years of the Code followed suit shortly thereafter. See Balducci Oil, 33 B.R. at 853 (citing Berger Steel and Depositors Trust for the so-called exception in a motion denying summary judgment because the existence of such an agreement constituted a genuine issue of material fact); Virginia Block, 16 B.R. at 562 (detailing the general rule against triangular setoff, citing Berger Steel for the so-called exception, and finding the exception to be inapplicable). Later on, these more recent cases started to be cited for the proposition that triangular setoffs may be permissible under certain circumstances. Eventually, nearly a dozen cases construing section 553 of the Code joined into this chain, each referencing one of the earlier decisions for the proposition *396advanced by Chevron in this case, yet none actually permitting a triangular setoff or addressing the merits of this purported exception in a written opinion.
The logical inconsistencies embodied in these decisions are evident in Chevron’s Motion. Chevron’s Motion claims that the setoff it seeks is one of “mutual obligations.” (Motion at 1). More specifically, it contends that this “multi-party mutuality is created” by the contracts discussed above. (Motion at 7). But Chevron also argues that triangular setoffs “are enforceable as an exception to the mutuality requirement” when contemplated by a valid contract. (Id.). Although Chevron appears to take these positions as part of a single argument, and not as alternative arguments, the Court finds these propositions to be mutually exclusive.6 If a debt is mutual one, then the rule of mutuality is, by definition, satisfied without the need for an exception to the rule. For a setoff to be enforceable as an “exception” to the mutuality requirement, however, the mutuality requirement itself must not have been satisfied.
Therefore, in the complete absence of controlling or persuasive published caselaw on the issue, the Court is faced with two distinct questions. First, may debts owing among different parties be considered “mutual” when there are contractual netting provisions governing all parties’ business relationship? If the answer is “no,” then the second question is whether a “contractual exception” exists to section 553’s mutuality requirement.
A. Private Agreements Cannot Confer Mutuality On Nonr-Mutual Debts
As is made clear by the express language of the section 553, and the numerous decisions interpreting it, the Code only allows for setoff of “mutual debts” in bankruptcy. See 11 U.S.C. § 553(a). No mention is made in the statute of allowing setoff of non-mutual debts, thus a debt must be mutual in order to be setoff under section 553. On this general rule, the courts are in unanimous agreement. See, e.g., Westinghouse, 278 F.3d at 149; Garden Ridge, 338 B.R. at 633; Westchester, 181 B.R. at 738-39.
In determining whether a tripartite agreement that contemplates a triangular setoff can create mutuality for purposes of section 553 when it is otherwise lacking, the Court must scrutinize the meaning of the term “mutual debt” as it is used in section 553. This analysis is complicated by the fact that the term is not defined by the Code.
The Court finds the definition of “mutuality” embraced by other courts to be instructive in this matter. The overwhelming majority of courts to consider the issue have held that debts are mutual only if “they are due to and from the same persons in the same capacity.” See, e.g., Westinghouse, 278 F.3d at 149; Garden Ridge, 338 B.R. at 633; Westchester, 181 B.R. at 740. It is also widely accepted that “mutuality is strictly construed against the party seeking setoff.” In re Bennett Funding Group, Inc., 212 B.R. 206, 212 (2d Cir. BAP 1997). See also Garden Ridge, 338 B.R. at 634; In re Clemens, 261 B.R. 602, 606 (Bankr. M.D.Pa.2001). The effect of this narrow construction is that “each party must own his claim in his own right severally, with the right to collect in his own name against the debtor in his own right and severally.” Garden Ridge, 338 B.R. at 633-34 (quoting Braniff Airways, Inc., 814 F.2d at 1036).
Construing the generally accepted definition of mutuality narrowly, as it is *397obliged to do, the Court concludes that mutuality cannot be supplied by a multiparty agreement contemplating a triangular setoff. Unlike a guarantee of debt, where the guarantor is liable for making a payment on the debt it has guaranteed payment of, an agreement to setoff funds does not create an indebtedness from one party to another.7 An agreement to setoff funds, such as the one claimed by Chevron in this case, does not give rise to a debt that is “due to” Chevron and “due from” SemCrude. A party such as SemCrude does not have to actually pay anything to a creditor such as Chevron under a tripartite setoff agreement; rather, it only sees one of its receivables reduced in size or eliminated. SemCrude does not owe anything to Chevron, thus there are no debts in this dispute owed between the “same persons in the same capacity.”
Likewise, Chevron does not have' a “right to collect” against SemCrude under the agreement in this case. At most, the agreement of the parties would give Chevron a “right to offset” — a right to pay less than it would otherwise have to pay to the extent of the setoff. The agreement does not call for SemCrude to make a payment to Chevron, however. Consequently, the agreement does not call for Chevron to “collect” anything from SemCrude. Chevron is thus without a “right to collect” from SemCrude. At bottom, Chevron may enjoy privity of contract with each of the relevant Debtors, but it lacks the mutuality required by the plain language of section 558.
The Court’s determination that the contracts at issue in this case do not confer mutuality on Chevron is further informed and supported by the express terms of section 553. Section 553, like section 68 of the Bankruptcy Act before it, speaks not only of a “mutual debt,” but of a mutual debt owing between a particular creditor and a particular debtor. Or, to be more precise, section 553 preserves only the “right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement [of the bankruptcy case] against a claim of such creditor against the debtor that arose before the commencement of the case.” 11 U.S.C. § 553(a) (emphasis added). In articulating exactly who must owe whom a debt to effect a setoff under section 553(a), Congress used a greater detail of precision than is seen in many other parts of the Code. This statutory language is of critical importance in this case, because the setoff sought by Chevron simply does not fall within its terms.
Chevron is a creditor, seeking to enforce its state law right to offset a debt owing by it to a debtor in this bankruptcy case (the debt it owes to SemCrude), and the debt arose before the commencement of the case. But Chevron is not seeking to offset a claim against “the debtor” to whom it owes a debt (SemCrude). Instead, Chevron is seeking to offset the debt it owes to “the debtor” (SemCrude) against the amounts owed to it by either of two other debtors, namely SemFuel, SemStream, or both. Regardless of whatever contractual right to setoff these debts against each other it might have under state law, the fact remains that Chevron only owes a debt to one debtor, SemCrude, and SemCrude owes nothing to Chevron. Chevron *398does not even have a “claim” against SemCrude because to have a claim it must have a “right to payment” from SemCrude. See 11 U.S.C. § 101(5).8 As noted above, a right to effect a setoff can never impose a “right to payment,” it only can yield a right to pay less than one would otherwise have to pay. Therefore, the setoff advocated by Chevron falls outside the express terms of section 553, and is impermissible.
Accordingly, the Court holds that non-mutual debts cannot be transformed into a “mutual debt” under section 553 simply because a multi-party agreement allows for setoff of non-mutual debts between the parties to the agreement.
B. No Exception To The “Mutual Debt” Requirement Exists
The Court now turns to the question of whether there is a “contract exception” to the requirement of mutuality under section 553. In addressing this question, the Court begins with the language of the statute itself. Duncan v. Walker, 533 U.S. 167, 172, 121 S.Ct. 2120, 150 L.Ed.2d 251 (2001). “[W]here ... the statute’s language is plain, ‘the sole function of the courts is to enforce it according to its terms.’ ” United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442 (1917)); see also Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992) (“[I]n interpreting a statute a court should always turn first to one, cardinal canon before all others. We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there. When the words of a statute are unambiguous, then, this first canon is also the last: ‘judicial inquiry is complete.’” (quoting Rubin v. United States, 449 U.S. 424, 430, 101 S.Ct. 698, 66 L.Ed.2d 633 (1981))). “It is ‘a cardinal principle of statutory construction’ that ‘a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.’ ” TRW Inc. v. Andrews, 534 U.S. 19, 31, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001)(quoting Duncan, 533 U.S. at 174, 121 S.Ct. 2120).
If “ ‘the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters’ ” or if the language of the statute is unclear, courts may resort to legislative history and “the intention of the drafters”. Ron Pair, 489 U.S. at 242-43, 109 S.Ct. 1026 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982)); see also United States v. E.I. DuPont De Nemours & Co. Inc., 432 F.3d 161, 169 (3d Cir.2005) (“Where a statute’s text is ambiguous, relevant legislative history, along with consideration of the statutory objectives, can be useful in illuminating its meaning.” (citing Gen. Dynamics Land Sys., Inc. v. Cline, 540 U.S. 581, 600, 124 S.Ct. 1236, 157 L.Ed.2d 1094 (2004) *399(examining “the text, structure, purpose, and history” of the relevant statute))).
Section 553(a) provides, in relevant part, that the Code “does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case....”9 11 U.S.C. § 553(a).
The Court finds nothing in the language of the Code upon which to base a conclusion that there is a contractual exception to the “mutual debt” requirement. Absent a clear indication from the text of the Code that such an exception exists, the Court deems it improper to recognize one.10 To do so would run counter to the great weight of authority holding that “there is no reason for enlarging the right to setoff beyond that allowed in the Code.” In re NWFX, Inc., 864 F.2d 593, 595-96 (8th Cir.1989). See also Public Serv. Co. of New Hampshire, 884 F.2d at 13-17 (“From a federal perspective, the law is settled that the bankruptcy court, in the guise of ‘doing equity,’ has no power to enlarge setoff rights beyond the dimensions sculpted by non-bankruptcy law or explicitly required by the Code.”); Boston and Maine Corp. v. Chicago Pacific Corp., 785 F.2d 562, 564-66 (7th Cir.1986).
Although dictated by the plain language of section 553, the Court’s holding also is consistent with the purpose of section 553 and the broader policies of the Code. One of the primary goals — if not the primary goal — of the Code is to ensure that similarly-situated creditors are treated fairly and enjoy an equality of distribution from a debtor absent a compelling reason to depart from this principle. By allowing parties to contract around the mutuality requirement of section 553, one creditor or a handful of creditors could unfairly obtain payment from a debtor at the expense of the debtor’s other creditors, thereby upsetting the priority scheme of the Code and reducing the amount available for distribution to all creditors. See In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 896 F.2d 54, 57 (3d Cir.1990) (“setoff is at odds with a fundamental policy of bankruptcy, equality among creditors ...”); BNY Fin. Corp. v. Masterwear Corp. (In re Masterwear Corp.), 229 B.R. 301, 311 (Bankr.S.D.N.Y.1999) (“[setoff] operates to prefer one creditor over every other”). Such a result is clearly contrary both to the text of the Code and to the principle of equitable distribution that lies at the heart of the Code.
For these reasons, the Court holds that no exception to the “mutual debt” requirement in section 553 can be created by private agreement.
*400IV. CONCLUSION
For the foregoing reasons, the Court finds that Chevron is not entitled to enact a triangular setoff of the amounts owed between it and the Debtors. Accordingly, the Court will deny the Motion.
An appropriate order follows.
ORDER
AND NOW, this 9th day of JANUARY, 2009, upon consideration of the motion (the “Motion”) [Docket No. 888] of Chevron USA, Inc. seeking relief from the automatic stay and the objections thereto; for the reasons set forth in the accompanying Opinion, it is hereby
ORDERED, that the Motion is DENIED.
. This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to Federal Rule of Bankruptcy Procedure 7052.
. At no time, however, did SemCrude, SemFuel, and SemStream sign either the CSAT Terms and Conditions, the Conoco Terms and Conditions, or the LSAT Terms and Conditions. These three sets of terms and conditions govern the relevant contracts by cross-references within the contracts.
. Certain other objectors argue against allowing Chevron to effect the setoff for a different reason. These objectors contend that the funds Chevron seeks to setoff are required by Oklahoma law to be held in constructive trust by the Debtors for the benefit of oil producers who have sold crude oil to the Debtors and not yet received payment. The Court need not address the merits of these objections, however, because it will not permit the setoff sought by Chevron on other grounds.
. See Garden Ridge, 338 B.R. 627 (citing cases recognizing the purported exception, but holding that "[t]his case does not present a permissible triangular setoff based upon an agreement between the related entities”); U.S. Aeroteam, Inc. v. Delphi Automotive Sys., LLC (In re U.S. Aeroteam, Inc.), 327 B.R. 852 (Bankr.S.D.Ohio 2005) (holding that mutuality existed for two separate setoffs, one stemming from an assignment, and the other stemming from unpaid goods, then stating in dicta that "further support” for these results existed because the creditor in question had a "contractual right of setoff”); In re Custom Coals Laurel, 258 B.R. 597 (Bankr.W.D.Pa. 2001) (noting triangular setoffs are generally disallowed and that the creditor in the case did not claim that the so-called "contract exception” applied); Wooten v. Vicksburg Refining, Inc. (In re Hill Petroleum Co.), 95 B.R. 404 (Bankr.W.D.La.1988) (citing cases recognizing "the narrow exception to the rule against three party, 'triangular' setoffs,” but holding that no such agreement existed in the case); In re Lang Machinery Corp., 1988 WL 110429 (Bankr.W.D.Pa.1988) (noted allegation of an oral agreement to setoff various liabilities, but found that no such evidence was ever introduced); In re Ingersoll, 90 B.R. 168 (Bankr.W.D.N.C.1987) (noting that "a situation can exist where a debtor has formally agreed that two entities may aggregate debts owed to and from the debtor for offset purposes,” but finding no such formal agreement existed); Matter of Fasano/Harriss Pie Co., 43 B.R. 864 (Bankr.W.D.Mich.1984) (recognizing court decisions carving out the so-called exception, but finding that no such agreement existed in the case); Bloorv. Shapiro, 32 B.R. 993 (S.D.N.Y.1983) (discussing the so-called exception in a Bankruptcy Act case involving two guarantors, each of whom had mutuality because of their status as a guarantor); In re Balducci Oil Co., 33 B.R. 847 (Bankr.D.Colo.l983)(discussing the so-called exception in a motion denying summary judgment because genuine issues of material fact existed); In re Virginia Block Co., 16 B.R. 560 (Bankr.W.D.Va.1981) (citing an earlier case for the so-called exception, and finding the exception to be inapplicable); Depositors Trust Co. of Augusta v. Frati Enterprises, Inc., 590 F.2d 377 (1st Cir.1979) (citing an earlier case for the so-called exception, and finding the exception to be inapplicable in this Bankruptcy Act case).
. Section 68(a) of the Bankruptcy Act of 1898, former 11 U.S.C. § 108(a), contained similar, though not identical, language to section 553 of the Code. It provided that "[i]n all cases mutual debts and mutual credits between the estate of a bankrupt and the creditor shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid.”
. No pun intended.
. This is not to say that setoff would necessarily be appropriate against SemCrude if it were a guarantor of SemStream or SemFuel’s debt, however. The Court notes that a split of authority exists regarding the issue of whether an unpaid guarantee can create mutuality for purposes of section 553. Compare Ingersollf 90 B.R. at 172, with Bloor, 32 B.R. at 1001-02. The Court does not reach this issue in this case because the only guarantor in this matter is SemGroup, an entity that is not owed a debt by Chevron.
. Section 101(5) of the Code defines a "claim” as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured” or a “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.” Although Chevron may be able to assert a state law right to the equitable remedy of setoff, this right is not based on a breach of performance that gives rise to a "right to payment,” as noted above. A setoff agreement such as the one in this case only creates a right to pay less or nothing, not a right to receive a payment.
. Section 553 also provides a number of other limitations on a creditor’s right to enact a setoff, none of which is applicable here. See 11 U.S.C. § 553(a).
. Although some courts may have recognized an "exception” that allows for setoff of a debt owed to one unit of the federal government against that owed from a different unit, this so-called exception is not really an exception. Rather, it is a reading of the term "mutual debt” that considers all agencies, branches, and subdivisions of the federal government to be a single, unitary creditor. See HAL, Inc. v. United States (In re HAL, Inc.), 122 F.3d 851, 852-54 (9th Cir.1997) (holding that "the various agencies of the federal government constitute a single 'governmental unit’ for purposes of setoff under § 553 of the Bankruptcy Code”); Turner v. Small Business Admin. (In re Turner), 84 F.3d 1294, 1299 (10th Cir.1996) (en banc) ("Because we hold that the United States is a unitary creditor in bankruptcy, it, like any other single creditor, should be entitled to offset any mutual debts it has involving multiple agencies in accordance with § 553.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494302/ | ORDER ON UNITED STATES OF AMERICA’S [RENEWED] MOTION TO DISMISS FIRST AMENDED COMPLAINT (Doc. No. 34)
ALEXANDER L. PASKAY, Bankruptcy Judge.
This is the second attempt by the United States of America (Government) to dismiss the above captioned adversary proceeding commenced by Ernest Robert McFarland, Jr., and Marleen V. McFarland (Debtors). The Debtors in their three-count Complaint seek a determination by this Court that certain claims asserted against them by the Government are not within the exception to discharge under Section 523(a)(7) of the Bankruptcy Code.
This Court held an evidentiary hearing on the first Motion to Dismiss (Doc. No. 7) filed by the Government. At the conclusion, this Court stated that the Motion to Dismiss was denied because the Motion was filed prematurely and the parties should have an opportunity to conduct discovery of facts which are relevant to the resolution of the issue. On December 9, 2008, this Court entered its Order Denying Defendant’s Motion to Dismiss (Doc. No. 30).
On December 18, 2008, the Government filed its Motion to Dismiss First Amended Complaint (Doc. No. 34) (Renewed Motion to Dismiss), which is the matter presently before this Court. The facts presented in the Renewed Motion to Dismiss are the same as those which were stated in the first one. Although the Renewed Motion to Dismiss was not technically heard, this Court heard extensive arguments not only on the original Motion to Dismiss but also on the pleading entitled “Cross-Motion for Summary Judgment” (Doc. No. 11) and is satisfied that it is appropriate to rule on the Renewed Motion to Dismiss without the necessity of additional hearing as the arguments on the facts which are part of the record are without dispute and sufficient to form the basis of the ruling. For clarity’s sake, this Court is satisfied that it is appropriate to summarize the facts relevant to the resolution of this matter.
The Debtor Ernest Robert McFarland was at the time relevant the President and owner of Pacific General, Inc., (Pacific). In 1999 the Debtor, on behalf of Pacific, signed a contract with General Services Administration to provide construction services in Arizona, California, Hawaii, and Nevada. Under the contract, Pacific became a general contractor for the National Park Service' (NPS) and the U.S. Department of Interior (Department of Interior). Under the contract, Pacific was required to obtain a performance and a payment bond for the construction projects it was to perform.
In May 2004 Pacific- closed down its operation and went out of business. On October 15, 2005, both Debtors filed their joint Petition for Relief under Chapter 7 of the Bankruptcy Code. Although Mrs. McFarland was not involved with the affairs of Pacific, she signed an indemnity agreement required by the bonding company. The Debtors properly scheduled *551the Department of Interior in their Schedule of Liabilities and it is without dispute that the Government was aware of the pendency of the Bankruptcy case. They also received the notice sent to creditors of the bar date for filing a Complaint seeking a judgment against the Debtors declaring that the debt owed to the Government was excepted from the general discharge either under Sections 523(a)(2),(4) or (6) of the Bankruptcy Code. The Government failed to file a Complaint pursuant to Section 523(c)(1). In due course, the Debtors obtained their discharge on March 29, 2006.
In the interim, the Government had launched a criminal investigation into Pacific, especially to find out why certain contracts of Pacific with the Department of Interior had not been bonded. The investigation culminated in a twenty-nine (29) Count indictment against Mr. McFarland. The indictment was based on allegations that Mr. McFarland made false representations in connection with certain contracts Pacific had with the Department of Interi- or. Twenty-three (23) of the Counts asserted that he deliberately misrepresented that performance bonds covered certain contracts when they were not covered. Notwithstanding this fact, Pacific had been charging the Government for premiums for the non-existing bonds when it submitted its request for payment. The other six (6) Counts involved certain certifications made by Pacific on request for payment which falsely stated that all subcontractors had been paid in full on the contract when, in fact, they were not paid.
Mr. McFarland disputed the bond Counts and claimed that the billing for the premiums were simply erroneous and offered to repay the Government $29,000.00, representing the amount of premiums charged. The Government refused to accept the offer. Ultimately, McFarland plead guilty to six (6) Counts for falsely claiming that the subcontractors had been paid. As part of the plea bargain, the Government dismissed the twenty-three Counts which dealt with the bond premiums.
Mr. McFarland agreed to restitution in the total amount of the pecuniary loss of the Government which included both the cost of finishing the unbonded jobs and the improperly collected reimbursement for bond premiums. As stated at the sentencing hearing by the Assistant U.S. Attorney, the total amount of restitution was $435,297.24. Also as part of the plea agreement, Mr. McFarland was assessed a $5,000.00 fine. Mr. McFarland agreed that these sums were nondischargeable. McFarland was sentenced on the remaining six (6) Counts of the indictment. In addition to a non-custodial penalty and probation, he was also ordered to pay the restitution of $435,297.24, the exact number that the other Assistant U.S. Attorney agreed to be the Government’s actual damages.
Very shortly after the sentencing of the Debtor on August 8, 2008, Assistant U.S. Attorney Robert K. Lu with the Civil Division of the Department of Justice wrote a letter to Martin Raskin, who represented McFarland in the criminal case, stating that McFarland is still liable for sixty-three (63) false claims submitted under the contract. These claims were false because the subcontractors on those jobs were never paid, or because the work was never bonded. On those sixty-three (63) claims the Government paid out a total of $7,284,497.62. If this amount is trebled, the total would be approximately $22,500,000.00. While this amount could be trebled under the Statute, the Government offered to settle the matter for $2,346,500.00. Mr. Lu stated that while the Government was willing and ready to dissolve the dispute amicably, he was pre*552pared to file a lawsuit against Mr. McFarland and his wife, Marlene, should they fail to reach an acceptable resolution of these claims. The Debtors refused the offer to settle and insisted that while the obligation represented by the judgment of restitution is nondischargeable, the Government is not entitled to any additional amounts asserted against them.
These are the facts relevant to the issues raised by the Debtors in their Complaint in which they seek a declaration by this Court that, with the rare exception of the criminal restitution fine and costs, all other claims by the Government now asserted for treble or exemplary damages are dischargeable in their Bankruptcy case. The Government now asserts that the total liability of the Debtors is in the sum of $22,500,000.00 and the amount is within the exceptions to discharge of Section 523(a)(7) of the Bankruptcy Code.
As an alternative grounds for relief, the Debtors now contend that even if the Government’s claim against them is within the exception of Section 523(a)(7), imposition of the claim would be a violation of the Double Jeopardy Clause of the Fifth Amendment of the United States Constitution.
It is evident from the foregoing, that a resolution of the claim asserted by the Debtors, i.e., the dischargeability of a claim asserted against them for treble damages by the Government would require a construction by this Court of Section 523(a)(7) and 31 U.S.C. §§ 3729-3731 (1982 Edition. Supp. II)
Section 523(a)(7) provides:
(a) A discharge under section 727, 1141, 1228(a) 1228(b) or 1328(b) of this title does not discharge an individual debtor from any debt—
(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty — ...
Section 523(c)(1) provides:
(c)(1) Except as provided in subsection (a)(3)(B) of this section, the debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the case may be, of subsection (1) of this section.
F.R.B.P. 4007(c) provides:
(c) TIME FOR FILING COMPLAINT UNDER § 523(c) IN A CHAPTER 7 LIQUIDATION, CHAPTER 11 REORGANIZATION, OR CHAPTER 12 FAMILY FARMER’S DEBT ADJUSTMENT CASE; NOTICE OF TIME FIXED. A complaint to determine the dischargeability of a debt under § 523(c) shall be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a). The court shall give all creditors no less than 30 days’ notice of the time so fixed in the manner provided in Rule 2002. On motion of a party in interest, after hearing on notice, the court may for cause extend the time fixed under this subdivision. The motion shall be filed before the time has expired.
In attempting to construe Section of 523(a)(7), the Debtors rely on the language used by Congress in using the term the amount of “damages ” which the Government sustained because of the act of the person. According to the Debtor, that terminology indicates an intention by Congress that the exception should not cover *553compensation for damages, but is limited to fíne, penalty or forfeiture payable to the Government.
The primary case relied on by the Debt- or involves factually the same scenario which is involved presently before this Court in the case of Winters v. United States of America (In re Winters), 2006 WL 3833921, 2006 Bankr.Lexis 3678 (Bankr.W.D.Tenn, Dec. 27, 2006); vacated due to death of debtor, 2007 WL 1149952, 2007 Bankr.Lexis 1382 (Bankr.W.D.Tenn., Feb. 16, 2007)
The Court in Winters considered the sections involved and concluded that the civil penalty of $10,000.00 imposed upon the debtor represented a pecuniary loss to the Government for the damages it suffered. Therefore, the obligation was not excepted by Section 523(a)(7) and because the Government failed to file a complaint seeking to except the obligation pursuant to Section 523(a)(2)(A), Section 523(c), F.R.B.P. 4007(c), and the award was discharged.
The difficulty with the position urged by the Debtor and the viability of the decision in Winters is weakened because after the decision was granted, and although it was a final decision, the debtor died and, therefore, the Government filed a motion to alter or amend an order granting summary judgment in favor of the debtor because the debtor died. The Court considered the motion and granted the same and dismissed the Adversary Proceeding.
In opposition, the Government cites the case of United States v. Cassidy (In re Cassidy), 213 B.R. 673 (Bankr.W.D.Ky. 1997). Thomas M. Cassidy was a medical doctor who was sued by the Government on the False Claims Act, 31 U.S.C. §§ 3729-3733. In addition to the civil suit, the Debtor was indicted. The Debtor entered a guilty plea in that action to one Count of submitting false claims to CHAMPUS, one Count of Medicare Fraud and one Count of Medicaid fraud. Less than one month thereafter, the defendant filed his bankruptcy and sought relief under Chapter 7 of the Code. On July 2, 1996, the District Court entered a judgment against the defendant based on a plea agreement and sentenced the defendant to 12 months of imprisonment and ordered him to pay $80,645.68 in restitution. Of the $80,645.68 restitution amount, $33,463.00 was to be paid to CHAMPUS under Count I of the criminal complaint; $10,213.80 to Medicare under Count II; and $36,968.00 to Medicaid under Count III.
The Court held that the treble damages imposed by the False Claims Act were penal in nature as opposed to compensatory, thus making the award nondischargeable under Section 523(a)(7). The government also relies on the cases of United States v. Custodio, 1995 WL 670137 (D.Colo.1995); In re Tapper, 123 B.R. 594 (Bankr.N.D.Ill.1991); In re Renfrow, 112 B.R. 22 (Bankr.W.D.Ky.1989) (civil penalties for violation of Kentucky coal mining was held to be nondischargeable, pursuant to Section 523(a)(7)).
Having considered the authorities cited by the Government, one would be constrained to conclude that the treble damage claim in the matter before this Court is within the exception to discharge pursuant to Section 523(a)(7).
Although the application of the Double Jeopardy Clause was not asserted in the pleadings, counsel for McFarland argued it as a defense under the teaching of the Supreme Court Case of United States v. Halper, 490 U.S. 435, 109 S.Ct. 1892, 104 L.Ed.2d 487 (1989)
Mr. Halper was convicted for submitting sixty-five (65) false claims for reimbursement by the Government under the Feder*554al Criminal False Claim Statute, 18 USC § 287. He was sentence to imprisonment for two years and fined $5000.00. After the conclusion of the criminal case the Government sued Mr. Halper in the U.S. District Court under the Civil False Claims Act 31 USC §§ 3729-3731. The Court considered the remedy under Section 3729 which provides that a person in violation is “liable to the United States Government for a civil penalty of $2000, an amount equal to two (2) times the amount of damages the Government sustains because of the act of the person, and costs of the civil action.” Having violated the Act sixty-five (65) separate times, Mr. Halper thus appeared to be subject to a statutory penalty of more than $130,000.00.
The Supreme Court in Halper considered whether the civil penalty imposed bore any “rational relation” to the amount of the Government’s actual loss in investigating and prosecuting a false claim. The Court, having concluded that it did not, held that the imposition of the full amount of the statutory claim would violate the Double Jeopardy Clause of the Fifth Amendment.
Eight years later the Supreme Court had the opportunity to consider again the applicability of the Double Jeopardy Clause involving a similar factual scenario as in Halper. In the case of John Hudson, et al. v. United States, 522 U.S. 93, 118 S.Ct. 488, 139 L.Ed.2d 450, Mr. Hudson and other bank officers were subjected to a debarment and monetary penalties by the Office of the Comptroller of Currency (OCC) for misapplication of bank funds. Thereafter, Mr. Hudson and the others were indicted for the same violation. The District Court dismissed the indictment, finding that the indictment violated the Double Jeopardy Clause. On appeal, the Court of Appeals reversed and remanded. Certiorari was granted.
The Supreme Court, having considered the historical treatment of the application of the Doctrine of Double Jeopardy and the appropriate standard of statutory construction, concluded that Halper deviated from long-standing Double Jeopardy principles and was ill considered. The Halper test for determining whether a particular sanction is “punitive,” thus subject to the strictures of the Double Jeopardy Clause, proved unworkable. The Court pointed out that all civil penalties have some deterrent effect, and the fact that the sanctions imposed may also be criminal is insufficient to render money penalties and debarment sanctions criminally punitive, particularly in the Double Jeopardy context. Hudson, supra.
As stated by Justice Scalia in his concurring opinion that it has been settled since the decision in Blockburger v. United States, 284 U.S. 299, 52 S.Ct. 180, 76 L.Ed. 306 (1932) that the Double Jeopardy Clause is not implicated simply because the criminal charge involves “essentially the same conduct” for which the defendant has previously been punished. Hudson, supra.
This Court is not unmindful that the factual scenario in Hudson is unlike the scenario involved in the matter under consideration. However, the relevancy of Hudson still cannot be disregarded because of its teaching, which was to expressly reject the approach and the holding of Halper.
In the instant case, the criminal case was concluded against the Debtor after the Government asserted, for the first time, a civil claim for treble damages contending that it was within the exception to discharge pursuant to Section 523(a)(7). The assertion of this claim is not made to pursue a criminal case against McFarland, since that was already concluded. It is *555merely to challenge the nondischargeability of the claim by the Debtor.
Considering the totality of the issues as outlined above, this Court is satisfied that the Debtor’s claim that the Government’s treble damage claim asserted against them is not within the Section 523(a)(7) exception is rejected and, therefore, the claim as pled in Count I of the Complaint is without merit and shall be dismissed as to Mr. McFarland.
This leaves for consideration the claim asserted against Mrs. McFarland who was not charged criminally. This record is devoid of any evidence which would even intimate that she did knowingly present or caused to be presented, to an officer or employee of the United States Government a false or fraudulent claim for payment or approval, thus subjecting her to the civil penalty under 31 U.S.C. § 3729(a)(1). For this reason, any claim against Mrs. McFarland has been discharged in Bankruptcy and, therefore, the Government is prohibited to proceed to attempt to enforce the penalties against her based on 31 U.S.C. § 3729(a).
Accordingly, it is
ORDERED, ADJUDGED AND DECREED that the Motion to Dismiss filed by the United States of America (Doc. No. 34) be, and the same is hereby, denied in part and granted in part. It is further
ORDERED, ADJUDGED AND DECREED that the Motion to Dismiss filed by the United States of America as to the claim asserted in Count I of the Complaint by Mr. McFarland be, and the same is hereby, granted and his claim is declared to be within the exception of Section 523(a)(7), thus nondischargeable. It is further
ORDERED, ADJUDGED AND DECREED that the Motion to Dismiss filed by the United States of America as to the claim asserted in Count I of the Complaint by Mrs. McFarland be, and the same is hereby, denied and the claim asserted against her is declared to have been discharged. It is further
ORDERED, ADJUDGED AND DECREED that the Motion to Dismiss filed by the United States of America as to the claim asserted in Count II of the Complaint by Mrs. McFarland be, and the same is hereby, denied. The Government shall have 30 days from the date of this Order to file an Answer to the claim asserted for contempt in Count II. It is further
ORDERED, ADJUDGED AND DECREED that the Motion to Dismiss filed by the United States of America as to the claim asserted in Count III of the Complaint by Mr. McFarland be, and the same is hereby, granted and the claim is hereby dismissed with prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494356/ | HAINES, Bankruptcy Appellate Panel Judge.
American Express Bank, FSB, appeals from the bankruptcy court’s order disal*498lowing its general unsecured claim for $42,452.61 in credit card debt. Michael Askenaizer, the chapter 7 trustee, appeals the bankruptcy court’s order allowing eCast Settlement Corporation’s general unsecured claim, another credit card debt, in the amount of $6,309.75. The trustee also appeals the court’s denial of his request for an award of attorney’s fees pursuant to New Hampshire statute.
Although the combatants initially locked horns over allowance of the AmEx and eCast claims, the scope of the contest narrowed in the course of the appeal. At oral argument, the trustee acknowledged that the estate is indebted to each creditor, but he pressed his point that neither provided sufficient evidence to support payment as a general unsecured claim. As he had in the lower court, he argued that each creditor’s claim comprised principal, interest, and other fees such that, without a detailed itemization of the basis and timing of their charges, the court could not determine the priority distribution their claims should be accorded.
In the end, we agree that the claims are not entitled to share as general unsecured claims1 because both AmEx and eCast failed to prove their entitlement to the distributional status they sought. Accordingly, we REVERSE disallowance of AmEx’s claim and AFFIRM allowance of eCast’s claim, but do so with an accompanying determination that their allowed claims are entitled to no better treatment than the priority provided under § 726(a)(4). We also AFFIRM the disal-lowance of the trustee’s request for a fee award.
JURISDICTION
Before addressing the merits, we must determine our jurisdiction. See Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724 (1st Cir. BAP 1998). We have jurisdiction to hear appeals from: (1) final judgments, orders, and decrees; or (2) with leave of court, from certain interlocutory orders. 28 U.S.C. § 158(a); Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998). A decision is final if it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment,” id. at 646 (citations omitted), whereas an interlocutory order “only decides some intervening matter pertaining to the cause, and requires further steps to be taken in order to enable the court to adjudicate the cause on the merits.” Id. (quoting In re American Colonial Broad. Corp., 758 F.2d 794, 801 (1st Cir.1985)). The bankruptcy court’s order allowing or disallowing a claim is final and, thus, appealable. See Orsini Santos v. Lugo Mender (In re Orsini Santos), 349 B.R. 762, 768 (1st Cir. BAP 2006) (citing Perry v. First Citizens Fed. Credit Union (In re Perry), 391 F.3d 282, 285 (1st Cir.2004)). Similarly, the order denying the trustee’s request for a fee award is final *499and appropriate for our review. See General Elec. Capital Corp. v. Future Media Prods., 536 F.3d 969 (9th Cir.2008); see also Xifaras v. Morad (In re Morad), 328 B.R. 264 (1st Cir. BAP 2005).
STANDARD OF REVIEW
We review the bankruptcy court’s findings of fact for clear error and conclusions of law de novo. See T.I. Fed. Credit Union v. DelBonis, 72 F.3d 921, 928 (1st Cir.1995); Western Auto Supply Co. v. Savage Arms, Inc. (In re Savage Indus., Inc.), 43 F.3d 714, 719-20 n. 8 (1st Cir.1994). To resolve the issues on appeal, we must interpret and apply §§ 726 and 502, and Bankruptcy Rule 3001. Such interpretations are legal questions subject to de novo review. See Caplan v. B-Line, LLC (In re Kirkland), 572 F.3d 838, 840 (10th Cir.2009).2 Disposition of the trustee’s request for a fee award was the result of a legal conclusion, as well. Thus, we review all the issues presented de novo.
BACKGROUND
1. The Case and Claims
Robert and Debra Plourde filed a voluntary chapter 7 petition in October 2005. Their schedules listed multiple credit card debts.
AmEx filed a proof of claim for an unsecured, nonpriority claim in the amount of $42,452.61, designated Claim #4 on the bankruptcy court’s claims register. AmEx utilized Official Form 10,3 and indicated, by failing to check a particular box in Part 4, that no “interest or other charges in addition to the principal” constituted a part of its claim. Attached to the form was one page from a credit card account statement dated October 14, 2005, issued to “Debra A. Plourde and Elect. Contr/As-soe.” The statement showed a $42,452.61 balance and indicated that the account was “cancelled and suspended.” Although the Plourdes listed two unsecured, nonpriority debts to AmEx in Schedule F, neither corresponded with the debt set out in Claim # 4.
Also employing Official Form 10,4 eCast filed its proof for an unsecured, nonpriority claim in the amount of $6,813.06, designated Claim # 18 on the bankruptcy court’s claims register. In the same manner as AmEx, eCast indicated its claim consisted of principal only (i.e., no “interest or other charges”). Attached to the claim form was a single-page computer-generated document entitled “Account Summary.” It identified Robert Plourde as the debtor, and set out the bankruptcy case number, the filing date, the last four digits of an account number, and a listing of statement balances for June 9, 2005 through November 9, 2005. The Plourdes scheduled no debts to eCast, but did schedule an unsecured obligation in the amount of $6,309.75 to “The GM Card,” bearing the same account number eCast had listed for Claim # 18.
2. The Claims Objections
The trustee insisted that AmEx and eCast be put to their proof. AmEx’s Claim # 4 was deficient in his view be*500cause: (1) the obligation had not been listed on the Plourdes’ schedules and the proof of claim’s accompanying documentation was insufficient to establish their liability; and (2) because the claim appeared to be a credit card obligation, it likely included interest and other charges not reflected on the claim form or itemized separately. Thus, he asserted that Claim # 4 did not conform with the requirements of Bankruptcy Rule 3001(a) and (c), and, therefore, was not entitled to a presumption of validity under Bankruptcy Rule 3001(f).
With respect to Claim # 18, the trustee stated that: (1) although the Plourdes’ schedules listed a debt to The GM Card with an account number that matched the account number listed by eCast, the claim amount in the schedules was less than the amount set forth in Claim # 18; and (2) although Claim # 18 seemed to include interest and other charges, eCast’s proof of claim form did not acknowledge them or itemize them. As a result, he argued that Claim # 18 did not conform with the requirements of Bankruptcy Rule 3001(a) and (c), and was not entitled to the presumption of validity under Bankruptcy Rule 3001(f).
Shortly thereafter, the creditors’ counsel provided documentation intended to address the trustee’s objections.5 With respect to Claim # 4, he provided: (1) credit card account statements issued to “Debra A. Plourde and Elect. Contr/Assoe.” for October 2004 through June 2005; and (2) a document that purported to be the credit card agreement between AmEx and Mrs. Plourde. With respect to eCast’s Claim # 18, he provided credit card account statements for December 2004 through July 2005.6 eCast also filed another proof of claim, designated Claim #28, which amended Claim # 18, reducing the sum from $6,813.06 to $6,778.06. The reduced amount remained greater than the GM Card debt scheduled by the Plourdes. Attached to Claim #28 were six monthly credit card account statements (February 2005 through July 2005).
After an initial hearing, AmEx and eCast filed a formal response to the trustee’s objections, arguing, inter alia, that itemized statements (relating to interest and other charges, as required by Official Form 10) were not necessary because:
For an unsecured revolving debt instrument such as a credit card account, the filing of bankruptcy effectively cancels the account. The accumulation of interest and other charges on the account also cease as of the petition date for any account that is open and active on the petition. A claim filed for a credit card account, therefore, represents a “snapshot” of the account as of the filing of the Debtor’s petition. The claim amount is the outstanding balance on the Debtor’s account on the petition date. There is no unmatured interest. By any practical characterization, the balance owed on the petition date is all principal. It is not subject to separate interest, fee, and principal components such as would be the case with a secured claim.
Response of American Express Bank and eCast Settlement Corporation to Trustee’s Objections to Claim Numbers 4 and 18.
In turn, the trustee argued that the AmEx and eCast proofs of claim were “misleading and incomplete”; that, despite his requests, each had failed to itemize the *501interest and other charges contained within their claims. He asserted that, although AmEx and eCast had produced a few monthly statements, those did not enable him to determine the accuracy of the claims and, as a result, the claims should be disallowed under § 502(b). He also urged that the creditors must provide itemized statements so that he could identify whether any components of their claims should, pursuant to § 726(a)(4), receive distributions only after payment of general unsecured claims.7
Finally, the trustee sought an award of attorney’s fees pursuant to New Hampshire state law, N.H.Rev.Stat. Ann. § 361-C:2, if the bankruptcy court concluded that he was the prevailing party on his objections to the AmEx and eCast claims.
The bankruptcy court ultimately convened a final hearing, accepted briefs and took the matter under submission.
3. The Decision Below.
The bankruptcy court sustained the trustee’s objection as to AmEx’s claim, disallowing it entirely. It allowed eCast’s claim for $6,309.75, the amount the Plourdes had scheduled as The GM Card debt, but less than eCast had sought.
In its lengthy decision, the bankruptcy court concluded that Claim # 4 did not establish the prima facie validity of AmEx’s claim because it did not include the applicable credit card agreement or any evidence itemizing the charges included in the claim. Although AmEx provided a copy of the original credit card agreement, the court noted that the agreement’s terms were not fixed. There was no way to ascertain whether, during the life of the agreement, AmEx may have exercised its unilateral right to impose additional or different terms.8 Consequently, the bankruptcy court concluded that “in the absence of any evidence of the contractual charges that constitute AmEx’s [Claim # 4], this Court can make no finding that any of those charges are either allowable under § 502 or entitled to second priority distribution under § 726(a)(2).”
The court allowed eCast’s claim as a general unsecured claim in the amount the Plourdes scheduled for The GM Card, $6,309.75. It observed that the Plourdes had acknowledged the debt by scheduling *502it (as undisputed) and, therefore, then-schedules, combined with the information submitted by eCast, provided “limited but sufficient evidence to establish the nature and amount of its claim absent a substantive objection by the Trustee.” The court concluded, however, that eCast had failed to submit any evidence to support its claim in an amount beyond that scheduled by the Plourdes.
Finally, the bankruptcy court denied the trustee’s request for an award of attorney’s fees, which he had sought under N.H.Rev.Stat. Ann. § 361-C:2, a statute imposing reciprocal responsibility when a credit card agreement purports to impose responsibility for fees on a debtor when the creditor successfully enforces it.9 Although the trustee had been partially successful in his objection to eCast’s claim, nothing in the record satisfied the statute’s principal condition-that the underlying agreement provided for the creditor to recover attorney’s fees in an action against the debtors. As to AmEx, the court determined that, although the credit card agreement did provide for AmEx to recover attorney’s fees, it was expressly governed by Utah law, not New Hampshire law, and the trustee failed to prove the content of Utah law or, alternatively that New Hampshire law should override the agreement’s terms. See Plourde, 397 B.R. at 227.
On appeal, AmEx challenges its claim’s disallowance, while the trustee challenges allowance of eCast’s claim and the denial of his request for attorney’s fees.
DISCUSSION
I. Filing and Allowance of Claims
A. Sections 501 and 502 and Bankruptcy Rule 3001-Claims Allowance
Sections 501 and 502 govern the filing and allowance of creditor claims in bankruptcy proceedings. See Travelers Cas. & Sur. Co. of America v. Pacific Gas & Elec. Co., 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007). When a debtor files for relief, each creditor is entitled to file a proof of claim against the debtor’s estate pursuant to § 501. Once a creditor has filed such a proof, the bankruptcy court must determine whether the claim is “allowed.” 10 Section 502(a) provides that a proof of claim filed under § 501 is deemed allowed unless a party in interest (often *503the trustee) objects. However, even where a party in interest objects, the court “shall allow” the claim unless one of nine exceptions enumerated in § 502(b) applies.11
The Bankruptcy Code itself does not prescribe what documentation, if any, must accompany a proof of claim. However, the Federal Rules of Bankruptcy Procedure, which provide the procedural framework for the filing and allowance of claims, regulate the form, content, and attachments for proofs of claim. Bankruptcy Rule 3001(a) requires that a proof of claim be a written statement that conforms substantially with “the appropriate Official Form,” which is Official Form 10. Bankruptcy Rule 3001(c) directs creditors filing a proof of claim “based on a witíng” to attach either ^be ori8™al or a duplicate of the writing.
Official Form 10 instructs the claimant to “attach copies of supporting documents, such as promissory notes, purchase orders, invoices, itemized statements of running *504accounts, contracts, court judgments, mortgages, security agreements, and evidence of perfection of liens.” Official Form 10. The creditor is required to explain any failure to attach documents based on a lack of availability. In addition, if the required documents are too voluminous, the creditor may attach a summary. Official Form 10 further requires the claimant to specify whether the claim includes “any interest or other charges in addition to the principal amount of the claim,” and if so, to attach an “itemized statement of all interest or additional charges.”
Bankruptcy Rule 3001(f) sets the eviden-tiary effect of a properly filed proof of claim (i.e., one that complies with the requirements of the rule and form), stating that a claim “filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.” Fed. R. Bankr.P. 3001(f); see also In re Long, 353 B.R. 1, 13 (Bankr.D.Mass.2006) (citing Juniper Dev. Group v. Kahn (In re Hemingway Transp., Inc.), 993 F.2d 915, 925 (1st Cir.1993)).
In order to rebut the prima facie evidence a proper proof of claim provides, the objecting party must produce “substantial evidence” in opposition to it. See In re Long, 353 B.R. at 13; see also United States v. Clifford (In re Clifford), 255 B.R. 258, 262 (D.Mass.2000). If the objection is substantial, the claimant “is required to come forward with evidence to support its claims ... and bears the burden of proving its claims by a preponderance of the evidence.” Tracey v. United States (In re Tracey), 394 B.R. 635, 639 (1st Cir. BAP 2008) (citing In re Organogenesis, Inc., 316 B.R. 574, 583 (Bankr.D.Mass.2004)).12
*505Were we to determine this appeal based on issues pertaining solely to the allowance of the AmEx and eCast claims, the questions would be close. On the one hand, AmEx produced its original agreement with Mrs. Plourde, although the terms of the agreement as they existed through the life of the credit relationship remained in doubt. The AmEx agreement vested in AmEx the right to amend its terms at will. Thus, as the bankruptcy judge concluded, one could not be sure exactly for what AmEx charged the account without a far more careful and comprehensive itemization than AmEx chose to provide. For the bankruptcy judge, those failings were enough to order the claim’s disallowance. But we wonder whether, putting questions about priority to the side, one could conclude as a matter of law that AmEx had not proved estate liability on its claim. After all, it did produce the credit agreement and a series of statements showing the balances owed.
eCast, on the other hand, produced no agreement, but relied upon the Plourdes’ scheduling of the identically-numbered GM Card debt, with a balance approximating the amount of eCast’s proof of claim. For the bankruptcy judge, that was sufficient proof to allow eCast’s claim, granting the schedule evidentiary weight notwithstanding its hearsay character as to the trustee.13 He credited the Plourdes’ schedule and considered it evidence supporting liability as a hearsay statement imbued with sufficient indicia of reliability to be admissible under the federal evidence rules’ residuary exception to the hearsay rule.14 The correctness of that conclusion, however, rests on the exception’s applicability, which is questionable. One of the rule’s requirements is that the hearsay statement “is more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts.... ” Can it really be said that a statement in the debtors’ schedules is “more probative” on the question of liability on the account than the creditor’s own records? That the creditor cannot be expected to procure and proffer its own records to support its claim? 15
But we need not resolve those issues. The trustee concedes that the Plourdes’ bankruptcy estate is liable on both claims. *506Thus, both may now be considered “allowed.” The trustee has, however, continued his insistence that, in light of then-failures of proof, neither AmEx nor eCast had established its entitlement to be paid as a general unsecured claim.
B. Distributional Priorities— § 726
Under § 502(b), “allowance” of a claim constitutes a determination of “the amount of such claim”.16 As has been the case here, parties often conflate a claim’s allowance with establishing its distributional entitlement. This is understandable. In most cases, the question simply is whether- — -and how much — a claimant is owed by a debtor (and thus the estate). When a claim is asserted to be a general unsecured claim, issues about its entitlement to that priority in the bankruptcy distributional scheme do not often arise.
But a claim’s allowance merely establishes it as a charge against the estate. Its distributional priority is separately addressed by § 726(a).17 In each instance (including the cross-reference to § 507 administrative claims in § 726(a)(1)), the priorities set by § 726(a) dictate the order in which allowed unsecured claims are to be paid. A claim’s allowance stands for little in terms of actually getting paid if, in the course, the claimant has not also established its claim’s § 726(a) priority.18
*507For example, an unsecured creditor seeking administrative claim treatment within § 726(a)(1) (ahead of the general pool of unsecured creditors) has the burden of proving the elements that qualify it for that status. See, e.g., McMillan v. LTV Steel, Inc., 555 F.3d 218, 226 (6th Cir.2009); Supplee v. Bethlehem Steel Corp. (In re Bethlehem Steel Corp.), 479 F.3d 167, 172 (2d Cir.2007); Isaac v. Temex Energy, Inc. (In re Amarex, Inc.), 853 F.2d 1526, 1530 (10th Cir.1988); In re Franklin, 284 B.R. 739, 742 (Bankr.D.N.M.2002); In re Philadelphia Mortg. Trust, 117 B.R. 820, 827 (Bankr.E.D.Pa.1990); see also Woburn Assocs. v. Kahn (In re Hemingway Transport, Inc.), 954 F.2d 1 (1st Cir.1992); In re Beyond Words Corp., 193 B.R. 540, 543 (N.D.Cal.1996).
A party in interest may object to a claimant’s right to be paid as a general unsecured claim. In such instances, when a substantial objection to the claimed priority is interposed, the claimant shoulders the burden of proving its entitlement to payment under § 726(a)(2). Once a claim is deemed allowed, its priority must be determined.
In most Chapter 7 cases, like this one, a claim holder’s “rung” on the priority “ladder” created under section 726 is crucial because the estate assets are limited. There are usually insufficient assets to pay all claimants in full, and section 726(b) mandates pro rata distribution among all claimants at each level, or rung of the priority ladder, with an absolute priority cutoff. All allowed claimants at a particular level or rung of the ladder must be paid in full before any estate funds can be distributed to holders of claims at the next lower rung. Thus, the race among claimants is to reach the highest rung on the claims ladder.
In re Stoecker, 151 B.R. 989, 995 (Bankr.N.D.Ill.1992), rev’d on other grounds, 179 B.R. 532 (N.D.Ill.1994).
There is no presumed, or “default,” “rung” on the priority ladder; creditors are not automatically assigned to the “general unsecured” pool. Rather, each creditor must demonstrate its entitlement to distribution at a particular level. See Amarex, 853 F.2d at 1530 (“[T]he burden of proving entitlement to a priority is on the person claiming priority.”). Otherwise, a claimant may be provided priority at a higher level than that to which it is entitled, watering down the dividend provided to creditors the legislation prefers. This would be contrary to the predominant goal of the Bankruptcy Code “to secure equal distribution among [similarly situated] creditors.” See Howard Delivery Serv. v. Zurich Am. Ins. Co., 547 U.S. 651, 655, 126 S.Ct. 2105, 165 L.Ed.2d 110 (2006); Bethlehem Steel Corp., 479 F.3d at 172 (“Because the presumption in bankruptcy cases is that the debtor’s limited resources will be equally distributed among his creditors, statutory priorities are narrowly construed.”).
*508Thus, questions of a claim’s statutory priority are properly raised as part of a claim objection. These questions must be distinguished from attempts at equitable subordination under § 510.19 We acknowledge § 510 here only to be clear that we are not proceeding under that section (where different procedures and burdens apply), but rather under the explicit statutory priority-setting provisions of § 726.
Having limned the contours of claims allowance and priority with respect to substance and process, we now turn to the remaining disputes.
C. The AmEx and eCast Claims 1. Sufficiency of the Proofs of Claim
That neither AmEx’s nor eCast’s proof of claim was entitled to be treated as prima facie evidence of a valid claim could not be plainer. To begin, neither noted on the form that its claim included “interest or other charges.” That representation was untrue and the trustee properly took exception to it.20
*509The creditors’ defense to the trustee’s objection on this score belies their denial that interest and other charges made up part of their claim. They assert that, because interest and other assessments cease when a credit card account is “canceled” on the bankruptcy filing, and as the amount claimed on the proof is the sum total of all that is owed on the petition date, the only “practical characterization” of what is claimed must be that it is entirely “principal.”
The defects in the creditors’ logic are manifest. Their claims are not composed purely of principal just because they say so.21 The trustee is entitled to know what charges were assessed and the contractual basis for each charge. These creditors not only denied that interest or other charges were included in their claims, they failed to provide itemizations sufficient for the trustee to ascertain the bases for the claims or the effective terms of the credit agreements in force at the time the accounts were debited.22
The components of a claim can be critical. Examining a claim in light of interest and fees added to the account prepetition may have a lot to say about all or part of the claim’s allowance (say, should consumer protection laws be implicated). In addition, by assigning lower priority to claims to the extent they include fines, penalties, forfeitures, or damages that are not compensation for “actual, pecuniary loss,” the Code promotes equal treatment for creditors, aiming to distribute funds in respect to actual losses, before channeling them to pure penalties.23
Citing Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735, 116 S.Ct. 1730, 135 L.Ed.2d 25 (1996), AmEx and eCast contend that they were not required to identify the prepetition interest and other charges that contributed to their claim because such charges can never be relegated to the subordinated priority of § 726(a)(4). To begin, Smiley addressed the enforceability of late charges imposed by a credit card issuer against its customer. Although the Court held that, in accordance with interpretations announced *510by the Comptroller of Currency pursuant to the National Bank Act, the late charges constituted “interest” and were enforceable, it did not address bankruptcy priorities and limited its holding to fees imposed as commercial compensation, rather than penalties. Id. at 746-47. Moreover, Smiley addressed enforceability of a contractual late charge provision in a bilateral dispute between creditor and debtor, ignoring the implications of bankruptcy-a collective proceeding aimed at providing similarly situated creditors fair, pro rata distributions from a bankruptcy estate. “In bankruptcy courts, penalties are not in accordance with the goal of equity because they inevitably favor one creditor to the disadvantage of the other creditors.” In re Rally Partners, L.P., 306 B.R. 165, 170 (Bankr.E.D.Tex.2003).24
2. The Failures of Proof
Faced with the trustee’s objections to their claims, and his insistence that the creditors provide sufficiently detailed account summaries so that he could ascertáin the nature, amount, and timing of, as well as the contractual bases for, the interest and other charges bound up in their claims, AmEx and eCast simply stonewalled. By refusing to provide or introduce evidence that established the nature of such charges, they failed to sustain their burden of demonstrating their claims (now their allowed claims) should be entitled, in their full amounts, to share in the estate as general unsecured claims. At the same time, neither creditor has provided the information necessary to discern what parts, if any, of their claims should be accorded general unsecured status under § 726(a)(2) and what parts might be provided lower priority under § 727(a)(4).
Under the circumstances, we conclude that, although allowed, the AmEx and eCast claims must be paid (entirely) only to the extent funds are available for distribution to § 726(a)(4) priority creditors. The consequences of their failures of proof must be visited on them alone, rather than on the estate’s creditor constituents generally. Cf. McMillan, 555 F.3d at 226 (concluding that claimant had not demonstrated that certain component of his claim was entitled to administrative expense priority and, therefore, was appropriately relegated to status as general unsecured claim); In re Uly-Pak, Inc., 128 B.R. 763 (Bankr.S.D.Ill.1991) (concluding that claimant’s severance pay claim did not constitute an administrative expense entitled to priority under § 726(a)(1) and therefore was entitled only to general unsecured status). To do otherwise would be to risk diluting the dividend of creditors who had sustained pecuniary losses.
II. The Trustee’s Fee Request
The trustee argues that the bankruptcy court erred in denying his request for *511attorney’s fees as the prevailing party in the underlying claims objection pursuant to N.H.Rev.Stat. Ann. § 361-C:2. The trustee asserts that the bankruptcy court’s ruling was premature, “as the issue was not joined by either AmEx or eCast and the bankruptcy court should have provided the parties with an opportunity to obtain discovery and to present arguments on the issues.”
“It is well settled that arguments made in a perfunctory manner below are deemed waived on appeal.” F.D.I.C. v. World Univ., Inc., 978 F.2d 10, 16 (1st Cir.1992). “It is not enough merely to mention a possible argument in the most skeletal way, leaving the court to do counsel’s work, create the ossature for the argument, and put flesh on its bones.” U.S. v. Zannino, 895 F.2d 1, 17 (1st Cir.1990).
Here, the trustee did not request attorney’s fees as part of his initial claims objection, but asserted it in a single paragraph in his reply to AmEx’s and eCast’s response to his claims objection (filed on June 6, 2006). App. Tab E, at 89. AmEx and eCast did not file any further responsive pleading and therefore did not object to or otherwise address this issue. It is unclear whether the issue was raised and/or argued at the June 13, 2009, hearing on the claims objection as the trustee has not provided a copy of the transcript on appeal. Although the parties filed post-hearing supplemental briefs, none (including the trustee) addressed the issue.
No basis exists upon which to determine that the trustee made anything other than a perfunctory argument regarding his claim for attorney’s fees before the bankruptcy court. Therefore, we will not address the issue here. See World Univ., 978 F.2d at 16.
CONCLUSION
Because the trustee concedes the estate’s liability for the debts to AmEx and eCast, their claims must be deemed allowed. But because we conclude that AmEx and eCast failed to prove their claims were entitled to general unsecured status, they must be afforded priority under § 726(a)(4), rather than § 726(a)(2). Because the trustee has not demonstrated he raised more than a perfunctory argument regarding his request for attorney’s fees below, he has waived that argument, and the bankruptcy court’s denial of his request will stand.
We therefore AFFIRM the allowance of eCast’s claim, REVERSE disallowance of AmEx’s claim, and order that each is entitled to treatment under § 726(a)(4). We also AFFIRM the disallowance of the trustee’s request for a fee award.
. The term “general unsecured claim” is nearly universally considered by bankruptcy courts and practitioners to mean an unsecured claim that will receive distribution from the estate via § 726(a)(2). We use the term intending that meaning throughout this opinion. As we employ it, the term does not include unsecured claims that receive more favored treatment under § 726(a)(1) (i.e., administrative claims) and those that receive less favored treatment under § 726(a)(3) (tardily filed claims), § 726(a)(4) (fines and penalties), and § 726(a)(5) (post-petition interest on allowed claims).
Unless otherwise noted, all references to statutory sections or to the “Bankruptcy Code” are to the Bankruptcy Reform Act of 1978, as amended prior to April 20, 2005, 11 U.S.C. §§ 101, et seq. All references to “Bankruptcy Rule” are to the Federal Rules of Bankruptcy Procedure.
. The lesser included question whether AmEx’s and eCast's proofs of claim established "prima facie evidence” of their validity is a question of law. And, although the bankruptcy court took evidence, its determination regarding the sufficiency of each creditor's evidence constitutes a legal conclusion, as well.
. In filing their proofs of claim, AmEx and eCast used a version of Official Form 10, as revised in September 1997. Form 10 was subsequently further revised, most recently in December 2008.
. See note 3, supra.
. AmEx and eCast were represented by the same attorney below, as they are on appeal.
. The documents themselves are not contained in either the appendix or the appellate record as designated by the parties.
. Section 726(a)(4) subordinates allowed claims "for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages" to the extent they "are not compensation for actual pecuniary loss.”
. The bankruptcy court stated:
After all, regardless of the provisions of the credit card agreement, the card issuer may have exercised its right under the agreement to impose additional or different terms. Under the terms of the typical credit card agreement, including the AmEx agreement in this case, the terms that exist between the issuer and the consumer at any particular time may only be determined if a listing or historical summary of charges and interest is provided. The agreement itself is at best only evidence of the existence of a contractual relationship, but is little or no evidence of the terms of the contract from time to time. The need to provide details on the terms and conditions of the contract, and the actual charges and interest imposed, from time to time may be onerous from the credit card issuers's [sic] point of view. However, such difficulties flow from the business model that the credit card industry has voluntarily adopted. So long as credit card issuers wish to maintain sole discretion to vary the terms of their agreement with a consumer at any time, and from time to time, they must accept the legal consequences of that business model. One of those consequences is that they may need to provide details of the charges and interest imposed by them in response to a proper objection to a proof of claim in a bankruptcy proceeding.
See In re Plourde, 397 B.R. 207, 226 (Bankr.D.N.H.2008).
. The statute, which governs the collection of attorney’s fees in consumer cases, provides:
If a retail installment contract or evidence of indebtedness provides for attorney’s fees to be awarded to the retail seller, lender or creditor in any action, suit or proceeding against the retail buyer, borrower or debtor involving the sale, loan or extension of credit, such contract or evidence of indebtedness shall also provide:
I. Reasonable attorney's fees shall be awarded to the buyer, borrower or debtor if he prevails in
(a) Any action, suit or proceeding brought by the retail seller, lendor or creditor; or
(b) An action brought by the buyer, borrower or debtor; and
II. If a buyer, borrower or debtor successfully asserts a partial defense or set-off, recoupment or counterclaim to an action brought by the retail seller, lender or creditor, the court may withhold from the retail seller, lender or creditor the entire amount or such portion of the attorney fees as the court considers equitable.
N.H.Rev.Stat. Ann. § 361-C:2.
. "Allowance” constitutes determination of the amount of a "claim” (see § 101(5)) "in lawful currency of the United States as of the date of the filing of the petition” except to the extent that it is unenforceable as a matter of law (generally speaking, contract law) or unless its enforceability against the estate is limited for reasons related to bankruptcy policies such as equalizing treatment among creditors or avoiding overreaching by insiders of the debtor. See 11 U.S.C. § 502(b).
. Section 502(b) provides:
Except as provided in subsections (e)(2), (£), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that—
(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured;
(2) such claim is for unmatured interest;
(3) if such claim is for a tax assessed against property of the estate, such claim exceeds the value of the interest of the estate in such property;
(4) if such claim is for services of an insider or attorney of the debtor, such claim exceeds the reasonable value of such services;
(5) such claim is for a debt that is unma-tured on the date of the filing of the petition and that is excepted from discharge under section 523(a)(5) of this title;
(6) if such claim is the claim of a lessor for damages resulting from the termination of a lease of real property, such claim exceeds—
(A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of—
(i) the date of the filing of the petition; and
(ii) the date on which such lessor repossessed or the lessee surrendered, the leased property; plus
(B) any unpaid rent due under such lease, without acceleration, on the earlier of such dates;
(7) if such claim is the claim of an employee for damages resulting from the termination of an employment contract, such claim exceeds—
(A) the compensation provided by such contract, without acceleration, for one year following the earlier of—
(i) the date of the filing of the petition; or
(ii) the date on which the employer directed the employee to terminate, or such employee terminated, performance under such contract; plus
(B) any unpaid compensation due under such contract, without acceleration, on the earlier of such dates;
(8) such claim results from a reduction, due to late payment, in the amount of an otherwise applicable credit available to the debtor in connection with an employment tax on wages, salaries, or commissions earned from the debtor; or
(9) proof of such claim is not timely filed, except to the extent tardily filed as permitted under paragraph (1), (2), or (3) of section 726(a) of this title or under the Federal Rules of Bankruptcy Procedure, except that a claim of a governmental unit shall be timely filed if it is filed before 180 days after the date of the order for relief or such later time as the Federal Rules of Bankruptcy Procedure may provide, and except that in a case under chapter 13, a claim of a governmental unit for a tax with respect to a return filed under section 1308 shall be timely if the claim is filed on or before the date that is 60 days after the date on which such return was filed as required.
. Section 502 lists nine bases for disallowing claims. Failure to file a proof of claim meeting the requirements of Bankruptcy Rule 3001 and Official Form 10 is not among them. See 11 U.S.C. § 502(b), supra n. 11. Neither Bankruptcy Rule 3001 nor § 502 provides that a proof of claim which does not conform with the requirements of the rule and/or the form be disallowed due to such noncompliance, nor do they otherwise address the consequence of filing a proof of claim that fails to meet all of the rule’s requirements. Rather, when the proof of claim is not filed in accordance with the Federal Rules of Bankruptcy Procedure, it does not constitute prima facie evidence of the validity and amount of the claim, and the burden of proof rests on the claimant. In re Long, 353 B.R. at 13. Bankruptcy Rule 3001 and Official Form 10’s documentary requirements and the shifting burden serve two purposes. See In re Burkett, 329 B.R. 820, 827 (Bankr.S.D.Ohio 2005). First, the supporting documentation required by the rule and form are intended to enable the debtor or trustee to evaluate the claim's amount and validity and to challenge portions of the claim that may be inaccurate. Id. Second, the rules governing claims are intended to simplify the claims allowance process and provide a fair and inexpensive process for all parties including creditors. Id.
Courts differ as to whether § 502(b) sets forth the exclusive bases upon which a claim may be disallowed, or whether a court may disallow a claim for reasons other than those listed in that subparagraph. Compare Heath v. American Express Travel Related Servs. Co., Inc. (In re Heath), 331 B.R. 424 (9th Cir. BAP 2005); Dove-Nation v. eCast Settlement Corp. (In re Dove-Nation), 318 B.R. 147 (8th Cir. BAP 2004); In re Moreno, 341 B.R. 813 (Bankr.S.D.Fla.2006); In re Burkett, 329 B.R. at 828-29; In re Shaffner, 320 B.R. 870 (Bankr.W.D.Mich.2005); In re Mazzoni, 318 B.R. 576 (Bankr.D.Kan.2004); In re Shank, 315 B.R. 799 (Bankr.N.D.Ga.2004); In re Kemmer, 315 B.R. 706 (Bankr.E.D.Tenn. 2004); In re Cluff, 313 B.R. 323 (Bankr. D.Utah 2004), aff'd, 2006 WL 2820005 (D.Utah Sept.29, 2006); with In re Stoecker, 5 F.3d 1022 (7th Cir.1993) (adopting nonexclusive view); eCast Settlement Corp. v. Tran (In re Tran), 369 B.R. 312 (S.D.Tex.2007); In re Taylor, 363 B.R. 303 (Bankr.M.D.Fla.2007); In re Armstrong, 320 B.R. 97 (Bankr.N.D.Tex.2005); In re Henry, 311 B.R. 813 (Bankr.W.D.Wash.2004); In re Jorczak, 314 B.R. 474 (Bankr.D.Conn.2004). We note these diver*505gent views here, although, because allowance of the claims is no longer the issue in this appeal, we need not choose sides.
.Generally, a bankruptcy court may properly consider a debtor’s petition, schedules and statement of affairs as evidentiary admissions made by the debtor. See Fed.R.Evid. 801(d)(2) (providing that a statement is not hearsay if "the statement is offered against a party and is ... the party’s own statement ... ”). Therefore, a debtor’s schedules may be admissible as nonhearsay evidence to establish the validity and ownership of a claim against a debtor when the debtor is the party objecting to the claim. See Torgenrud v. Wolcott (In re Wolcott), 194 B.R. 477, 483 (Bankr.D.Mont.1996); see also In re Bohrer, 266 B.R. 200, 201 (Bankr.N.D.Cal.2001) ("Statements in bankruptcy schedules are executed under penalty of perjury and when offered against a debtor are eligible for treatment as judicial admissions.”). However, when the objecting party is the trustee, the bankruptcy schedules are not admissible as an admission against the trustee. See Kirkland, 572 F.3d at 840-41 (stating that debtor’s schedules "were of no evidentiary value against the Trustee”); Burkett, 329 B.R. at 829 ("Of course, a debtor’s scheduling of a debt does not constitute an admission by the trustee....”); Jorczak, 314 B.R. at 482-83 (scheduling of a debt constitutes an admission which is binding upon the debtors but not the trustee).
. See Fed.R.Evid. 807.
. At least one court of appeals has held that the statements in the debtors’ schedules are of "no evidentiary value” against a bankruptcy trustee contesting allowance of a creditor’s claim. See Kirkland, 572 F.3d at 840-41.
. See 11 U.S.C. § 502(b), supra n. 11.
. Section 726(a) provides:
Except as provided in section 510 of this title, property of the estate shall be distributed—
(1) first, in payment of claims of the kind specified in, and in the order specified in, section 507 of this title, proof of which is timely filed under section 501 of this title or tardily filed on or before the earlier of—
(A) the date that is 10 days after the mailing to creditors of the summary of the trustee's final report; or
(B) the date on which the trustee commences final distribution under this section;
(2) second, in payment of any allowed unsecured claim, other than a claim of a kind specified in paragraph (1), (2), (3), or (4) of this subsection, proof of which is—
(A) timely filed under section 501(a) of this title;
(B) timely filed under section 501(b) or 501(c) of this title; or
(C) tardily filed under section 501(a) of this title, if—
(i) the creditor that holds such claim did not have notice or actual knowledge of the case in time for timely filing of a proof of such claim under section 501(a) of this title; and
(ii) proof of such claim is filed in time to permit payment of such claim;
(3) third, in payment of any allowed unsecured claim proof of which is tardily filed under section 501(a) of this title other than a claim of the kind specified in paragraph (2)(C) of this subsection;
(4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim;
(5) fifth, in payment of an interest at the legal rate from the date of the filing of the petition, on any claim paid under paragraph (1), (2), (3), or (4) of this subsection; and
(6) sixth, to the debtor.
11 U.S.C. § 726(a).
.Payment priority is critical in chapter 7 cases. We know that few of these liquidation proceedings produce any distributions to creditors. And, for those that do, it is seldom the case that all general unsecured claimants are fully paid. Thus, practically speaking, relegation to subordinated status means receiving no distribution from the estate in most cases. See United States v. Waindel (In re Waindel), 65 F.3d 1307, 1309-1310 (5th Cir.1995) ("Section 726 sets forth the order for payment of claims. The general scheme requires payment of priority claims followed by *507unsecured claims and, if any money remains, payment of late claims, various types of penalties and interest. There will hardly ever be surplus funds available to the estate after payments to the first two tiers of creditors in a Chapter 7 case .... ”); see also U.S. Trustee Program, Preliminary Report on Chapter 7 Asset Cases 1994 to 2000 (June 2001), available at http://www.usdoj.gov/ust/eo/ public— affairs/statistics/stats — reports.htm ("Historically, the vast majority (about 95 to 97 percent) of chapter 7 cases yield no assets.” Of the remaining chapter 7 cases closed between 1994 and 2000, 54.6 percent had receipts of less than $5,000); Jimenez, Dalie, The Distribution of Assets in Consumer Chapter 7 Bankruptcy Cases (September 10, 2009), available at SRRN: http://ssrn.com/abstract= 1471603 (finding that of 2,500 consumer chapter 7 cases examined in the year 2007, only seven percent had assets available for distribution to unsecured creditors).
. Section 510(c)(1) of the Bankruptcy Code explicitly allows bankruptcy courts to reorder existing priorities among creditors "under principles of equitable subordination."
Bankruptcy courts do indeed have some equitable powers to adjust rights between creditors. See, e.g., § 510(c) (equitable subordination). That is, within the limits of the Code, courts may reorder distributions from the bankruptcy estate, in whole or in part, for the sake of treating legitimate claimants to the estate equitably. But the scope of a bankruptcy court's equitable power must be understood in the light of the principle of bankruptcy law discussed already, that the validity of a claim is generally a function of underlying substantive law. Bankruptcy courts are not authorized in the name of equity to make wholesale substitution of underlying law controlling the validity of creditors’ entitlements, but are limited to what the Bankruptcy Code itself provides. See United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213, 228-229, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996); United States v. Noland, 517 U.S. 535, 543, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996).
Raleigh v. Ill. Dep’t of Revenue, 530 U.S. 15, 24, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000).
. The trustee's objection to the AmEx proof of claim stated, inter alia, "In addition, it is possible, and no doubt likely, that the claim includes interest and other charges that are not reflected on the statement attached to the proof of claim, despite the fact that section 4 of the proof of claim requires that the claimant, if it is seeking interest and other charges in addition to the principal, to so indicate and to attach an itemized statement of all interest or additional charges.” As to eCast’s claim, the trustee objected in similar terms.
The objection was sufficiently substantial to overcome the possibility that the proofs of claim would be given prima facie evidence of the claims' validity as general unsecured claims. Unless one accepts the silly sidestep suggested by AmEx and eCast, it is virtually inconceivable that a credit card claim would not include interest and "other charges.” "There are two kinds of creature in the jungle: the tiger and the iguana. The tiger sets the fees, and the iguana pays them.” Mark Halperin, Memoir from Anlproof Case at 463 (Harcourt Brace & Co. 1995). Credit card issuers are the tigers of consumer finance. See Testimony of Elizabeth Warren, Leo Gott-lieb Professor of Law, Harvard Law School, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs hearings "Examining the Billing, Marketing, and Disclosure Practices of the Credit Card Industry, and Their Impact on Consumers” (January 25, 2007); see also Johnson M. Tyler, "Exempt Income Protection Act Better Protects Strapped Debtors,” N.Y. Law Journal, Jan. 27, 2009, at 4; U.S. General Accounting Office, "Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosure to Consumers” (GAO 06-929) (October, 2006); Tamara Draut, "The Plastic Safety Net, the Reality Behind Debt in America” (2005) (report released by public policy groups, Demos and the Center for Responsible Lending, discussing the truth behind the credit card debt explosion in the United States); Mitchell Pacelle, "Growing Profit Source for Banks: Fees From Riskiest Card Holders,” Wall St. J., July 6, 2004 at A1 *509(reporting that credit card fees in 2003 rose to 33.4 percent of total credit card revenue, and that the credit card industry reaped $ 11.7 billion from penalty fees).
. "If you call a tail a leg, how many legs does a dog have? Four. Calling a tail a leg does not make it a leg.” Abraham Lincoln, quoted in United States v. Bowen, 527 F.3d 1065, 1077 n. 9 (10th Cir.2008).
. We recognize that proofs of claim may properly be accompanied by summaries, rather than voluminous records displaying every jot and tittle of account history. See Fed. R. Bankr.P. 3001(a) (providing that proof of claim shall conform substantially with appropriate Official Form); Official Form 10 (directing claimant to attach documents to support the claim or, if voluminous, a summary of such documents); see also Dove-Nation, 318 B.R. at 151 (concluding that claimant complied substantially with rules by identifying the claims, attaching summaries of claims, providing explanations why additional documentation was not attached, and providing instructions to request additional documentation if desired); In re Cluff, 2006 WL 2820005, *12-13 (D.Utah Sept.29, 2006) (concluding that bankruptcy court did not err in declining to disallowed unsecured claims solely for insufficiency of attached documentation); In re Heath, 331 B.R. at 432. A reasoned, case-by-case approach, taking into account detail provided, content of the schedules, the identity of the objector (e.g., trustee or debtor) is appropriate.
.Section 726(a), while elevating certain unsecured claims over others for policy reasons, see § 726(a)(1), also assures that recompense for actual pecuniary loss is not diluted by including noncompensatory "losses” at an equal priority. See § 726(a)(4). Indeed, allowed, tardily filed claims for actual losses are paid before noncompensatory fines, penalties, forfeitures, and damages. See § 726(a)(3).
. Contractually based charges have been determined to be penalties or forfeitures. Sometimes this results in their nonenforceability, and, thus, disallowance. 11 U.S.C. § 502(b)(1); see, e.g., In re Leatherland Corp., 302 B.R. 250, 264 (Bankr.N.D.Ohio 2003) (concluding that "success fee” was in nature of unenforceable penalty and not allowable); In re Shepherds Hill Dev. Co., LLC, 2000 WL 33679427 (Bankr.D.N.H. Jun. 6, 2000); In re Rally Partners, 306 B.R. at 170; In re Timberline. Prop. Dev., Inc., 136 B.R. 382, 386-87 (Bankr.D.N.J.1992); In re Jordan, 91 B.R. 673 (Bankr.E.D.Pa.1988); In re White, 88 B.R. 498 (Bankr.D.Mass.1988). Sometimes, though enforceable, such claims are relegated to § 726(a)(4) status. See Crawford v. Ajax Enterp., LLC (In re Pheasant Cove, LLC), 2008 WL 187529, 2008 Bankr.LEXIS 393 (Bankr.D.Idaho Jan. 18, 2008); Fundex Cap. Corp. v. Balaber-Strauss (In re Tampa Chain Co., Inc.), 53 B.R. 772, 781-82 (Bankr.S.D.N.Y.1985); 4 Norton Bankr.Law and Practice 3d, §§ 83:2 n. 7 and 85:6 (noting that the former provision, § 57j of the Bankruptcy Act, disallowed any penalty-type debts, but under § 726(a)(4), penalty-type debts are subordinated, but not disallowed). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494357/ | MEMORANDUM OPINION
KEVIN GROSS, Bankruptcy Judge.
The Chapter 7 Trustee, George L. Miller (the “Trustee”) brings this adversary action to recover what he alleges are damages in excess of $12 million to USA Detergents, Inc. (the “Debtor” or “USAD”) resulting from the operation of USAD by Titan Global Holdings, Inc. (“Titan”) for the benefit of USAD’s prepetition secured lender, Greystone Business Credit II, L.L.C. (“Greystone”). The Trustee claims that defendants, through their conflicted relationships with USAD, harmed Debtor by wrongfully perpetuating USAD rather than recapitalizing or liquidating Debtor for the benefit of all creditors.
The Court has before it the Motion to Dismiss (“the Motion”) of defendants Titan, Bryan Chance (“Chance”), R. Scott Hensell (“Hensell”), David M. Marks (“Marks”)1, Titan PCB West, Inc. n/k/a Titan Electronics, Inc., Titan PCB East, Inc. n/k/a Titan East, Inc., Oblio Telecom, Inc., Titan Wireless Communications, Inc., Starttalk, Inc., Pinless, Inc., Appco-Ky, *537Inc., and Frank P. Crivello (“Crivello”)(col-lectively the “Defendants”) (D.I. 9). The parties fully briefed the Motion and the Court heard oral argument on July 29, 2009. For the following reasons, the Motion is denied.
I. JURISDICTION
The Court’s jurisdiction rests upon 28 U.S.C. §§ 157(b)(1) and 1334(b) and (d). The adversary proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B) and (0).
II. STATEMENT OF FACTS
A motion to dismiss requires this Court “to accept as true all allegations in the complaint and reasonable inferences that can be drawn therefrom, and .view them in the light most favorable to the plaintiff.” Evancho v. Fisher, 423 F.3d 347, 350 (3d Cir.2005). Therefore, the following recitation of facts conforms with the plaintiffs view of the events and is drawn primarily from the complaint.
A. Initiation of the Main and Adversary Proceedings2
On February 12, 2008, three creditors filed an involuntary Chapter 7 petition for relief against USA Detergents, Inc. (the “Debtor” or “USAD”), a manufacturer and distributor of value priced laundry care products, household cleaners, personal care items, candles, and air fresheners with its principal place of business in New Brunswick, New Jersey. Thereafter, the Debtor moved for, and on April 9, 2008, the Court granted, conversion to Chapter 11. On June 2, 2008, the Official Committee of Unsecured Creditors filed its Motion to Convert the Debtor’s Chapter 11 case to a Chapter 7 case (D.I. 158), and on June 11, 2008, the Debtor filed its Notice of Conversion of Chapter 11 case to Chapter 7 (D.I. 177), which the Court granted on June 17, 2008 (D.I. 188). On February 2, 2009, the Chapter 7 Trustee (the “Trustee”) initiated this adversary proceeding by filing its Complaint against the Defendants.
B. The Loans by Greystone and GBC
Debtor and Greystone Business Credit II, L.L.C. (“Greystone”) entered into a Loan and Security Agreement, dated as of December 27, 2006 consisting of a $10 million revolving line of credit and a term loan of up to $500,000 (the “Loan”) against which Debtor borrowed an aggregate principal amount of $8,049,583.41. Compl. ¶ 26.
As early as February 2007, Greystone3 realized that the Debtor would be unable to repay the Loan or continue doing business unless it received an additional infusion of capital. Compl. ¶ 27. While negotiating with two parties regarding further capital infusion, the Debtor required additional cash, and in April 2007, GBC waived a $500,000 permanent reserve in exchange for a personal guarantee from the Debtor’s CEO, Uri Evan (“Evan”). Compl. ¶29. GBC demanded that Evan increase his personal guarantee and in June 2007, after the Debtor’s financial condition further deteriorated and the negotiations with the potential capital investors terminated without other prospects, Evans increased his personal guarantee up to $1 million. Compl. ¶ 30.
*538C. Titan’s Involvement with GBC and the Debtor
At approximately the same time the Debtor and Greystone executed the Loan, Titan and GBC also closed on a credit facility for Titan that included a $15 million revolving line of credit and a $7.95 million term loan. Compl. ¶ 32. Titan, in exchange, executed a stock pledge agreement granting Greystone a first priority security lien and interest in the common stock of Titan’s subsidiaries and their goods and inventory. Compl. ¶ 32. Titan also issued 500,000 shares of its common stock to GBC and a warrant to purchase an additional 500,000 shares.
In June 2007, Titan sought additional funding from GBC to purchase Appalachian Oil Company, Inc. (“AOCI”). GBC agreed to extend the necessary funds provided that Titan assist GBC by acquiring the Debtor. Compl. ¶ 35. The Trustee alleges that Crivello, the Managing Member of Crivello Group, LLC (“Crivello Group”) of which Titan was an investment portfolio company, had a personal interest in seeing that the AOCI deal closed. Cri-vello Group would receive a finder’s fee of $750,000 in cash and ten million ten-year warranties from the acquisition. Because both Titan and Crivello Group were anxious to close the AOCI deal, and funding from GBC was necessary to do so, Titan investigated acquiring the Debtor. Compl. ¶ 36.
On or about July 27, 2007, Titan entered into a number of agreements (the “Option Agreements”) as part of the closing by which it acquired an option to purchase an eighty percent controlling interest in the Debtor. This transaction included a Stock Purchase Agreement entered into between Titan, the Debtor and Evan under which Defendant Frank J. Orlando (“Orlando”)4 was appointed the Chief Restructuring Officer of the Debtor and Defendant Chance, the President and CEO of Titan, became an advisor to the Debtor’s Board. Compl. ¶ 37.
Another aspect of this transaction was that Titan guaranteed the Debtor’s debt to GBC (the “First Corporate Guarantee”)5 which included an additional $1.5 million over advance that would not be made available by GBC to the Debtor until the Titan-USAD transaction closed. The only additional consideration required of Titan to acquire eighty percent of the Debtor’s stock after execution of the Option Agreements was to continue to guarantee the Debtor’s obligation to GBC and pay one dollar to the escrow agent. Compl. ¶ 38.
In July 2007, Titan and the Debtor entered into a Services Agreement whereby Titan would provide “business management services” to the Debtor with “complete authority with respect to the restructuring of the business of USAD.
Debtor’s financial condition continued to deteriorate in the next two months. Orlando regularly reported to Crivello about the Debtor’s poor financial condition and disclosed to Titan, through Crivello, Chance, Hensell (Titan’s Chief Financial Officer) and/or Marks (the Chairman of Titan and a Member of the Crivello Group) that Debtor needed $1 million to $1.5 million in working capital to continue doing business in the ordinary course. Vendors *539were refusing to ship products to the Debtor making it impossible for them to fill open orders. Despite these disclosures in September of 2007, Titan exercised its option and became owner of 80% of USAD’s stock on October 16, 2007.” At the time that Titan acquired the Debtor, both Titan and GBC knew of the Debtor’s desperate financial condition, and that Debtor was unable to pay its debts as they became due. Compl. ¶ 41. Titan refused, however, to invest equity in USAD. Compl. ¶¶ 40-43.
On or about October 17, 2007, USAD and GBC entered into Amendment No. 2 to Loan and Security Agreement (“Amendment No. 2”). The Titan Entities6 also executed a second corporate guarantee (the “Second Corporate Guarantee”).
In the final months of 2007, Debtor’s financial condition rapidly deteriorated due to cancellation of back orders and a sharp increase in accounts payable. Revenues for the quarter ending June 2007 were $10,206,000; for the quarter ending September 2007 were $8,295,000; and for the quarter ending December 2007 were $5,720,000. By December 2007, Titan’s primary objective was to extricate itself from its relationship with the Debtor with the least amount of loss, loss of investment already made and loss under the Second Corporate Guarantee. On December 20, 2007, Crivello wrote to GBC that Titan’s “mission is only to get GBC repaid and to recover our thousands of dollars already sunk into it. I think we have to explore an efficient sale and/or liquidation process.” Compl. ¶¶ 50-51.
During this time, Orlando had begun to wind down the Debtor’s operations but his focus, as well as that of the Director Defendants and Titan, was on minimizing both GBC’s and Titan’s exposure under the Corporate Guarantees rather than maximizing value for all creditors. Through their efforts, GBC received payments totaling at least $35,039,680 from USAD between January 1, 2007 and February 11, 2008, with $12,135,662.94 of that amount paid between July 27, 2007 and the Petition Date. Compl. ¶¶ 52-59.
III. DISCUSSION
Defendants seek to dismiss Counts II, VI, VII, and VIII of the Complaint under Rule 12(b)(6) for failure to state a claim upon which relief can be granted. In these Counts, the Trustee seeks to avoid and recover preferential transfers pursuant to 11 U.S.C. §§ 547 and 550, and to recover for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and civil conspiracy. The Complaint contains the following counts:
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*540A. Rule 12(b)(6) Standard of Review
A motion to dismiss pursuant to Rule 12(b)(6) serves to test the sufficiency of the factual allegations in a plaintiffs complaint. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir.1993). To survive a motion to dismiss under Rule 12(b)(6), a plaintiffs complaint must contain sufficient “factual allegations” which, if true, would establish “plausible grounds” for a claim: “the threshold requirement ... [is] that the ‘plain statement’ possess enough heft to ‘sho[w] that the pleader is entitled to relief.’” Twombly, 550 U.S. at 557, 127 S.Ct. 1955. In deciding a motion to dismiss under Rule 12(b)(6), a court tests the sufficiency of the factual allegations: it evaluates whether a plaintiff is “entitled to offer evidence to support the claims,” and “not whether a plaintiff will ultimately prevail.” Oatway v. Am. Int’l Group, Inc., 325 F.3d 184, 187 (3d Cir.2003). This is true even if “actual proof of those facts is improbable” and “a recovery is very remote and unlikely.” Twombly, 550 U.S. at 556, 127 S.Ct. 1955.
As discussed above, the Court must accept as true all allegations in the light most favorable to the plaintiff. Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir.2008); Morse v. Lower Merion School District, 132 F.3d 902, 905 (3d Cir.1997). However, “a court need not credit a plaintiffs ‘bald assertions’ or ‘legal conclusions’ when deciding a motion to dismiss.” Sands v. McCormick, 502 F.3d 263, 267-68 (3d Cir.2007)(quoting Morse, 132 F.3d at 906).
B. Applicable Law
There are two categories of claims that the Defendants urge this Court to dismiss: Count II which arises under the United States Bankruptcy Code; and Counts VI, VII, and VIII which contain allegations of breaches of fiduciary duties and are governed by state law.
Under the internal affairs doctrine, only one state, the state of incorporation, has the authority to regulate a corporation’s internal affairs. Edgar v. MITE Corp., 457 U.S. 624, 645, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982). “Few, if any, claims are more central to a corporation’s internal affairs than those relating to alleged breaches of fiduciary duties by a corporation’s directors and officers.” In re Fedders North America, Inc., 405 B.R. 527, 539 (Bankr.D.Del.2009)(citing In re Topps Co. Shareholders Litigation, 924 A.2d 951 (Del.Ch.2007)). Because Counts VI-VIII allege breaches of fiduciary duties and related claims, they relate to the internal affairs of the Debtor and are governed by the laws of the state of incorporation, in this case Delaware. Therefore, the Court will apply Delaware law when determining whether to dismiss these Counts.
C.Count II: To Avoid and Recover Preferential Transfers Pursuant to 11 U.S.C. §§ 547 and 550
Count II of the Complaint alleges that during the preference period, from July 27, 2008 to the Petition Date, the Debtor made payments totaling $12,135,662.94 directly to or for the benefit of Titan and its subsidiaries on account of loan obligations owed to GBC that Titan guaranteed.
Subsection (b) of § 547 provides that:
the trustee may avoid any transfer of an interest of the debtor in property
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
*541(3) made while the debtor was solvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such the transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
The Defendants argue that the Trustee has not met at least two of the requirements of Section 547. They contend that he has not demonstrated that Titan, as a guarantor of debt owed to GBC, is a creditor within the meaning of Section 547. Alternatively, Defendants argue that even if Titan is a creditor, because the Trustee previously admitted that GBC was overse-cured, the Trustee therefore cannot establish the fifth requirement, that the creditor received more through the preferential payments than it would have in a Chapter 7 liquidation.
1. Titan is a Creditor
The parties have presented strong and thoughtful arguments on both sides of the first issue, whether Titan, by virtue of guaranteeing the debt that was paid down during the preference period, qualifies as a creditor. Titan acknowledges that preference actions may be brought against guarantors because when a lender “receives direct payment on its antecedent debt, the insider guarantor will realize a corresponding dollar-for-dollar reduction in the amount of his contingent liability on the guarantee.” In re Erin Food Services, Inc., 980 F.2d 792, 801 (1st Cir.1992). The Titan Entities argue that because in the Second Corporate Guaranty they waived their right to collect from Debtor for any amounts they paid on their guarantees, they are not creditors. This doctrine, known as the “Deprizio waiver,” arises from the Seventh Circuit decision in Levit v. Ingersoll Rand Financial Corp. (In re V.N. Deprizio Construction Co.), 874 F.2d 1186 (7th Cir.1989) which held that transfers made during the preference period that benefit a non-insider creditor including a guarantor, who received payments on a debt owed by the debtor to a non-insider creditor can be recovered under § 547. They maintain, however, that this rule of law does not apply when the guarantor has waived any claims against the debtor as Titan did in this case. Such a waiver, referred to as an “anti-Deprizio” waiver, effectively negates a guarantor’s status as a “creditor.”
The Trustee, on the other hand, argues that an “anti-Deprezio” waiver cannot serve as a bar to the Trustee’s recovery of the preference payment because a guarantor can easily overcome its waiver by purchasing the lender’s note rather than paying it, thus stepping into the shoes of the lender and becoming a creditor. The Trustee and various courts have characterized such waivers as merely an effort to eliminate, by contract, a provision of the Bankruptcy Code.
The Court does not have the benefit of precedent in this Circuit. The Court’s review of the available case law leads it to conclude that the Defendants who the Trustee named in Count II (the “Preference Defendants”) are creditors and therefore subject to Section 547.
*542The Preference Defendants concede that guarantors are creditors because “a guarantor of ... a claim against the debtor will also be a creditor, because he will hold a contingent claim against the debtor that will become fixed when he pays the creditor whose claim he has guaranteed or insured.” In re XTI Xonix Technologies, Inc., 156 B.R. 821, 828 (Bankr.D.Or.1993). The Preference Defendants argue however, that if the guarantor waives his right to collect against the debtor, he loses creditor status. Id. at 834.
The Titan Entities waived subrogation, contribution, indemnity and reimbursement rights in the Second Corporate Guarantee. The Trustee cites several cases, which the Court finds persuasive, holding that were a guarantor’s waiver to eliminate creditor status, it would contravene the policy considerations of the preference sections of the Code. Russell v. Jones (In re Pro Page Partners, LLC), 292 B.R. 622, 631 (Bankr.E.D.Tenn.2003); and In re Telesphere Communications, Inc., 229 B.R. 173, 176, n. 3 (Bankr.N.D.Ill.1999), wherein the court held the guarantor was a creditor and stated:
[S]uch a waiver has no economic impact — if the principal debtor pays the note, the insider guarantor would escape preference liability, but if the principal debtor does not pay the note, the insider could still obtain a claim against the debtor, simply by purchasing the lender’s note rather than paying on the guarantee. Thus, the “Deprizio waiver” could only be seen as an effort to eliminate, by contract, a provision of the Bankruptcy Code. The attempted waiver of subordination rights was thus held to be a sham provision, unenforceable as a matter of public policy.
The Court agrees with the Trustee that the waiver does not transform the Titan Entities’ creditor status. Even were the Titan Entities not creditors, they might be responsible for transfers to GBC as beneficiaries by way of reduction in their contingent liability on the guarantee. As such, the Trustee might recover under Bankruptcy Code Section 550.
2. GBC and Titan Received More Than Under Chapter 7
An important element of a cause of action to recover a preferential payment is that the creditor received more than it would have in a Chapter 7 liquidation. Section 547(b)(5) is not a defense to a preference action, but a fundamental element of any case asserting that preference claim. In re Radnor Holdings Corp., 353 B.R. 820, 846-47 (Bankr.D.Del.2006). Section 547(g) places the burden of proving the elements of a preference action on the plaintiff. Id. at 847 (citing Mellon Bank, N.A. v. Metro Commc’ns, Inc., 945 F.2d 635, 642 (3d Cir.1991); Golden v. The Guardian (In re Lenox Healthcare, Inc.), 343 B.R. 96,107 (Bankr.D.Del.2006)). It is well established that transfers to fully or over secured creditors are generally not preferential because fully-secured creditors are entitled to completely recover in a chapter 7 liquidation. Id. at 846.
The Trustee makes enough factual assertions at this early pleading stage with respect to this element of Section 547 in the Complaint. The Trustee’s numerous factual allegations detailing Debtor’s financial woes raise a strong inference that Titan, Greystone, GBC, the Guarantors, Appalachian and Appco all received more than if the payments had not been made and they had received payment of their debts to the extent provided under the provisions of the Bankruptcy Code.
Defendants also argue that the Trustee is judicially estopped from asserting the Count II claims. “Judicial estop-*543pel prevents a party from ‘playing fast and loose with the courts’ by adopting conflicting positions in different legal proceedings (or different stages of the same proceeding).” In re Teleglobe Communications Corp., 493 F.3d 345, 377 (3d Cir.2007)(quoting Delgrosso v. Spang & Co., 903 F.2d 234, 241 (3d Cir.1990)). This doctrine requires a showing of (1) a clear inconsistency and (2) that the party es-topped obtained an unfair advantage from that inconsistency. Id. (citing In re Armstrong World Indus., Inc., 432 F.3d 507, 517-18 (3d Cir.2005)). Defendants seize upon Debtor’s statement made in a different context in Debtor’s objection to a lift stay motion. In opposing GBC’s lift stay motion, the Trustee argues that GBC “cannot demonstrate that its alleged collateral is declining in value as a result of the automatic stay, and, in fact [GBC] has recited that the value of the alleged collateral is more than the alleged claim.” Objection, ¶ 9 (D.I. 211). Clearly, USAD was reiterating GBC’s argument and was arguing that GBC had failed to meet its burden. The Court is satisfied that judicial estoppel does not apply.
D. Count VI: Breach of Fiduciary Duty
In his Complaint, the Trustee asserts that the four Director Defendants moving for dismissal, Orlando, Chance, Hensell and Marks, violated their fiduciary duties to the Debtor, specifically the duties of good faith, fair dealing, trust, loyalty, diligence and due care. To support this allegation, he sets out three specific facts: that after becoming CEO and President of USAD, Orlando took orders directly from Crivello and was not the true decision maker for USAD; that Chance, Hensell and Marks never met nor took action as a Board between the time of their appointment in the summer of 2007 and the initiation of the bankruptcy proceedings; and that the four Directors did not focus on what was in USAD’s best interest, concentrating instead on reducing Titan’s and GBC’s exposure.
The Director Defendants argue that the Trustee has not alleged sufficient facts, or at least specific enough facts, to sustain a cause of action for breach of fiduciary duties. Further, they argue that they are protected by a provision in USAD’s certificate of incorporation which exculpates directors against personal liability, and when combined with Delaware General Corporation Law, 8 Del. C. § 102(b)(7), mandates that this Court dismiss Count VI with respect to any alleged breach of the duty of care. As for breaches of duties not included in the exculpatory provisions of the certificate of incorporation, the Director Defendants argue that the Trustee has not alleged sufficient enough facts to overcome the presumptive application of the business judgment rule.
Breaches of fiduciary duties by directors and officers are central to a corporation’s internal affairs. See In re Topps Co. Shareholders Litigation, 924 A.2d 951 (Del.Ch.2007); see also In re Fedders North America, Inc., 405 B.R. 527, 539 (Bankr.D.Del.2009). These duties, often referred to as a “triad of duties,” include the duties of care, loyalty and good faith. Malone v. Brincat, 722 A.2d 5, 10 (Del.1998). This “triparte fiduciary duty does not operate intermittently but is the constant compass by which all director actions for the corporation and interactions with its shareholders must be guided.” Id.
1. Duty of Care
In the face of Debtor’s certificate of incorporation, the Trustee must show gross negligence. Cargill, Inc. v. JWH Special Circumstance L.L.C., 959 *544A.2d 1096, 1113 (Del.Ch.2008). The gross negligence standard, however, is somewhat flexible in that the “exact behavior that will constitute gross negligence varies based on the situation, but generally requires directors and officers to fail to inform themselves fully and in a deliberate manner.” In re Fedders, 405 B.R. at 540 (citing Cede & Co. v. Technicolor, Inc., 684 A.2d 345, 368 (Del.1993)).
The Trustee alleges facts that upon proof would establish that the Director Defendant were grossly negligent in failing to inform themselves about the financial condition of the Debtor in order to formulate a plan to stop the financial decline. The Trustee alleges that the Director Defendants abdicated their responsibilities to exercise informed, independent judgment. Compl. ¶¶ 44-47 and 49. The Complaint contains enough facts which, if proven, show that the Director Defendants were grossly negligent and therefore in breach of their duty of due care.
The Court’s analysis must turn to whether it must dismiss Count VI based upon the existence and legal effect of the exculpatory provision of the Certificate of Incorporation, adopted pursuant to 8 DeLC. § 102(b)(7). The provision in USAD’s Certificate of Incorporation states:
The personal liability of all of the directors of the Corporation to the Corporation or its stockholders is hereby eliminated and limited to the fullest extent legally permissible under the provisions of the Delaware General Corporation Law, as the same may be amended and supplemented (but, in the case of any such amendment, only to the extend that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment).
Application of this provision is not reserved solely for the corporation and its shareholders but also applies to claims brought by creditors of an insolvent corporation. IT Group Inc. v. D’Aniello, C.A. No. 04-1268, 2005 Dist. LEXIS 27869, *40, 2005 WL 3050611, *11 (D.Del. Nov. 15, 2005).
As the Delaware Supreme Court has explained, courts can apply § 102(b)(7)7 exculpatory provisions to claims for a violation of the duty of care. Malpiede v. Townson, 780 A.2d 1075, 1090-96 (Del.Supr.2001). The policy behind exculpation is to allow directors to take business risks without fear of negligence lawsuits. Id. at 1095. Delaware courts, however, have also made it clear that this exculpation is only available where the cause of action only states a due care violation and not a claim which alleges gross negligence or breaches of multiple duties, including the duty of loyalty. Id. at 1093, 1095 (quoting Arnold v. Society for Savings Bancorp., 650 A.2d 1270, 1288 (1994)(“[W]here the factual basis for a claim solely implicates a violation of the duty of care, this court has indicated that the protections of such a character *545provision may properly be invoked and applied.”)).
It appears, therefore, that whether this Court can dismiss Count VI for breach of fiduciary duties, specifically the duty of due care, based upon the exculpation clause depends on whether the Trustee establishes a cause of action for gross negligence and breach of duty of loyalty and/or duty of good faith. Because, as explained in further detail below, the Trustee alleges facts sufficient to sustain a cause of action for breach of the duties of loyalty and good faith, the Director Defendants cannot invoke the exculpation clause and the Court will not dismiss the claims for breach of the duty of due care.
2. Duty of Loyalty
The duty of loyalty “mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally.” In re Fedders North America, 405 B.R. 527, 540 (Bankr.D.Del.2009)(quoting Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del.1993)). Delaware law requires a plaintiff to establish that: (1) a self interested transaction occurred and (2) the transaction was unfair to the plaintiffs. Joyce v. Cuccia, 1997 WL 257448, at *5 (Del.Ch. May 14, 1997).
As to the first requirement, the Trustee’s facts support the claim that the Director Defendants promoted their self-interest. The Trustee clearly alleges that Titan, acting as the controlling shareholder of USAD, was seeking funds to purchase AOCI while receiving funding from GBC. Compl., ¶ 95, incorporating ¶ 35. The Trustee further alleges that after Titan acquired the option to purchase 80% of USAD’s stock, Titan guaranteed USAD’s debt owed to GBC in consideration for GBC’s funding of Titan’s acquisition of USAD. This claim of self interest is sufficient to establish a self-interested transaction. The Trustee also properly pleads unfairness, the second requirement. Not only did Titan — while acting in control of USAD — guarantee USAD’s debt to GBC, but it also failed to invest any equity into USAD. Paragraph 40 of the Complaint as incorporated into the Trustee’s breach of fiduciary claim in paragraph 95, is sufficient. The allegations satisfy the breach of duty of loyalty standard as set forth in Joyce v. Cuccia.
3. Duty of Good Faith
The duty to act in good faith is a subsidiary element of the duty of loyalty. Stone v. Ritter, 911 A.2d 362, 370 (Del.2006). To sustain this cause of action, a plaintiff must demonstrate “conduct that is qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care (i.e., gross negligence).” Id. at 369. In In re Walt Disney Co. Derivative Litigation, the Delaware Supreme Court described three scenarios in which a director may be found liable under a theory of breach of the duty of good faith. 906 A.2d 27 (Del.2006). Among these are when a director “intentionally acts with a purpose other than that of advancing the best interests of the corporation;” “acts with the intent to violate applicable positive law;” and “intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.” Id. at 67.
In this case, two of the facts the Trustee alleges suggest a failure to comply with the duty of good faith: Orlando taking orders from Crivello regarding decisions made about the Debtor and the four Director Defendants focusing on limiting Titan and GBC’s exposure rather than what was in the best interest of USAD. These *546facts, if taken as true, demonstrate both intentional acts with a purpose other than that of advancing the best interests of the corporation and an intentional failure to act in the face of a known duty to act. By advancing the interests of Titan and GBC rather than those of the Debtor, the Director Defendants breached their duty of good faith. The Trustee has set out facts sufficient to survive a motion to dismiss the alleged breaches of the duty of good faith.
E. Count VII: Aiding and Abetting Breach of Fiduciarg Dutg
The Trustee alleges that Titan and Crivello each aided and abetted the breach of fiduciary duties by one or more of Orlando, Chance, Hensell and/or Marks as they substantially and knowingly participated in, benefitted from and aided and abetted the breach of fiduciary duty or duties engaged in by the officers, directors and controlling shareholders of the Debtor. Defendants contend that because the alleged breaches of fiduciary duties were essentially the alleged preferential transfers, this Count must be dismissed. They argue that such a claim cannot be supported by Delaware state law which does not recognize a cause of action for aiding and abetting a fraudulent transfer and therefore cannot support a claim for aiding and abetting a preferential payment.8 The Trustee counters that the alleged breaches of fiduciary duties that the Director Defendants aided and abetted were not the preferential transfers but those contained in Count VI of the complaint, and therefore are not barred.
In order to establish a case for aiding and abetting breach of fiduciary duty, a plaintiff must establish: “(1) the existenee of a fiduciary relationship; (2) proof that the fiduciary breached its duty; (3) proof that a defendant, who is not a fiduciary, knowingly participated in a breach; and (4) a showing that damages to the plaintiff resulted from the concerted action of the fiduciary and nonfiduciary.” In re Fedders North America, Inc., 405 B.R. 527, 544 (Bankr.D.Del.2009)(eiting Cargill, Inc. v. JWH Special Circumstance LLC, 959 A.2d 1096, 1125 (Del.Ch.2008)).
Drawing all reasonable inferences in favor of the Trustee, the Complaint sets out facts sufficient to sustain Count VII with respect to Defendants Crivello and Titan. A fiduciary relationship existed between the Director Defendants and the Debtor. As discussed above, the Trustee set out sufficient facts to survive dismissal on the breach of fiduciary duty claims. While the Defendants contend that the alleged breaches were preferential transfers, the discussion regarding Count VI of the Complaint demonstrates that the Complaint casts a wider net than the alleged preference transactions. Therefore, the cited authorities do not mandate dismissal of Count VII. The Trustee further alleges facts showing that both Defendants Crivel-lo and Titan knowingly participated in the fiduciary duty breaches. Specifically, the Trustee alleges a breach of the duty of good faith, when Crivello and Titan: (1) gave orders directly to Orlando, rather than allowing him to make decisions regarding the Debtor; and (2) pressured the Director Defendants to focus on minimizing losses for Titan and GBC rather than the Debtor. The Court will therefore not dismiss Count VII of the Complaint for aiding and abetting the breaches of fiduciary duties.
*547F. Count VIII: Civil Conspiracy
The Trustee alleges that the Director Defendants, GBC, Titan and Crivello engaged in a conspiracy to breach fiduciary duties and engage in other wrongdoings. The Trustee further alleges that the Defendants took actions in furtherance of the conspiracies. The Defendants moved for dismissal based on two arguments. First, they contend that to state a valid cause of action for civil conspiracy, a plaintiff must also allege a tort independent of the conspiracy. Second, Defendants argue that because the Director Defendants were acting as agents for the other Defendants, they could not have conspired with one another. The Trustee responds that the independent tort is the breach of the fiduciary duties, and even if the Director Defendants were agents of Titan and/or Crivello (an issue not before the Court as this time), the inclusion of GBC as a defendant on this Count elevates Defendants’ actions to a civil conspiracy.
Under Delaware law, “civil conspiracy is an independent wrong that occurs when there is: ‘(1) a confederation or combination of two or more persons; (2) an unlawful act done in furtherance of the conspiracy; and (3) actual damages.’ ” In re Am. Intern. Group, Inc., 965 A.2d 763, 805 (Del.Ch.2009)(quoting Nicolet, Inc. v. Nutt, 525 A.2d 146, 149-50 (Del.1987)). Despite a split in authorities, Delaware has maintained the requirement of an independent tort for a civil conspiracy claim. Id. The rationale for civil conspiracy claims is that it allows a plaintiff to recover against all conspirators, under a theory of vicarious liability, for the acts of co-conspirators in furtherance of the conspiracy. Allied Capital v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1036 (Del.Ch.2006)(citing Laventhol, Krekstein, Horwath & Horwath v. Tuckman, 372 A.2d 168, 170 (Del.1976)). State law also suggests that there is an overlap between aiding and abetting a breach of fiduciary duty and civil conspiracy to breach fiduciary duties. Id. at 1038 (citing Weinberger v. Rio Grande Industries, Inc., 519 A.2d 116, 131 (Del.Ch.1986) (stating that claim for civil conspiracy involving breaches of fiduciary duty is sometimes called “aiding and abetting”); Gilbert v. El Paso Co., 490 A.2d 1050, 1057 (Del.Ch.1984) (defining civil conspiracy claim using traditional elements associated with aiding and abetting breach of fiduciary duty), aff'd, 575 A.2d 1131 (Del.1990); Carlton Investments v. TLC Beatrice Int’l Holdings, Inc., 1995 WL 694397, at *15 n. 11 (Del.Ch.1995) (noting that the court has analyzed the knowing participation requirement of aiding and abetting a breach of fiduciary duty by reference to elements of a civil conspiracy claim); Malpiede v. Townson, 780 A.2d 1075, 1098 n. 82 (Del.2001) (stating, in breach of fiduciary duty ease, that “[a]lthough there is a distinction between civil conspiracy and aiding and abetting, we do not find that distinction meaningful here”)).
The Court will not dismiss the Count VIII for civil conspiracy. Because under Delaware law the causes of action for aiding and abetting a breach of fiduciary duty, and civil conspiracy to breach fiduciary duty, are so closely related and this Court held that the Trustee’s facts are sufficient to support the aiding and abetting claim, Count VIII will also survive. The Trustee sufficiently alleges, when reading the Complaint in a light most favorable to the Trustee, that there was an agreement between all of the parties, the Director Defendants, Titan, Crivello, and GBC, to engage in activities that constitute a breach of fiduciary duties. Finally, the Trustee alleges damages as a result of the conspiracy.
*548The Court does not accept the Defendants’ argument that the Court should dismiss Count VIII because, they allege, the Director Defendants were agents of Titan and Crivello and an agent cannot conspire with its principal. There is, as yet, no basis to find an agency relationship and the Trustee has not alleged such a relationship.
CONCLUSION
In conclusion, the Court will deny the Defendants’ Motion to Dismiss. The Trustee alleges sufficient facts to survive the dismissal of the alleged preferential transfers, the breaches of fiduciary duties and the related aiding and abetting and civil conspiracy claims.
The Court will issue an Order consistent with this opinion.
. The Court will refer to Chance, Hensell and Marks as the "Director Defendants,” as they served as directors of USAD. At all relevant times, Chance was also Titan's CEO and President, Hensell was Titan’s CFO and Marks was the Chairman of the Board of Titan.
. Judge Brendan Shannon presides over the main case and assigned the adversary proceeding to the undersigned.
. As of March 7, 2007, Greystone sold, transferred and assigned to GBC Funding, LLC ("GBC”) all its right, title and interest in the Loan. The Court will refer to Greystone and GBC collectively as "GBC.”
. Defendant Orlando is not a party to the Motion.
. All of Titan’s then-subsidiaries, defendants in this action (the Court will refer to Titan and its subsidiaries, as a group, as the "Titan Entities”), were also signatories to the First Corporate Guarantee. They did so at GBC's instruction., and did not have any real business relationship with the Debtor to warrant guaranteeing the Debtor’s obligation to GBC. Compl. ¶ 38.
. Titan's new subsidiaries, AOCI and Appco, had also executed a separate guarantee following the closing of the AOCI purchase with the result that the Titan Entities’ collectively guaranteed Debtor's entire debt to GBC. Compl. ¶ 48.
. This section sets out in relevant part:
(b) The certificate of incorporation may also contain ... (7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit.
. The cases cited by the Director Defendants include: Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 203 (Del.Ch.2006), aff'd, Trenwick Am. Litig. Trust v. Bil-lett, No. 495, 2006, 2007 Del. LEXIS 357, 2007 WL 2317768 (Del. Aug. 14, 2007); In re Universal Mining Corp., 2001 Bankr.LEXIS 1064 (Bankr.E.D.Ky.2001). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494358/ | DECISION
JAMES E. SHAPIRO, Bankruptcy Judge.
On December 20, 2006, John J. and Jennifer M. McCarthy (“McCarthys”) filed a joint petition in bankruptcy under chapter 7, caused by the failure of their real estate investments in Minnesota.
Some facts in this case are undisputed. The McCarthys’ Minnesota real estate investments involved a scam orchestrated by Vu Le a/k/a Vihn Le (hereafter referred to as “Vu Le”) and by various entities controlled by him. Vu Le’s present whereabouts are unknown. It is believed that he is the subject of a pending criminal investigation in Minnesota. The question before this court is: What role, if any, did the McCarthys have in Vu Le’s scam? Were they, as they contend, innocent investors who, along with other parties, were victimized by Vu Le or were they, as the U.S. Trustee and chapter 7 trustee contend, in cahoots with Vu Le in his scam?
The U.S. Trustee (“UST”) and Virginia E. George (“chapter 7 trustee”) assert that the McCarthys are not deserving of a discharge in this bankruptcy. It is their position that the McCarthys were voluntary and eager participants in non-arm’s length transactions and that Vu Le and the entities he controlled were insiders of the McCarthys. The UST and chapter 7 trustee further contend that the McCarthys fully knew their role as straw buyers, when title to each of the various parcels of real estate was placed in their names in exchange for fees. The chapter 7 trustee also asserts that the McCarthys crossed the line with respect to pre-petition bankruptcy planning by being overly aggressive in converting non-exempt assets into exempt assets.
This adversary complaint consists of the following counts:
*7491. § 727(a)(4)(A) (false oath),
2. § 727(a)(5) (failure to explain loss of assets), and
3. § 727(a)(2) (fraudulent transfer of property within one year of the filing of the bankruptcy).
This is a core proceeding under 28 U.S.C. § 157(b)(2)(J), and this court has jurisdiction under 28 U.S.C. § 1334.
BACKGROUND
John J. McCarthy (“John”) and Jennifer M. McCarthy (“Jennifer”) are married and have two minor children. When they filed their bankruptcy petition and before their involvement with Vu Le, they owned a home in Waukesha, Wisconsin, valued at $275,000 and subject to a mortgage with a balance due of approximately $223,750. They also, at that time, owned an income property consisting of a duplex in Milwaukee, Wisconsin, valued at $90,000 and subject to a mortgage with a balance due of approximately $81,900.
The McCarthys are both in their early thirties. Jennifer currently is a real estate broker who began working at Shorewest Realtors as a real estate agent in approximately 2003 and later obtained a real estate broker’s license. She is primarily involved in residential sales, with annual earnings in the range of $92,000 when this bankruptcy petition was filed. She is a graduate of the University of Wisconsin-Madison holding a bachelors degree in marketing and management. John also graduated from the University of Wisconsin-Madison, where he obtained a bachelors degree in engineering. He also holds a masters degree in engineering, which he received from Portland State University, and is currently employed at General Electric where he has worked since 2003. His annual salary at the time this bankruptcy petition was filed was in the range of $69,000-75,000.
Before the McCarthys became involved in the Minnesota real estate investments, their financial condition was stable. That situation drastically changed after they invested in the Minnesota real estate properties.
how the McCarthys became INVOLVED WITH VU LE
In late 2005 or early 2006, the McCar-thys were approached by Bryce Andrews (“Andrews”), a long-time friend of Jennifer, about an investment opportunity. Andrews and Jennifer had been in the same college business fraternity and remained good friends. Andrews told the McCar-thys about an “amazing opportunity” for an investment he had with Wisdom Development Group (“Wisdom”), one of the entities controlled by Vu Le. Andrews showed the McCarthys some testimonial letters from prominent Minnesotans about this business opportunity and also displayed a spreadsheet which Andrews had created reflecting the potential profits which could be obtained from this investment opportunity. Wisdom had several alternative investment programs available for potential investors. While these programs differed with each other to some degree, they all provided for participating investors to become title owners and sign mortgages on these properties. Wisdom would make all of the financing arrangements with mortgage lenders obtained by Wisdom. The properties in these programs consisted of either vacant lots or partially developed lots owned by third parties and available for sale. Under these programs, Wisdom also arranged to have the properties fully developed as residential dwellings. All expenses in connection with these properties, including payment of the mortgages, would initially be paid by the investors who would then be promptly reimbursed by Wisdom. These expenses included not only the mortgage payments but all other *750expenses including construction costs, real estate taxes, and insurance. After these properties were fully developed, they would first be leased out by Property and Lease Management, LLC (“PLM”), which is another entity fully controlled by Vu Le. PLM would obtain tenants for these properties and also collect rents and maintain the properties. Approximately five years after the properties were fully completed, they would then be resold with Wisdom or another of the entities controlled by Vu Le handling the resales. The McCarthys testified that, for their part in signing as title owners and obtaining the loans, they would receive fees ranging from $1,000 per property to $3,500 per property. Later, when the properties were to be resold, they would also share in the profits from such resales. Jennifer testified that the percentage of profits which she and John were to receive upon resale would be “somewhere around 35 percent.” (February 4, 2009 Tr. p. 160, line 7) Everything else that would be involved in these programs would be handled by Wisdom or one of Vu Le’s other controlled entities. Wisdom drafted all of the agreements it entered into with the McCarthys.
Andrews told the McCarthys that, based on his experience, Wisdom had fully complied with all of its responsibilities, including reimbursement for any expenses including the mortgage payments which he incurred. The McCarthys, in reliance upon what they were told by Andrews, decided to invest with Wisdom and signed all of the agreements prepared by Wisdom without these documents first having been reviewed by legal counsel. During March and April of 2006, the McCarthys purchased four separate parcels of real estate — all located in Minnesota — as follows:
12th Avenue Property
This was the first transaction and involved the purchase of a vacant lot located at 2500 — 12th Avenue South, Minneapolis, Minnesota. This parcel was purchased solely in the name of John1 at a price of $70,000. A $358,500 mortgage loan was obtained from the Bank of Cherokee, which was used, in part, to pay the $70,000 purchase price. The McCarthys understood that other withdrawals from this loan would be needed for anticipated construction costs. $25,000 was paid to Acquisition Services, another Vu Le controlled entity, for construction. However, no construction was ever commenced. The full amount borrowed on this loan, including the purchase price of the lot, totaled $105,950. John received a fee of $2,500 for placing title to this property in his name. When John was asked what was the purpose of this fee, his response was: “for bringing our creditworthiness to the table as investors.” (February 5, 2009 Tr. p. 23, lines 8-11)
1606 and 1608 Woodbridge, St. Paul, Minnesota
The next purchases made by the McCar-thys consisted of two side-by-side townhouses which were nearly fully developed, except for completion of landscaping and construction of a driveway. Jennifer’s friend, Andrews, was the seller of these townhouses. The McCarthys testified that, after the purchases of these properties, they discovered that what had been represented in the plans for these townhouses as containing three bedrooms in each townhouse contained only two bed*751rooms in each townhouse. Mortgages of $238,000 were obtained for each townhouse. A portion of each mortgage loan was funded by Countrywide for $190,400 and the balance of each mortgage loan of $47,600 was funded by Homecomings Financial. Title to each townhouse was put in the names of both John and Jennifer who received a fee of $3,500 for each townhouse. None of the remaining construction promised to be completed was ever performed. John also testified that appliances would be put in each townhouse, but no appliances were provided. Neither townhouse was ever leased. The McCar-thys testified that there was a $26,920 withdrawal made to Wisdom. They stated that they did not know why this withdrawal was made because no further construction was performed on either townhouse after the purchases. Andrews never told the McCarthys how much he made from the sales of these townhouses to the McCarthys. However, at the trial, Andrews stated he received $2,500 in the aggregate from the sales. (February 4, 2009 Tr. p. 184, lines 10-14)
5th Avenue Property
The final transaction involved a purchase of a vacant lot at 26XX — 5th Avenue, St. Paul, Minnesota, bought for $120,000. At the closing, Acquisition Services, another entity controlled by Vu Le, received at least $12,500 which the McCar-thys understood would be used for closing costs and anticipated costs of construction for this property. No construction was ever started on this property. Jennifer purchased this property in her name only and received a $ 1,000 fee. This transaction was funded by a mortgage with FCC Acquisition Corp.2 The total amount obtained from the mortgage loan, including the purchase price of the lot, was approximately $147,000. (February 4, 2009 Tr. p. 73, lines 6-16)
WHAT HAPPENED AFTER THE PURCHASES?
In late June or early July of 2006, these Minnesota investments started to unravel. The McCarthys began receiving only partial reimbursement for mortgage payments which they made. By the end of August of 2006, Wisdom discontinued making all further reimbursements to the McCarthys.
The McCarthys testified that Wisdom paid them a total of $23,481.30 of which $10,500 consisted of the fees, with the balance as reimbursement for mortgage payments and miscellaneous other expenses which they made. The total amount which the McCarthys paid was $28,936.35, leaving them with a deficit of $5,455.05 (Plaintiffs exhibit 29). But the worst was yet to come.
In late July of 2006, the McCarthys met with Vu Le in Minnesota. This was their first and only meeting with him in person. They inquired why they were not being fully reimbursed for payments which they made and why the properties were not being developed. Jennifer testified that Vu Le failed to provide them with a satisfactory response.
Around the middle of December of 2006, a mortgage foreclosure proceeding was commenced by The Bank of Cherokee against the McCarthys in connection with the 12th Avenue property. The McCar-thys tried to surrender this property to The Bank of Cherokee in lieu of foreclosure. They made this same attempt with the other mortgage lenders with respect to the other Minnesota parcels of real estate. *752However, all of these efforts failed. They then considered other alternatives, including selling the properties or developing them on their own. None of their options panned out. The McCarthys finally realized that their only recourse was to file a chapter 7 petition in bankruptcy.
The McCarthys’ bankruptcy petition includes a combined unpaid balance due to the various mortgage lenders on these Minnesota properties in the amount of approximately $728,000. In addition to the mortgage foreclosure brought on the 12th Avenue property by The Bank of Cherokee, mortgage foreclosure proceedings were also commenced with respect to the Woodbridge properties. No mortgage foreclosure proceedings have, as yet, been started in connection with the 5th Avenue property. The McCarthys testified that they also lost their investment property in Milwaukee through mortgage foreclosure.
LAW
The court recognizes that a denial of a debtor’s discharge is an extreme remedy and that denial of such discharge must be construed liberally in favor of the debtor. In re Koss, 403 B.R. 191 (Bankr.D.Mass.2009). At the same time, however, the court also recognizes that a discharge is not a right but is a privilege and is available only to honest debtors. Id. at 215. The burden of proof for denial of discharge is upon the UST to establish grounds for denial of discharge by a preponderance of the evidence. In re Serafini 938 F.2d 1156 (10th Cir.1991).
FALSE OATH — SEC. 727(a)(4)(A)
Under § 727(a)(4)(A) (false oath or account), the U.S. Trustee must prove:
1. debtor made a statement under oath,
2. which was false,
3. debtor knew statement was false,
4. the statement was made with a fraudulent intent, and
5. statement related materially to the bankruptcy case.
In re Beaubouef, 966 F.2d 174, 178 (5th Cir.1992). Omissions from the bankruptcy schedules and Statement of Financial Affairs constitute a false oath for purposes of § 727(a)(4). In re Hamilton, 390 B.R. 618, 625 (Bankr.E.D.Ark.2008) (“Omissions from schedules qualify as a false oath if they are made knowingly and with fraudulent intent.”); In re Glenn, 335 B.R. 703, 707 (Bankr.W.D.Mo.2005); In re Bostrom, 286 B.R. 352, 360 (Bankr.N.D.Ill.2002).
In this case, the chapter 7 trustee testified that there were numerous omissions from the debtors’ schedules and Statement of Financial Affairs (“SOFA”), including the following: *753With respect to the chapter 7 trustee’s assertions of inaccuracies in Schedule “G,” she did acknowledge that the supporting documents she requested from the McCar-thys to more accurately explain the nature of their involvement in the Minnesota properties were voluntarily turned over to her before the adjourned § 341 meeting of creditors held on February 20, 2007. It is well established that the court may consider the debtor’s subsequent voluntary disclosure as evidence of innocent intent. In re Kelly, 135 B.R. 459, 461 (Bankr.S.D.N.Y.1992); In re Giquinto, 388 B.R. 152, 181 (Bankr.E.D.Pa.2008).
*7521. Schedule G. Although the McCar-thys disclosed the various agreements entered into with Wisdom and PLM, the chapter 7 trustee contends that these disclosures were “kind of skiddy on characterization” (February 4, 2009 Tr. p. 227, lines 21-22). In her opinion, the disclosures made were not an accurate or truthful statement of the McCarthys’ interest in these properties.
2. Questions 1 and 2 of SOFA. Failure to disclose the $10,500 fees which the McCarthys received from Wisdom.
3. Question 10 of SOFA. Failure to disclose preferential transfers.
4. Question 14 of SOFA. Failure to disclose property held for another person.
5. Question 21 of SOFA. Failure to disclose the McCarthys’ partnership interest.
*753With respect to the lack of disclosure of fees which the McCarthys received, Atty D. Alexander Martin, who prepared the McCarthys’ bankruptcy petition and schedules, testified that the reason these fees were not disclosed in either Questions 1 or 2 of SOFA was because he “missed it.” (February 5, 2009 Tr. p. 179, line 20) Atty Martin also testified that he did not include any preferences in Question 10 of SOFA because he concluded that the McCarthys’ debts, being primarily non-consumer debts, did not include any payments in excess of $5,000, which was the prerequisite amount to qualify as a preferential payment within the meaning of § 547(c)(9) when this bankruptcy case was filed. Atty Martin further stated that this was a complicated case which required an emergency filing and added: “At the time I filed, I thought it was my best work. Looking back on it, I could have improved; I could have done better.” (February 5, 2009 Tr. p. 180, lines 5-7) Atty Martin also stated that he answered Questions 14 and 21 of SOFA as “none” because he reached the conclusion that the debtors were not partners with Vu Le. The court is aware that one of the exhibits in this adversary proceeding is an agreement in connection with the 5th Avenue Property between Property Lease Management LLC and Jennifer labeled a “Partner Agreement,” and which also referred to Jennifer as “Partner”. However, the record in this case persuades the court that neither Jennifer nor John had any control over any of the parcels of real estate they purchased. It is well established that the bankruptcy court is not bound by labels given to a debt in the parties’ agreement. 6 Collier on Bankruptcy ¶ 523.11[6][a] (15th ed. rev.). Mark Dorman, a 25-year veteran investigator for the Wisconsin Department of Revenue assigned to the task of investigating possible security violations involving Vu Le, testified that: “[fit’s very common for investors to be referred to as partners in schemes involving securities transactions.” (February 5, 2009 Tr. p. 94, lines 1-4).
This case turns on the credibility of the McCarthys in deciding if they were innocent investors duped by a con artist, or were more deeply involved with Vu Le in a scheme. The chapter 7 trustee testified that it is simply unbelievable that the McCarthys, in view of their educational background and business expertise: “... would risk incurring a million dollars in debt to get $2,500 on each of the parcels. It never made any sense to me.” (February 4, 2009 Tr. p. 250, lines 18-21) Fraudulent intent is a difficult element to establish because, generally, it is the debtor or debtors who are the only persons able to testify as to their true intent. In this case, the court, having had an opportunity to observe and evaluate the demeanor of the McCarthys, was impressed by their credibility and is persuaded that there was no fraudulent intent on their part.
The most compelling testimony which supports this conclusion with respect to credibility was presented by Dorman. He stated that he had interviewed the McCar-thys to establish their credibility as well as the credibility of other investors with Vu *754Le and concluded that the McCarthys were only passive investors and victims of the scam perpetrated by Vu Le. (February 5, 2009 Tr. p. 89, line 12) He further testified that the fees paid to the McCar-thys were part of a “lulling technique to have them thinking they were actually in a legitimate investment.” (February 5, 2009 Tr. p. 95, lines 23-25) Dorman added that people who are “smarter, richer, and more successful” than the McCarthys also lost money in these types of schemes. (February 5, 2009 Tr. p. 100, lines 2 and 3) He concluded by stating that the McCarthys had no control over the promised construction of the various real estate properties which they had purchased in their names, and in his opinion, this was not a straw man scheme because the McCarthys were not conscious of their role in this scheme.
The lesson learned from this case is that even intelligent people, like the McCar-thys, can be duped by a clever con artist.
Recently, in In re Guillet, 398 B.R. 869 (Bankr.E.D.Tex.2008), the court concluded that the debtor, a doctor by occupation who had previously been involved in various business enterprises, was a victim of a scam rather than a perpetrator in the scam. The court, finding that the debtor was truthful and credible in his testimony and entitled to a bankruptcy discharge, declared: “financial victims, no matter how desperate, foolish, or stupid, should not be financially punished for their ineptitudes.” Id. at 891.
Any omissions from the McCarthys’ schedules resulted from unintentional mistakes and not from any fraudulent intent on their part. Atty Martin has accepted full responsibility for omissions which should have been included in the bankruptcy schedules. This is in sharp contrast to what occurred in In re Dailey, 405 B.R. 386 (Bankr.S.D.Fla.2009). In Dailey, the debtor attempted to blame his former bankruptcy counsel but failed to call that counsel to testify at the trial. The court in Dailey stated that the debt- or’s failure to have his former attorney testify caused the court to draw an adverse inference from such failure, and the debtor was denied a discharge. In the case at bar, however, the McCarthys did call Atty Martin, who had prepared the bankruptcy petition and schedules, to provide testimony.
The UST has failed to establish by a preponderance of the evidence all the elements necessary for denial of discharge under § 727(a)(4)(A).
SEC. 727(a)(5)
Under § 727(a)(5), proof of fraudulent intent is not required. What must be shown is that the McCarthys failed to satisfactorily explain a loss of assets or a deficiency of assets. Initially, the UST, as the objecting party, must show that the McCarthys at one time owned substantial and identifiable assets which are no longer available to their creditors. In re Bostrom, 286 B.R. 352, 364 (Bankr.N.D.Ill.2002); In re Stamat, 395 B.R. 59, 76 (Bankr.N.D.Ill.2008). Once this showing has been made, the burden then shifts to the debtor or debtors to provide a satisfactory explanation for the unavailability of the assets. Stamat, 395 B.R. at 76. Stamat further states that courts are not concerned with the wisdom of a debtor’s disposition of assets and income but instead focuses upon the truth of the debtor’s explanation. See also In re Maletta, 159 B.R. 108, 116 (Bankr.D.Conn.1993) (“The test under this subsection relates to the credibility of the proffered explanation, not the propriety of the disposition.”)
The UST did not make the initial prerequisite showing that substantial and identifiable assets are no longer available *755to the McCarthys’ creditors. The court is persuaded that the purchase prices paid by the McCarthys for the various parcels of real estate were well in excess of then-then fair market values. The inflated purchase prices paid for the Minnesota properties were part of the scam perpetrated upon the McCarthys by Vu Le. When John was asked at the trial by his attorney if there were any assets lost or dissipated, he responded:
No. I mean, the question is really the property never had the value — they never had the asset. I mean, they were appraised for more than what actual value there was. There never had a loss of assets; they simply didn’t have them. The properties were never finished.
(February 5, 2009 Tr. p. 117, lines 8-13). Even had the UST overcome this hurdle, the court concludes that the McCarthys were truthful in explaining what occurred, to the best of their ability. They fully cooperated with the UST and Chapter 7 Trustee in promptly turning over all documentation in their possession when asked to do so.
The court concludes that denial of discharge under § 727(a)(5) has not been established.
SEC. 727(a)(2) — FRAUDULENT TRANSFER OR CONCEALMENT OF PROPERTY
The UST’s third count for denial of discharge is grounded upon its contention that the McCarthys transferred certain assets from non-exempt funds into exempt funds, consisting of the following:
1.$2,500 transferred on October 9, 2006 and
2.$7,400 transferred on December 13, 2006.3
in violation of 11 U.S.C. § 727(a)(2).
The McCarthys have responded by stating that these transfers were made upon advice of their bankruptcy counsel.
Sec. 727(a)(2) requires proof of the following elements:
1. act complained of done within one year before 'filing of bankruptcy petition,
2. act was done with actual intent to defraud,
3. act was done by the debtor, and
4. act consists of transferring or concealing property of the debtor.
Pre-bankruptcy planning is, in and of itself, not improper. As noted in Collier on Bankruptcy, both the House and Senate Reports validate this approach by stating the following:
As under current law, the debtor will be permitted to convert nonexempt property into exempt property before filing a bankruptcy petition. The practice is not fraudulent as to creditors and permits the debtor to make full use of the exemptions to which he is entitled under the law.
6 Collier on Bankruptcy ¶ 727.02[3][f] (15th ed. rev.), citing 50 H.R. Rep. 595, 95th Cong. 1st Sess. 361 (1977), reprinted in App. Pt. 4(d)(1) infra; S.Rep. No. 989, 95th Cong., 2d Sess. 76 (1978), reprinted in App. Pt. 4(e)(1) infra. However, where a conversion is made with the intent to defraud creditors, such conversion is objectionable and may provide a basis for denial of discharge under § 727(a)(2). In re Smiley, 864 F.2d 562 (7th Cir.1989). Smiley also recognizes that conversions of as*756sets from non-exempt to exempt forms within a year preceding a petition in bankruptcy are not necessarily fraudulent, and whether § 727(a)(2) applies depends on the facts and circumstances of each case.
The record in this case shows that the McCarthys established a pattern over the years of periodically setting aside some of their funds for retirement purposes. Moreover, the total amount in this case ($9,900) is not excessive. This court in In re Bogue, 240 B.R. 742 (Bankr.E.D.Wis.1999), concluded that where a debtor placed $17,800 into exempt annuity contracts it was not an exorbitant amount. The court is also persuaded that the McCarthys reasonably relied on the advice of their bankruptcy counsel in making these pre-bankruptcy transfers and that such reliance has negated the element of fraudulent intent required in § 727(a)(2).
Because the transfer of these funds by the McCarthys was not made with actual intent to defraud creditors, denial of discharge under § 727(a)(2) is not warranted.
CONCLUSION
The UST has not established, by a preponderance of the evidence, that the McCarthys should be denied a discharge under § 727(a)(2), § 727(a)(4), or § 727(a)(5). This adversary complaint is dismissed, with prejudice, and the McCar-thys shall be granted a discharge.
The foregoing constitutes the court’s findings of fact and conclusions of law pursuant to Federal Bankruptcy Rule 7052.
A separate order dismissing this adversary proceeding shall be issued.
. When John was asked why he purchased this property only in his name, his response was: "We were looking at getting — you know, purchasing multiple properties. We were under the understanding that in order to — you know, in order to do multiple investments for properties, that if we had everything in both of our names it could limit our potential for acquiring more properties.” (February 5, 2009 Tr. p. 10, lines 20-25)
. FCC Acquisition Corp. and Acquisition Services are two separate entities. FCC Acquisition Corp. is not controlled by Vu Le, while Acquisition Services is a Vu Le controlled entity.
. In addition, there was a third transfer of $1,800 on December 21, 2006, which was made one day after the McCarthys filed their bankruptcy petition. This transfer has not been challenged by the chapter 7 trustee, who has since filed a no asset report in this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494359/ | OPINION
RHODES, Bankruptcy Appellate Panel Judge.
After reviewing the record and the parties’ briefs, and after considering their oral arguments, the Panel determines that the bankruptcy court’s findings of fact are not clearly erroneous and its conclusions of law are correct. We therefore affirm the bankruptcy court’s decision for the reasons stated by that court in its well-written opinion entered in Hardesty v. Citifinancial, Inc. (In re Roberts), 402 B.R. 808 (Bankr.S.D.Ohio 2009), and incorporated in In re Friesner. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488072/ | Matter of Antonucci (2022 NY Slip Op 06623)
Matter of Antonucci
2022 NY Slip Op 06623
Decided on November 18, 2022
Appellate Division, Fourth Department
Per Curiam
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., CENTRA, LINDLEY, CURRAN, AND BANNISTER, JJ. (Filed Nov. 18, 2022.)
&em;
[*1]MATTER OF DAVID P. ANTONUCCI, A SUSPENDED ATTORNEY, RESPONDENT. GRIEVANCE COMMITTEE OF THE FIFTH JUDICIAL DISTRICT, PETITIONER.
OPINION AND ORDER
Order of suspension entered.Per Curiam
Opinion: Respondent was admitted to the practice of law by this Court on January 14, 1988, and he maintains an office in Watertown. In January 2022, the Grievance Committee filed a petition alleging against respondent three charges of professional misconduct, including violating an established rule of a tribunal, failing to keep a client informed about the status of a legal matter, and making misrepresentations to a client about the status of a matter. Although respondent filed an answer denying material allegations of the petition, the parties have since filed a joint motion for discipline on consent wherein respondent conditionally admits that he has engaged in certain acts of professional misconduct and the parties request that the Court enter a final order imposing the sanction of suspension for a period of three years.
With respect to charge one, respondent conditionally admits that, in 2019, he represented a client in a matter pending before the Division of Human Rights (DHR) and that, although DHR advised him at the outset of the matter that the law and rules applicable to such proceedings required that certain private information pertaining to any person be redacted from documents submitted to DHR, respondent subsequently filed a document that disclosed the opposing party's social security number, bank account number, date of birth, driver's license number, and U.S. passport number. Respondent also admits that the private personal information he failed to redact from the document submitted to DHR was not relevant to the matters at issue in the proceeding.
With respect to charge two, respondent conditionally admits that, in March 2018, he agreed to represent several individuals in litigation arising from a dispute regarding ownership of a parcel of land located in the Town of Sandy Creek. Respondent admits that, shortly after he commenced a civil action on behalf of the clients, certain defendants moved to dismiss the causes of action against them, and the trial court provisionally granted the motion, unless respondent filed an amended complaint adding as necessary parties all property owners abutting the disputed parcel. Respondent admits that he subsequently informed his clients, inter alia, that the trial court had denied the defendants' motion to dismiss.
Respondent admits that, in June 2018, he filed an amended summons and complaint joining the additional necessary parties, after which certain of the defendants asserted counterclaims against respondent's clients and moved to dismiss the causes of action against them. Respondent admits that he failed to inform his clients of the counterclaims and motion to dismiss. Respondent also admits that he thereafter failed to respond to his clients' requests for an accounting of the retainer funds they had paid to respondent at the outset of the representation.
Respondent admits that, in December 2018, the trial court granted the defendants' motion to dismiss and enjoined respondent's clients from using or altering the disputed parcel of land. Respondent admits that he failed to inform his clients of that ruling, failed to respond to inquiries from the clients about the matter, and delayed meeting with the clients until April 2019, at which time he falsely told them that disposition of the matters at issue in the real property litigation had been delayed because the judge handling the case had retired and a different judge had been assigned to preside over the matter.
In June 2019, respondent's clients learned through means other than respondent of the trial court's ruling issued in December 2018. Respondent admits that he falsely advised his clients that there was some uncertainty about the effect of the trial court's ruling and that various substantive issues would be addressed at an upcoming hearing. Respondent admits that, although he attempted to dissuade his clients from attending the hearing, certain of his clients nonetheless attended the hearing and learned that the defendants' motion to dismiss had been granted, that certain counterclaims remained pending against them, and that the purpose of the hearing was to determine, inter alia, whether sanctions were warranted against respondent for [*2]filing a frivolous action.
Charge three relates to a prior attorney disciplinary proceeding wherein this Court found that respondent had engaged in certain acts of professional misconduct and imposed the sanction of suspension from the practice of law for a period of one year. In imposing that sanction, however, the Court additionally stayed the imposition of the suspension on the condition that respondent provide to the Grievance Committee regular reports confirming that he was participating in mental health treatment and an attorney mentoring program (see Matter of Antonucci, 118 AD3d 110, 113 [4th Dept 2014]). In relation to the joint motion for discipline on consent, respondent conditionally admits that he failed to provide the Grievance Committee with the reports required under this Court's prior order and that he failed to participate in mental health treatment for a period of time.
Motions for discipline by consent are governed by section 1240.8 (a) (5) of the Rules for Attorney Disciplinary Matters (22 NYCRR), which provides that, at any time after a petition is filed with this Court alleging professional misconduct against an attorney, the parties may file a joint motion requesting the imposition of discipline by consent. Such a motion must include a stipulation of facts, the respondent's conditional admission of acts of professional misconduct and specific rules or standards of conduct violated, any relevant aggravating and mitigating factors, and an agreed-upon sanction (see 22 NYCRR 1240.8 [a] [5] [i]). If the motion is granted, the Court must issue a decision imposing discipline upon the respondent based on the stipulated facts and as agreed upon in the joint motion. If the Court denies the motion, the respondent's conditional admissions are deemed withdrawn and may not be used in the pending proceeding (see 22 NYCRR 1240.8 [a] [5] [iv]).
In this case, we grant the joint motion of the parties and conclude that respondent's admissions establish that he has violated the following Rules of Professional Conduct (22 NYCRR 1200.0):
rule 1.4 (a) (1) (iii)—failing to inform a client in a prompt manner of a material development in a matter including settlement or plea offers;
rule 1.4 (a) (3)—failing to keep a client reasonably informed about the status of a matter;
rule 1.4 (a) (4)—failing to comply in a prompt manner with a client's reasonable requests for information;
rule 3.3 (f) (3)—intentionally or habitually violating an established rule of procedure or evidence while appearing as a lawyer before a tribunal;
rule 8.4 (c)—engaging in conduct involving dishonesty, fraud, deceit, or misrepresentation;
rule 8.4 (d)—engaging in conduct that is prejudicial to the administration of justice; and
rule 8.4 (h)—engaging in conduct that adversely reflects on his fitness as a lawyer.
In imposing the sanction requested by the parties, we have considered the serious nature of the misconduct at issue in this proceeding and respondent's disciplinary history, which includes the one-year stayed suspension imposed in 2014 and a public censure imposed in 2006 (see Matter of Antonucci, 34 AD3d 133, 135 [4th Dept 2006]). Accordingly, after consideration of all of the factors in this matter, we conclude that respondent should be suspended from the practice of law for a period of three years. We also vacate the stay of the one-year suspension and direct that the one-year suspension run concurrently with the three-year suspension imposed herein. | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488077/ | DiGiacco v Grenell Is. Chapel (2022 NY Slip Op 06576)
DiGiacco v Grenell Is. Chapel
2022 NY Slip Op 06576
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., CENTRA, LINDLEY, CURRAN, AND WINSLOW, JJ.
635 CA 21-00810
[*1]ROBERT DIGIACCO, PLAINTIFF-APPELLANT, AND MARY ANN GRASSI, PLAINTIFF,
vGRENELL ISLAND CHAPEL, DEFENDANT-RESPONDENT.
BOUSQUET HOLSTEIN PLLC, SYRACUSE (GREGORY D. ERIKSEN OF COUNSEL), FOR PLAINTIFF-APPELLANT.
Appeal from an order of the Supreme Court, Jefferson County (James P. McClusky, J.), entered May 11, 2021. The order denied the motion of plaintiff Robert DiGiacco for leave to amend the complaint.
It is hereby ORDERED that the order so appealed from is unanimously reversed on the law without costs and the motion is granted.
Memorandum: In this action seeking, among other things, to quiet title to real property, Robert DiGiacco (plaintiff) appeals from an order denying his motion for leave to amend the complaint to add causes of action for slander of title and removal of a cloud on title by reformation or cancellation of a deed.
We agree with plaintiff that Supreme Court abused its discretion in denying the motion. "Leave to amend a pleading should be freely granted in the absence of prejudice to the nonmoving party where the amendment is not patently lacking in merit" (Uhteg v Kendra, 200 AD3d 1695, 1699 [4th Dept 2021] [internal quotation marks omitted]; see CPLR 3025 [b]). "A court should not examine the merits or legal sufficiency of the proposed amendment unless the proposed pleading is clearly and patently insufficient on its face" (Matter of Clairol Dev., LLC v Village of Spencerport, 100 AD3d 1546, 1546 [4th Dept 2012] [internal quotation marks omitted and emphasis added]; see generally Great Lakes Motor Corp. v Johnson, 156 AD3d 1369, 1371 [4th Dept 2017]). Here, we conclude that the court erred in denying the motion inasmuch as there was no showing of prejudice arising from the proposed amendments (see generally Greco v Grande, 160 AD3d 1345, 1346 [4th Dept 2018]; Williams v New York Cent. Mut. Fire Ins. Co. [appeal No. 2], 108 AD3d 1112, 1114 [4th Dept 2013]) and the proposed amended complaint adequately asserts causes of action for slander of title (see 39 Coll. Point Corp. v Transpac Capital Corp., 27 AD3d 454, 455 [2d Dept 2006]; Fink v Shawangunk Conservancy, Inc., 15 AD3d 754, 756 [3d Dept 2005]; see generally Pelc v Berg, 68 AD3d 1672, 1674 [4th Dept 2009]) and removal of a cloud on title by reformation or cancellation of a deed (see Nurse v Rios, 160 AD3d 888, 888 [2d Dept 2018]; see generally Fonda v Sage, 48 NY 173, 181 [1872]). In making its determination that the proposed causes of action were palpably insufficient, the court improperly looked beyond the face of the proposed pleading to the documents establishing the chain of title to plaintiffs' properties and a 2011 deed from the Trustees of Grenell Island Chapel to defendant.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488074/ | Grace v Cayuga Youth Athletic Assn., Inc. (2022 NY Slip Op 06586)
Grace v Cayuga Youth Athletic Assn., Inc.
2022 NY Slip Op 06586
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: PERADOTTO, J.P., LINDLEY, CURRAN, WINSLOW, AND BANNISTER, JJ.
726 CA 21-01752
[*1]MATTHEW S. GRACE, PLAINTIFF-RESPONDENT,
vCAYUGA YOUTH ATHLETIC ASSOCIATION, INC., DEFENDANT-APPELLANT.
GOLDBERG SEGALLA LLP, BUFFALO (JAMES M. SPECYAL OF COUNSEL), FOR DEFENDANT-APPELLANT.
LIPSITZ GREEN SCIME CAMBRIA LLP, BUFFALO (JOHN A. COLLINS OF COUNSEL), FOR PLAINTIFF-RESPONDENT.
Appeal from an order of the Supreme Court, Niagara County (Frank Caruso, J.), entered August 26, 2021. The order denied defendant's motion for summary judgment dismissing plaintiff's complaint.
It is hereby ORDERED that the order so appealed from is unanimously affirmed without costs.
Memorandum: Plaintiff commenced this action seeking damages for injuries he sustained when he was hit with a baseball bat at a youth baseball game. Plaintiff was struck in the face by a bat swung by a teammate, in an off-field area behind the dugout, near spectators, and outside the areas designated for practice swings, i.e., home plate on the field or the caged on-deck area. Defendant moved for summary judgment dismissing the complaint on the ground, inter alia, that plaintiff assumed the risks associated with playing baseball. Supreme Court denied the motion, and we affirm.
The doctrine of assumption of the risk acts as a complete bar to recovery where a plaintiff is injured in the course of a sporting or recreational activity through a risk inherent in that activity (see Turcotte v Fell, 68 NY2d 432, 438-439 [1986]). "As a general rule, participants properly may be held to have consented, by their participation, to those injury-causing events which are known, apparent or reasonably foreseeable consequences of the participation" (id. at 439). Thus, "primary assumption of the risk applies when a consenting participant in a qualified activity 'is aware of the risks; has an appreciation of the nature of the risks; and voluntarily assumes the risks' " (Custodi v Town of Amherst, 20 NY3d 83, 88 [2012]). "Whether a plaintiff should be deemed to have made an informed estimate of the risks involved in an activity before deciding to participate depends upon the openness and obviousness of the risk, the plaintiff's background, skill and experience, the plaintiff's own conduct under the circumstances, and the nature of the defendant's conduct" (Butchello v Herberger, 145 AD3d 1586, 1587 [4th Dept 2016]; see Morgan v State of New York, 90 NY2d 471, 485-486 [1997]; Lamey v Foley, 188 AD2d 157, 164 [4th Dept 1993]). "It is not necessary to the application of assumption of [the] risk that the injured plaintiff have foreseen the exact manner in which his or her injury occurred, so long as he or she is aware of the potential for injury of the mechanism from which the injury results" (Maddox v City of New York, 66 NY2d 270, 278 [1985]). "The doctrine of primary assumption of the risk, however, will not serve as a bar to liability if the risk is unassumed, concealed, or unreasonably increased" (Ribaudo v La Salle Inst., 45 AD3d 556, 557 [2d Dept 2007], lv denied 10 NY3d 717 [2008]; see Morgan, 90 NY2d at 485). Moreover, inasmuch as "the assumption of risk to be implied from participation in a sport with awareness of the risk is generally a question of fact for a jury . . . , dismissal of a complaint as a matter of law is warranted [only] when on the evidentiary materials before the court no fact issue remains for decision by the trier of fact" (Maddox, 66 NY2d at 279; see McKenney v Dominick, 190 AD2d 1021, 1021 [4th Dept 1993]).
" '[T]he danger associated with people swinging bats on the sidelines while warming up for the game' is inherent in the game of baseball and, accordingly, a risk assumed, even by child participants" (Roberts v Boys & Girls Republic, Inc., 51 AD3d 246, 248 [1st Dept 2008], affd 10 NY3d 889 [2008]). Here, however, defendant's own submissions raise a triable issue of fact whether the injury-causing event was a known, apparent or reasonably foreseeable consequence of plaintiff's participation because the incident occurred off the fenced field of play behind a dugout, near spectators, outside the areas designated for practice swings, such as the caged on-deck area, and in a location where players had never previously been observed taking practice swings (cf. Roberts, 10 NY3d at 889; 51 AD3d at 248-249). Indeed, in contrast to Roberts, in which the evidence established as a matter of law that the plaintiff assumed the risk of being struck by a swinging bat in the area where the accident occurred, defendant's submissions here raise a triable issue of fact whether the teammate was "left to take practice swings precipitately in [a] place[] where such activity had no prior obvious presence" (Roberts, 51 AD3d at 249-250).
Defendant further contends that, regardless of assumption of risk, plaintiff's claim of negligent supervision must be rejected as a matter of law. We conclude, however, that defendant's own submissions raise "an issue of fact whether inadequate supervision was responsible for the accident or . . . [whether] better supervision could have prevented it" (Hochreiter v Diocese of Buffalo, 309 AD2d 1216, 1218 [4th Dept 2003] [internal quotation marks omitted]; see Sheehan v Hicksville Union Free School Dist., 229 AD2d 1026, 1026 [4th Dept 1996]).
We therefore conclude that the court properly denied the motion for summary judgment dismissing the complaint.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488075/ | Garcia v Town of Tonawanda (2022 NY Slip Op 06584)
Garcia v Town of Tonawanda
2022 NY Slip Op 06584
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., PERADOTTO, NEMOYER, CURRAN, AND BANNISTER, JJ.
710 CA 21-00911
[*1]OSVALDO GARCIA, PLAINTIFF-APPELLANT,
vTOWN OF TONAWANDA AND COUNTY OF ERIE, DEFENDANTS-RESPONDENTS.
CAMPBELL & ASSOCIATES, HAMBURG (JOHN T. RYAN OF COUNSEL), FOR PLAINTIFF-APPELLANT.
COLUCCI & GALLAHER, P.C., BUFFALO (RYAN L. GELLMAN OF COUNSEL), FOR DEFENDANT-RESPONDENT TOWN OF TONAWANDA.
MICHAEL A. SIRAGUSA, COUNTY ATTORNEY, BUFFALO (KENNETH R. KIRBY OF COUNSEL), FOR DEFENDANT-RESPONDENT COUNTY OF ERIE.
Appeal from an order of the Supreme Court, Erie County (Emilio Colaiacovo, J.), entered June 2, 2021. The order granted the motions of defendants Town of Tonawanda and County of Erie for summary judgment and dismissed the complaint and all cross claims.
It is hereby ORDERED that the order so appealed from is unanimously modified on the law and in the exercise of discretion by denying the motion of defendant Town of Tonawanda and reinstating the complaint against it and by granting plaintiff's motion in part and directing that the Town of Tonawanda disclose the documents requested therein and as modified the order is affirmed without costs.
Memorandum: After plaintiff was injured when his bicycle hit a signpost that had fallen and obstructed the sidewalk on which he was riding, plaintiff commenced this personal injury action against defendant Town of Tonawanda (Town) and defendant County of Erie (County). Plaintiff moved to strike the Town's answer in the event that the Town failed to produce certain requested discovery materials within 30 days. Supreme Court denied plaintiff's motion. Subsequently, the Town moved for summary judgment dismissing the complaint against it, and the County separately moved for summary judgment seeking, inter alia, dismissal of the complaint against it. As relevant, the Town and County each contended that it had not received prior written notice of the alleged hazardous condition as required by Town of Tonawanda Code § 68-2 (A) and Local Law No. 3-2004 of the County of Erie, respectively. The court granted the motions and dismissed the complaint against the Town and the County. Plaintiff now appeals from the order granting defendants' summary judgment motions, and we modify.
We reject plaintiff's contention that the court erred in granting the County's motion insofar as it sought summary judgment dismissing the complaint against it. The County met its initial burden on the motion by establishing that it did not receive prior written notice of the allegedly defective condition as required by Local Law No. 3-2004 (see Craig v Town of Richmond, 122 AD3d 1429, 1429 [4th Dept 2014]; see generally Yarborough v City of New York, 10 NY3d 726, 728 [2008]). The burden thus shifted to plaintiff to demonstrate, as relevant here, that the County "affirmatively created the defect through an act of negligence . . . that immediately result[ed] in the existence of a dangerous condition" (Yarborough, 10 NY3d at 728 [internal quotation marks omitted]). Plaintiff failed to meet his burden. Mere "speculation that [the County] created the allegedly dangerous condition is insufficient to defeat the motion" (Hall v City of Syracuse, 275 AD2d 1022, 1023 [4th Dept 2000]).
We agree with plaintiff, however, that the court erred in granting the Town's motion for summary judgment dismissing the complaint against it, and we therefore modify the order accordingly. The Town had the initial burden on the motion of establishing that no prior written notice of the alleged condition was given to either the Town Clerk or the Town Superintendent of Highways (see Town of Tonawanda Code § 68-2 [A]). In support of its motion, the Town submitted, inter alia, the deposition testimony of an administrative aide in the Town Highway Department and the Town's sign shop fabricator, each of whom testified that he did not learn of the fallen sign until he received the police report for the incident. However, neither employee testified that he searched the Highway Department's or the Town Clerk's records. Thus, the Town failed to establish as a matter of law that neither the Town Clerk nor the Town Superintendent of Highways received prior written notice of the alleged condition (see Weinstein v County of Nassau, 180 AD3d 730, 732 [2d Dept 2020]; see generally Horst v City of Syracuse, 191 AD3d 1297, 1298-1299 [4th Dept 2021]). Because the Town failed to meet its initial burden, we need not consider the sufficiency of plaintiff's opposing papers (see Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853 [1985]).
Plaintiff further contends that the court erred in denying his motion seeking to strike the Town's answer in the event that the Town failed to produce certain requested discovery materials within 30 days. Initially, we note that the appeal from the final order granting defendants' summary judgment motions brings up for review the interlocutory order that denied plaintiff's motion and thus the propriety of that order is properly before us (see CPLR 5501 [a] [1]; see generally Christiana Trust v Rice [appeal No. 3], 187 AD3d 1495, 1496 [4th Dept 2020]).
With respect to the merits, we conclude that plaintiff's motion should be granted insofar as it seeks to compel discovery of the requested documents (see generally Rivera v Rochester Gen. Health Sys., 144 AD3d 1540, 1541 [4th Dept 2016]). Plaintiff sought certain discovery from the Town consisting of a spreadsheet documenting all repairs to the Town's signs for the three years immediately before the accident, copies of all repair orders for "no standing" and "no parking" signs in the Town for the same period, and a copy of a global inventory of all signs in the Town (collectively, discovery documents).
CPLR 3101 (a) provides that "[t]here shall be full disclosure of all matters material and necessary in the prosecution or defense of an action." "The words, 'material and necessary,' are . . . to be interpreted liberally to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity. The test is one of usefulness and reason" (Allen v Crowell-Collier Publ. Co., 21 NY2d 403, 406 [1968]; see Snow v DePaul Adult Care Communities, Inc., 149 AD3d 1573, 1574 [4th Dept 2017]; Rawlins v St. Joseph's Hosp. Health Ctr., 108 AD3d 1191, 1192 [4th Dept 2013]). Documents are "material and necessary" where "they may contain information reasonably calculated to lead to relevant evidence" (Goetchius v Spavento, 84 AD3d 1712, 1713 [4th Dept 2011] [internal quotation marks omitted]). "In opposing a motion to compel discovery, a party must 'establish that the requests for information are unduly burdensome, or that they may cause unreasonable annoyance, expense, embarrassment, disadvantage, or other prejudice to any person or the courts' " (Rawlins, 108 AD3d at 1192). "While discovery determinations rest within the sound discretion of the trial court, the Appellate Division is vested with a corresponding power to substitute its own discretion for that of the trial court, even in the absence of abuse" (Andon v 302-304 Mott St. Assoc., 94 NY2d 740, 745 [2000]; see Daniels v Rumsey, 111 AD3d 1408, 1409 [4th Dept 2013]; Radder v CSX Transp., Inc., 68 AD3d 1743, 1745 [4th Dept 2009]). Here, we conclude that plaintiff met his burden of establishing that the discovery documents were material and necessary to the prosecution of the action (see generally CPLR 3101 [a]). In opposing the motion, the Town failed to establish that the discovery requests were unduly burdensome (see generally Kimball v Normandeau, 83 AD3d 1522, 1523 [4th Dept 2011]). Under the circumstances of this case, we therefore substitute our own discretion for that of the motion court, and we modify the order by granting plaintiff's motion in part and directing the Town to disclose the discovery materials.
We have considered plaintiff's remaining contentions and conclude that they do not require reversal or further modification of the order.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488073/ | Green v Evergreen Family Ltd. Partnership (2022 NY Slip Op 06588)
Green v Evergreen Family Ltd. Partnership
2022 NY Slip Op 06588
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., CENTRA, PERADOTTO, LINDLEY, AND NEMOYER, JJ.
749 CA 21-01817
[*1]BRADFORD GREEN, PLAINTIFF-RESPONDENT-APPELLANT,
vEVERGREEN FAMILY LIMITED PARTNERSHIP, EVERGREEN II FAMILY LIMITED PARTNERSHIP, EVERGREEN FAMILY LIMITED PARTNERSHIP, DOING BUSINESS AS PRECISION WASH, AND JAMES M. DONEGAN FAMILY TRUST, DEFENDANTS-APPELLANTS-RESPONDENTS.
GOLDBERG SEGALLA LLP, SYRACUSE (AARON M. SCHIFFRIK OF COUNSEL), FOR DEFENDANTS-APPELLANTS-RESPONDENTS.
LONGSTREET & BERRY, LLP, FAYETTEVILLE (MARTHA L. BERRY OF COUNSEL), FOR PLAINTIFF-RESPONDENT-APPELLANT.
Appeal and cross appeal from an order of the Supreme Court, Oneida County (David A. Murad, J.), entered November 30, 2021. The order granted in part and denied in part the motion of defendants for summary judgment and the motion of plaintiff for partial summary judgment.
It is hereby ORDERED that the order so appealed from is affirmed without costs.
Memorandum: Plaintiff commenced this action to recover damages for injuries he sustained when he fell from an A-frame ladder while working on a 10-foot-high car wash overhead door. Defendants moved for summary judgment dismissing the amended complaint, and plaintiff moved for partial summary judgment on liability and for summary judgment dismissing, inter alia, defendants' 14th affirmative defense alleging that plaintiff was the sole proximate cause of his injuries. Defendants appeal and plaintiff cross-appeals from an order that, among other things, denied their motions with respect to the Labor Law § 240 (1) claim and granted plaintiff's motion with respect to the 14th affirmative defense. We affirm.
On their respective appeal and cross appeal, the parties contend that Supreme Court erred in denying their motions with respect to the Labor Law § 240 (1) claim because, according to defendants, plaintiff was not engaged in activity covered by the statute at the time of his accident and, according to plaintiff, he was. " '[I]t is well settled that the statute does not apply to routine maintenance in a non-construction, non-renovation context' " (Ozimek v Holiday Val., Inc., 83 AD3d 1414, 1415 [4th Dept 2011]; see Esposito v New York City Indus. Dev. Agency, 1 NY3d 526, 528 [2003]). "Whether a particular activity constitutes a 'repair' or routine maintenance must be decided on a case-by-case basis, depending on the context of the work" (Dos Santos v Consolidated Edison of N.Y., Inc., 104 AD3d 606, 607 [1st Dept 2013]; see Pieri v B & B Welch Assoc., 74 AD3d 1727, 1728 [4th Dept 2010]). "Delin[e]ating between routine maintenance and repairs is frequently a close, fact-driven issue . . . , and [t]hat distinction depends upon whether the item being worked on was inoperable or malfunctioning prior to the commencement of the work . . . , and whether the work involved the replacement of components damaged by normal wear and tear" (Cullen v AT & T, Inc., 140 AD3d 1588, 1589 [4th Dept 2016] [internal quotation marks omitted]; see Wolfe v Wayne-Dalton Corp., 133 AD3d 1281, 1282 [4th Dept 2015]). Here, the evidence submitted in support of both the motions raises triable issues of fact whether plaintiff was engaged in the replacement of overhead door parts that occurred due to normal wear and tear (see Esposito, 1 NY3d at 528) or whether the work being performed by plaintiff at the time of the accident was necessary to restore the proper functioning of an otherwise inoperable overhead door (see Brown v Concord Nurseries, Inc., 37 AD3d 1076, 1077 [4th Dept 2007]).
Defendants further contend on their appeal that the court erred in denying their motion with respect to the Labor Law § 240 (1) claim and in granting plaintiff's motion with respect to the 14th affirmative defense because they established as a matter of law that plaintiff was the sole proximate cause of his injuries. We reject that contention. In support of their motion, defendants submitted an affidavit from an expert who opined that plaintiff was the sole proximate cause of his accident because he improperly stood on the second to last step of the ladder at the time of his fall and shifted his weight, as well as plaintiff's deposition testimony wherein plaintiff admitted that he understood it to be unsafe to stand on the top two steps of the ladder. The expert offered no opinion, however, on whether the eight-foot A-frame ladder was adequate to allow plaintiff to safely complete his assigned task at the time of the accident without standing on the top two steps. In opposition to defendants' motion and in support of his motion, plaintiff offered an affidavit from his own expert, who opined that the eight-foot ladder provided to plaintiff was not an adequate safety device because it could not be positioned in the car wash bay so as to permit plaintiff to access the bearing and shaft on which he was working without standing on the top step of the ladder and reaching forward. Defendants never addressed the opinion of plaintiff's expert, but argued in their reply that plaintiff testified at his deposition that he had "selected his ladder for the project and confirmed it was appropriate for the work he was going to perform."
Initially, there is no dispute that the only safety devices available for plaintiff's use on the job site at the time of the accident were two eight-foot A-frame ladders. Thus, this is not a case where plaintiff exercised his judgment in using the top step of the eight-foot A-frame ladder but "there were [more appropriate] ladders on the job site, . . . [plaintiff] knew where they were stored, and that he routinely helped himself to whatever tools he needed rather than requesting them from the foreman" (Robinson v East Med. Ctr., LP, 6 NY3d 550, 554-555 [2006]; see generally Cahill v Triborough Bridge & Tunnel Auth., 4 NY3d 35, 40 [2004]).
Next, plaintiff testified at his deposition that he considered an eight-foot A-frame ladder to be appropriate, i.e., "safe or tall" enough, to complete work on a 10-foot overhead door generally and he thought that this ladder "probably might" be "sufficient" to perform the work on the car wash overhead door. Plaintiff, however, further testified that an eight-foot ladder would be chosen "if [the customer] did[ not] want to pay for a platform lift," he did not choose the safety devices on the day of his accident, he could not recall having ever worked on the overhead doors at this particular job site before his accident, and the overhead door on which he was working at the time of the accident was not "a standard overhead door. It was a special type of door that was used in car washes." Plaintiff was not asked and offered no opinion during his deposition on the placement of the ladder or his ability to perform his assigned work in the car wash bay without utilizing the top two steps of the ladder. This is therefore also not a case where a plaintiff has offered a fact-based assessment of the adequacy of a safety device for the particular task in which the plaintiff was engaged at the time of the accident (cf. Martin v Niagara Falls Bridge Commn., 162 AD3d 1604, 1605 [4th Dept 2018]; Weitzel v State of New York, 160 AD3d 1394, 1395 [4th Dept 2018]). Thus, there is no evidence in the record that contradicts the opinion of plaintiff's expert that the eight-foot A-frame ladder provided to plaintiff was inadequate because it could not have been placed so as to provide proper protection to plaintiff during his work on the bearing and shaft of the car wash overhead door at the time of the accident (see generally Labor Law § 240 [1]). Plaintiff therefore established his entitlement to judgment as a matter of law dismissing the sole proximate cause affirmative defense; any failure by plaintiff to refrain from standing on the top steps of the ladder amounts to no more than comparative negligence, which is not a defense under Labor Law § 240 (1) (see Fronce v Port Byron Tel. Co., Inc., 134 AD3d 1405, 1407 [4th Dept 2015]; Kazmierczak v Town of Clarence, 286 AD2d 955, 955-956 [4th Dept 2001]; see generally Blake v Neighborhood Hous. Servs. of N.Y. City, 1 NY3d 280, 289-290 [2003]). For the same reason, the court properly denied defendants' motion with respect to the Labor Law § 240 (1) claim insofar as it was based upon the ground that plaintiff was the sole proximate cause of his injuries.
All concur except Peradotto and NeMoyer, JJ., who dissent in part and vote to modify in accordance with the following memorandum: We respectfully dissent in part because, contrary to the majority's conclusion, plaintiff failed to meet his initial burden on his motion of establishing as a matter of law that he was not the sole proximate cause of the accident. We would therefore modify the order by denying plaintiff's motion insofar as it sought summary judgment dismissing the 14th affirmative defense and reinstating that defense.
"Where a 'plaintiff's actions [are] the sole proximate cause of his [or her] injuries, . . . liability under Labor Law § 240 (1) [does] not attach' " (Robinson v East Med. Ctr., LP, 6 NY3d 550, 554 [2006]; see Cahill v Triborough Bridge & Tunnel Auth., 4 NY3d 35, 39-40 [2004]; Blake v Neighborhood Hous. Servs. of N.Y. City, 1 NY3d 280, 290 [2003]). Instead, for liability to attach, "the owner or contractor must breach the statutory duty under section 240 (1) to provide a worker with adequate safety devices, and this breach must proximately cause the worker's injuries" (Robinson, 6 NY3d at 554). "These prerequisites do not exist if adequate safety devices are available at the job site, but the worker either does not use or misuses them" (id.). Additionally, "[o]n a motion for summary judgment, the facts must be viewed in the light most favorable to the non-moving party . . . , and every available inference must be drawn in the [non-moving party's] favor" (Matter of Eighth Jud. Dist. Asbestos Litig., 33 NY3d 488, 496 [2019] [internal quotation marks omitted]). Here, although plaintiff submitted the affidavit of his expert, who averred that the eight-foot ladder was not an adequate safety device for the height of the job and that a scissor lift was the appropriate device to complete the work, plaintiff also submitted conflicting evidence in the form of his own deposition inasmuch as his testimony, viewed in the appropriate light, indicates that he considered and adjudged the eight-foot ladder adequate to safely perform the assigned work on the subject 10-foot overhead car wash door.
In particular, plaintiff testified that his supervisor would inform him that a service call involved a 10-foot overhead door and instruct him to take an appropriate ladder, which plaintiff understood to mean a ladder that was safe and tall enough to work on that overhead door. Plaintiff later testified, upon further questioning on the appropriate height of a ladder, that he would use an eight-foot A-frame ladder to perform work on a 10-foot overhead door and that, for the type of service call involving such a door, he would be instructed by his supervisor to take an eight-foot A-frame ladder. The favorable inference that must be drawn from that testimony, given our standard of review, is that plaintiff and his supervisor considered an eight-foot ladder to be safe and tall enough to complete work on a 10-foot overhead door. Plaintiff's testimony that he would use an eight-foot A-frame ladder on a 10-foot overhead car wash door was not, contrary to the majority's characterization, general testimony about a generic overhead door. In characterizing plaintiff's testimony in that manner, the majority improperly divorces plaintiff's answer from the context of the questioning. Rather, viewed in the appropriate light, plaintiff's answer was in response to the culmination of questioning on the topic whether using an eight-foot A-frame ladder would be adequate—i.e., safe and tall enough—to work upon an overhead car wash door, like the one at issue, with a height of 10 feet.
Moreover, plaintiff expressly testified that, in his judgment, he thought the work could be completed safely using the eight-foot A-frame ladder that he had been provided for this particular job. Admittedly, plaintiff also testified that, in situations where he found the equipment provided to be unsafe for the job, he would call his supervisor to resolve the issue and that his supervisor would not have answered at the time in the evening that plaintiff was working on the subject car wash door. That hypothetical situation is, however, inapposite here because, according to plaintiff's own testimony, he adjudged that the work could be safely performed with the equipment provided. In addition, when asked whether the eight-foot A-frame ladders that had been provided to him and his coworker were "sufficient to do the work that [they] were doing in that particular [car wash] bay," plaintiff testified that, upon making an assessment, he thought that the ladders "probably might" be adequate to perform the work.
In sum, while plaintiff's expert stated definitively that the eight-foot ladder was not an adequate safety device for the height of the job, plaintiff himself contradicted that view inasmuch as his testimony, viewed in the light most favorable to defendants and with every available inference drawn in their favor, shows that plaintiff thought the provided eight-foot ladder was adequate to safely perform the assigned work on the subject 10-foot overhead car wash door. Such conflicting evidence presents a classic issue of fact with respect to whether an adequate safety device was provided.
With respect to causation, we conclude that, " '[u]nlike those situations in which a safety device fails for no apparent reason, thereby raising the presumption that the device did not provide proper protection within the meaning of Labor Law § 240 (1), here there is a question of fact [concerning] whether the injured plaintiff's fall [resulted from] his own misuse of the safety device and whether such conduct was the sole proximate cause of his injuries' " (Thome v [*2]Benchmark Main Tr. Assoc., LLC, 86 AD3d 938, 940 [4th Dept 2011]; see Bahrman v Holtsville Fire Dist., 270 AD2d 438, 439 [2d Dept 2000]). In particular, plaintiff testified that, based on his safety training, it was never appropriate to stand on the second step from the top or the top cap of an A-frame ladder. Plaintiff further acknowledged that, if he was standing on the second step from the top, he would be going against his safety training. Plaintiff also testified that he would read the safety warning labels on ladders if such labels were not scratched or torn off, and photographs of the ladder that plaintiff was using at the time of the accident showed a label on the second step from the top that stated: "Do Not Stand at or above this level. YOU CAN LOSE YOUR BALANCE." Despite all of the warnings and safety training, plaintiff acknowledged during his deposition that the surveillance video depicted him standing on the second step from the top of the ladder just before the accident. Indeed, screenshots from the surveillance video submitted by plaintiff in support of his motion depict plaintiff improperly standing on the second step from the top before the ladder tips to the right as plaintiff loses his balance and falls toward the floor before landing on and denting the leg of the tipped ladder with his body.
Inasmuch as unnecessarily standing on the second step from the top of an A-frame ladder constitutes misuse of such a ladder, and plaintiff was depicted standing on the ladder in that manner just before the fall, we conclude that plaintiff's submissions raised an issue of fact whether it was necessary for plaintiff to be on that step in order to perform his work on the 10-foot overhead door and, if not, whether plaintiff's own actions were the sole proximate cause of the accident (cf. Kosinski v Brendan Moran Custom Carpentry, Inc., 138 AD3d 935, 936 [2d Dept 2016]; Miller v Spall Dev. Corp., 45 AD3d 1297, 1298-1299 [4th Dept 2007]). Unlike other cases, there is evidence here that plaintiff knew at the time of the accident that his use of the second step from the top of the A-frame ladder was unsafe (cf. Kin v State of New York, 101 AD3d 1606, 1608 [4th Dept 2012]), and plaintiff's misuse of the ladder is not based on conjecture but rather on plaintiff's own testimony and surveillance video of the accident (cf. Kirbis v LPCiminelli, Inc., 90 AD3d 1581, 1582 [4th Dept 2011]; Woods v Design Ctr., LLC, 42 AD3d 876, 877 [4th Dept 2007]).
Taken all together, we conclude that "questions of fact exist as to whether 'the ladder failed to provide proper protection,' whether 'plaintiff should have been provided with additional safety devices,' and whether the ladder's purported inadequacy or the absence of additional safety devices was a proximate cause of plaintiff's accident" (Cutaia v Board of Mgrs. of the 160/170 Varick St. Condominium, 38 NY3d 1037, 1039 [2022]). Thus, contrary to the majority's conclusion, the court erred in granting plaintiff's motion insofar as it sought summary judgment dismissing defendants' sole proximate cause defense because, on this record, "there is a plausible view of the evidence—enough to raise a fact question—that there was no statutory violation and that plaintiff's own acts or omissions were the sole cause of the accident" (Blake, 1 NY3d at 289 n 8). Defendants should be able to litigate those issues before a trier of fact.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488078/ | Davis v State of New York (2022 NY Slip Op 06591)
Davis v State of New York
2022 NY Slip Op 06591
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: LINDLEY, J.P., NEMOYER, WINSLOW, BANNISTER, AND MONTOUR, JJ.
789 CA 22-00105
[*1]JESSIE DAVIS, JR., CLAIMANT-APPELLANT,
vTHE STATE OF NEW YORK, DEFENDANT-RESPONDENT. (CLAIM NO. 125370.)
THE DRATCH LAW FIRM, P.C., NEW YORK CITY (BRIAN M. DRATCH OF COUNSEL), FOR CLAIMANT-APPELLANT.
LETITIA JAMES, ATTORNEY GENERAL, ALBANY (JONATHAN D. HITSOUS OF COUNSEL), FOR DEFENDANT-RESPONDENT.
Appeal from a judgment of the Court of Claims (Judith A. Hard, J.), entered July 7, 2021. The judgment dismissed the claim.
It is hereby ORDERED that the judgment so appealed from is unanimously affirmed without costs.
Memorandum: Claimant commenced this action seeking damages for injuries he allegedly sustained while he was an inmate when he fell to the ground after the table he was directed to sit on collapsed. After a nonjury trial on the issue of proximate cause and damages, the Court of Claims dismissed the claim on the ground that claimant failed to prove that defendant's negligence was a proximate cause of claimant's injuries. Claimant appeals, and we affirm. Contrary to claimant's contention, we conclude that the court's determination is supported by a fair interpretation of the evidence (see generally Reames v State of New York, 191 AD3d 1304, 1305-1306 [4th Dept 2021], affd 37 NY3d 1152 [2022]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494363/ | FINAL ORDER ON APPLICATIONS FOR COMPENSATION AND REIMBURSEMENT OF EXPENSES OF PAUL BATTISTA, ESQ., OF THE LAW FIRM GENOVESE, JOBLOVE & BATTISTA, P.A., LOCAL CO-COUNSEL TO THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS (Doc. Nos. 294 & 338) AND THE AMENDED OBJECTION TO SAME BY THE UNITED STATES TRUSTEE (Doc. No. 380) AND THE DEBTORS’ PRINCIPAL, STUART DUNKIN (Doc. No. 353)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THIS IS a confirmed Chapter 11 set of jointly administered cases and the matters under consideration by the Court in this instant final order are the applications for compensation and reimbursement of expenses of Paul Battista, Esq., of the law firm Genovese, Joblove & Battista, P.A., local counsel of record for the Official Committee of Unsecured Creditors in the above captioned jointly administered chapter 11 cases. (Doc. Nos. 243, 281, and 310). Also considered were this Court’s interim and prior orders on compensation to Mr. Battista, (Doc. Nos. 294 and 338), together with the amended objection to compensation filed by the United States Trustee for Region 21, (Doc. No. 380 amending 359), and the motion to alter or amend the prior orders of compensation filed by the Debtors’ principal Mr. Stuart Dunkin. (Doc. No. 353). Upon conclusion of the hearing conducted on September 1, 2009, this Court took the matters under advisement, and now finds and concludes the following.
Statement of the Case
On November 6, 2008, the debtors filed petitions under Chapter 11 of Title 11, United States Code. This Court subsequently ordered that the chapter 11 cases to be jointly administered, and on August 5, 2009, a Joint Plan of Reorganization was confirmed.
With regards to the Compensation Applications of Mr. Battista, this Court approved his employment as local counsel for the Official Unsecured Creditors Committee, on December 27, 2009, retroactive to November 24, 2008. Mr. Battista has filed an interim fee application and two supplemental seeking compensation of fees in the amount of $74,282.50 and reimbursement of expenses of $543.50.
Jurisdiction
The applications and objections filed against them and the compensation orders all constitute a contested matter and are a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (O); 11 U.S.C. §§ 330 and 331; Fed. R. Bankr.P.2016, 9013, and 9014. This Court has jurisdiction to hear, determine, and enter appropriate orders under 28 U.S.C. §§ 157, 1334.
Discussion
A review of professional fees begins with the statutory framework set out *886in 11 U.S.C. §§ 327-330. See Miller Buckfire & Co., LLC v. Citation Corp. (In re Citation Corp.), 493 F.3d 1313, 1318 (11th Cir.2007). Mr. Battista was employed under Section 1103(a) which authorizes the Committee to employ professionals, with this Court’s approval, “to represent or perform services for such committee.” Just because Mr. Battista was employed by the Committee does not change the statutory standard for review of professional fees.
It is uniformly recognized in the Eleventh Circuit, that the starting point for calculating reasonable attorney’s fees is that of the lodestar method. See Citation, 493 F.3d at 1318; Grant v. George Schunmann Tire & Battery Co., 908 F.2d 874, 878 (11th Cir.1990); Norman v. Housing Authority of Montgomery, 836 F.2d 1292, 1299 (11th Cir.1988). Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974). Simply put, the “lodestar method,” is a computation of the reasonable time expended by counsel in performing the reasonably required services rendered multiplied by a reasonable hourly rate.
Neither at the application to employ Mr. Battista nor at his application for compensation, has any party in interest objected to Mr. Battista’s hourly rate or the hourly rates of those in his firm. By his verified statement under Rule 2014, Mr. Battista’s hourly rate is $500 and the hourly rate for the primary associate in his firm that billed time in this case, Ms. Heather Harmon, is $310. These rates do appear to be on par with rates charged in the Southern District of Florida, Miami, where Mr. Bat-tista customarily practices. Without objection, this Court finds under the facts and circumstances of this case that Mr. Battista’s hourly rates charged by his firm in this case are reasonable.
Procedurally, Mr. Battista, has not filed a Final Fee Application. Rather, Mr. Battista filed his First Interim Application, (Doc. No. 243), on May 15, 2009. That application was supplemented, (Doc. No. 281), on June 16, 2009. Right on its heels Mr. Battista filed a Second Supplemental Application, (Doc. No. 310), on June 30, 2009. The U.S. Trustee objected to the timing of these multiple interim fee applications. In accordance with Section 331, interim compensation may not be awarded more than once every 120 days. “Section 331 is intended to alleviate the unwarranted financial burden on professionals that occurs when judicial scrutiny, allowance, and payment of fees applications is withheld until the conclusion of the case, as contemplated by Section 330.” In re Commercial Financial Services, Inc., 231 B.R. 351, 354 (Bankr.N.D.Okla.1999). Section 331 does permit, upon finding of cause by the Court, for a reduction of the time period of 120 days. This requires a finding by the Court on a case by case basis. The case does not raise unusual circumstances warranting more frequent applications, and professionals did not seek permission by this Court under Section 331 to submit compensation applications on a more frequent basis.
In resolution of the U.S. Trustee’s objection to the timing of Mr. Battista’s compensation applications, the U.S. Trustee and Mr. Battista arrived at a consensus to treat them all together as a final fee application governed by Section 330(a), title 11, United States Code. One reason for obtaining this consensus is that the Applicant, Mr. Battista, agreed and stipulated on the record to not seek further professional fees for services provided to the Official Committee after June 30, 2009. This Court does find after a review of the *887court record in this case that Mr. Battista, or members of his firm, were in attendance at hearings before this Court after July 1, 2009. The concession made by Mr. Battis-ta with regards to his post July 1, 2009 services, together with treating all of the compensation applications as a final application under Section 330, appear reasonable under the circumstances of this case. This Court thereby finds and concludes that Mr. Battista’s applications (and supplemental) are to be considered together as a final fee application under Section 330(a).
Mr. Dunkin, objects to Mr. Battista’s application, and raises allegations of duplicate charges and billing errors shared between Mr. Battista’s law firm and that of Mr. Ian Winters, Esq. of Klestadt & Winters, L.L.P., a New York law firm approved as co-counsel to represent the Official Committee. Mr. Dunkin objects to approximately $45,000 of duplicative work conducted by both law firms representing the Official Committee.1 It appears by Mr. Dunkin’s listing of objectionable time entries, that approximately $17,302.50 of objectionable time is being sought by Mr. Battista. The U.S. Trustee likewise raises objections to Mr. Battista’s fee applications on grounds of duplication of services provided between his firm and that of Mr. Winters’ firm, as well as lumping of time entries, insufficient task detail, and/or basis for having multiple attendees at conferences, meetings, and court hearings. The U.S. Trustee and Mr. Battista arrived at a proposed settlement of the U.S. Trustee’s objections to compensable time. Mr. Bat-tista has agreed to reduce his overall professional compensation request by 10% or $7,482.60.
In accordance with Fed. R. Bankr.P. 2016, the applicant is required to provide sufficient detail. The U.S. Trustee has the statutory obligation to “review, in accordance with procedural guidelines.., applications filed for compensation and reimbursement under section 330 of title 11.” 28 U.S.C. § 586(a)(3)(A)(I). In furtherance of that mandate, the Executive Office of the United States Trustee promulgated in 1994 the Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses Filed Under 11 U.S.C. § 330. 61 F.R. 24890, May 17, 1994. These guidelines were not written in a vacuum, but rather on a foundation of case law spanning both the Bankruptcy Act and Code.
Prior to the United States Trustee program, it was the Bankruptcy Court that held an independent mandate to review fee applications. That requirement still exists independently with the Court, but is also held concurrently with that of the United States Trustee. Case law supports the objections raised by the U.S. Trustee. Neither the Eleventh Circuit nor the Middle District of Florida permit “lumping” of discreet entries together into singular time entries. See In re Beverly Manufacturing Corp., 841 F.2d 365, 370 (11th Cir.1988); In re Mulberry Phosphates, Inc., 151 B.R. 948, 950 (M.D.Fla.1992)(“Applicants cannot circumvent the requirements of detail by ‘lumping’ together several activities into a single entry”). Lumping is impermissible be*888cause it fails to shed the requisite light upon the activities for the Bankruptcy Court to determine “whether or not the time spent on a specific task was reasonable” and beneficial or even necessary. See Mulberry, 151 B.R. at 950.
Counsel for the Official Committee have an obligation to their client, the committee, as well as to the bankruptcy estate to keep professional costs to a minimum. Mr. Dunkin raised that as an objection and included correspondence apparently between members of the Official Committee and their putative co-counsel. Although co-counsel may have projected a range of professional costs, the complexities of any given case must also be taken into account. The alleged correspondence between putative co-counsel and the Official Committee, although interesting in and of itself, it was allegedly written early in the case and prior to several changes in ultimate direction the case took overall. This Court does not consider that alleged correspondence relevant in conducting its review under Section 330 at this time in the case. However, part of the criteria for attorney fee awards to creditors’ committee counsel include a quantity factor as well as a result factor.
Mr. Battista, as local co-counsel, does appear to perform many of the same functions as that of Mr. Winters, as New York co-counsel to the Committee. This duplication of work appears to impact the efficiency, economy, and necessity of these two professionals’ services provided to their client and ultimately impacts the bankruptcy estate. While all parties were on notice that the Committee was utilizing co-counsel, duplicity of services provided are not generally warranted. As seen here, Mr. Dunkin alleges that duplicity and necessity increased the overall Official Committee counsels’ costs by over $45,000. By maintaining a cost benefit analysis of professional billing, counsel for the Committee ensures that their actions secure a results driven outcome; here the bottom line amount recovered for the estate and its creditors. Under the facts of this case, this Court concludes that the agreement reached between the U.S. Trustee and Mr. Battista is reasonable and addresses the concerns raised by not only Mr. Dunkin, but also by this Court. However, that does not completely resolve the professional compensation matter.
This Court also must review professional compensation to determine the impact upon, and what is in the best interests of, the creditors and the bankruptcy estate. Mr. Dunkin owns the interests in the jointly administered debtors. His interests are provided for under Class 10 of the confirmed plan. Had this Court awarded Mr. Battista 100% of his compensation, that compensation would have been paid in full under Article 2 of the confirmed plan prior to Mr. Dunkin receiving any distribution. As this Court has found and concluded that Mr. Battista’s professional compensation is due to receive a bankruptcy haircut, those clippings fall down to the classes of claims. This Court finds and concludes that the reduction in professional compensation allowed to Mr. Battista is to inure to the benefit of the General Unsecured Creditors.
Accordingly, it is
ORDERED, ADJUDGED, AND DECREED that the Motion to Alter or Amend Order Granting Amended First Supplement Application of Paul Battista, (Doc. No. 353), filed by the party in interest, the Debtors’ Principal, Stuart Dunkin, *889be and is hereby SUSTAINED in part and denied in part. It is further
ORDERED, ADJUDGED, AND DECREED that the Omnibus Objection filed by the United States Trustee, as amended, (Doc. Nos. 380 amending 359), to the extent of the objections raised to the Applications and interim compensation of Paul Battista, be and is hereby SUSTAINED. It is further
ORDERED, ADJUDGED, AND DECREED, that the First Interim Order Allowing Compensation to Paul Battista, entered under Section 331 by this Court, (Doc. No. 294), be and is hereby AMENDED and SUPERCEDED by this Final Order. It is further
ORDERED, ADJUDGED, AND DECREED, that the Second Order Allowing Compensation to Paul Battista, entered by this Court, (Doc. No. 338) be and is hereby AMENDED and SUPERCEDED by this Final Order. It is further
ORDERED, ADJUDGED, AND DECREED that in accordance with 11 U.S.C. § 330, the Applications of Paul Battista, of the law firm Genovese, Joblove & Battista, P.A., as local counsel to the Official Committee of Unsecured Creditors be and are hereby finally APPROVED in the following total amounts:
(A) Professional Fees — $66,799.90 for reasonable professional services rendered from November 24, 2008 to the entry date of this order; and
(B) Expenses — $543.50 for the reasonable and necessary expenses incurred in provided the professional services stated above.
It is further
ORDERED, ADJUDGED, AND DECREED that the reduction in compensation, totaling $7,482.60 shall be paid in addition to the “Debtor shall fund an initial sum of $100,000 in December 2009,” (Plan 4.9.2), and shall be disbursed to Class 8 General Unsecured Claims in accordance with the first Distribution Date contemplated in the Plan to Class 8 claimants. (Plan 4.9.2).
. Mr. Dunkin asserts that the amounts are in excess of $45,000 and constitute duplicate charges or clerical errors. It does not appear that any of Mr. Dunkin's asserted objectionable time entries from Mr. Battista are due to clerical errors. Mr. Winters’ fee application is also the subject of objections by Mr. Dunkin as well as the U.S. Trustee and are the subject of a separate order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494364/ | FINAL ORDER ON APPLICATIONS FOR COMPENSATION AND REIMBURSEMENT OF EXPENSES OF HOWARD HOFF, OF THE FIRM MARKS, PANETH & SHRON, L.LP., AS FINANCIAL ADVISOR FOR THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS (Doc. No. 336) AND THE OBJECTIONS TO SAME BY THE UNITED STATES TRUSTEE (Doc. No. 380) AND THE DEBTORS’ PRINCIPAL, STUART DUN-KIN (Doc. No. 351)
ALEXANDER L. PASKAY, Bankruptcy Judge.
THIS IS a confirmed Chapter 11 set of jointly administered cases and the matters under consideration by the Court in this instant final order are the applications for compensation and reimbursement of expenses of Howard Hoff, of the firm Marks, Paneth & Shron, L.L.P., as Financial Ad-visor for the Official Committee of Unsecured Creditors in the above captioned jointly administered chapter 11 cases. (Doc. Nos. 280, 283, 284, and 311). Also considered were this Court’s interim and prior orders on compensation to Mr. Hoff, (Doc. No. 336), together with the amended objection to compensation filed by the United States Trustee for Region 21, (Doc. No. 380 amending 359), and the motion to alter or amend the prior orders of compensation filed by the Debtors’ principal Mr. Stuart Dunkin. (Doc. No. 351). Upon conclusion of the hearing conducted on September 1, 2009, this Court took the matters under advisement, and now finds and concludes the following.
Statement of the Case
On November 6, 2008, the debtors filed petitions under Chapter 11 of Title 11, United States Code. This Court subsequently ordered that the chapter 11 cases to be jointly administered, and on August 5, 2009, a Joint Plan of Reorganization was confirmed.
With regards to the Compensation Applications of Mr. Hoff, this Court approved his employment as financial advisor for the Official Unsecured Creditors Committee, on April 30, 2009, retroactive to February 27, 2009. Mr. Hoff has filed an interim fee application, an amendment thereto and two supplemental seeking compensation of fees in the amount of $32,287.50, with no expenses to be reimbursed.
Jurisdiction
The applications and objections filed against them and the compensation orders all constitute a contested matter and are a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), and (O); 11 U.S.C. §§ 330 and 331; Fed. R. Bankr.P.2016, 9013, and 9014. This Court has jurisdiction to hear, determine, and enter appropriate orders under 28 U.S.C. §§ 157, 1334.
Discussion
A review of professional fees begins with the statutory framework for approval of a professional’s employment. This Court *892approved the employment of Mr. Hoff under Section 1108(a) which authorizes the Committee to employ professionals, with this Court’s approval, “to represent or perform services for such committee.” No party has objected to the employment of Mr. Hoff and this Court is satisfied that the approval of his employment need not be revisited.
Neither at the application to employ Mr. Hoff nor at his application for compensation, has any party in interest objected to Mr. Hoffs hourly rate or the hourly rates of those in his firm. By his verified statement under Rule 2014, Mr. Hoffs hourly rate is $450 and the hourly rate for the primary associate in his firm that billed time in this case, Ms. Palma Ventura-Riggio, is $255. Without objection, this Court finds under the facts and circumstances of this case that Mr. Hoffs hourly rates charged by his firm in this case are reasonable.
Procedurally, Mr. Hoff has not filed a Final Fee Application. Rather, Mr. Hoff filed his First Interim Application, (Doc. No. 280), on June 16, 2009, and subsequently amended that application on June 18, 2009. (Doc. No. 284). That application was contemporaneously supplemented on June 18, 2009, (Doc. No. 288), and again on June 80, 2009. (Doc. No. 311). The U.S. Trustee objected to the timing of these multiple interim fee applications.
In resolution of the U.S. Trustee’s objection to the timing of Mr. Hoffs compensation applications, the U.S. Trustee and Mr. Hoff arrived at a consensus to treat them all together as a final fee application governed by Section 330(a), title 11, United States Code. One reason for obtaining this consensus is that the Applicant, Mr. Hoff, agreed not to seek further professional fees for services provided to the Official Committee after June 30, 2009. It is unclear whether Mr. Hoff provided any additional services to the Committee after June 30, 2009. However, the concession made by Mr. Hoff and the U.S. Trustee, to treat all of the compensation applications as a final application under Section 330, do accomplish the goal of bringing finality and an adjudication under Section 330. This Court thereby finds and concludes that Mr. Hoffs application, as amended, (and its supplemental), are to be considered together a final fee application under Section 330(a).
Mr. Dunkin, objects to Mr. Hoffs application, and raises allegations of multiple attendees at a meeting, property searches conducted on Mr. Dunkin’s personal holdings, and an alleged fee cap of $19,000. In total, Mr. Dunkin objects to $13,854 in professional fees by Mr. Hoffs firm. The U.S. Trustee likewise raises objections to Mr. Hoffs fee applications on grounds of lumping of time entries, insufficient task detail, and/or basis for having multiple attendees at meetings. The U.S. Trustee and Mr. Hoff arrived at a proposed settlement of the U.S. Trustee’s objections to compensable time. Mr. Hoff has agreed to reduce his overall professional compensation request by 10% or $3,228.75.
In accordance with Fed. R. Bankr.P. 2016, the applicant is required to provide sufficient detail. The U.S. Trustee has the statutory obligation to “review, in accordance with procedural guidelines.., applications filed for compensation and reimbursement under section 330 of title 11.” 28 U.S.C. § 586(a)(3)(A)(I). In furtherance of that mandate, the Executive Office of the United States Trustee promulgated in 1994 the Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses Filed Under 11 *893U.S.C. § 330. 61 F.R. 24890, May 17, 1994. These guidelines were not written in a vacuum, but rather on a foundation of case law spanning both the Bankruptcy Act and Code.
Mr. Dunkin and the U.S. Trustee both objected to multiple attendees at a meeting for the Committee. The meeting in question appears to be the initial formation meeting of the Committee. Mr. Dun-kin asserts that financial advisors were not required for this meeting and seeks time entries disallowed from both Mr. Hoff and Ms. Ventura-Riggio. The U.S. Trustee did not seek disallowance for either of the time entries. As financial advisors to the Committee, it would be reasonable to see an advisor present for any in-depth meeting to address financial concerns of the Committee and get the Committee’s input and directions on how the advisor should proceed in the case on behalf of the Committee. The central objection goes to duplicity of work. The agreement reached between the U.S. Trustee and Mr. Hoff reasonably addresses that duplication of service.
Mr. Dunkin also objects to Mr. Hoff conducting property searches on the principal of the Debtors, Mr. Dunkin and asserts that Mr. Dunkin’s personal holdings are not relevant to the business bankruptcy. Mr. Dunkin’s assertion is not supported by the chapter 11 confirmed plan. The joint chapter 11 plan, as confirmed by this Court, contemplates an injection of cash into the Debtors by Mr. Dunkin in the amount of no less than $100,000 to occur by December 2009. This injection of cash is intended to fund the initial distribution to allowed claims of the General Unsecured Creditors. This injection of cash also was not initially contemplated by the Debtors and their principal at the outset of negotiating a plan of reorganization with the joint Debtors’ creditors. It appears reasonable that the Committee would ask its financial advisor to investigate and advise whether the jointly administered Debtors’ new plan provision is sound.
Additionally, Mr. Dunkin objects to Mr. Hoffs fees that are in excess of an alleged fee cap of $19,000. Mr. Dunkin included correspondence apparently between Mr. Hoff and New York counsel to the Official Committee, Mr. Winters. By the alleged correspondence, Mr. Hoff may have projected a range of professional costs, but also may have capped his work at $19,000. Putting evidentiary issues aside, at this time, the alleged correspondence occurred two weeks prior to the time period Mr. Hoffs employment was retroactively approved by this Court. This Court approved Mr. Hoff under Section 1103 and the order approving Mr. Hoffs employment did not state any findings under Section 328 establishing a limitation or cap on compensation. Because of the changes and complexities in the structure of the cases over time, this Court need not consider the alleged correspondence in conducting its review under Section 330 at this time in the case. Under the facts of this case, this Court concludes that the agreement reached between the U.S. Trustee and Mr. Hoff is reasonable and addresses the concerns raised by not only Mr. Dunkin, but also by this Court. However, that does not completely resolve the professional compensation matter.
This Court also must review professional compensation to determine the impact upon, and what is in the best interests of, the creditors and the bankruptcy estate. Mr. Dunkin owns the interests in *894the jointly administered debtors. His interests are provided for under Class 10 of the confirmed plan. Had this Court awarded Mr. Hoff 100% of his compensation, that compensation would have been paid in full under Article 2 of the confirmed plan prior to Mr. Dunkin receiving any distribution. As this Court has found and concluded that Mr. Hoffs professional compensation is due to be re-cut; this Court finds and concludes that the reduction in professional compensation allowed to Mr. Hoff is to inure to the benefit of the General Unsecured Creditors.
Accordingly, it is
ORDERED, ADJUDGED, AND DECREED that the Motion to Alter or Amend Order Granting Amended First Supplement Application of Howard Hoff, (Doc. No. 351), filed by the party in interest, the Debtors’ Principal, Stuart Dunkin, be and is hereby SUSTAINED in part and denied in part. It is further
ORDERED, ADJUDGED, AND DECREED that the Omnibus Objection filed by the United States Trustee, as amended, (Doc. Nos. 380 amending 359), to the extent of the objections raised to the Applications and interim compensation of Howard Hoff, be and is hereby SUSTAINED. It is further
ORDERED, ADJUDGED, AND DECREED, that the First Interim Order Allowing Compensation to Howard Hoff, entered under Section 331 by this Court, (Doc. No. 336), be and is hereby AMENDED and SUPERCEDED by this Final Order. It is further
ORDERED, ADJUDGED, AND DECREED that in accordance with 11 U.S.C. § 330, the Applications of Howard Hoff, of the firm Marks, Paneth & Shron, L.L.P., as financial advisor to the Official Committee of Unsecured Creditors be and are hereby finally APPROVED in the following total amounts:
(A) Professional Fees — -$29,058.75 for reasonable professional services rendered from February 27, 2009 to the entry date of this order; and
(B) Expenses — $0.00 for the reasonable and necessary expenses incurred in provided the professional services stated above.
It is further
ORDERED, ADJUDGED, AND DECREED that the reduction in compensation, totaling $3,228.75 shall be paid in addition to the “Debtor shall fund an initial sum of $100,000 in December 2009,” (Plan 4.9.2), and shall be disbursed to Class 8 General Unsecured Claims in accordance with the first Distribution Date contemplated in the Plan to Class 8 claimants. (Plan 4.9.2). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494365/ | MEMORANDUM OPINION
CRAIG A. GARGOTTA, Bankruptcy Judge.
The above referenced adversary proceeding came before this Court for trial the weeks of March 23 and March 30, 2009. After trial, the Court took the matter under advisement. The Court also requested certain post-trial briefing from *260the parties, which has been submitted and reviewed. This is a core proceeding. This Court has jurisdiction to enter a final order with regard to matters presently under submission pursuant to 28 U.S.C. § 1334(a), (b) and (d), 28 U.S.C. § 157(a) and (b), 28 U.S.C. § 151 and the Standing Order of Reference of Bankruptcy Matters entered by the United States District Court for the Western District of Texas. This Memorandum Opinion is being issued as written findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.
CONTENTS
PROCEDURAL HISTORY. .262
THE PARTIES. 2fi3
THE WITNESSES. DO I C5 (
BACKGROUND FACTS. CO Gl
THE TRUSTEE’S CLAIMS AND THE PARTIES’ ALLEGATIONS. DO Oi
FINDINGS OF FACT. DO O
The Facts Regarding the Joint Cash-Management System and the Zero Balance Accounts.
Cash-Management System Prior to March 2002 .
The Joint Cash-Management System from March 2002 Onward.
The Facts Regarding Claim Category 1: The Intercompany Transfers .
Facts Regarding Claim Category 2: The Expense Reallocations.
Regarding Claim Category 3: The Net Balance Transfer.
The Facts Regarding Claim Category 4: The Fixed Assets Transfers.
The Facts Regarding the Decision to Shut Down .
The Facts Regarding Corporate Control and Corporate Formalities.
LAW.
Preliminary Issue I: Whether the Trustee’s Expert Testimony Was Sufficient.
Preliminary Issue II: Whether the Lien Securing the Lehman Loan Fully Encumbered All of the Debtor’s Property, So That There Was No “Asset” That Could Have Been the Subject of a “Transfer”. DO OO o
Preliminary Sub-Issue IIA: Whether the Definition of “Asset” under TUFTA, as Interpreted in Mullins, Means That Even When There Is Equity in the Collateral Considered as a Whole, There Is No “Transfer” of an “Asset” So Long as the Value of the Item(s) of Property Conveyed Is Less Than the Entire Secured Debt. OO <N
Preliminary Sub-Issue IIB: Whether the Debtor Should Be Considered Liable for the Full Amount of the Lehman Loan Balance, or for Only Some Lesser Amount. CO
Whether the Debtor’s Liability Should be Considered “Contingent” CO
Whether the Trustee Proved the Debtor’s Liability Should Be Discounted. OO CO CQ
Preliminary Sub-Issue IIC: Whether the Lehman Loan Balance Exceeded the Value of All the Debtor’s Property at the Time of the Conveyances. DO CD
Preliminary Issue III: Insolvency. DO CD
The Trustee’s Claims for Transfers Made with Actual Intent to Hinder, Delay or Defraud. . >0 (O X>
Direct Evidence of Actual Intent.300
The Early Wind-Down Period.300
The Post-Default Period ..301 Circumstantial Evidence of Actual Intent: Badges of Fraud on Claim Category 1: The Intercompany Transfers.303
Badge of Fraud 1: Transfers made to insiders or obligations to insiders incurred.304
Badge of Fraud 2: The debtor retained possession or control of the property transferred after the transfer.304
*261Badge of Fraud 3: The transfer or obligation was concealed. O CO
Badge of Fraud 4: Before the transfer was made or obligation was incurred, the debtor had been threatened with suit. CO o
Badge of Fraud 5: The transfer was of substantially all the debtor’s assets. o CO
Badge of Fraud 6: The debtor absconded . TP o CO
Badge of Fraud 7: The debtor removed or concealed assets. ^ o CO
Badge of Fraud 8: The value of the consideration received by the debtor was reasonably equivalent to the value of the assets transferred or the amount of the obligation incurred. o CO
Badge of Fraud 9: The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred . CO o OS
Badge of Fraud 10: The transfer occurred or the obligation was incurred shortly before or shortly after a substantial debt was incurred. CD o CO
Badge of Fraud 11: The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. CO o
Summary: Badges of Fraud on the Intercompany Transfers. CO o
Circumstantial Evidence of Actual Intent: Badges on 2: The Expense Reallocations. CO o -3
Badge of Fraud 1: Transfers made to insiders or obligations to insiders incurred. o CO
Badge of Fraud 2: The debtor retained possession or control of the transferred after the transfer. CO o
Badge of Fraud 3: The transfer or obligation was concealed. CO o -3
Badge of Fraud 4: Before the transfer was or was incurred, the debtor had been threatened with suit. o CO
Badge of Fraud 5: The transfer was of substantially all the debtor’s assets. 00 o CO
Badge of Fraud 6: The debtor absconded . 00 o CO
Badge of Fraud 7: The debtor removed or concealed assets. 00 o CO
Badge of Fraud 8: The value of the debtor was reasonably equivalent to the value of the assets transferred or the amount of the obligation incurred. 00 o CO
Badge of Fraud 9: The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred . OS o CO
Badge of Fraud 10: The transfer occurred or the obligation was incurred shortly before or shortly after a substantial debt was incurred. CO o CD
Badge of Fraud 11: The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. CO o CD
Summary: Badges of Fraud on the Expense Reallocations. CO o CD
Circumstantial Evidence of Actual Intent: Badges of Fraud on Claim Category 3: The Net Balance Transfers.
Badge of Fraud 1: Transfers made to insiders or obligations to insiders incurred.
Badge of Fraud 2: The debtor retained possession or control of the property transferred after the transfer. CO l-l o
Badge of Fraud 3: The transfer or obligation was concealed. CO 1 — 1 o
Badge of Fraud 4: Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit o 1 — 1 CO
Badges of Fraud 5: The transfer was of substantially all the debtor’s assets. 1 — 1 CO
Badge of Fraud 6: The debtor absconded . 1 — f CO
Badge of Fraud 7: The debtor removed or concealed assets. 1 — 1 CO
*262Badge of Fraud 8: The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
Badge of Fraud 9: The debtor was insolvent or became insolvent shortly after the transfer occurred or the obligation was incurred .
Badge of Fraud 10: The transfer occurred or the obligation was incurred shortly before or shortly after a substantial debt was incurred. CO tH 00
Badge of Fraud 11: The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. CO CO
Summary of Badges of Fraud on the Net Balance Transfer. CO CO
Circumstantial Evidence of Actual Intent: Badges of Fraud on Claim Category 4: The Fixed Assets Transfers. CO CO
Badge of Fraud 1: Transfers made to insiders or obligations to insiders incurred.
Badge of Fraud 2: The debtor retained possession or control of the property transferred after the transfer. CO t — I CO
Badge of Fraud 3: The transfer or obligation was concealed. ^ rH CO
Badge of Fraud 4: Before the transfer was made or obligation was incurred, the debtor had been threatened with suit.
Badge of Fraud 5: The transfer was of substantially all the debtor’s assets. CO ^
Badge of Fraud 6: The debtor absconded . CO ox
Badge of Fraud 7: The debtor removed or concealed assets. CO OX
Badge of Fraud 8: The value of the consideration received by the Debtor was reasonably equivalent to the value of the assets transferred or the amount of the obligation incurred.
Badge of Fraud 9: The debtor was insolvent or became insolvent shortly after the transfer occurred or the obligation was incurred .
Badge of Fraud 10: The transfer occurred shortly after a substantial debt was incurred.
Badge of Fraud 11: The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. tH
Summary of Badges of Fraud on Fixed Assets Transfers. i — (
Conclusions Regarding the Trustee’s Claims for Transfers Made with Actual Intent to Hinder, Delay or Defraud. CO rH
The Trustee’s Claims for Transfers Made with Constructive Fraud. <£> rH
Constructive Fraud Elements as to Claim Category 1: The Intercompany Transfers . <X> rH CO
Constructive Fraud Elements as to Claim Category 2: The Expense Reallocations . Ct — I CO
Constructive Fraud Elements as to Claim Category 3: The Net Balance Transfer. OO rH CO
Constructive Fraud Elements as to Claim Category 4: The Fixed Assets Transfers . CO rH
The Trustee’s Veil Piercing Claims. Cl iH
The Trustee’s Veil-Piercing Claim Based on Alter Ego. O 03
The Trustee’s Veil-Piercing Claim Based on Sham to Perpetrate a Fraud CO 03
in 03
PROCEDURAL HISTORY
The Trustee initiated this adversary by filing his Original Complaint on December 13, 2004. The Trustee filed his Fourth Amended Complaint on October 27, 2008. Rulings on the Defendants’ 12(b)(6) and *263summary judgment motions limited the claims remaining for trial. Specifically, the Court dismissed the Trustee’s single enterprise and conspiracy theory causes of actions and limited the Trustee’s veil-piercing liability, if any, to SMTC Corporation (“SMTC Corporate”), HTM Holdings, Inc. (“HTM”), and SMTC Manufacturing Corporation of Canada (“SMTC Canada”).
Thus, as claims remaining for trial, the Plaintiff/Trustee on behalf of the estate of the Debtor, SMTC Manufacturing Corporation of Texas (“SMTC Texas”) seeks to avoid pursuant to 11 U.S.C. § 544(b) and §§ 24.005(a)(1), (2) and 24.006(a) of the Texas Uniform Fraudulent Transfer Act (“TUFTA”) certain allegedly fraudulent transfers to certain Defendants that occurred from January 2002 through December 2003 and with an alleged value in excess of $80 million dollars. Additionally, the Plaintiff/Trustee requests relief under Texas law against certain Defendants based on corporate veil-piercing theories of alter ego and sham to perpetrate a fraud.
The case was tried over nine days. At the close of the Trustee’s evidence, the Defendants moved under Rule 52(c) for a judgment as a matter of law on the TUF-TA claims, arguing that there were no “transfers” of any “assets” as defined in that statute. The Court denied that motion, for reasons stated on the record.
At the close of all the evidence, Defendants once again made a motion under Rule 52(c) (the “Rule 52(c) Motion”), asserting a number of grounds including those urged in their prior motion that had been denied. The post-trial motion was carried with the Court’s consideration after trial of the merits of the action, and was taken under advisement.
THE PARTIES
The Plaintiff in this action is Ron In-galls, the Chapter 7 Trustee (“Trustee”) of the Debtor.
The Defendants in this action are:
1. SMTC Corporate, a corporation organized under the laws of Delaware and is the parent company of all the SMTC corporations1;
2. HTM, a corporation organized under the laws of Delaware and the holding company for several subsidiaries of the SMTC family and a wholly-owned subsidiary of SMTC Corporate;
3. SMTC Manufacturing Corporation of North Carolina (“SMTC Charlotte”), a wholly-owned subsidiary of HTM;
4. SMTC Mex Holdings, Inc. (“SMTC Mex”), a corporation organized under the laws of Delaware and is a wholly-owned subsidiary of HTM;
5. SMTC de Chihuahua, S.A. de C.V. (“SMTC Chihuahua”), a corporation organized under the laws of Mexico and is a wholly-owned subsidiary of SMTC Mex; and
6. SMTC Canada, a corporation organized under the laws of Canada and a wholly-owned subsidiary of SMTC Nova Scotia Company, which is a wholly-owned subsidiary of SMTC Corporate.
THE WITNESSES
1. Ron Ingalls, the Chapter 7 Trustee and the Plaintiff;
2. Kirk Hartstein, the vice president and general manager of the Debtor from 1999 to 2002 and the vice-president of the Debtor from 2002 until its closing;
*2643. John Sommerville, the director of engineering and vice president of operations of the Debtor from June, 1999 to March, 2003;
4. Scott Kingery, a test engineer for the Debtor from 1999 to just prior to its closing;
5. Richard Winter, the vice-president and general manager for Debtor from 1996 to 1999;
6. Frank Skerlj, director of finance for SMTC Canada and the corporate representative for all the Defendants;
7. Julian Alexander, the expert hired by the Trustee, the owner of Accounting Economics Appraisal Group, a Certified Public Accountant, certified in financial forensics, and a certified fraud examiner;
8. Margaret Reinhart, an expert originally hired by the Trustee2 and a shareholder in Forensic Strategic Solutions;
9. Kell Mercer, the attorney who prepared the proof of claim for Flextronics International, Inc.;
10. Cliff Ernst, corporate lawyer in Austin, Texas, who prepared the initial incorporation documents of the Debtor and handled various other corporate matters;
11. Mario Ochoa, a corporate representative of Flextronics International, Inc., whose video deposition testimony was admitted at trial;
12. Alma Carbajal Velasquez, currently the controller of SMTC Chihuahua/SMTC Mex, who held positions with that company as accounting supervisor prior to 2000 and accounting manager between 2000 and 2002;
13. Terry Hart, who testified by deposition and was the former manufacturing manager of the Debtor, a position which required him to work with the accounting department at SMTC Chihuahua (or Mex) in connection with exporting products from SMTC Chihuahua to SMTC Texas. Defendants introduced Mr. Hart’s testimony by deposition;
14. Tom Rossi, a former employee of SMTC Chihuahua and/or SMTC Mex, whose testimony was offered by the Defendants by video deposition;
15. Kristin Markland, a former accounting manager for Debtor, who prior to that position had worked as an accounts payable supervisor and clerk as well as an administrative assistant and receptionist for the Debtor;
16. B.J. Desai, the former director of engineering with SMTC Corporate, whose primary responsibility was accountability for all of the equipment held by all of SMTC Corporate’s subsidiaries;
17. Jane Todd, the current president and CFO of SMTC Corporate and also the secretary and treasurer for most of the subsidiaries; and
18. Otto Wheeler, a Certified Public Accountant who owns Wheeler and Company and who testified as Defendants’ expert witness.
BACKGROUND FACTS
Two Austin American Statesman articles were written in mid-2002 regarding the economic difficulties associated with *265computer component manufacturers. These articles directly address problems experienced not only by SMTC Texas, but also the Debtor’s lessor, Flextronics International, Inc. (“Flextronics”):
SMTC will lay off about 1000; U.S. Foodservice also plans to pare jobs Weak demand from computer buyers and a grinding price war among computer makers continue to take a heavy toll on component manufacturers.
SMTC Corp., which makes motherboards for Dell Computer Corp. servers will lay off about half of the 200 workers at its North Austin plant in August. Like the computer makers, suppliers such as Toronto-based SMTC have been closing facilities and cutting jobs in an effort to return to profitability. In the first quarter, SMTC closed a plant in Cork, Ireland.
SMTC is moving motherboard production to its plant in Chihuahua, Mexico, said Kirk Hartstein, general manager of the Austin plant. As computer prices continue to fall, manufacturers have increasingly farmed out work to plants in Mexico, where wages are much lower than in the United States.
SMTC is just the latest contract manufacturer in Central Texas to cut jobs in the wake of the slowdown in technology spending. Last month, Flextronics, Inc. said it will close its New Braunfels plant in August, eliminating 780 jobs, according to a filing with the Texas Workforce Commission.
Exh. D-31, Austin American Statesman Online Archives dated June 6, 2002 by John Pletz.
Plant changes helped Dell avoid Mexico move
The dramatic productivity improvements achieved at Dell Computer Corp.’s Parmer North 2 plant, in part, helped keep the production of corporate desktop computers in Austin instead of Mexico.
Although Dell couldn’t figure out a way to make Mexico work out logistically for its own finished PCs, components are another story. Many of the computers coming down the conveyors at Parmer join up with monitors bearing the Dell logo that are assembled in Mexico.
Several Dell suppliers have moved to Mexico because of their ever shrinking profits in the computer-industry food chain.
SMTC Corp., which makes motherboards for Dell, laid off 100 workers in Austin recently and moved production to Chihuahua, in central northern Mexico. Flextronics, Inc., which made metal computer housings for Dell, closed its plants in New Braunfels, laying off the last of about 1,000 workers this month and moved production offshore.
Exh. D-32, Austin American Statesman Online Archives dated August 26, 2002 by John Pletz
It is within the context of this economic downturn that the decision to shut down the Debtor and later to file bankruptcy, ultimately leading to the filing of this adversary proceeding.
THE TRUSTEE’S CLAIMS AND THE PARTIES’ ALLEGATIONS
The Trustee brought suit to avoid allegedly fraudulent pre-petition transfers of cash and fixed assets made by the Debtor to certain Defendants from January 2, 2002 through December 2003. The allegedly more than $80 million of fraudulent transfers can be divided into four categories:
*2661) transfers of cash, allegedly totaling approximately $37 million, to SMTC Mex and SMTC Charlotte between February 2002 and February 2003 (the “Intercompa-ny Transfers”),
2) the reallocations to the Debtor from September 2002 through January of 2003 of certain costs totaling $1,959 million, previously borne by SMTC Corporate (the “Expense Reallocations”),
3) cash transfers between January 2002 and December 2003 between SMTC Texas’s bank accounts and the HTM consolidated bank accounts, which the Trustee and his expert netted out to arrive at a net transfer of approximately $41.1 million in favor of HTM (the “Net Balance Transfer”), and
4) transfers of SMTC Texas’s fixed assets to affiliates in March and April of 2003 (the “Fixed Assets Transfers”).
Finally, the Trustee also asserts a claim alleging that certain of the Defendants should be responsible for the debts of the Debtor under various veil-piercing theories.
The Trustee asserts that SMTC Corporate, SMTC Canada and HTM orchestrated, planned, and arranged to bankrupt the Debtor and transfer all the cash, capital, and other property from the Debtor to certain affiliates at the Debtor’s expense to avoid the financially cumbersome lease obligation the Debtor owed to Flextronics. The Trustee claims that as part of the plan to siphon cash and other assets from the Debtor to certain affiliates, SMTC Corporate decided to disengage the Debtor from its largest and most lucrative customer, Dell. Then, once it became known that Debtor had disengaged from Dell, other customers left the company. By mid-2002, the Debtor, having lost almost its entire customer base, commenced lay-offs and initiated the shutdown of its operating facility and such activity defrauded not only Flextronics, the Debtor’s largest creditor, but other creditors as well.
The Defendants dispute the Trustee’s allegations. The Defendants allege that no transfers occurred because all of the Debtor’s assets were fully encumbered by a lien to its lender and were therefore beyond the reach of TUFTA. Defendants further allege that the Debtor’s bankruptcy was the result of economic and market conditions prevailing in Austin, Texas, and in the technology sector at that time. Defendants assert the Debtor could not continue to service the Dell account without the aid of its sister company in Mexico and ultimately not at all due to the continuous pricing pressure put on it by Dell. Furthermore, Defendants assert the Debtor did not have enough income to pay its debts and its lease so it chose to pay creditors other than Flextronics. With the exception of Flextronics, most obligations incurred by the Debtor prior to closing its doors in the spring of 2003 were paid. That is reflected by the low number of proofs of claim filed in this case, all but one of which are claims that did not arise until after the Debtor closed its doors in May of 2003. Defendants assert that for every transfer by the Debtor, reasonably equivalent value was provided to the Debt- or. Defendants also assert that any liability of a Defendant for avoidance is offset by Defendants’ right of setoff and recoupment.
FINDINGS OF FACT
SMTC Texas was engaged in the business of manufacturing computer components in Austin, Texas. The Debtor was at all relevant times a wholly-owned subsidiary of HTM which is itself a wholly-owned subsidiary of SMTC Corporate. The Debtor is a corporation duly organized under the laws of Texas. P-120,121. The Debtor is one of several subsidiaries *267owned by HTM and was considered an operating subsidiary, that is, its purpose was to manufacture electronic component parts for computer and other technology related companies. The Debtor was one of several subsidiaries under the SMTC umbrella. The SMTC entities operated globally with companies in Canada, the United States, Mexico, and Ireland.
The Debtor’s operations consisted of a single manufacturing facility in Austin, Texas. The Debtor leased this facility from Flextronics pursuant to a lease agreement dated September 1, 2001 (the “Lease”). The Lease was a ten-year lease to which the Debtor was committed through September 2011. The Debtor had initially commenced operations at another location in 1996. It also owned property on Bratton Lane in Austin, Texas but did not use the property in its operations. As its operations expanded in 2000, it was necessary for the Debtor to find additional space, resulting in the Lease with Flex-tronics.
The SMTC entities financed their operations collectively, as co-debtors and co-guarantors. On or about July 27, 2000, SMTC Corporate, HTM, SMTC Canada and several wholly-owned subsidiaries, including the Debtor, executed a restated and amended credit and collateral agreement (“Lehman Loan Agreement”) with several banks and financial institutions, the primary lenders being Lehman Commercial Paper, Inc. (“Lehman”) and General Electric Capital Corporation (collectively the “Lenders”).
The Lehman Loan Agreement consists of two documents (1) the Amended and Restated Credit and Guarantee Agreement (“Credit Agreement”), Exh. D-107, and (2) the Amended and Restated Guarantee and Collateral Agreement (“Guarantee Agreement”), Exh. D-108.
Pursuant to the Credit Agreement and Guarantee Agreement, the Lenders extended credit and granted loans (“Lehman Loan”) for the general corporate purposes of HTM and its subsidiaries. SMTC Corporate and several of HTM’s subsidiaries, including the Debtor, were parties to and guaranteed the Lehman Loan. The Debtor absolutely and unconditionally guaranteed the Lehman Loan pursuant to the Guarantee Agreement.
All of Debtor’s assets secured the Lehman Loan. Exh. D-107 and D-108. Lehman filed UCC-1 financing statements to perfect its security interest in the Debtor’s assets.
The Debtor maintained a portion of the Lehman Loan debt on its books. Although the Debtor was not the actual borrower on the Lehman Loan, it had guaranteed this debt and it used the borrowed funds in its daily operations. During operations, the Debtor’s individual use of the Lehman Loan fluctuated. The monthly outstanding balances on the Lehman Loan for the all of the entities and the portion carried on the books of the Debtor are as follows:
Date Entire Balance of the Lehman Loan Debtor’s Proportionate Share of the Lehman Loan
January 2002 $138,753,000.00 $32,715,000.00
February 2002 132,622,000.00 33,435,000.00
March 2002 112,452,000.00 35,603,000.00
April 2002_131,903,000.00 43,184,000.00
May 2002_119,970,000.00 41,565,000.00
June 2002_114,036,000.00 35,619,000.00
July 2002 118,577,000.00 33,930,000.00
August 2002 104,602,000.00 27,990,000.00
Sept. 2002_90,163,000.00 25,129,000.00
Oct. 2002 96,509,000.00 23,894,000.00
Nov. 2002_92,307,000.00 21,544,000.00
Dec. 2002 82,589,000.00 19,971,000.00
January 2003 82,311,000.00 21,462,000.00
*268Date Entire Balance of the Lehman Debtor’s Proportionate Share of the Loan
February 2003 86,844,000.00 19,736,000.00
March 2003 80,869,000.00 20,706,000.00
April 2003_79,197,000.00 16,097,000.00
May 2003_76,426,000.00 16,395,000.00
June 2003_67,160,000.00 14,642,000,00
July 2003 77,716,000.00 16,624,000.00
August 2003 77,592,000.00 15,757,000.00
Sept. 2003 74,922,000.00 15,925,000.00
Oct. 2003 72,717,000.00 16,218,000.00
Nov. 2003 76,170,000.00 17,093,000.00
Dec. 2003 70,077,000.00 17,327,000.00
Exh. D-24 (“Total Debt”) and Line 342 on Exhs. D-l and D-2; see also Defendants’ Motion For Final Summary Judgment on Lien, Reasonably Equivalent Value, and Conspiracy Issues.
The monthly total value for the assets of the Debtor, according to its balance sheet, are as follows:
Date Value of the Debtor’s Property
January 2002 $50,297,000.00
February 2002 53,451,000.00
March 2002 57,373,000.00
April 2002 63,950,000.00
May 2002 66,108,000.00
June 2002 60,349,000.00
July 2002 59,539,000.00
August 2002 50,837,000.00
Sept. 2002 38,296,000.00
Oct. 2002 32,768,000.00
Nov. 2002 30,890,000.00
Dec. 2002 22,129,000.00
January 2003 22,232,000.00
February 2003 20,614,000.00
March 2003 14,916,000.00
April 2003 7,513,000.00
May 2003 4,599,000.00
June 2003 2,332,000.00
July 2003 1,360,000.00
August 2003 1,299,000.00
Date Value of the Debtor’s Property
Sept. 2003 1,181,000.00
Oct. 2003 1,270,000.00
Nov. 2003 1,206,000.00
Dec. 2003 83,000.00
Line 324, Exhs. D-l and D-2.
The Facts Regarding the Joint Cash-Management System and the Zero Balance Accounts
The SMTC entities used a joint cash-management system that facilitated efficient financing from the Lehman Loan. This system operated in tiers or levels and was initially operated one way and then, at the request of Lehman, the arrangement changed.
The Joint Cash-Management System Prior to March 2002
At the top tier of the banking arrangement is the Lehman Loan which funded all operations of the SMTC entities. The consolidated accounts (all other operating subsidiaries) constitute the second tier. Prior to March 2002, there was only one consolidated account: the HTM-maintained consolidated zero-balance account, Comeriea Account Number xxxxxx5417 (“Consolidated ZBA Account”). The bottom tier constituted each of the subsidiaries’ various bank accounts. Each subsidiary maintained a general bank account. The Debt- or’s general bank account was Comeriea Account Number xxxxxx5375 (“Debtor General Bank Account”). Debtor’s payroll bank account was Comeriea Account Number xxxxxx5367 (“Debtor Payroll Bank Account”).
When the Debtor would receive money from a customer, Debtor deposited it into the Debtor General Bank Account. When the Debtor needed to pay a bill, debt or any payable, funds from the Lehman Loan would be deposited into the Consolidated ZBA Account and from there deposited into the Debtor General Bank Account. *269Funds needed for payroll were deposited into the Debtor Payroll Bank Account. Any other expenses were paid directly out of the Debtor General Bank Account.
At the end of the business day, whatever funds remained in Debtor General Bank Account (including deposits from customers and funds that had not been used to pay bills or other expenses) would be swept into the Consolidated ZBA Account, and then swept again and applied to the Lehman Loan.
The Joint Cash-Management System from March 2002 Onward
The banking arrangements changed in March 2002. Additional disbursement accounts were established and a “lockbox” arrangement was instituted which prevented the SMTC entities from accessing the money deposited from customers into the general accounts.
A new consolidated disbursement bank account was created: Comerica Account Number xxxxxx5393 (“Consolidated Disbursement Account”). After March 2002, funds were no longer disbursed to the subsidiary accounts through the Consolidated ZBA Bank Account. Rather, funds needed by the operating subsidiaries would be deposited into the new Consolidated Disbursement Account. Likewise, new disbursement bank accounts were created for each individual subsidiary. Debt- or’s disbursement bank account was Com-erica Account Number xxxxxxx4651 (“Debtor Disbursement Bank Account”). Instead of funds flowing from the Consolidated ZBA Bank Account to Debtor General Bank Account, they now flowed from the Consolidated Disbursement Bank Account to Debtor Disbursement Bank Account. The Debtor Payroll Bank Account remained in place. However, if funds were needed to pay payroll, they would now flow from the Debtor Disbursement Bank Account to the Debtor Payroll Bank Account.
The inflow of cash essentially remained the same as it was before March, 2002. That is, Debtor continued to receive deposits from customers into the Debtor General Bank Account. Just as before, at the end of each day these funds were swept into the Consolidated ZBA Account and then finally swept again and immediately applied to pay down the Lehman Loan.
What distinguished the arrangement in place after March 2002 is the Lender’s control over deposits. Prior to March 2002, the subsidiaries would use the funds that were deposited into their general accounts to pay vendors immediately, and only the net remaining in the account was swept up and applied to the Lehman Loan. After March 2002, a “lockbox” arrangement existed. Subsidiaries could no longer access any money deposited into their respective general accounts. As noted, economic pressures had been plaguing electronics manufacturers since 2001, and Lehman demanded more control.
HTM facilitated the operation of the consolidated accounts. The Debtor would make its funding requests for its expenses to SMTC Canada which would then authorize HTM to allow the Lehman Loan funds to be put into the Debtor’s Disbursement Bank Account to pay expenses and then into the Debtor’s Payroll Bank Account to make payroll. This was a routine, automatic efficient method of paying down the debt as well as reducing the amount of interest ultimately paid on the Lehman Loan.
The Facts Regarding Claim Category 1: The Intercompany Transfers
All of the subsidiaries purchased and sold products from one another. With respect to the transfers in question, the Debtor purchased products from two of its subsidiaries, SMTC Charlotte and SMTC *270Mex. The alleged fraudulent transactions occurred between February 2002 and February 2003 and were a result of the need for the Debtor to outsource to Mexico to maintain competitiveness.
John Sommerville testified that SMTC Mex ramped up to offer customers a lower cost of production. Customers wanted to then shift production to Mexico to take advantage of lower manufacturing costs. In particular, Dell, the Debtor’s main customer, was aggressive in its pricing strategies. As such, the Debtor, along with Dell, moved the Dell production to SMTC Mex to be profitable. Kirk Hartstein corroborated the testimony of Mr. Sommer-ville. Mr. Hartstein agreed that Dell was a continually difficult and demanding customer. SMTC Mex had the capacity to fulfill orders from the Debtor, and to remain competitive and profitable, the Debt- or moved the manufacturing to Mexico.
Mr. Hartstein acknowledged that Dell’s products were being built in Mexico and shipped to Texas. The labor in Mexico was $3.00 an hour and in Texas $19.00 an hour. Mexico would ship the requested goods to Texas. Dell would then pay Texas for the goods and Texas would place the goods in inventory for receipt by Dell. Texas received a markup for holding the inventory and servicing Dell in connection with the products made in Mexico. Mr. Hartstein could not testify as to the exact mechanics of how the intercompany financial transactions were set up to handle these purchases from Mexico. He indicated this area was Mr. Giordano’s responsibility. Mr. Giordano was the Debtor’s on-site controller. Mr. Hartstein, however, acknowledged that the Mexico intercompa-ny transactions existed.
Terry Hart, former manufacturing manager of the Debtor, also confirmed that the Debtor purchased product from SMTC Mex. Likewise, Kristin Markland, the Debtor’s accounting manager at the time the intercompany transfers took place, also acknowledged that Debtor purchased product from Mexico as well as Charlotte because she processed the payables to SMTC Mex and SMTC Charlotte. Ms. Markland indicated that the Debtor would receive the product into inventory where it was recorded in an inventory program. She would then receive an invoice that she would match to the inventory. The transactions were documented with voided “dummy checks” payable to the subsidiary providing the product and by journal entries into the general ledger.
Tom Rossi, a former employee of SMTC Chihuahua also verified that product was made and shipped to the Debtor from Mexico. And, Alma Carbajal, the accounting manager at SMTC Mex also confirmed the Debtor’s purchase of the product from SMTC Mex. Once SMTC Mex shipped the product from its warehouse, then SMTC Mex would invoice. She explained that an invoice would not be generated unless the goods were actually shipped. Ms. Carba-jal also explained that SMTC Chihuahua actually manufactured the goods for SMTC Mex who sold the product to the Debtor. This was due to the maquiladora laws in effect in Mexico. She also acknowledged that the payments were by intercompany transaction and that when the Debtor purchased product from SMTC Mex and issued a dummy check, entries would be made on both SMTC Mex and the Debtor’s 10800 general ledger account.
There was no controverting evidence in connection with this testimony nor any documentary evidence that the transactions were somehow falsified. In fact, Mr. Alexander, the Plaintiffs own expert, assumed in his analysis that value was received and that all the entries in the general ledger of SMTC Texas, which included the dummy checks, were valid. *271Transcript-AIexander (Mar. 27, 2009), p. 91 line 28 through p. 92 line 1. He further assumed for his report that the goods were received by the Debtor and that they were then sold based on the Debtor’s financial reporting. Transcript-AIexander (March 27, 2009), p. 131 1.12 to 1.17. Mr. Alexander did question certain missing papers in connection with the shipping of the goods from Chihuahua to El Paso; however, B.J. Desai explained that SMTC Chihuahua owned its own trucks and used them to deliver the products to El Paso for shipping.
The Debtor negotiated with Dell to move the manufacturing of its products to SMTC Mex because of lower costs of production. This was no secret. See Newspaper Articles, supra. Dell continued to use the Debtor as its primary SMTC contact. The Debtor would then place the purchase orders with SMTC Mex on behalf of Dell. SMTC Mex would have SMTC Chihuahua manufacture the product, invoice the Debtor, and deliver the goods to the Debtor. The Debtor would purchase the product from SMTC Mex and then turn around and sell it to Dell with a price markup. The Debtor invoiced Dell and Dell paid the Debtor. The Debtor at trial produced invoices, Mexican custom records, and freight documents to demonstrate the Debtor received the products from SMTC Mex in exchange for these payments. Exhs. D-40 through D-55, D-68, D-69 and D-71.
There was little testimony on the Debt- or’s purchase of goods from Charlotte. On cross examination, Mr. Hartstein did acknowledge that the Debtor did purchase some goods and assembly time from the North Carolina subsidiary and that Charlotte would ship goods to the Debtor for it to then ship to its customers. Mrs. Mark-land also acknowledged these transactions. Mr. Hartstein acknowledged that this would again have been some type of inter-company transaction and that the Debtor’s on-site controller, Mr. Giordano, would handle the financial aspects of these transactions.
The Debtor, at trial, produced the original purchase orders, invoices, packing lists and shipping memos as evidence of the fact that products were received from SMTC Charlotte in exchange for these payments. Exhs. D-56 through D-68.
These transfers were all documented by voided intercompany checks instead of money actually changing hands. As such, these transfers between the Debtor and SMTC Mex and SMTC Charlotte were not reflected on the bank statements but only on the general accounting ledgers of the various subsidiaries. Rather than tie up funds and increase interest payments to Lehman, the SMTC entities simply recorded the entries on their respective ledgers, making the appropriate debit or credit to the respective subsidiaries’ general ledger 10800 account. All of the intercompany payments for these transactions were then reconciled through the ZBA Consolidated Bank Account at the HTM level.
The Facts Regarding Claim Category 2: The Expense Reallocations
Starting on September 29, 2002, SMTC Corporate reallocated certain costs to all of its subsidiaries for services rendered since 2000. Exh. D-2, lines 200 and 222, Exhs. D-233 through D-237. In the months preceding the September reallocations, there had been no allocation of costs in either the Corporate Reallocation category or the Sales and Marketing Reallocation category. Exh. D-2, lines 200 and 222. The Debtor’s books reflect a Corporate Reallocation charge in September 2002 of approximately $750,000 and a Sales and Marketing Reallocation of $1.138 million. Exh. D-2, lines 200 and 222. The Debtor’s Income Statement reflects Corporate *272Reallocation charges after September 2002 of $19,000 in October, $34,000 in November, and $36,000 in December of 2002, and $23,000 in January of 2003. Exh. D-2, line 200. For Sales and Marketing Reallocation, monthly charges were negative: < $5,000> in October, < $12,000> in November, and < $16,000> in December of 2002, and < $5,000 > in January of 2003. Exh. D-2, line 222.
The SMTC Corporate services covered by these charges (the “Expense Realloca-tions”) were sales and marketing consultation, training, centralized buying, and information technology services as well as other services incurred by the corporate office that benefitted each subsidiary and would have been incurred by the subsidiary individually had SMTC Corporate not provided these services. Originally, these costs had been incorrectly allocated solely to SMTC Corporate and needed to be allocated to the benefit of each subsidiary for tax purposes. The Expense Realloca-tions apparently corrected this problem.
Frank Skerlj and Kirk Hartstein both acknowledged that SMTC Corporate assisted the Debtor in many ways and that the Debtor received value for the services rendered by the parent and that all SMTC entities, not just the Debtor, were allocated the proper share of expenses. Mr. Kingery also indicated that SMTC Corporate provided leadership and a benefit to the Debtor. Mr. Kingery explained that Derek D’Andrade, an engineer at SMTC Corporate, would provide advice and suggestions to the Debtor regarding engineering issues on the lines. Richard Winter testified that SMTC Corporate negotiated more favorable financing terms for the entities and more favorable equipment terms and also helped in soliciting customers for the Debtor. Jane Todd and Frank Skerlj further explained that financial procedures and methodologies were in place to allocate these costs and that KPMG, a well-known accounting firm, had reviewed and approved these guidelines. Exh. D-239.
Other than perhaps the size of the charges reallocated, the Trustee produced no testimony or other evidence tending to show that the services were not actually rendered or that the costs allocated were not reasonably equivalent to the value of the services provided.
The Facts Regarding Claim Category 3: The Net Balance Transfer
Between January 2002 and December 2003 an aggregate net of $41.1 million was swept from the Debtor’s Comerica bank account to the consolidated bank accounts, meaning that the Debtor sent more cash to the Consolidated ZBA Bank Account handled by HTM than came back into the Debtor General Bank Account.
Mr. Alexander prepared a chart (the “Net Balance Chart”) showing amounts flowing between the bank accounts of the Debtor and HTM. Exh. P-9. When asked, both Mr. Skerlj and Mr. Wheeler (Defendants’ expert witness) agreed that the calculations reflected in Mr. Alexander’s Net Balance Chart are entirely correct.
The Facts Regarding Claim Category 4: The Fixed Assets Transfers
In March and April of 2003 as Debtor finalized its closing, its remaining fixed capital assets (except for the Bratton Lane land) were transferred to SMTC Chihuahua and SMTC Canada. As of March, 2003, the book value of SMTC Texas’s fixed assets on its balance sheet was approximately $5,386,000.00. Exh. D-2, line 318. Of this amount, leasehold improvements accounted for approximately $2,730,000.00. These improvements were not transferred but abandoned back to Flextronics. The Bratton Lane land was *273also included in this calculation and had a value of $537,000.00.
Several witnesses testified as to what assets they thought remained in the building after the Debtor closed for business. Mr. Sommerville remembers some equipment on hand at closing but could not remember any specifics regarding disposition although he surmised that any leased equipment was returned to lessors and any Debtor-owned equipment was moved to another site, as it was standard upon closing to move equipment to an affiliate.
Mr. Kingery testified he purchased five testers for the Debtor and at the time they were purchased, three cost from $200,000 to $250,000, the gen rad tester cost between $400,000 and $450,000, and the probe tester cost $250,000. He could not verify if the testers had actually been purchased by the Debtor or leased by the Debtor. Mr. Kingery recalled that there were 7 to 9 lines in good working condition (a fine being several pieces of equipment that worked together to manufacture the electronic components) remaining at the building when the Debtor ceased operations, but that he had not purchased any of those lines and he did not know which components of the lines, if any, were owned or leased by the Debtor. Mr. King-ery explained that in his current position with Flextronics he purchases lines which cost between $400,000 and $500,000.
Mr. Hartstein also testified that he thought there were seven operational lines at the facility upon closing which were purchased originally at $2 million each and which were eventually shipped at closing to Chihuahua and Canada. He also acknowledged that some of the equipment was owned by the Debtor and some of it leased but did not testify as to any specifics with respect to the equipment.
B.J. Desai, who managed all the subsidiaries’ equipment for SMTC Corporate, testified on behalf of the Defendants. Mr. Desai actually prepared a list of each piece of equipment the Debtor transferred to Chihuahua and Canada. Exh. P-124. The list contained each manufacturer, serial and model number, ship date (which were dates in March and April 2003) and whether the equipment was owned by the Debt- or or leased at time of shipment. The list also placed a value on each item. The SMTC Texas owned equipment was valued at no more than $301,000. In February 2003 the Debtor’s total assets on the Balance Sheet totaled $20,614 million and its current liabilities were $6,706 million. Exh. D-2, lines 324, and 338. At that time the portion of the Lehman Loan carried on its balance sheet was $19,736 million. Exh. D-2, line 342. In March of 2003, the total assets on the Debtor’s Balance Sheet (which did not include the capital assets) was $14,916 million and its current liabilities were $5,487 million with the portion of the Lehman Loan being $20,705 million. Exh. D-2, lines 324, 338 and 342. By April 2003 (when the $301,000 of Debtor’s assets were fully transferred to Chihuahua and Mexico) the Debtor listed total assets of $7,513 million, current liabilities of $6.3 million, and the Debtor’s portion of the Lehman Loan was $16,097 million. Exh. D-2, lines 324, 338 and 342.
The Trustee produced a personal property tax appraisal reflecting furniture, fixtures and equipment valued as of January 29, 2002, at $4,212,334. The Defendants claim SMTC Chihuahua and SMTC Canada assumed Debtor’s portion of the Lehman Loan as consideration for this exchange; however, the Debtor continued to carry the Lehman Loan on its books until December 2003 and listed the Lehman Loan in its entirety on its bankruptcy schedules.
The Debtor wrote off its capital assets to zero in March 2003 and did not place *274these assets back on its books. The Debt- or recorded all items in accordance with Generally Accepted Accounting Principles. KPMG audited the Debtor and its affiliates. The Debtor and its affiliates regularly reported on a consolidated basis to the SEC and issued 10-Ks annually regarding its operations.
The Facts Regarding the Decision to Shut Down
On May 22, 2002, Paul Walker, president of SMTC Corporate as well as the president of the Debtor, sent an email to a group of SMTC executives asking them to help prepare a proposal for the board of directors of SMTC Corporate. Exh. P-80. The proposal envisioned by Mr. Walker involved closing the Austin facility in the 3rd quarter of 2002, but “[t]he actual timing is not as important as determining the restructuring charges and balance sheet impact.” Exh. P-80.
On May 29, 2002, Paul Walker, along with other corporate executives, traveled to Austin and negotiated a disengagement with Dell that required a methodical winding down of business between Dell and the Debtor as the Debtor continued to sell product to Dell through 2002. That same day Paul Walker emailed SMTC executives the following:
We just told Dell we are disengaging, they understood, and we are going to put a plan in place to be finished in the next few months.
They committed to keep it confidential, as we have not told anyone at SMTC yet, and we need to keep it amongst ourselves as well, as it has effects on the Austin site and people.
Freeing up this working capital to deploy to other sites and programs is the way to go, and in my opinion, is a major step in insuring the financial health and long term viability of SMTC.
I have given the finance team certain scenario’s to model as to what SMTC will look like for the rest of 2002 and 2003 and my guess is “... short term pain in 2002 for long term gain in 2003 ...” but let’s see what the scenario’s look like....
Exh. P-81.
On May 31, 2002, Phil Woodard, the COO of SMTC Canada, sent an email to corporate executives (including Mr. Walker). Exh. P-82. In the body of the email, Mr. Woodard asked the others for their help in finalizing the worksheet so that it could be presented at the board meeting:
We need to complete this in draft form for presentation to the Board on Tuesday so we need [the] following reviewed ASAP:
1. Building Lease-Gary lets have BJ [Desai] finish the summary of the lease today. I just plugged in a 3 year obligation as a starting point and you can see that drives $6.5m of lease payments and probably another $5m of building maint. And tax’s. We need to discuss other options of sub-letting it earlier, buying the building and then reselling it or bankrupting the Texas company and walking away from the lease.
There are no board minutes from the board meeting held June 4, 2002 reflecting what actions the Board did or did not approve with respect to the Debtor’s operations. These minutes were requested by the Trustee in discovery but were never produced by the Defendants or used at trial by the Defendants. At the time of these emails in May 2002, the Debtor’s books reflected over $66 million in assets. Exh. D-2, line 324. Current liabilities were $30 million and the Debtor’s portion of the Lehman Loan was $41,565 million. Exh. D-2, line 338 and 342.
On September 9, 2002, Kirk Hartstein received an email from Scott Jessen of the *275Morse Company which reflects that this company was attempting to lease or sell the property (and attaches the confidential property offering materials) and which states that Mr. Jessen is “excited about working with you [the Debtor] to find a user that is interested in buying and or leasing the facility.” Mr. Jessen indicates in his email that he is sending a copy of the materials to Mike Carney and Dan Hollingsworth of Flextronics for them comments. Exh. D-322. Mr. Hartstein testified that the email reflected some of the efforts of the Debtor to sublet/sell the building after the Dell disengagement.
On September 19, 2002, Phil Woodard again emailed certain corporate executives regarding closure of San Jose, Charlotte, and Donegal, Ireland sites. In connection with Austin, he indicated a plan for Austin to remain for “entire year” based on being able to settle with “Flex” and have a transition plan with Alcatel. Exh. P-83.
On September 24, 2002 Kirk Hartstein sent the following email regarding the Debtor’s continuing operations:
Dave:
Thank you for taking the time to talk with me this morning.
As I mentioned, SMTC is remaining in Austin. We have disengaged with Dell, (our decision due to pricing pressures), but still remain supporting Alcatel, General Bandwidth and Xplore Technologies in Austin. We have about 120 employees at the facility and are working to grow the business back.
Exh. D-321.
On January 22, 2003 Phil Woodard sent the following email to Gary Walker, Paul Walker, and Derek D’Andrade at SMTC Corporate:
Austin—
• I spoke to John this morning, he see’s [sic] the writing on the wall with Alca-tel’s lower requirements.
• I think we need to make the decision to shut the site down by end of Q1 by next week to give us enough time to do it by end of March.
Exh. P-84.
On February 14, 2003, John Sommer-ville sent an email to Paul Walker copying Gary Walker and Phil Woodard:
w.r.t. Alcatel they did communicate their intent to end production of the Quads/ ABCU’s during meetings with Paul and later me in late December. Production was to end in March '03. They have significantly increased their fest. to us for Feb./Mar. To the point where SMTC has the majority of production on the above assemblies vs. the planned 30%. On 2/13 they confirmed that despite their ongoing performance issues in No-gales it is still their intent to migrate both products to Nogales and SMTC will not see loading beyond March '03.
Exh. P-85. On February 14, 2003, Paul Walker drafted a return email to John Sommerville:
1) Nothing stays internal, and it will be out in public in a “New York minute.”
2) Do we have to specifically mention Alcatel? As I am sure they do not want to be blamed for this, but just as important the message will get all messed up as more people in the industry become aware, and I know it will end up being that “SMTC lost the Alcatel account” completely which is far from the truth.
3) Can’t we just do the WARN for now, which indicates “significant” reductions and then in the next short while ie 1 to 2 weeks take it to a shutdown decision.
*2764) We still have to prepare our complete game plan for talking to Flex, so we may need a week or so on that....
Exh. P-85.
A March 19, 2003 email from John Som-merville to Paul Walker regarding a Flex-tronics tour of the building stated:
Terry is the GM of Flextronics Piano site. He is looking for 20K sq. ft. for some work they plan to do for Applied. He wanted to make sure I was comfortable with collocation. I don’t think he had any other agenda. If he was checking us out the place is still busy and staffed so it would not be obvious we are exiting next month.
Exh. P-87.
In a March 25, 2003 email to Paul Walker, Nicholas Giordano, the on-site controller, stated:
I received a call from Melissa Stone-Credit Manager of Flextronics ... inquiring about the March rent payment ($185K). Apparently, Flextronics has done a financial review and they would like SMTC to sign a Parent Company Guaranty for the Austin Facility. You’ve got to love the timing on this one!
I told her I would look into the March Rental payment and get back with her today. The check is cut, but has not been released by the site per John S. Do you want me to release the check.
She will be forwarding the PCG documentation to me and I will subsequently forward it on once I get it. I have not committed or enlightened her about Austin’s present scale back....
Exh. P-86. Paul Walker’s same day response to Mr. Giordano was to release the check and say no more. Exh. P-86. However, the Debtor did not send the March rent check.
When Flextronics demanded payment of the rent from the Defendants on April 3, 2003, Paul Walker responded on April 9, 2003, with:
When looking at the Texas operation, it is a stand alone entity, and at this point, due to the downturn in business, doesn’t have any assets to speak of, let alone cash for buyouts. We do have 20 acres of land valued at $500k, that although is is [sic ] pledged to the bank group, our attorneys feel strongly that we can get it released, and offer it to Flex as that is really the only asset of any value in the entity. I realize that the last thing you want is more land in Texas, but frankly, that is all we have.
Exh. P-89. In March 2003, the Debtor’s balance sheet showed nearly $15 million in assets, Exh. D-2, line 324, $5,487 million in current liabilities, and the Debtor’s portion of the Lehman Loan was $20,705 million. Exh. D-2, lines 338 and 342.
On Wednesday April 9, 2003, Flextronics employee, Mike Carney, sent an email to Paul Walker that stated:
Thank you for your input in describing your difficulties in Texas, obviously a 500k settlement would not be attractive or acceptable to Flextronics with 8 years remaining on a 10 year lease. As I do understand your difficulties in Texas I would look to you to provide Flextronics with a more suitable settlement knowing you would need to draw from resources other than your Texas corporation.
Exh. P-117.
Prior to shutting down, the Debtor paid $3.5 million to most of its remaining creditors. Exhs. D-77 and D-348. The Debtor made its monthly payments to Flextronics through February 2003.
The Debtor filed bankruptcy on December 14, 2004. It listed on its schedules the *277full amount of the Lehman Loan as a liability.
Seven proofs of claim were filed in the Debtor’s bankruptcy: (1) the claim of Flextronics (later amended) for $6,471,190.32, (2) an electric bill in the amount of $9,209.82 for services billed in May, June and July of 2003, after the Debtor had exited the building, (3) a secured claim by Travis County of $272,333.86 for property taxes for the years 2003 and 2004, (4) secured claims by Round Rock ISD of $133,247.99 for property taxes for the years 2003 and 2004 and for 2005 and 2006, and two minor unsecured claims, (5) a claim by Bax Global Exchange for $114.40 for services performed between October 27, 2004 and November 15, 2004, (6) a claim by Digikey Corp. for $577.30, and (7) a claim by Broadway Advisors for an alleged preferential payment received by the Debtor, in the amount of $1,391,402.95, which apparently is no longer being pursued.
Although SMTC Texas stopped paying rent after the February 2003 payment, the $475,000.00 security deposit held by Flex-tronics satisfied the Debtor’s March and April rent as testified to by Kell Mercer. SMTC Texas surrendered the building on May 22, 2003. After the Debtor’s surrender of the property, Flextronics occupied the building and eventually sold it to Long Vista Industrial, L.P., on August 2, 2005 for $8.25 million. Exhs. D-326 and D-277.
The Facts Regarding Corporate Control and Corporate Formalities
SMTC Corporate was involved in the day to day operations of the Debtor. SMTC Corporate made the decision to disengage from Dell. Hartstein and Som-merville both testified that the Debtor requested permission from corporate to proceed with certain operations. And, the Debtor operated with no cash. HTM7 SMTC Canada handled the financing for all the operating subsidiaries and determined what funding and when should be made to the subsidiaries to pay each’s expenses. This was in part due to the structuring of the Lehman Loan and the entities’ attempts to save on interest payments. Mr. Winter testified that SMTC Corporate’s stance on controlling certain operations was much more pronounced after the large decline in value in 2000 in the technology sector of the economy. Additionally, this centralized control obtained economies of scale, i.e., SMTC Corporate provided various services to the Debtor in an attempt to control costs at each site.
After March 2003, any cash received by HTM was never redirected back to the Debtor to pay Flextronics. All the Debt- or’s manufacturing equipment was transferred to Chihuahua and Canada. All of the Debtor’s accounts receivable and other assets were liquidated by the end of 2003. Paul Walker told Flextronics that the Debtor had no assets to speak of when in fact the books showed not only accounts receivable and inventory but certain fixed manufacturing assets and land. He did, however, indicate that the Debtor owned land although that asset was subject to the bank loan and had questionable value for settlement purposes. At the time he relayed this information, in April of 2003, the Debtor’s assets were $7,513 million, its current liabilities were $6.3 million, and its portion of the Lehman Loan was $16,097 million. Exh. D-2, lines 324, 338 and 342.
CONCLUSIONS OF LAW
To create liability under TUFTA, the Debtor must have made a transfer or have incurred an obligation:
1) with actual intent to hinder, delay or defraud any creditor of the debtor; or
*2782) without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor:
(A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transactions; or
(B) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.
Tex. Bus. Com.Code Ann. § 24.005(a) (Vernon 2009).
In addition, § 24.006(a) (Transfers Fraudulent as to Present Creditors) provides:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
Tex. Bus. Com.Code Ann. § 24.006(a) (Vernon 2009).
Thus, other than the claims involving the Expense Reallocations (which were obligations incurred, not transfers of assets), each of the Trustee’s claims requires the “transfer” of an “asset,” both of which are defined terms for purposes of TUFTA. The term “asset” is defined as “property of a debtor, but the term does not include: (A) property to the extent it is encumbered by a valid lien-” Tex. Bus. Com. Code Ann. § 24.002(2) (Vernon 2009). In that same section, transfer is defined as “ “[transfer” means every mode ... of disposing of or parting with an asset or an interest in an asset_” Tex. Bus. Com. Code Ann. § 24.002(12) (Vernon 2009).
Further, § 24.003 of TUFTA regarding “insolvency” provides:
(a) A debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.
(b) A debtor who is generally not paying the debtor’s debts as they become due is considered to be insolvent.
(d) Assets under this section do not include property that has been transferred, concealed or removed with intent to hinder, delay or defraud creditors or that has been transferred in a manner making the transfer voidable under this chapter.
(e) Debts under this section do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset.
Tex. Bus. Com.Code Ann. § 24.003(a), (b), (d) and (e) (Vernon 2009).
Section 24.004 of TUFTA regarding “value” provides, in relevant part:
(a) Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but does not include an unperformed promise made otherwise than in the ordinary course of the promisor’s business to furnish support to the debtor or another person.
(d) “Reasonably equivalent value” includes without limitation, a transfer or obligation that is within the range of values for which the transferor would have sold the assets in an arms length transaction.
Tex. Bus. Com.Code Ann. § 24.004(a) and (d) (Vernon 2009).
Proof that assets were transferred and an assessment of their value *279are essential to sustaining a fraudulent conveyance action. Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333, 341 (Tex.2009). “It is the creditor’s burden to offer evidence addressing the elements of fraudulent transfer as to each transfer.” Walker v. Anderson, 232 S.W.3d 899, 913 (Tex.App.-Dallas 2007, no pet.); Tow v. Pajooh (In re CRCGP LLC), Adv. No. 07-3117, 2008 WL 4107490, at *3 (Bankr.S.D.Tex. Aug.28, 2008); see G.M. Houser, Inc. v. Rodgers, 204 S.W.3d 836, 843 (Tex.App.-Dallas 2006, no. pet.). Further, the Trustee bears the burden of proving all elements of his TUFTA claims by a preponderance of the evidence. Walker v. Anderson, 232 S.W.3d at 913; Tow v. Pajooh, 2008 WL 4107490, at *3; In re Sullivan, 161 B.R. 776, 780 (Bankr.N.D.Tex.1993); Texas Custom Pools, Inc. v. Clayton, 293 S.W.3d 299, 311-12 (Tex.App.-El Paso 2009) (op. on motion).
As discussed above, the Defendants moved at the close of evidence under Rule 52(e) for judgment as a matter of law on several grounds. Specifically, they argued (as they had in their previous motion under that Rule, which was denied by the Court) that none of the transfers at issue involved “assets” subject to “transfer” (as those terms are defined under TUFTA) because all of the Debtor’s assets were encumbered by a valid lien. Defendants also asserted that the Trustee: (1) failed to prove insolvency, (2) failed to produce sufficient evidence under § 24.005(a)(1) to prove actual intent to hinder, delay, or defraud a creditor, (3) produced no evidence under § 24.005(a)(2)(A) and (B) to show that the Debtor failed to receive reasonably equivalent value for the property it transferred, and (4) failed to provide sufficient evidence to support his veil-piercing theories.
The Court may render judgment on partial findings after hearing all the evidence. Fed.R.Civ.P. 52(c); Fed. R. Bankr.P. 7052. The Court is not bound by the denial of a motion for judgment as a matter of law made at the conclusion of plaintiffs case. See Weissinger v. U.S., 423 F.2d 795, 797-98 (5th Cir.1970). As the ultimate fact-finder in a bench trial, the Court need not draw any special inferences in favor of the nonmovant. Premier Capital Funding, Inc. v. Earle (In re Earle), 307 B.R. 276, 289 (Bankr.S.D.Ala.2002); Regency Holdings (Cayman), Inc. v. The Microcap Fund, Inc. (In re Regency Holdings (Cayman), Inc.), 216 B.R. 371, 374 (Bankr.S.D.N.Y.1998). Rather, the Court may weigh the evidence, resolve any conflicts and decide where the preponderance of evidence lies. Earle, 307 B.R. at 289; Regency Holdings, 216 B.R. at 374.
Certain of the issues raised by the Rule 52(c) Motion and raised generally by the evidence presented at trial affect many of the causes of action asserted, and they will be addressed first. Those three preliminary issues are: (1) whether the Trustee’s expert testimony was sufficient, (2) whether the lien securing the Lehman Loan fully encumbered all of the Debtor’s property so that, as defined in TUFTA, there was no “asset” that could have been the subject of a “transfer,” and (3) whether the Debtor was insolvent at the time of the challenged transfers.
The other issues raised by the Defendants in their Rule 52(c) Motion are discussed below in the Court’s conclusions on each of the elements of the Trustee’s TUFTA claims and veil-piercing theories.
Preliminary Issue I
Whether the Trustee’s Expert Testimony Was Sufficient
The Defendants claim that the Trustee’s expert testimony is insufficient because it is based on unreliable data and therefore cannot support the fact findings necessary to a judgment for the Trustee. *280See Defendants’ Rule 52(c) Motion. The Defendants argue that Mr. Alexander’s opinions are speculative and unreliable because he relied, in part, on data compiled by Forensic Strategic Solutions (“FSS”) and should not be considered by the Court. The Trustee originally retained FSS as the forensic consulting firm to the estate on an hourly-rate basis, but was later forced to place FSS on a contingency arrangement because of limited estate funds. Mr. Alexander was retained to testify in this case after Ms. Reinhart’s firm, FSS, was disqualified as an expert witness because of the contingency compensation arrangement that Texas law prohibits as unethical.
The Defendants claim that Mr. Alexander testified that he relied on FSS to collect information critical to his analysis. He also testified that he received and reviewed a copy of FSS’s initial report, which could not be used because of the improper compensation agreement.
Mr. Alexander testified that he relied on FSS to simply gather raw financial data that had been produced by the Defendants to the Trustee. He further testified that the only compilations he might have relied upon are the summaries of bank statements and bank “downloads” that he used to create his Net Balance Chart. Exh. P-9. These bank statements and downloads were produced by Defendants in discovery. Further, the remainder of his analysis came straight from the numbers on the Debtor’s balance sheet. Mr. Alexander’s opinions are neither based on improper evidence nor speculative, and so they will be considered.
Preliminary Issue II
Whether the Lien Securing the Lehman Loan Fully Encumbered All of the Debtor’s Property, So That There Was No “Asset” That Could Have Been the Subject of a “Transfer”
Other than his claim involving the Expense Reallocations, which involves the in-currence of a fraudulent obligation, not a fraudulent transfer of an asset, each of the Trustee’s claims under TUFTA require a finding that there was a “transfer” of an “asset.” Both of these terms are defined in TUFTA. Section 24.002(12) of TUFTA provides that “ “[t]ransfer” means every mode ... of disposing of or parting with an asset or an interest in an asset.” Section 24.002(2) provides that “ “[a]sset” means property of a debtor, but the term does not include ... property to the extent it is encumbered by a valid lien.... ” The Defendants contend that no “transfer” occurred because none of the Debtor’s property that was conveyed was at the time an “asset.” That is because, they argue, the evidence showed that “the extent” to which each item of property was “encumbered by a valid lien” was at all times complete — i.e. the property was fully encumbered.
First, the Defendants assert that whether the Debtor was liable for the entire balance on the Lehman Loan or for only a portion of it, at the time of each conveyance by the Debtor the amount of its liability, and the corresponding extent of the lien, exceeded the value of the particular item or items of property that the Debtor conveyed. Under this argument each of those items of property was not an “asset” that could have been “transferred” under TUFTA. The Defendants claim this result is mandated by Mullins v. TestAmerica, Inc., 564 F.3d 386 (5th Cir.2009).
Alternatively, the Defendants argue that even if the value of all of the Debtor’s property that was subject to the lien was considered, because the Debtor was liable for the entire balance of the Lehman Loan, the value of the lien which secures the Lehman Loan exceeded the combined value of all the Debtor’s property, and so at all times the Debtor’s property was fully *281encumbered. Accordingly, the Defendants argue, none of the conveyances by the Debtor was a “transfer” that involved an “asset” of the Debtor.
The Trustee’s position, if correct, defeats both these arguments. He does not dispute, and the Court so finds, that under the loan documents the collateral on which the Debtor granted the lien included all of its property. Exhs. D-35, D-36. The Trustee also does not dispute that the lien was valid. He claims, however, that the evidence at trial established that on each occasion when the Debtor’s property was conveyed, its property was not fully encumbered by the lien.
To defeat either of the Defendants’ arguments, the Trustee must establish that the debt that was secured by all of the Debtor’s property was less than the value of that property. To do so he argues that, based on established case law involving insolvency determinations, the Debtor’s liability should be considered contingent and reduced according to the likelihood that the Debtor would ever have had to pay on that liability. The Trustee then claims that the evidence showed that there was virtually no possibility at the time of the transfers that the Debtor would have had to pay any of the Lehman Loan, and so the Debtor’s liability should be discounted to $0.00, or at least to a de mini-mus amount. Thus, the Trustee argues, at all relevant times there was equity in the property conveyed by the Debtor and, therefore, the conveyances were “transfers” of “assets.”
The Court’s analysis of the broad issue of whether the Debtor in this case transferred any asset begins with the undisputed legal proposition that TUFTA does not apply to “an alleged fraudulent transfer of property to the extent that such property is encumbered by a security interest.” Mullins, supra; see Yokogawa Corp. of Am. v. Skye Int’l Holdings, Inc., 159 S.W.3d 266, 269 (Tex.App.-Dallas 2005, no pet.) (noting that “[p]roperty encumbered by a valid lean [sic ] is not an asset under TUFTA”); see also United States v. Commercial Tech., Inc., 354 F.3d 378, 387 n. 5 (5th Cir.2003) (concluding that “an asset does not include, among other things, ‘property to the extent it is encumbered by a valid lien’ ”).
The two legal questions presented for the Court in connection with its decision on whether an “asset” could have been the subject of a “transfer” are (1) how to decide whether property conveyed is fully encumbered in the context of a blanket lien covering all assets of a debtor — i.e., whether the Debtor should be considered to have conveyed some of its encumbered property, or some of its equity with each conveyance; and (2) whether, for purposes of a TUFTA analysis, the Debtor should be considered to have been liable for the entire Lehman Loan balance. The first of these questions hinges on the Court’s interpretation of the holding in Mullins, recently decided by the Fifth Circuit Court of Appeals.
Preliminary Sub-Issue IIA
Whether the Definition of “Asset” under TUFTA, as Interpreted in Mullins, Means That Even When There Is Equity in the Collateral Considered as a Whole, There Is No “Transfer” of an “Asset” So Long as the Value of the Item(s) of Property Conveyed Is Less Than the Entire Secured Debt
As the Court understands it, the Defendants’ first argument with respect to whether any “assets” were “transferred” starts from the indisputable proposition that the Trustee must prove each and every element with respect to each conveyance he claims was fraudulent. Walker v. Anderson, 232 S.W.3d 899, 913 (Tex.App.*282Dallas 2007, no writ). From there, the Defendants reason that so long as each conveyance involved property that had a value less than the amount of debt secured by all of the Debtor’s property, and even if that debt was determined to be something less that the entire balance of the Lehman Loan, each conveyance involved property that was fully encumbered by a lien, which is not disputed to have been valid. Therefore, the Defendants assert, according to TUFTA’s definitions, no conveyance was a “transfer” of an “asset.” In support of their reading of the statute, the Defendants rely on the recent decision of the Fifth Circuit Court of Appeals in Mullins v. TestAmerica, Inc., 564 F.3d 386 (5th Cir.2009), which they claim is factually indistinguishable from this case.
The Trustee characterizes the issue presented by the Defendants’ first argument based on their reading of Mullins as whether or not, in a case “[w]here the debtor has some equity in its total assets, and a portion of those assets is transferred to an insider, ... the asset represents the debtor’s equity.” Trustee’s Response to Defendants’ Rule 52(c) Motion, p. 18. According to the Trustee, if the facts show that the value of all the Debtor’s property was greater than the amount of debt secured by the lien, the property transferred should be considered to represent part of that equity rather than part of the encumbered collateral, so that each conveyance involved property that was not fully encumbered — i.e., each conveyance involved an “asset” that was “transferred.”
This Court has previously ruled on this precise argument when it denied the Defendants’ Rule 52(c) Motion presented at the close of the Trustee’s case. Its decision has not changed, and for the reasons stated on the record on April 2, 2009, when it made that ruling, as repeated below, it rejects the Defendants’ argument and now holds that any conveyance made by the Debtor at a time when the debt secured by all its property was less than the value of all that property, was a “transfer” of an “asset” under TUFTA.
In Mullins a creditor challenged, as a fraudulent transfer under TUFTA, a transfer of a portion of the proceeds of the sale of the debtor’s assets to its majority shareholder. The material facts were: (1) the debtor, TestAmerica, owed a total of approximately $26.2 million to Fleet Capital Corporation; (2) the debt to Fleet was secured by a valid lien; and (3) according to the court, Fleet’s “loans were secured by all of TestAmerica’s assets.” TestAm-erica sold all its assets for $33.5 million, establishing the value of those assets. Therefore, at the time of the sale, there was equity of $7.3 million in the collateral available to pay other claims.
These facts in Mullins are analogous to those in this case if the Court finds that the debt secured by the Debtor’s property was less than the combined value of all that property, at the time of the challenged conveyance. But in Mullins, however, there were additional facts that distinguish it from this case.
In Mullins at the closing of the sale the secured party partially released its lien, agreeing to be paid only $23 million in full satisfaction of its debt, and directing that the $3.2 million in proceeds that was released from the lien be instead transferred at closing to the majority shareholder of the debtor, Sagaponack Partners, LP. The Court held that the $3.2 million was fully encumbered by Fleet’s lien and so under TUFTA was not an “asset” that was “transferred.”
Looking solely at those facts and the result, it might appear that when the Court of Appeals found that the property transferred was fully encumbered and not *283an asset under TUFTA, it found the fact that there was equity in the collateral (collateral value of $33.5 million less secured debt of $26.2 million) to be immaterial, looking only at whether the value of the property transferred, $3.2 million to Saga-ponack (even when considered with the $23 million that was transferred to Fleet), was less than or equal to the amount of the debt to Fleet — $26.2 million.
However, the third fact recited above-that the loans were secured by all the assets of the debtor — -was only the court’s observation of the parties’ positions at a time before the transaction in question. It was not the situation by the time of the sale, and so not the transaction addressed by the court of appeals — i.e., at the time of the transfers to Fleet and Sagaponack, the loans were in fact not secured by all the assets of the debtor. Rather, the court points out that Fleet released its lien on the remaining collateral — the equity — at the closing of the transaction in question. Id. at 415 (“In consideration for HIG’s payment of Fleets’ discounted loan, Fleet agreed to release it security interests ‘upon receipt of payment on the day of closing.’ ”). The value of Fleet’s collateral from that point on was therefore limited to the amounts paid at closing — $23 million to Fleet and $3.2 million to Sagaponack, or $26.2 million total, and because the Court found that value to have been equal to the amount of the debt secured by that property — $26.2 million — it found that the property that was transferred was fully encumbered and not an “asset.”
That is the critical distinction between Mullins and this case. In this case, truly all of the Debtor’s property is undisputedly subject to the lien. Thus, the Court agrees with the Trustee that if the total value of all property exceeded the amount of the debt that it secured at the time of a conveyance, each item of property that was conveyed should be considered part of the Debtor’s equity, and not fully encumbered. Therefore, as to any such “assets,” the Debtor “transferred” them within the meaning of TUFTA.
Preliminary Sub-Issue IIB
Whether the Debtor Should Be Considered Liable for the Full Amount of the Lehman Loan Balance, or for Only Some Lesser Amount
The Trustee claims that the Debtor’s liability for the Lehman Loan was contingent or should be discounted to an amount reflecting the likelihood it would have to pay on its full guaranty on the Lehman Loan. Therefore, he argues, there was equity in the Lenders’ collateral, their lien did not fully encumber the Debtor’s property, and its “assets” were thus “transferred” (both as defined in TUFTA). Whether the Debtor’s Liability Should be Considered “Contingent”
The Defendants rely on the express terms of the documents, and certain Texas cases involving joint and several guarantee liability, to support their assertion that at the time of the transactions in question, the Debtor was liable for the entire balance of the Lehman Loan. In particular, the Second Amended and Restated Guarantee and Collateral Agreement, dated as of June 1, 2004 provides, in relevant part:
2.1 Guarantee, (a) Each of the Guarantors hereby, jointly and severally, unconditionally and irrevocably, guarantees to the General Administrative Agent, for the ratable benefit of the Lenders and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Borrower when due (whether at stated maturity, by acceleration or otherwise) of the Borrower Obligations. *2842.5 Guarantee Absolute and Unconditional .... Each Guarantor understands and agrees that the guarantee contained in this Section 2 shall be construed as a continuing, absolute and unconditional guarantee of payment. When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Guarantor, the General Administrative Agent or any Lender may, but shall be under no obligation to, make a similar demand hereunder or otherwise pursue its rights and remedies as it may have against the Borrower, any other Guarantor or any other Person or against any collateral security or guarantee for the Borrower Obligations or any right of offset with respect thereto, and any failure by the Administrative Agent or any Lender to [do so] shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the General Administrative Agent or any Lender against any Guarantor....
Exh. D-108, pp. 10-12. In addition, the Guarantee Agreement provided that the Guarantors pledge their property as collateral to secure the entire Lehman Loan:
SECTION 3. GRANT OF SECURITY INTEREST
(a) Each Guarantor hereby confirms that pursuant to the Existing Guarantee and Collateral Agreement such Grantor has assigned and transferred to the General Administrative Agent, and hereby confirms that pursuant to the Existing Guarantee and Collateral Agreement such Grantor has granted, or pursuant hereto hereby continues such grant, to the General Administrative Agent, for the ratable benefit of the Lenders, a first priority security interest (junior only to the Congress Liens) in all of the following property now owned or at any time in the future hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the “Collateral”), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of such Grant- or’s Obligations in respect of the [Lehman Loan]:
[there follows a list of types of collateral that the parties agree covers every type of property of the Debt- or]
Exh. D-108, p. 13.
It is undisputed that the Debtor was one of the Guarantors and Grantors under the Guarantee Agreement. “Borrower Obligations” as used therein is defined as, among other things, the “unpaid principal and interest on the [Lehman] Loan[ ],” without any limitation. Exh. D-108, p. 5. Thus, according to the terms of the documents, the Debtor was liable to the Lenders (as defined therein) for, and its property secured, the full amount of the Lehman Loan.
The Trustee argues that the Debtor’s property should not be considered to have secured the entire balance of the loan because to burden the Debtor with the entire debt ignores the joint and several nature of the Debtor’s obligation — that there were other obligors on the debt, including the primary obligor.
In particular, the Trustee claims that the liability should be reduced to $0.00 based on the reasoning of In re Xonics Photochemical, Inc., 841 F.2d 198 (7th Cir. 1988), the seminal case on the need to reduce or discount contingent liabilities in *285determining solvency.3 In Xonics, the Court of Appeals addressed the valuation of one affiliate’s guarantee and co-maker obligations in determining that affiliate’s solvency for purposes of deciding whether a transfer was preferential under the Bankruptcy Code. The Court found that each of those obligations, as “a contingent asset or a contingent liability .... must be reduced to its present, or expected, value before a determination can be made whether the firm’s assets exceed its liabilities.” Id. at 200.
The Defendants contend that Xonics and the line of cases that follow it are not applicable to the Debtor’s obligation under the Guarantee because those cases apply only to contingent claims and, by its terms (quoted above), the Guarantee was not contingent but rather it was “absolute and unconditional” and the Debtor’s liability was several. This fact, they argue, compels the conclusion that the Debtor’s liability should not be discounted at all-
in support, the Defendants cite a number of cases under Texas law for the propositions that a guarantee is not contingent, but is absolute and unconditional, when it requires no condition precedent to its enforcement other than the default of the principal obligor, and that a guarantor’s liability under an absolute and unconditional guarantee is the same liability that the principal obligor bears. See e.g., Reece v. First State Bank, 566 S.W.2d 296, 297 (Tex.1978); Mid-South Telecommunications Co. v. Best, 184 S.W.3d 386, 391 (Tex.App.-Austin 2006, no writ); RTC v. Northpark Joint Venture, 958 F.2d 1313 (5th Cir.1992); see also cases cited in Defendants’ Motion for Final Summary Judgment (on Lien, Reasonably Equivalent Value and Conspiracy Issues) (filed under seal, see docket # 156), pp. 30-31.
With only one exception, the cases cited by the Defendants involved the legal rights and obligations of the parties in the context of the enforcement of a guarantee against the guarantor by the lender or other obligee.4 This Court does not disagree with such decisions that find guarantees to be not legally “contingent” under those circumstances. In fact, it agrees with the Defendants that, under Texas law, the Guarantee in this case is “absolute” as between the Guarantors under the Guarantee Agreement (including the Debt- or) and the Lenders. If this were a case involving the Lenders’ legal right to en*286force the Guarantee against the Debtor, the Court would find that they were entitled to recover from the Debtor the full amount of the outstanding balance of the Lehman Loan.
However, those are not the facts of this case. Instead, the Court is asked to determine, for purposes of deciding under TUF-TA if the Debtor fraudulently conveyed its property, whether at the time of those conveyances the Debtor had equity in that property over and above the amount of the hen securing the Lehman Loan. Under these facts, there is a contingency present that is not present when a lender is enforcing its rights against the guarantor: the contingency that some or all of the debt may be satisfied by another obligor.
The difference is this. At the point when a lender sues to collect from its guarantor, it has made its choice that it will seek payment in full from that particular obligor. At that point, the focus is on the guarantor that is being sued and there is no contingency that the debt will be paid by another — the relief sought is that it be paid in full by the defendant guarantor. However, in this case and in Xonics and similar cases, the issue to be decided is not what the lender is entitled to collect, but whether a guarantor’s liabilities exceed its assets — i.e., whether a guarantor is insolvent for the purpose of deciding whether property had been fraudulently or preferentially transferred. In such a ease, it is necessary to consider whether the guaranteed debt would be satisfied by another obligor in order to decide whether or not there are enough of the guarantor’s assets available to satisfy all claims against it.5 In other words, because the liquidation analysis performed by a court is hypothetical, it is entirely appropriate, even necessary, that a court also hypothesize the payment of the debt, in whole or in part, by another obligor.
Stated otherwise, the meaning of “contingent” used in Xonics and in this case is different from the one urged by the Defendants and supported by the cases they cite, that defines the legal rights and obligations of the parties to an obligation. Rather, “contingent” as used in Xonics and as applicable here, is used similarly to its use in accountancy where it refers to a liability (or an asset) that, because of some possible occurrence in the future, should not be considered from the perspective of the owner/debtor to be “worth” its full face value. “Discounting a contingent liability by the probability of its occurrence is good economics and therefore good law, for solvency ... is an economic term.” Covey v. Commercial Nat. Bank of Peoria, 960 F.2d 657, 660 (7th Cir.1992).
The Xonics Court’s discussion of its reasoning shows that this economic definition of “contingent” is the one it used in its analysis:
Every firm that is being sued or that may be sued, every individual who has signed an accommodation note, every bank that has issued a letter of credit, *287has a contingent liability. Such liabilities are occasionally listed on the firm’s balance sheet, for example by earmarking a portion of surplus for contingent liabilities. (They are supposed to be listed “if the future event is likely to occur and if its amount can be reasonably estimated.” Nikolai et al., Intermediate Accounting 6111 (3d ed.1985) (emphasis in original).) More often they are listed in a footnote, thus leaving the firm’s stated net worth undisturbed. Often they are not listed at all, when they are remote or when they are too small to affect net worth substantially. On the proper accounting treatment of contingent liabilities see id. at 610-14; Faris, Accounting for Lawyers 362-64 (3d ed.1975); Williams, Stanga & Holder, Intermediate Accounting 609-17 (1984); Meigs, Mosich & Johnson, Accounting: The Basis for Business Decisions 288 (3d ed.1972); Financial Accounting Standards Board, FASB Statement of Standards No. 5 (1975).
Xonics, 841 F.2d at 199-200.6 Mr. Alexander’s testimony shows that this economic definition, and not the “legal definition” urged by the Defendants, is also the meaning of “contingent” that he used in forming his opinions:
the valuation of contingent liability ... could be a liability arising under a guaranty agreement, it could be an asset arising under a recovery action such as this, and those are matters that auditors routinely consider, the valuation of the amount that should or should not be disclosed or recorded.
Because Generally Accepted Accounting Principles require disclosure of all important elements of a credit agreement, I didn’t need to read the [Lehman Loan Credit] agreement. The most important thing that I needed to do was assess the likelihood or the probability that that contingent liability would become a reality, and do that not from reading the agreement; I made an assumption about what that agreement said based on the disclosures. You do that by evaluating the financial position of the company as well as reading the audit opinion ... of the auditors that are also obligated to make the same kind of review in far more detail than I am.
Transcript — Alexander—March 26, 2009, p. 12, lines 12-18, p. 47, line 17-p. 48, line 3.
Admittedly, Mr. Wheeler testified that one would “assess the value of the liability for a breach of a covenant” from the. lender’s perspective, and that “Lehman’s risk upon breach of a covenant” was “[u]l-timately” the entire amount of the loan. Transcript — Wheeler—April 3, 2009, pp. 47-49. However, this testimony followed questioning by counsel about “the approximate minimum outstanding balance under the Lehman facility ... as to the whole company,” a reference to the entire group of SMTC affiliates. Transcript — Wheeler — April 3, 2009, pp. 48-49 (emphasis added). Mr. Wheeler was never asked to *288provide an opinion on whether, for an accountant’s consideration of equity in collateral or solvency, the Debtor alone should have been considered liable for the entire balance of the Lehman Loan.
Finally, a review of the facts of Xonics also confirms that the appellate court was using this definition of contingent, and not its “legal definition.” The obligations considered by the court in Xonics included not only the guarantee, but also an obligation as a co-maker on a note:
The startling feature of the case is the parties’ apparent assent to the proposition that if the loan guarantee and the note that Xonics Photochemical had cosigned were valid obligations, Xonics Photochemical was insolvent as of the date the obligations were assumed, on the theory that they created liabilities greater than the company’s net assets (much greater: $28 million in liabilities versus less than $2 million in net assets). The proposition is absurd; it would mean that every individual or firm that had contingent liabilities greater than his or its net assets was insolvent-something no one believes.
Id. at 199 (emphasis added). With a comaker obligation, not even the condition of a primary obligor’s default stands in the way of the lender’s right to payment by the co-maker. Yet the Xonics court applied the same analysis to that obligation that it did to the guarantee, considering them both contingent and both subject to being discounted depending on the likelihood of payment. The contingency common to both obligations, in the context the court considered them in Xonics, is the possibility that another obligor on the debt will pay some or all of it so that the debtor as co-maker or guarantor would not do so. That same contingency being present in this case, this Court finds that the Debt- or’s liability under the Guarantee at the time of the challenged conveyances was contingent within the meaning used in Xonics, so that it is proper and necessary to consider the probability that the Debtor would have to pay that obligation.
Whether the Trustee Proved the Debtor’s Liability Should Be Discounted
In dicta, the Seventh Circuit Court of Appeals in Xonics suggested, as a method of determining the extent of the liability of the guarantor/co-maker, that the likelihood the guarantor/co-maker would have to pay the debt in full be converted into a percentage, and that that percentage be applied to the value of the assets of the guarantor/co-maker (on the theory that the amount the guarantor/co-maker could pay on the debt was limited to the value of its assets).7 Xonics, 841 F.2d at 200. The Trustee urges this Court to adopt such a method, and argues that the evidence showed that the appropriate percentage of likelihood that the Debtor would have had to pay the Lehman Loan in full, determined as of the time of the conveyances in question, was 0%, or at least a percentage so small that it results in a de minimus liability.
In support, the Trustee offers the conclusion of his expert, Mr. Alexander, that “[t]he guaranty contingent liability could not have any reasonable value whatsoever *289based on the SEC forms filed by its parent company, by SMTC Texas’s parent company, SMTC Corp.” Transcript — Alexander — March 26, 2009, p. 47, lines 6-8. The basis for that conclusion, according to Mr. Alexander’s testimony, was the Form 10-Ks of SMTC Corporate, for the years 2001 through 2004. Specifically, he testified that
... contingent liabilities of that sort are disclosed in 10(k)s, so I obtained the SEC-filed Form 10(k)s for SMTC Corporate and read those financial statements, taking particular note of ... [t]he assets of the parent company, the financial position of the parent company, and the audit opinion expressed by KPMG during the relevant years.
Transcript — Alexander—March 26, 2009, p. 46, line 22-p. 47, line 4.
The Trustee argues that such information should persuade the Court, as it did Mr. Alexander, that there was virtually no likelihood that the Debtor would have to pay on the Guarantee, particularly when considered with other evidence that the Lehman Loan was never in default and that the Lenders never foreclosed on any assets of the Debtor, SMTC Corporate or any of the SMTC affiliates or other subsidiaries. See Plaintiffs Letter Brief to the Court, docket # 266, p. 3, filed April 1, 2009, in response to Defendants’ Rule 52(c) Motion made at the close of Plaintiffs case; Transcript Mr. Wheeler April 6, 2009, p. 46 (to his knowledge, based on financial records he had reviewed, the Lehman Loan had never been “placed into default during the period of its existence.”). As further evidence that the Debtor was never required to pay on the Guarantee and so the liability should be discounted to $0.00, the Trustee points to the fact that the Lehman Loan “was paid in full in 2004, including through the raising of equity to new investors.” Exh. P-54, 2004 10-K of SMTC Corporate, at p. 18.
Courts have considered events occurring subsequent to challenged transfers, as well as those occurring contemporaneously with those transfers, as evidence on the likelihood a guaranteed obligation would be paid. For example, in In re Martin, 145 B.R. 933 (Bankr.N.D.Ill.1992), appeal dismissed, 151 B.R. 154 (N.D.I11.1993), the bankruptcy court considered the payment “history” on the guaranties and the primary obligations following the date of the alleged fraudulent transfer. It found that, because the holders of the guarantees “had not called on [the debtor] to honor his guarantees as of June 1, 1985 [the date of the alleged fraudulent transfer], and neither of these creditors’ moved to enforce these guarantees during the four years after that date,” and because the primary obligors “were paying their debts to [the creditors] in 1985,” the creditors were unlikely to call on their guarantees at the time of the transfers and so the guarantee obligations should be “conservatively valued at zero” for purposes of the Court’s analysis under Illinois fraudulent transfer laws. Id. at 943.
In this case, however, contrary to the Trustee’s contentions, the evidence did not show that there were no subsequent defaults on the Lehman Loan. Rather, Jane Todd testified that the covenants of the Loan had been breached, but that the Lenders waived those defaults. See also Transcript — Wheeler—April 3, 2009, pp. 46-47. In addition, rather than having been paid in full from the resources of the other obligors, the Lehman Loan was in fact only partially paid by them, the balance having been restructured. Exh. P-54, pp. 17-18 (“On June 1, 2004, we completed ... a transaction with SMTC’s preexisting lenders to repay a portion of SMTC’s preexisting debt and restructure *290the balance of SMTC’s pre-existing debt...."). Specifically, “SMTC ... repaid $40 million of debt at par; ... exchanged $10 million of debt for $10 million of SMTC’s common stock and warrants ... and ... converted $27.5 million in debt into second lien subordinated debt with maturity ranging from four to five years.” Exh. P-54 at p. 18.
The Trustee argues that the Lenders’ acceptance in 2004 of $10 million worth of SMTC’s common stock and warrants in satisfaction of that amount of existing debt is also evidence that the Lenders considered the other obligors as being able to pay the debt without the Debtor’s participation, and therefore the risk that the Debtor would have had to pay on the Guarantee during the period 2002-2003 was de minimus. The Court finds, however, that such evidence may equally be considered as a concession made by the Lenders because of their assessment that the other obligors did not have the ability to pay the debt in full in cash.
Finally, although subsequent occurrences may be relevant to the likelihood of payment, they are not in this case conclusive. The determination of the amount of the Guarantee obligation that was secured by the lien on the Debtor’s property must still be made as of the time of the alleged fraudulent conveyances — in 2002 and 2003. The fact that after those conveyances the Lehman Loan was satisfied by others obligated to pay it does not necessarily mean that it was likely or probable at the time of the conveyances that the Debtor could not have paid it. Those other obligors may have ultimately had to pay or restructure the Loan without the Debtor’s participation because the Debtor by that time had become unable to pay its share. While that fact may be obvious in hindsight, in light of the Debt- or’s having ceased doing business, disposed of its assets and filed this bankruptcy case, the determination of whether to discount a debt because of the likelihood of payment should be made from the perspective of the Debtor, operating as it was at the time of the transfers. See Travellers Int’l AG v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 134 F.3d 188, 194, 196-97 (3d Cir.1998) (determining solvency by treating the debtor as a going concern “[bjecause liquidation in bankruptcy was not clearly imminent on the date of the challenged transfer” and therefore finding that the court “cannot consider the market’s devaluation of [the debtor’s publicly traded] debt resulting from the possibility as of the date of the transfer that [it] would cease operations and be unable to satisfy its promises.”).
The Debtor in this case was still operating as late as March of 2003. Exh. P-87 (March 19, 2003 email from John Sommer-ville to Paul Walker, stating that “the place is still busy and staffed.... ”). Its financial statements show that it had sufficient assets to have made at least some significant payments on the Lehman Loan throughout the period when the transfers occurred, with the exception of December of 2003. In fact, it paid down its share of the Lehman Loan fairly steadily from April of 2002 to June of 2003, from a high of $43,184 million to $14,642 million. Exh. D-2, line 342. At worst, between July and December of 2003, the Debtor’s share of the Lehman Loan increased less than 11%, from $15,624 million in July to $17,327 in December, but until December it still listed assets in excess of $1 million. Exh. D-2, line 324. Overall, the Debtor reduced its share of the Lehman Loan by a total of $25,857, or by almost 60%, from April of 2002 to December of 2003. Exh. D-2, line 324. The Court finds, therefore, that when it made the transfers in question, the *291Debtor was paying or could have paid on its Guaranteed obligation.
The Court therefore cannot find that there was no likelihood that it would pay, or even that there was merely a de mini-mus probability that it would, and so finds that the Trustee’s contention that the Debtor’s liability on the Guarantee should be discounted to $0.00 or a de minimus amount is not supported by the evidence. The Trustee presented no evidence of any other appropriate discount. In the absence of such evidence, the Court is unable to find that the lien did not secure the entire amount of the Guarantee.
The inquiry as to whether the property transferred was fully encumbered, and therefore not an asset, does not end there. To determine whether the Debtor’s property was fully encumbered, the debt — the entire balance of the Lehman Loan — must be compared to the value of the Debtor’s property at the relevant times.
Preliminary Sub-Issue IIC
Whether the Lehman Loan Balance Exceeded the Value of All the Debtor’s Property at the Time of the Conveyances
The parties and their experts focused on the Debtor’s balance sheets as evidence of the value of the Debtor’s property at the time of the conveyances. According to Mr. Wheeler’s testimony, the approximate fair market value of the Debt- or’s property can be considered as reflected in the figures on line 324 of its financial statements. Compare testimony of Otto Lee Wheeler, April 3, 2009, Transcript p. 36, line 20, with line 324 on Exhs. D-l and D-2. The following chart shows that comparison between the value of the Debtor’s property as shown on its balance sheets (line 324 on Exhs. D-l and D-2), and the entire balance on the Lehman Loan, according to the Consolidated Debt Spreadsheet (“Total Debt” on Exh. D-24).
Date Value of the Debtor’s Property Entire Balance of the Lehman Loan
January 2002_$50,297,000.00 $138,753,000.00
February 2002_53,451,000.00 132,622,000.00
March 2002 57,373,000.00 112,452,000.00
April 2002_63,950,000.00 131,903,000.00
May 2002_66,108,000.00 119,970,000,00
June 2002 60,349,000.00 114,036,000.00
July 2002_59,539,000.00 118,577,000.00
August 2002 50,837,000.00 104,602,000.00
Sept. 2002_38,296,000.00 90,163,000.00
Oct. 2002 32,768,000.00 96,509,000.00
Nov. 2002_30,890,000.00 92,307,000.00
Dec. 2002 22,129,000.00 82,589,000.00
January 2003 22,232,000.00 82,311,000.00
February 2003_20,614,000.00 86,844,000.00
March 2003 14,916,000.00 80,869,000.00
April 2003_7,513,000.00 79,197,000.00
May 2003_4,599,000.00 76,426,000,00
June 2003_2,332,000.00 67,160,000.00
July 2003_1,360,000.00 77,716,000.00
August 2003 1,299,000.00 77,592,000.00
Sept. 2003_1,181,000.00 74,922,000,00
Oct. 2003 1,270,000.00 72,717,000.00
Nov. 2003_1,206,000.00 76,170,000.00
Dec. 2003 83,000.00 70,077,000.00
This comparison, standing alone, would indicate that there was no equity in the Debtor’s property for all of the period 2002 through 2003.
The Trustee argued, however, that there is another reason, other than discounting the Debtor’s liability on its Guarantee of the Lehman Loan, why its property was not fully encumbered at that the time of the conveyances. He argues that the Debtor’s rights of contribution against the other obligors on the Lehman Loan should be included as part of its property. When the value of those rights of contribution is included, the Trustee claims, the value of *292all the Debtor’s property exceeded the amount of the lien, and so the property was not fully encumbered at the time of the conveyances.
The language of the Guarantee Agreement supports the Trustee’s position in theory, inasmuch as it expressly provides for such rights of contribution. Paragraph 2.2provides:
2.2Right of Contribution. Each Subsidiary Guarantor hereby agrees that to the extent that a Subsidiary Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Subsidiary Guarantor shall be entitled to seek and receive contribution from and against any other Subsidiary Guarantor hereunder which has not paid its proportionate share of such payment. ... The provisions of this Section 2.2shall in no respect limit the obligations and liabilities of any Subsidiary Guarantor to the General Administrative Agent and the Lenders for the full amount guaranteed by such Subsidiary Guarantor hereunder.
Exh. D-108, p. 10.
The Defendants point out that under the language of Paragraph 2.2, the Debtor’s obligation to the Lenders under the Guarantee is not affected by its rights of contribution, and so argue against considering them when determining the extent of the lien on the Debtor’s property. They cite First City Beaumont v. Durkay (In re Ford), 967 F.2d 1047 (5th Cir.1992), in support. In Ford, the Court of Appeals addressed the rights of the obligee, the bank, which had actually asserted a claim (by filing a proof of claim against the eo-maker/debtor) for the entire amount of the debt. The trustee argued that in light of the debtor’s rights of contribution, the court should estimate, as a contingent liability, the amount of the debtor’s liability as a co-maker on the note. The Court of Appeals held that the bank was entitled to assert a claim for the entire amount of the debt, but it also acknowledged the right of the co-maker (or guarantor) to collect from its coobligors their proportionate share(s) of the debt. Id. at 1053 (“[T]he debtor’s right to pursue the other co-makers is independent of the creditor’s right to payment of the debt, and in no way affects the creditor’s right to pursue its claim for the full amount against any co-maker, including the debtor.”). See also, generally, Traders Natl. Bank v. Clare, 76 Tex. 47, 13 S.W. 183, 187 (1890) (“While all were bound to the lender, as between themselves, each was primarily bound for the money by him received, and, from that standpoint has the right to protect himself.”); Barton v. Farmers’ State Bank, 276 S.W. 177, 183 (Tex.1925) (“For while, in respect of the bank, Barton, Hutto, and McCann are principal debtors, jointly and severally liable, yet, as between themselves, each is a principal only to the extent of his aliquot part of the debt and a surety for the remainder.”).
Much of the evidence that is relevant to the value of the Debtor’s rights of contribution is the same as described above with respect to the Trustee’s argument that the Debtor’s liability on the Guarantee should be discounted: the 10-K of SMTC Corporate, containing financial information showing its ability to pay the Lehman Loan and information regarding its ultimate payment and/or restructuring by ob-ligors other than the Debtor, and the testimony of Jane Todd that the Lenders never foreclosed on any of the Debtor’s property securing the Lehman Loan. While the Court has found that such evidence is insufficient to show how likely it was, and to what extent, that the Debtor would be called upon to pay the Guarantee, it does find that SMTC Corporate’s financial information and the information regarding *293the Lehman Loan’s subsequent payment and restructuring by obligors other than the Debtor support the Trustee’s position that the other obligors had the ability to pay the Lehman Loan in full and, therefore, the Debtor’s rights to contribution from those other obligors had substantial value.
However, under Para. 2.2 of the Guarantee Agreement, the parties, including the Debtor, expressly limited the right of each guarantor for contribution to the amount by which it “shall have paid more than its proportionate share of any payment made” on the Lehman Loan. Thus, one must assume that the Debtor had paid more than its share to “trigger” a right to contribution. Therefore, even if one assumed that all the other guarantors had the ability to pay the Lehman Loan in full, the value of the Debtor’s rights of contribution could be no more than the total balance on the Lehman Loan less the Debtor’s “proportionate share” of that debt.
The evidence showed that each guarantor’s “proportionate share” of the Lehman Loan was the amount of the proceeds of that Loan that that guarantor had actually received and used or was used by an affiliate for its benefit. Specifically, the Debtor received, on a daily basis, a portion of the proceeds of the Lehman Loan funded through HTM, and used those borrowed funds in its daily operations.
The testimony of Messrs. Wheeler and Skerlj and the Debtor’s bank records established the amount of the Lehman Loan proceeds that it used in its operations on a monthly basis, a figure that is reflected as a line item on its financial statements. Exhs. D-15, D-16,10850 Consolidated Disbursement Account Bank Reconciliations (Comerica 5393) (showing draws from the Lehman Loan credit facility and transfers to the Debtor’s Comerica account ending in 4651). By the Defendants’ own admission, the “Sub-Total Revolver” entries on line 342 of its financial statements reflected the Debtor’s proportionate share of the Lehman Loan balance during the relevant time period. See e.g., Defendants’ Supplemental Reply to Plaintiffs Supplemental Response to Defendants’ Rule 52(c) Motion, p. 4 (“[T]he debt reflected on line 342 of the Debtor’s financial statements ... constitutes SMTC Texas’s individual balance on the Lehman loan; the amount of the Lehman loan actually used and ultimately never re-paid by SMTC Texas....”).
Using again the figures from the Debt- or’s financial statements, the following chart shows the value of the Debtor’s rights of contribution during the relevant periods:
Date Entire Balance of the Lehman Loan Debtor’s Proportionate Share of the Lehman Loan Value of Debtor’s Rights of Contribution
January 2002_$138,753,000.00_$32,715,000.00_$106,038,000.00
February 2002_132,622,000,00_33,435,000.00_99,187,000.00
March 2002_112,452,000.00_35,603,000.00_77,300,000.00
April 2002_131,903,000.00_43,184,000,00_88,716,000.00
May 2002_119,970,000.00_41,565,000.00_78,405,000.00
June 2002_114,036,000.00_35,619,000.00_78,417,000.00
July 2002_118,577,000.00_33,930,000.00_84,647,000.00
August 2002_104,602,000,00_27,990,000.00_76,612,000.00
Sept. 2002_90,163,000.00_25,129,000,00_65,034,000.00
Oct. 2002 96,509,000.00 23,894,000.00 72,615,000.00
*294Date Entire Balance of the Lehman Loan Debtor’s Proportionate Share of the Lehman Loan Value of Debtor’s Rights of Contribution
Nov. 2002 92.307,000.00 21.544.000.00 70.763.000.00
Dec. 2002 82.589.000.00 19.971.000.00 62.618.000.00
January 2003 82.311,000.00 21,462.000.00 60.849.000.00
February 2003 86.844,000.00 19.736.000.00 67.108.000.00
March 2003 80.869,000.00 20.705.000.00 60.164.000.00
April 2003 79.197.000.00 16.097.000.00 3.100.000.00
May 2003 76.426.000.00 15.395.000.00 61.031.000.00
June 2003 67.160,000.00 14,642.000.00 52.518.000.00
July 2003 77,716.000.00 15.624,000.00 62,092.000.00
August 2003 77.592.000.00 15,757.000.00 61,835.000.00
Sept. 2003 74,922.000.00 15.925.000.00 58,997.000.00
Oct. 2003 72,717.000.00 16.218.000.00 56.499.000.00
Nov. 2003 76.170.000.00 17.093.000.00 59,077.000.00
Dec. 2003 70.077,000.00 17.327.000.00 52,750.000.00
The following chart shows the values of the Debtor’s property, when its rights of contribution are included, during the relevant periods:
Date Value of Debtor’s Rights of Contribution Value of the Debtor’s Property Not Including Rights of Contribution Total Value of the Debtor’s Property Including Rights of Contribution
January 2002 $106,038.000.00 $50.297.000.00 $156.335,000.00
February 2002 99,187,000.00 53,451,000.00 152,638,000.00
March 2002 77,300,000.00 57,373,000.00 134,673,000.00
April 2002 3,716,000.00 3,950,000.00 152,666,000.00
May 2002 78,405,000.00 66,108,000.00 144,513,000.00
June 2002 78,417,000.00 60,349,000.00 138,766,000.00
July 2002 84,647,000.00 59,539,000.00 144,186,000.00
August 2002 76,612,000.00 50,837,000.00 127,449,000.00
Sept. 2002 65,034,000.00 38,296,000.00 103,330,000.00
Oct. 2002 72,615,000.00 32,768,000.00 105,383,000.00
Nov. 2002 70,763,000.00 30,890,000.00 101,653,000.00
Dee. 2002 62,618,000.00 22,129,000.00 84,747,000.00
January 2003 60,849,000.00 22,232,000.00 3,081,000.00
February 2003 67,108,000.00 20,614,000.00 87,722,000.00
March 2003 60,164,000.00 14,916,000.00 75,080,000.00
April 2003 63,100,000.00 7,513,000.00 70,613,000.00
May 2003 61,031,000.00 4,599,000.00 65,630,000.00
June 2003 52,518,000.00 2,332,000.00 54,850,000.00
July 2003 62,092,000.00 1,360,000.00 63,452,000.00
August 2003 61,835,000.00 1,299,000.00 63,134,000.00
Sept. 2003 58,997,000.00 1,181,000.00 60,178,000.00
Oct. 2003 56,499,000.00 1,270,000.00 57,769,000.00
*295Date Value of Debtor’s Rights of Contribution Value of the Debtor’s Property Not Including Rights of Contribution Total Value of the Debtor’s Property Including Rights of Contribution
Nov. 2003 59,077,000.00 1,206,000.00 60,283,000.00
Dec. 2003 52,750,000.00 3,000.00 52,833,000.00
Finally, the following chart shows the difference between the total value of the Debtor’s property, including its rights of contribution, to the debt that property secured — d.e., the equity in the collateral — during the relevant periods:
Date Total Value of the Debtor’s Property Including Rights of Contribution Entire Balance of the Lehman Loan Equity or < Deficiency >
January 2002 $156,335,000.00 $138,753,000.00 $17,582,000.00
February 2002 152,638,000.00 132,622,000.00 20,016,000.00
March 2002 134,673,000.00 112,452,000.00 22,221,000,00
April 2002 152,666,000.00 131,903,000.00 20,763,000.00
May 2002 144,513,000.00 119,970,000.00 24,543,000.00
June 2002 138,766,000.00 114,036,000.00 24,730,000.00
July 2002 144,186,000,00 118,577,000,00 25,609,000.00
August 2002 127,449,000,00 104,602,000,00 22,847,000.00
Sept. 2002 103,330,000.00 90,163,000.00 13,137,000.00
Oct. 2002 105,383,000.00 96,509,000.00 8,874,000,00
Nov. 2002 101,653,000.00 92,307,000.00 9,346,000.00
Dec. 2002 84,747,000.00 82,589,000.00 2,158,000.00
January 2003 3,081,000.00 82,311,000.00 770,000.00
February 2003 87,722,000.00 6,844,000.00 878,000.00
March 2003 75,080,000.00 80,869,000.00 < 5,789,000.00>
April 2003 70,613,000.00 79,197,000.00 < 8,584,000.00>
May 2003 5,630,000.00 76,426,000.00 <10,796,000.00>
June 2003 54,850,000.00 67,160,000.00 <12,310,000.00>
July 2003 3,452,000,00 77,716,000.00 < 14,264,000,00>
August 2003 63,134,000.00 77,592,000.00 <14,458,000.00>
Sept. 2003 60,178,000.00 74,922,000,00 <14,744,000.00>
Oct. 2003 57,769,000.00 72,717,000.00 < 14,948,000.00>
Nov. 2003 60,283,000.00 76,170,000.00 < 15,887,000.00>
Dec. 2003 52,833,000.00 70,077,000.00 < 17,244,000.00>
Exhs. D-l, D-2, D-024.
Based on the foregoing, the Court finds that on and after March 1, 2003, there was no equity in the Debtor’s property and that the Lehman Loan lien fully encumbered the Debtor’s property. Thus, no “asset” was “transferred” as those terms are used under TUFTA, in any conveyance made by the Debtor on or after March 1, 2003. With respect to the conveyances prior to that date, the Court finds that there was equity in the Debtor’s property, the Debtor’s property was therefore not fully encumbered and, thus, the conveyances were “transfers” of “assets” under TUFTA.
*296
Preliminary Issue III
Insolvency
Defendants argue that, for a number of reasons, the Trustee did not establish that the Debtor was insolvent as both § 24.005 and § 24.006 require.
The first of the Defendants’ arguments is based on the statutory definition of insolvency, and much of the above discussion on the “lien issue” applies to that argument. Specifically, TUFTA provides that “a debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.” Tex. Bus. & Com. Ann. § 24.003(a). This definition captures the concept of “asset,” which by definition (as discussed above) does not include “property to the extent it is encumbered by a valid lien.” Tex. Bus. & Com. Ann. § 24.002(2). The incorporation of the definition of “asset” in the definition of insolvency under TUFTA is repeated (and thus confirmed, argues the Defendants) under subsection (e) of § 24.003 where it says that “[d]ebts under this section do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset.” The Defendants incorporate their argument above and contend that this “plain language” in the statute necessarily leads to the conclusion that, to the extent the lien fully encumbered all property of the Debtor, it could not have been “insolvent” because it had neither “debts” nor “assets” as TUFTA defines those terms.
The starting point of this argument is the Defendants’ argument on the “lien issue” discussed above. As noted above, the Court has determined that for the period from January 2, 2002 to March 1, 2003, the Debtor had equity in its property and therefore had “assets.” Thus, the Defendants’ argument that the Debtor could not as a matter of law have been insolvent because it had no “assets” (and thus no “debts”) fails in its premise as to that period, and so the Court must determine whether in fact the Debtor was insolvent during this period.
With respect to the period on and after March 1, 2003, the Court has found that the lien securing the Debtor’s Guarantee of the Lehman Loan did fully encumber all of the Debtor’s property, and therefore the Debtor’s conveyances on and after that date were not “transfers” of “assets” under TUFTA. The Court need not decide for that period whether the Debtor was insolvent for purposes of the statute. Out of an abundance of caution and for the sake of completeness, however, it will address the Defendants’ legal argument and also examine the facts to also determine whether the Debtor was insolvent on 'and after March 1, 2003.
First, as pointed out by the Trustee, the Defendants’ legal reasoning is flawed because debts are excluded from the insolvency calculation only to the extent they are “secured by a valid lien on property of the debtor not included as an asset.” Therefore, unsecured debt is clearly not excluded from the calculation. A debtor with $1.00 in “debt” and which has $0.00 in “assets” is clearly “insolvent.” Thus, even if the Debtor’s liability on the Lehman Loan, and the property that secured it, were ignored for purposes of determining solvency under Tex. Bus. & Com.Code Ann. § 24.003(a), so long as it had unsecured liabilities, “the sum of the [D]ebtor’s debts [wa]s greater than all of the [D]ebt- or’s assets at a fair valuation” and so it would have been insolvent.
At trial, the Court was presented substantial evidence that the Debtor was insolvent or on the verge of insolvency in 2001, became insolvent no later than June of 2002, and remained insolvent at all times thereafter. That evidence includes *297the Debtor’s financial statements and testimony from both expert witnesses.
Both experts agreed that the Debtor was at least in the zone of insolvency by December 2001. Prior to that date, the testimony conflicts, or at least can be said to differ, on when the Debtor became insolvent. Mr. Alexander testified that the Debtor became insolvent by June 2002 when the Debtor’s cash outflow started to exceed its inflow and remained insolvent at all times thereafter. Although Mr. Wheeler testified that if insolvency was measured by the Debtor’s being unable to make payments to its creditors as they came due, then the Debtor was not insolvent, he did not dispute Mr. Alexander’s determination based on the financial statements of the Debtor that the Debtor was insolvent, and he testified himself that the Debtor was insolvent as early as September of 2001. Further, Mr. Wheeler also testified that if the definition of insolvency under the law included a definition that assets were not included to the extent they were encumbered by a valid lien, his insolvency determination might be altered, although he did not quantify how, or by how much, it would have changed.
Moreover, there was no dispute that the Debtor’s balance sheets through December of 2003 accurately reflected its liabilities other than its liability under the Guarantee of the Lehman Loan. See Exhs. D-l, D-2, line 338. When these figures are compared to the equity available in the Lenders’ collateral (as calculated above), it is clear that the Debtor was insolvent throughout the period during which the challenged transfers occurred.
Date Equity or <Deficiency> Liabilities Other Than the Debtor’s Proportionate Share of the Lehman Loan Solvency or < Insolvency >
Jan. 2002 $17,582,000.00 $21,919,000.00 4,337,000.00 >
Feb. 2002 20,016,000.00 25,085,000.00 <5,069,000.00>
March 2002 21,770,000,00 26,868,000.00 <5,098,000.00>
April 2002 20,766,000.00 25,942,000.00 <5,176,000.00>
May 2002 24,543,000.00 29,884,000,00 <5,341,000,00>
June 2002 24,730,000.00 29,417,000.00 <4,687,000.00>
July 2002 25,609,000.00 29,445,000.00 <3,836,000.00 >
Aug. 2002 2,847,000.00 25,958,000.00 <3,111,000.00>
Sept. 2002 13,167,000.00 17,693,000.00 <4,526,000.00>
Oct. 2002 8,874,000.00 13,624,000.00 <4,750,000.00>
Nov. 2002 9,346,000.00 13,614,000.00 <4,268,000.00>
Dec. 2002 2,158,000.00 7,201,000.00 <5,043,000.00>
Jan. 2003 770,000.00 6,337,000.00 <5,567,000.00>
Feb. 2003 878,000.00 6,706,000.00 <5,828,000.00>
March 2003 <5,789,000.00> 5,487,000,00 <11,276,000.00>
April 2003 <8,584,000.00> 6,300,000.00 <14,884,000.00>
May 2003 <10,796,000.00> 4,217,000.00 <15,013,000.00>
June 2003 <2,310,000.00 > 3,386,000.00 <5,696,000.00>
July 2003 < 14,264,000.00> 8,151,000.00 <22,415,000.00>
Aug. 2003 <14,458,000.00> 7,956,000.00 <22,414,000.00>
Sept. 2003 < 14,744,000.00 > 4,573,000.00 <19,317,000.00>
Oct. 2003 < 14,948,000.00> 4,367,000.00 <19,315,000.00>
Nov. 2003 <5,887,000.00 > 3,430,000.00 <19,317,000.00>
*298Date Equity or Liabilities Other Than the Debtor’s Proportionate Share the Lehman Solvency or
Dec. 2003_<17,244,000.00>_2,073,000.00_< 19,317,000.00>
The Defendants did not rebut this evidence. Rather, in their Rule 52(c) Motion, they challenged the Trustee’s claim of insolvency only with the above legal argument, which the Court has rejected. The proof of insolvency at trial was uncontra-dicted and affirmatively established by the testimony of the Defendants’ own expert witness. The Court therefore finds that the Trustee sustained his burden of proving that the Debtor was insolvent at all relevant times. Thus, for the period before March 1, 2003, the Defendants’ Rule 52(c) Motion on this ground should be denied. With respect to the period on and after March 1, 2003, even though the Debt- or was solvent, the Rule 52(c) Motion should nevertheless be granted in light of the Court’s previous ruling regarding the absence of a “transfer” under TUFTA during that period.
The Trustee’s Claims for Transfers Made with Actual Intent to Hinder, Delay or Defraud
In order to prevail on the fraudulent conveyance claims under TUFTA § 24.005(a)(1), the Trustee must prove that the Debtor made the transfers in question “with actual intent to hinder, delay or defraud any creditor” of the Debtor, Tex. Bus. & Com.Code Ann. § 24.005(a)(1), and “[ijntent to hinder, delay or defraud may be established by circumstantial evidence.” In re GPR Holdings, L.L.C. v. Duke Energy Trading and Marketing, LLC (In re GPR Holdings, L.L.C.), No. 03-3430, 2005 WL 3806042, at *9 (Bankr.N.D.Tex. May 27, 2005)(citing Sherman v. FSC Realty, LLC (In re Brentwood Lexford Partners, LLC), 292 B.R. 255, 262-63 (Bankr.N.D.Tex.2003)); see also In re Reed, 700 F.2d 986, 991 (5th Cir.1983). Circumstantial evidence of actual fraudulent intent under TUFTA, “commonly known as ‘badges of fraud’ ” are codified in a nonexclusive list set forth in § 24.005(b) of TUFTA. In re Soza, 542 F.3d 1060, 1066 (5th Cir.2008). That section provides:
In determining actual intent under Subsection (a)(1) of this section, consideration may be given, among other factors, to whether:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor’s assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after a substantial debt was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor *299who transferred the assets to an insider of the debtor.
Tex. Bus. & Com.Code Ann. § 24.005(b).
The intent that is required is not the same intent that is necessary to support an action for fraud. See Nobles v. Marcus, 533 S.W.2d 923 (Tex.1976) (Fraud and fraudulent transfer are distinct causes of action.). Rather, the intent required under TUFTA is simply the intent to hinder, delay or defraud a creditor by putting assets beyond that creditor’s reach. In re Reed, 700 F.2d 986, 991 (5th Cir.1983). Further, the statute expressly authorizes avoidance of any transfer made with intent to hinder, delay or defraud “any creditor” of the debtor. Tex. Bus. & Com.Code Ann. § 24.005(a)(1). The Trustee bears the burden of proof to show, by a preponderance of evidence, that the transfers in question were made by the Debtor with the actual intent to hinder, delay or defraud any creditor of Debtor. The Trustee may prove intent through either direct evidence or circumstantial evidence — i.e., by establishing sufficient badges of fraud that the factfinder is satisfied that the requisite intent has been shown.
The Eighth Circuit has held that the party seeking to avoid a transfer must establish, by a preponderance of the evidence, the presence of multiple badges of fraud. Once that occurs, the burden shifts to the defendant to show, again by a preponderance of the evidence, that the defendant had a legitimate purpose in making the transfer. Kelly v. Armstrong, 141 F.3d 799, 802-03 (8th Cir.1998). In Kelly the court stated:
Kelly [the trustee] argues that the district court erred in failing to instruct the jury that, if it were to find multiple badges of fraud with regard to any transfer, the burden would shift to the defendants to establish a legitimate supervening purpose for making the transfer. The district court instructed the jury that it could “give the presence or absence of [badges of fraud] such weight as [the jury thought] thefir] presence or absence deservefd].” Kelly contends that the common law of fraudulent conveyances shifts the burden of both production and persuasion to the defendants once multiple badges of fraud have been established, and furthermore, that Federal Rule of Evidence 301 should not be applied to change this allocation of burden. We agree.
Id. at 802 (footnote omitted, bracketed portions in original). As the Kelly court further explained:
The instruction given by the district court — that badges of fraud, if found, could be given whatever weight the jury thought they warranted — could potentially have resulted in the jury’s improper allocation of the burden of proof. As the case was submitted, the jury was free to return a verdict in favor of defendants, despite finding the existence of multiple badges of fraud and disbelieving the defendants’ explanations for the transfers. The district court’s failure to instruct the jury properly regarding the burden of proof constitutes reversible error.
Id. at 803; see also In re Acequia, 34 F.3d 800, 806 (9th Cir.l994)(“[0]nce a trustee establishes indicia of fraud in an action under § 548(a)(1), the burden shifts to the transferee to prove some ‘legitimate supervening purpose’ for the transfers at issue.”); Crawforth v. Bachman (In re Bachman), Adv. No. 06-6027, 2007 WL 4355620, at *15 (Bankr.D.Idaho December 10, 2007) (failure “to show a legitimate supervening purpose for the transfers,” in the face of multiple badges of fraud means the trustee may avoid transfers).
The presence of many badges of fraud “will always make out a strong case *300of fraud.” Walker v. Anderson, 232 S.W.3d 899, 914 (Tex.App.-Dallas 2007, no pet.). Proof of four to five badges of fraud has been found sufficient in several reported cases. See, e.g., Mladenka v. Mladenka, 130 S.W.3d 397, 407 (Tex.App.-Houston [14th Dist.] 2004, no pet.); Tel Equip. Network, Inc. v. TA/Westchase Place, Ltd., 80 S.W.3d 601, 609 (Tex.App.-Houston [1st Dist.] 2002 no pet.).
As a matter of law, a finding of fraudulent intent cannot properly be inferred from the existence of just one “badge of fraud.” Diamant v. Sheldon L. Pollack Corp., 216 B.R. 589 (Bankr.S.D.Tex.1995) (“[0]ne badge of fraud standing alone may amount to little more than a suspicious circumstance, insufficient in itself to constitute fraud per se”) (quoting U.S. v. Fernon, 640 F.2d 609, 613 (5th Cir.1981)); Walker v. Anderson, 232 S.W.3d 899 at 914 (“An individual badge of fraud is not conclusive.”); G.M. Houser, Inc. v. Rodgers, 204 S.W.3d 836 at 843 (stating same); Roland v. U.S., 838 F.2d 1400, 1403 (5th Cir.1988) (holding that an inference of fraud is proper only when several indicia are found).
To prevail specifically on his § 24.005(a)(2) and § 24.006(a) TUFTA claims, the Trustee must demonstrate that the Debtor did not receive “reasonably equivalent value” in exchange for the transferred assets. Tex. Bus. & Com. Code Ann. §§ 24.005(a)(2), 24.006(a). “There need not be a dollar-for-dollar exchange to satisfy the reasonable equivalence test; rather, the Court should simply compare ‘the value of what went out [of the debtor’s estate] with the value of what came in.’ ” In re Sullivan, 161 B.R. 776 at 781; see also Smith v. Am. Founders Fin. Corp., 365 B.R. 647, 666 (S.D.Tex.2007); WCC Holding Corp. v. Tex. Commerce Bank-Houston, N.A., 171 B.R. 972, 984 (Bankr.N.D.Tex.1994); Matter of Besing, 981 F.2d 1488, 1495 (5th Cir.1993). The Court will take this case law into consideration in its discussion of “reasonably equivalent value” below.
Direct Evidence of Actual Intent
The Trustee asserts that there are two time periods during which the Debt- or’s actions prove its fraudulent intent: (1) the period from June 2002 through February 2003 (the “Early Wind-Down Period”); and (2) the period from March 1, 2003 to the end of 2003 (the “Post-Default Period”). The Court has previously found that during the Post-Default Period the Debtor had no “assets” that could be transferred. Because, as a matter of law, it therefore did not make any “transfers” of assets during the Post-Default Period, whether the Debtor had actual intent to hinder, delay or defraud its creditors during that time is immaterial. That said, however, out of an abundance of caution and for the purpose of completeness the Court will address the issue of intent during that period as well as during the prior period.
The Early Wind-Down Period
This period covers the bulk of the cash transfers alleged by the Trustee — of the approximately $41 million in transfers alleged by the Trustee, approximately $37 million was transferred during this period. He claims that there is considerable direct evidence of an intent to hinder, delay or defraud Flextronics during this period. Specifically, he points to facts surrounding a meeting of the board of directors of SMTC Corporate that apparently took place on June 4, 2002.
First, the Trustee relies on the May 22, 2002 email from Paul Walker in which he envisions closure of the Austin office in the third quarter of 2002, but notes that “[t]he actual timing is not as important as determining the restructuring charges and bal-*301anee sheet impact.” Exh. P-80. The Trustee insists that this email, coupled with Phil Woodard’s email of May 31, 2002, in which he includes as one of three suggested options for dealing with the Flextronics Lease, “bankrupting the Texas Company and walking away from the lease,” as proof that early on there was a scheme in place to defraud Flextronics. The Trustee argues that a reasonable fact-finder could infer that Mr. Woodard’s third option was adopted by the board of directors of the Debtor on June 4, 2002.
Next, the Trustee claims that the Defendants’ failure to produce the June 4th board minutes during discovery, in spite of the Trustee’s request, or to include them in their own trial exhibits leads to the conclusion that the minutes do not support Defendants’ case. He reasons that, even if the minutes were completely silent on the Flextronics Lease, the Defendants would have offered them into evidence at least to show that the board had not adopted Mr. Woodard’s third option. The Trustee argues that the emails among the executives in preparation for the board meeting and the inferences to be drawn from the Defendants’ failure to produce or offer the minutes of the June 4th board meeting are more than sufficient to support a finding of actual intent to hinder, delay or defraud Flextronics during the Early Wind-Down Period.
The Post-Default Period
The Trustee claims there is overwhelming evidence that the Debtor’s transfers after March 1, 2003 of cash (the Net Balance Transfer) and equipment (the Fixed Assets Transfers) were made with the actual intent to hinder, delay or defraud Flextronics.
First, he claims that the Debtor hindered a creditor when it stopped paying Flextronics in its ordinary course of business by failing to make the March 1, 2003 rent payment. The Trustee contends that the Defendants offered no legitimate reason for this, considering (1) the Debtor was bringing in more cash than it needed during this period, (2) the Debtor did not surrender the Lease to Flextronics until May 2003, three months after default, and (3) the Credit Agreement, rather than prohibiting payments to Flextronics, actually mandated the timely performance of all Debtor’s contractual obligations, both material and lesser ones. Exh. P-9 (Les Alexander spreadsheet, showing roughly $4 million dollars in net cash being transferred to HTM during the Posh-Default Period), Exh. P-116 (letter surrendering property to Flextronics on May 22, 2003), and Exh. D-35, Sections 10.4 and 10.5 (covenants under Lehman Loan requiring Borrowers to cause their subsidiaries, including the Debtor, to remain current on material obligations and “Contractual Obligations”).
As further evidence, the Trustee points to the fact that in April 2003 the Debtor ceased recording the monthly rent obligation on its books, as if the Lease no longer existed, and argues that the cash management system operated like a vacuum cleaner during this period for SMTC Corporate, quietly and effectively removing all of the Debtor’s cash from the Debt- or’s reach. Exh. D-2, line 104. He also cites the transfers by the Debtor in March and April of 2003 of allegedly valuable equipment to affiliates for no consideration, as additional evidence. During all these actions, the Trustee argues Mr. Walker stalled Flextronics with false representations that the Debtor was broke and had no assets. Exh. P-89.
It is undisputed that on April 2, 2003, during the Posh-Default Period, the Debt- or received Flextronics’s demand letter. As of March 2003, the Debtor’s balance sheet showed $20.6 million in total assets. *302Exh. D-2, line 324. Those assets consisted of $14.8 million in current assets (inventory and receivables) and $5.3 million in fixed assets. Exh. D-2, lines 311, 318. Following the default, in March and April 2003, the Debtor’s fixed assets were transferred to sister companies, and by the end of 2003, the book value of the Debtor’s assets was just $83,000. Exh. D-2.
In the Court’s opinion, however, none of this “direct evidence” demonstrates that any of the challenged transfers were motivated by an intention to defraud Flextron-ics. None of the emails mention any transfers at all. The Trustee’s Exhibits P-80 and P-82 do not show that any transfers were made with the intention of fraudulently removing assets from Flextronics’s reach. Rather, those exhibits merely show that SMTC Texas executives considered closing the SMTC Texas operations in late May and early June of 2002 when many other competitors — including Flextron-ics — were also closing their Texas operations and moving manufacturing elsewhere. Thus, the Court finds that the Debtor’s actions were made for legitimate business reasons as part of the Debtor’s effort to operate in a tough economic climate for as long as possible and then to orderly shut down and not to defraud creditors.
The Trustee’s argument may have more merit if the decision to close SMTC Texas had been made or even considered in May of 2002 but rather the evidence shows that, prompted by a further loss of business, that decision was made in early 2003. Exh. P-84, P-122. Mr. Hartstein and Mr. Sommerville both testified that the decision to close the Debtor occurred in 2003 and resulted from a loss of business.
The emails also do not support the Trustee’s contention that there was some general intent to defraud Flextronics. Mr. Hartstein testified regarding Exhibit D-322, a September 9, 2002 email from Scott Jessen of the Morse Company regarding Mr. Hartstein working with Morse to sell or lease the building. Mr. Hartstein testified that the email reflected some of the efforts the Debtor was making to sublet the building after the Dell disengagement. The fact that Mike Carney of Flextronics was copied on that email is evidence that nothing was concealed from Flextronics and that the Debtor was attempting to avoid defaulting on the Lease by looking for other means of paying Flextronics.
The Trustee’s conclusion that the board, at a meeting that presumably took place in June 2002, adopted Mr. Woodard’s third option of putting the company into bankruptcy and walking away from the Lease is not direct evidence of fraud, but can only be inferred from the facts the Trustee cites and the Court refuses to do so. Mr. Woodard did not testify, and the Court cannot glean Mr. Woodard’s actual intent from an email. Moreover, a decision to file bankruptcy does not always equate with an intent to defraud a creditor. See Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). Mr. Hartstein expressly testified that Mr. Walker did not want to bankrupt the Debtor. Furthermore, the actual bankruptcy decision was made well after Mr. Walker and Mr. Woodard had left the company. Exh. P-124; Exh. D-358. Finally, in a later email Mr. Woodard discusses a possibility of settling with Flextronics. Exh. P-83.
The testimony and other evidence reflects that the Debtor’s operations were disintegrating. Most all of the fabrication was being outsourced to Mexico where labor was less expensive. Flextronics knew this. Flextronics was also affected by the downturn. See Newspaper Articles, supra. The Debtor had disengaged from Dell in May 2002 due to the difficulty the *303Debtor experienced in dealing with Dell and its oppressive pricing mandates. As its operations slowed, the Debtor’s cash needs logically would have begun to decrease. From the emails, it appears that even after the Debtor disengaged with Dell, it was attempting to stay in business and that Alcatel was still a substantial customer. In later emails between Paul Walker and John Sommerville, it appears Alcatel’s ultimate decision to move the rest of its production to Nogales, Mexico precluded any opportunity the Debtor might have had to restructure its business and maintain ongoing operations in Austin.
In addition, the Debtor paid its rental obligations each month as it started its shutdown process. The security deposit of $475,000.00 satisfied the March and April 2003 rent. The Debtor paid all of its other expenses prior to shutdown except the debts represented by the few proofs of claims filed in the bankruptcy case, which debts were actually incurred or came due after the Debtor surrendered the premises.
In light of all this evidence, the Court cannot conclude from the emails that the Debtor intended to shut down its operations immediately and to systematically transfer all of its assets, all to the detriment of Flextronics.
Rather, SMTC Corporate evaluated its costs to shut down and determined it would handle the Lease obligation separately through some type of settlement negotiations. The Lease was a substantial burden to the Debtor because there were eight years remaining on it at the time of the shutdown. The evidence reflects that Paul Walker and Phil Woodard thought a settlement with Flextronics was possible. Paul Walker initiated settlement discussions with Flextronics by offering it the land the Debtor owned because he believed the Lenders would release their lien on the land to allow for such settlement.
The Trustee claims Paul Walker lied to Mike Carney of Flextronics when he said the Debtor was a stand-alone entity with no assets to speak of. The Court does not know what Mr. Walker thought because he did not testify, nor did Mr. Woodard or Mike Carney of Flextronics testify. Thus, it is equally likely that Paul Walker believed the Debtor had no assets, because these assets were encumbered by liens securing the Lehman Loan, including deed of trust liens on the Debtor’s real property. It is also possible that Paul Walker believed that Flextronics would have to mitigate its damages, either.by reletting or selling the building.
Finally, Flextronics requested that SMTC Corporate sign a parent company guaranty in March 2003 after a financial review of the Debtor. Exh. P-86. Why Flextronics had not required a guaranty when the Lease was executed, or earlier during the economic downturn, was not established at trial. Flextronics also occupied the building upon the Debtor’s surrender and eventually sold the building in August 2005 for $8.25 million, an amount that would have substantially reduced, if not eliminated, Flextronics’s damages from the Debtor’s breach of the Lease. Exh. D-326; Exh. D-277.
In summary, the evidence the Trustee claims directly establishes actual fraudulent intent lacks probative force. He has therefore failed to establish by direct evidence that the Debtor actually intended to hinder, delay or defraud Flextronics.
Circumstantial Evidence of Actual Intent: Badges of Fraud on Claim Category 1: The Intercompany Transfers
The Trustee alleges that, in a series of monthly transactions from February 2002 to June 2002, the Debtor transferred to SMTC Charlotte a total of $104,646.00, *304and from February 2002 to February 2003 it transferred to SMTC Mex/SMTC Chihuahua cash totaling approximately $37 million, all without the Debtor receiving reasonably equivalent value.
Badge of Fraud 1: Transfers made to insiders or obligations to insiders incurred
Yes. There is no dispute that these transfers were made by the Debtor to SMTC Mexico and SMTC Charlotte and that both entities were insiders of the Debtor.
Badge of Fraud 2: The debtor retained possession or control of the property transferred after the transfer
No. The Debtor did not retain possession or control. In fact, the Debtor received product from Mexico and Charlotte for the payments it made. Once the product was received, it was then sold to Dell or other customers at a slight markup.
Badge of Fraud 3: The transfer or obligation was concealed
No. It appears these transfers were in the ordinary course of the Debtor’s business. The Debtor was operating in 2002 and needed to purchase most of the products from Mexico at a lesser cost to insure that it could continue to sell inventory to Dell while disengaging. See Newspaper Articles, supra. The Defendants produced extensive documentation with respect to these transfers, not to mention countless witnesses who testified to the validity of these transactions. In addition, the Trustee’s own expert acknowledged that the Debtor had provided for these transactions on its books and that he had treated them, for purposes of his expert opinion, as transactions in the ordinary course of the Debtor’s business.
Badge of Fraud f: Before the transfer was made or obligation ivas incurred, the debt- or had been threatened with suit
No. The Debtor was not sued until after it had shut down in May 2003. The Debt- or continued to pay its operating expenses throughout 2002 and into 2003.
Badge of Fraud 5: The transfer was of substantially all the debtor’s assets
No. The Debtor received product in return for the payments made to Mexico and Charlotte which product it in turn sold to its customers. The Debtor continued to reflect significant assets on its books through March 2003. Exhs. D-2, line 324. Badge of Fraud 6: The debtor absconded
No. The Debtor ultimately closed its doors but not until May 2003. These transfers occurred in 2002 and early 2003 while the Debtor was still operating its facility.
Badge of Fraud 7: The debtor removed or concealed assets
No. This does not appear to be the case and there was no testimony to this effect. In fact, the witnesses testifying in connection with these transactions all confirmed that these transfers were spurred by Dell’s requirement that the Debtor lower its costs-evidence that these transactions were made in the ordinary course of business for a legitimate business purpose and not concealed from anyone. These transactions were accounted for not only on the financial books and records of the Debtor, but also the books and records of SMTC Charlotte and SMTC Mex.
Badge of Fraud 8: The value of the consideration received by the debtor ivas reasonably equivalent to the value of the assets transferred or the amount of the obligation incurred
Yes. The only evidence presented supports the Debtor’s receipt of reasonably equivalent value. The evidence and testimony presented at trial showed that the *305manufacture of Dell products was transitioned from the Debtor to SMTC Mex/Chihuahua beginning in 2001. The uncontro-verted testimony of Messrs. Hartstein, Sommerville, Hart, Rossi, and Skerlj and Mses. Carbajal and Markland is that this transition occurred because the Debtor could not manufacture the products at the low rates Dell demanded and the cheaper labor in Mexico allowed for such cost savings. Similarly, all the witnesses testified that although the Dell production shifted to SMTC Mex, the Debtor continued to be Dell’s customer contact and managed the Dell account until the Debtor had fully disengaged with Dell. These witnesses testified that SMTC Texas was purchasing the Dell production from SMTC Mex, which the Debtor then sold to Dell.
Further, the Defendants presented a multitude of documents evidencing the transfer of Mexican manufactured goods from SMTC Mex to the Debtor in exchange for the challenged payments. Exh. D — 40 through D-68. These documents included the following:
1. voucher checks listing all of the Mexican invoices paid by said check and the accompanying facsimile cover sheets evidencing the exchange of these documents between SMTC Texas and SMTC Mexico’s respective accounting departments, see e.g. Exh. D-68, Bates Nos. Resp. SMTC 04842-04849;
2. the Mexican invoices paid by these checks, see e.g. Exh. D-41, Bates No. Resp. SMTC 68906;
3. documents evidencing the passage of these goods through Mexican customs, see e.g. D-41, Bates No. Resp. SMTC 68901-68902; and
4. freight documents evidencing delivery to SMTC Texas’s leased facility, see e.g. Exh. D-41, Bates No. Resp. SMTC 68903.
Documentary evidence was also presented regarding the transfers to SMTC Charlotte, including the following:
1. voucher checks listing all of the SMTC Charlotte invoices paid by said check and the accompanying facsimile cover sheets evidencing the exchange of these documents between SMTC Texas and SMTC Charlotte’s respective accounting departments, see e.g. Exh. D-68, Bates No. Resp. SMTC 04834-04835;
2. the pertinent SMTC Charlotte invoices paid by these checks, see e.g. Exh. D-56, Bates No. Resp. SMTC 68906; and
3. stamped invoices, packing slips and shipping memo evidencing the delivery of the SMTC Charlotte-manufactured goods to SMTC Texas, see e.g. Exh. D-56, Bates No. Resp. SMTC 74382-74385; Exh. D-56, Bates No. SMTC 08273.
Ms. Markland, who worked with the Debtor’s accounts payables department, testified that the Debtor would never have paid SMTC Mex or SMTC Charlotte for something it did not receive because the computer system would not permit accounts payable personnel to pay an invoice without the respective product having been received in the warehouse and processed in the computer by the materials personnel in the warehouse. Ms. Markland also testified that the Debtor’s personnel who processed the receipt of inventory from SMTC Mex and SMTC Charlotte would not be the same SMTC Texas personnel who processed the invoices and payments.
Similarly, Ms. Carbajal, the controller of SMTC Mex responsible for the issuance of the invoices at issue and the processing of the checks from the Debtor, testified that it was impossible for an invoice to issue without goods having shipped: that the computer system would not permit SMTC Mex accounts receivable personnel to issue an invoice to the Debtor unless the SMTC *306materials personnel had first processed the shipment of the goods in the system. Ms. Carbajal further testified that the SMTC Mex warehouse personnel processing the shipment of goods would not be the same accounting personnel processing the invoices.
Ms. Markland testified that if the invoice did not match up with the receipt of inventory, the invoice would not be paid but would be set aside and disputed with SMTC Mex. Ms. Carbajal confirmed that the Debtor could and would dispute any invoices which did not comport with their inventory receipts recorded in the computer.
The testimony of Mr. Rossi, Ms. Carba-jal and Ms. Markland all indicate the Debtor received value for the product it purchased. And, the Trustee’s own expert assumed reasonably equivalent value regarding these transactions in preparing his report. There was absolutely no testimony illicited from anyone that in any way proves value not reasonably equivalent.
The Trustee presented no evidence to contradict the Debtor’s receipt of finished goods from SMTC Mex. Although Mr. Alexander speculated that there may have been fraud considering there were documents missing that would have evidenced the shipment from the SMTC plant in Chihuahua to the shipping facility in El Paso, his opinion was countered by Mr. Desai’s credible explanation that Chihuahua used its own trucks to transport the goods from its plant in Mexico to El Paso, and thus there were no outside shipping companies used that would have generated such documents.
Further, the Trustee has presented no evidence that SMTC Texas paid more for the goods than their reasonable value. Mr. Hartstein even testified that the product prices were increased for sale to Dell, which could mean that the Debtor paid less for the goods than what the Debtor received on the market for the same goods. Ms. Carbajal testified that SMTC Mex actually lost money on the Dell production, further evidencing Dell’s low price requirements or the low prices offered to the Debtor.
The Trustee also seems to argue that papering these transactions by dummy checks between sister companies somehow proves that these transactions were fraudulent and not for reasonably equivalent value. Most, if not all, of the testimony from the Debtor’s former employees indicates that these intercompany transactions were a normal part of business for the Debtor, its affiliates, and parent. The Trustee’s own expert did not question the dummy checks as being fraudulent. He had actually followed the postings of the underlying transactions evidenced by the dummy checks in the Debtor’s accounting ledgers and was satisfied that such were accounted for.
Badge of Fraud 9: The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred
Yes. The North Carolina transfers took place from February 2002 to June 2002, The Mexico transfers occurred from June 2002 to February 2003. The Trustee’s expert testified that the Debtor was insolvent by June 2002. The Court has found above that the Debtor was insolvent during the entire period these transfers occurred.
Badge of Fraud 10: The transfer occurred or the obligation was incurred shortly before or shortly after a substantial debt was incurred
No. The Debtor entered into the Lease with Flextronics on September 1, 2001 and the Debtor continuously paid its monthly rent to Flextronics until March, 2003. The *307Intercompany Transfers occurred from February 2002 to February 2003 meaning these transfers commenced five to six months after the Debtor entered into the Lease. There was no evidence of any other substantial incurrence of debt.
Badge of Fraud 11: The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor
No. This badge is not applicable. Summary: Badges of Fraud on the Inter-company Transfers
The Court can find the existence of one, maybe two badges of fraud which is insufficient proof for a finding of actual intent to hinder or delay. Based on the economic circumstances of the technology sector at this time, the continued outsourcing to less costly countries, and the Debtor’s need to satisfy its largest customer, there is no basis to rule for the Trustee. The Trustee did not provide evidence with regard to these transactions other than that they were made to an insider and some were made when the Debtor was insolvent. The Trustee has not demonstrated by a preponderance of the evidence the presence of multiple badges of fraud and therefore fails in his burden. Further, the Defendants have provided overwhelming evidence that these transfers were made in good faith, for reasonably equivalent value, and for a legitimate business purpose.
Circumstantial Evidence of Actual Intent: Badges of Fraud on Claim Category 2: The Expense Reallocations
The Trustee alleges that on September 29, 2002, SMTC Corporate recorded expenses of approximately $750,000 to a Corporate Reallocation Account of the Debtor and $1,138,000 to a Sales and Marketing Reallocation Account of the Debtor, and that after September 2002, it recorded additional “Corporate Reallocation” charges of $19,000 (in October), $34,000 (in November), $36,000 (in December), and $23,000 (in January of 2003). For each of these obligations incurred by the Debtor, the Trustee contends there was no reasonably equivalent value given it in return. Exh. D-2, lines 200 and 222.
Badge of Fraud 1: Transfers made to insiders or obligations to insiders incurred
Yes. There is no dispute that the reallo-cations were made on the books of the Debtor in September 2002. This is actually a transfer of an expense item to the Debtor for services provided to the Debtor by SMTC Corporate. The Court concludes these were obligations incurred to an insider for purposes of TUFTA.
Badge of Fraud 2: The debtor retained possession or control of the property transferred after the transfer
No. This badge is inapplicable. These were reallocations of expenses to pay for or to correct the amount owed for services previously provided by SMTC Corporate to the Debtor. Thus, they were obligations incurred and not transfers of assets.
Badge of Fraud 3: The transfer or obligation was concealed
No. It appears that the reallocations were made from September 2002 through January 2003, at a time when the Debtor was still in operation and paying its daily expenses and that the allocations were reflected on the Debtor’s financial statements.
Badge of Fraud J: Before the transfer was made or obligation was incurred, the debt- or had been threatened with suit
No. The Debtor was not sued until after it had shut down in 2003. Also, the Debt- or in 2002 was still paying its monthly *308expenses including its monthly rent to Flextronics.
Badge of Fraud 5: The transfer was of substantially all the debtor’s assets
No. The Expense Reallocations did not involve transfers of assets, but rather the incurrence of obligations. Moreover, while the Expense Reallocations significantly affected the Debtor’s net income in September 2002, making it a negative number (<$1,415 million>) for the month of September, the Debtor still had substantial assets as of September 2002 ($38,296 million) so even if the Expense Reallocations were considered transfers of assets, they were not transfers of substantially all of the Debtor’s assets. Exh. D-2, lines 271, 324.
Badge of Fraud 6: The debtor absconded
No. This badge does not appear to apply to a corporate expense reallocation. The Debtor did ultimately close its doors but not until mid-2003. The reallocations occurred from September 2002 to January of 2003.
Badge of Fraud 7: The debtor removed or concealed assets
No. This does not appear to be the case, and there was no testimony that these Expense Reallocations were concealed. They are disclosed in the financial records of the Debtor.
Badge of Fraud 8: The value of the consideration received by the debtor was reasonably equivalent to the value of the assets transferred or the amount of the obligation incurred
Yes. As attested by the uncontroverted testimony of multiple witnesses at trial, the services covered by these charges included marketing and sales services, training, information technology services, or other services that benefitted the company as a whole and would have been incurred by the subsidiary individually had SMTC Corporate not provided the services. As shown by the testimony of Mr. Skerlj and Ms. Todd, the allocations were uniformly made using a formula approved by the companies’ auditors, KPMG. Exh. D-239. Allocations were made to all of the subsidiaries.
Mr. Wheeler also verified that there are tax regulations that govern the allocation of expenses among subsidiaries and that one of the Internal Revenue Code provisions in particular, 26 U.S.C. § 482, requires this allocation so that one or more subsidiaries cannot manipulate their income to reduce taxes in one taxing district at the expense of another. Mr. Wheeler explained that when an affiliate renders services to another, the affiliate receiving the services must accrue that liability whether it is recorded on its books timely or not. He regarded the reallocations in September 2002 as catch up allocations, properly made and that they were settling an already accrued liability of the Debtor. He further explained that it would not have been proper for SMTC Texas to not book such a liability, and it would not have been proper to operate without recognizing it as an expense of the Debtor. There was no controverting testimony on this issue.
“Value is given for a transfer or an obligation if, in exchange for the transfer or obligation ... an antecedent debt is ... satisfied.” Tex. Bus. & Com.Code Ann. § 24.004(a). The Trustee claims that intangible, non-economic benefits do not constitute value, citing to In re Hinsley, 201 F.3d 638 (5th Cir.2000), and that the evidence at trial does not support the existence of an antecedent debt. The Trustee asserts that there was no existing written agreement between the Debtor and SMTC Corporate to pay for those services and because the services were provided by the Debtor’s parent, it is not reasonable to *309infer an expectation of payment. See generally Matter of Multiponics, Inc., 622 F.2d 709, 717 n. 8 (5th Cir.l980)(discussing various factors considered by courts in determining whether advances are loans or capital); Matter of Transystems, Inc., 569 F.2d 1364, 1370 (5th Cir.1978) (holding that would-be insider “loans” should be closely scrutinized, and determining that the parent’s past advances had been working capital advances as opposed to loans). Because there was no agreement or understanding that the Debtor would pay for these services, the Trustee claims no value is put into the estate for such reallocations. Based on the testimony regarding the tax and accounting reasons for reallocation of expenses among subsidiaries, the Court finds ample basis for imposing on the Debtor its share of such expenses. Thus, the Court does not agree with the Trustee’s argument.
The definition of “reasonably equivalent value” includes payment for services previously provided. See, e.g., Morris v. Nance, 132 Or.App. 216, 888 P.2d 571, 579 (1994) (“Because defendant’s past services constitute reasonably equivalent value, plaintiffs claims alleging constructive fraud are without merit.”). “An antecedent debt owed by the debtor occurs when a right to payment arises — even if the claim is not fixed, liquidated or matured.” In re First Jersey Sec., Inc., 180 F.3d 504, 511 (3d Cir.1999); see also In re Bennett Funding Group, Inc., 220 B.R. 739, 742 (2d Cir. BAP 1998) (“ ‘[A]n antecedent debt’ is a pre-existing debt that was incurred when the debtor previously obtained a property interest in the consideration provided by the creditor that gave rise to the debt.”). “The right to payment generally arises when the debtor obtains the goods or services.” First Jersey, 180 F.3d at 511. “[L]egal claims arise when the legal services are performed, not when the bill itself is presented to the client.” Id. “ ‘Debt’ means a liability on a claim.” Tex. Bus. & Com.Code Ann. § 24.002(5).
Thus, the Court finds that the Trustee provided no controverting evidence that the services provided to the Debtor were not performed by SMTC Corporate nor did he provide any evidence that the value of services provided were not reasonably equivalent to the allocations made. The retroactive cost allocations satisfied an antecedent debt owed by the Debtor to SMTC Corporate, and equivalent value was received.
Badge of Fraud 9: The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred
Yes. As discussed in detail above, the Court finds that the Debtor was insolvent during the time these reallocations were made from September 2002 through January of 2003.
Badge of Fraud 10: The transfer occurred or the obligation was incurred shortly before or shortly after a substantial debt was incurred
No. The Debtor executed the Lease with Flextronics in September 2001. These costs reallocations occurred one year later starting in September 2002. This was not shortly before nor shortly after the Debtor executed the Lease.
Badge of Fraud 11: The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor
No. This badge is inapplicable.
Summary: Badges of Fraud on the Expense Reallocations
In summary, the Trustee has failed to carry his burden in connection with the expenses that were reallocated, as at most only two badges of fraud can be found. In contrast, the Defendants have provided *310overwhelming and uncontroverted evidence that these cost reallocations were done for legitimate business purposes, and that the Debtor received reasonably equivalent value for the expenses allocated to its books.
Circumstantial Evidence of Actual Intent: Badges of Fraud on Claim Category 3: The Net Balance Transfers
The Trustee alleges that between January 2002 and December 2003, the daily cash transfers from the Debtor to HTM exceeded the amount of cash transferred from HTM to the Debtor during the same period by approximately $41 million and therefore reasonably equivalent value was not given. The Court has previously found that on and after March 1, 2003, the Debt- or had no “assets” that could have been transferred and so for that reason the cash transfers made after that date ($3.9 million, according to the Trustee) are not avoidable. However, out of an abundance of caution and for the sake of completeness, all of the transactions of which the Net Balance Transfer is comprised, without regard to their timing, will be addressed below.
There is no dispute that the SMTC entities had an elaborate cash management system centralized at HTM’s level. Pursuant to that system all customer product receipts from the different operating subsidiaries were deposited into a lockbox and swept each night to pay down the Lehman Loan. HTM would then provide funds the next day to each subsidiary to pay its operating expenses. The Trustee does not find fault with this system per se. Instead, the Trustee claims that once SMTC Corporate decided to disengage from Dell, close down the Debtor, and default on the Flextronics Lease, this centralized cash management system provided a sinister mechanism to siphon off any additional cash that otherwise the Debtor might have to pay its creditors.
The Trustee contends that, over the period from May 2002 to March 2003, $38 million net in cash was transferred to HTM. Then, on March 1, 2003, SMTC stopped making payments and defaulted on the Flextronics Lease. According to the Trustee, an additional $3.9 million in cash was transferred between March 2003 and December 2003 through the cash management plan.
Badge of Fraud 1: Transfers made to insiders or obligation to insiders incurred
Yes. All of the cash transfers were swept to an account held by HTM, an insider of the Debtor.
Badge of Fraud The debtor retained possession or control of the property transferred after the transfer
No. The Debtor did not retain possession or control of the property. The funds were swept each night to pay the Lehman Loan. HTM would then call on the loan the next day to fund the next day’s operations and would place other funds in the Debt- or’s disbursement account to enable the Debtor to pay its expenses.
Badge of Fraud 3: The transfer or obligation was concealed
No. These cash transfers were accounted for in the Debtor’s bank records and in the general ledgers.
Badge of Fraud I: Before the transfer was made or obligation was incurred, the debt- or had been sued or threatened with suit
No. Prior to April 2, 2003, the Debtor had not been threatened with any suit. On April 2, 2003, the Debtor received a demand letter from Flextronics to pay the rent due; however, even for cash transfers occurring after this date, the Court cannot find the Debtor had been sued or threatened with suit. This factor is listed as a badge of fraud because the pendency of *311litigation implies fraudulent intent when the circumstances show that there is a causal connection between the threatened litigation or judgment and the transfer. Dickinson v. Ronwin, 935 S.W.2d 358, 364 (Mo.App. S.D.1996) (“Conveyances made for the purpose of defeating an anticipated judgment in a case pending or about to be commenced are in fraud of creditors and void as to such plaintiff.”); see also Jacksonville Bulls Football, Ltd. v. Blatt, 535 So.2d 626, 629 (Fla.Dist.Ct.App.1988) (“[T]he mere fact that a suit is pending against a person, or that a person is indebted to another, does not in and of itself render fraudulent that person’s conveyance of property.”).
There is no evidence that the post-demand letter cash transfers were motivated by the desire to avoid paying a judgment to Flextronics. To the contrary, there were legitimate reasons for this system and the preponderance of the evidence suggests that the Debtor continued to make the cash transfers in the ordinary course of business as cash transfers had been made before the Debtor and Flex-tronics entered into the Lease as well as during the Lease term.
Badge of Fraud 5: The transfer was of substantially all the debtor’s assets
No. After most of the cash transfers, the Debtor still retained other assets on its books. Exh. D-2, line 324.
Badge of Fraud 6: The debtor absconded
No. The Debtor finally closed its doors in mid-2003.
Badge of Fraud 7: The debtor- removed or concealed assets
No. There was no testimony that these cash transfers were concealed. The transfers are clear from the bank records and were properly disclosed in the other financial records of the Debtor and HTM.
Badge of Fraud 8: The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred
There is insufficient proof to establish this badge of fraud. The Net Balance Chart is simply a running tally of the amount of net cash generated by the Debt- or and transferred to HTM in 2002 and 2003 through the bank accounts. Exh. P-9. The Debtor transferred $166 million in cash to HTM during 2002 and 2003 and only received back $125 million in cash, leaving a net cash transfer to HTM of roughly $41 million. These facts are not in dispute and, the Trustee claims, support his allegation that the Debtor did not receive “reasonably equivalent value” through the operation of the cash management system.
The Trustee’s expert, Mr. Alexander, opined that the SMTC entities could not possibly have “fed” the Debtor more than it lost. He claimed that the Debtor’s losses shown on its financial statements provide the upper limit of the amount that HTM could have funded to the Debtor or on its behalf during any given period. He then calculated the extent of the Debtor’s cash loss over a four-year period, and based on those calculations, concluded that the total value received by the Debtor between 2001 and 2004 from HTM was at least $2.5 million but could not have been more than $8.9 million. Exh. P-130.
Mr. Alexander compared two years’ of bank statements to four years’ of income statements to calculate what he claims were the minimum and maximum amounts of the Debtor’s cash loss that could have been funded by its parent. Based on that comparison, according to the Trustee’s expert, the Debtor provided the parent with much more value than the Debtor received in return.
*312The Defendants argue that Mr. Alexander’s analysis ignores the intercompany transfers that are not apparent from the bank records and that constitute additional value received by the Debtor. The Trustee asserts that his expert in fact presumed that the Debtor received equivalent value from affiliates for the intercompany transfers. However, according to the Defendants’ expert, Mr. Wheeler, that presumption was made only in the portion of Mr. Alexander’s analysis that is found in his Sources and Uses of Operational Cash report. See Exh. P-7.
Mr. Wheeler argued and the Court agrees that, because when Mr. Alexander analyzed the bank statements he dealt only with revenues from sales, he necessarily could not have taken into account those intercompany transfers that were reflected only in the bank reconciliations and on the general ledger and are accounted for only at the HTM level in the Consolidated ZBA Bank Account. Exh. D-367 and D-368. It was there that the Debtor’s “payment” for goods and services received from affiliates was recorded. It was there that the Debtor received “payment” for goods and services it provided to its affiliates. These transactions, reflecting what the subsidiaries bought and sold from each other, were not recorded at each subsidiaries’ individual level, but rather show up only as part of the activity in the HTM Consolidated ZBA Account.
This makes sense. For example, the Defendants’ contend that the $166 million in sales revenues that were received by the Debtor and swept into the HTM Consolidated ZBA Account were ultimately used to pay the Debtor’s expenses. Although the Debtor’s bank records reflect it had only $125 million in expenses, that figure, like the $166 million, appears to exclude expenses the Debtor incurred as a result of payments other affiliates made to it or on its behalf. Those payments were not paid by check and so do not appear in the Debtor’s bank records, but rather were made by intercompany adjustments at the HTM level. Exh. D-17 and D-18, 10800 ZBA Master Bank Reconciliation (Comeri-ca 5417). Because the evidence presented failed to show the extent of the value provided to the Debtor by those intercom-pany transfers, the Court finds that the Trustee failed to prove that the Debtor did not receive reasonably equivalent value for its transfers of cash that occurred with the daily sweeps of its accounts.
Finally, the Court is unclear why the extent of value received by the Debtor from the Defendants should be limited to the Debtor’s operational losses, as urged by the Trustee. As Mr. Wheeler testified, when Mr. Alexander compared the cash flowing through the bank accounts to the losses of the Debtor, he was “comparing apples to oranges.” Overall, the Debtor lost money, that is true, but the extent of that loss should not limit the consideration that the Debtor paid to other parties for goods and services it received, or that it received for goods and services it provided to other affiliates.
The Trustee has not provided the Court a complete picture that explains specifically why reasonably equivalent value was not received. What the ZBA Master Bank Reconciliation demonstrates is that the $41.1 million figure that was derived solely by analyzing the bank accounts does not accurately reflect the payments made to SMTC Mex or to any of the other affiliates on behalf of Debtor via intercompany transfers. The Trustee failed to account for this reconciliation in his explanation as to what effect these transactions would have on reasonably equivalent value. He therefore has not proved the absence of reasonably equivalent value by a preponderance of the evidence.
*313
Badge of Fraud 9: The debtor was insolvent or became insolvent shortly after the transfer ivas made or the obligation ivas incurred
Yes. The Court has found above that the Debtor was insolvent during the entire period these transfers occurred.
Badge of Fraud 10: The transfer occurred or the obligation was incurred shortly before or shortly after a substantial debt was incurred
No. The Debtor executed the Lease with Flextronics on September 1, 2001, nine months before the start of the Early Wind-Down Period. Exh. D-273. The first transfer listed on Mr. Alexander’s Appendix D occurred on January 2, 2002, four months after signing of the Lease. However, Mr. Alexander testified that it was only on or after June 27, 2002-nine months after the execution of the Lease— that he found the cash management system worthy of suspicion. Exh. B. Partial Trial Tr., Testimony of J. Lester Alexander, III, 36:16-17, March 26, 2009; Ex. A, Partial Trial Tr., Testimony of J. Lester Alexander, III, 254: 16-18, March 27, 2009. The Court cannot find that nine months is “shortly after the incurrence of the debt.”
Even if it were able to make that finding, other evidence substantially undermines the probative force of this four- or nine-month time span. The cash management system was in place long before the Lease existed. The continuation of this system does not evidence a fraudulent motive. In addition, there is substantial evidence there were legitimate reasons for the cash management system. It facilitated the joint credit-facility, without which the Debtor could not have sustained its operations. Moreover, the system was established at the demand of the Lenders, not the Defendants. Exh. D-37.
Badge of Fraud 11: The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor
No. This badge is inapplicable.
Summary of Badges of Fraud on the Net Balance Transfer
Based on all the foregoing, the Court finds that the Trustee has failed to carry his burden with respect to his allegations involving these cash transfers.
Circumstantial Evidence of Actual Intent: Badges of Fraud on Claim Category k: The Fixed Assets Transfers
The Trustee alleges transfers of the Debtor’s equipment, furniture, and machinery in March and April 2003 to other SMTC entities, specifically SMTC Chihuahua and SMTC Canada, were fraudulent. As discussed above, the Court has previously found that on and after March 1, 2003, the Debtor had no “assets” that could have been transferred and so for that reason alone the Fixed Assets Transfers are not avoidable. However, out of an abundance of caution and for the purpose of completeness, the Court will disregard that and assume for the sake of argument that these were “transfers” of “assets,” and address below the other issues affecting their avoidability.
Badge of Fraud 1: Transfers made to insiders or obligations to insiders incurred
Yes. There is no dispute that the Debt- or’s fixed assets were transferred to affiliates in Chihuahua and Canada in March and April of 2003.
Badge of Fraud 2: The debtor retained possession or control of the property transferred after the transfer
No. The Debtor closed its facility. SMTC Chihuahua and SMTC Canada stored the equipment after transfer.
*314
Badge of Fraud 3: The transfer or obligation was concealed
No. The Trustee asserts that Paul Walker’s statement that SMTC Texas did not have any assets to speak of as of April 2003 established that the Debtor was intentionally concealing assets from Flex-tronics because the Debtor’s balance sheet reflected assets at that time.
In that same email, Mr. Walker expressly told Mr. Carney of Flextronics that any negotiations were constrained “by the bank group” and that even the land the Debtor was offering was “pledged to the bank.” Exh. P-117. It could be that Mr. Walker thought he was honestly portraying the Debtor as having no assets that it could freely offer Flextronics, because any assets reflected on the balance sheet at that time were encumbered by the lien securing the Lehman Loan. Mr. Walker did not testify, however, so his intentions are not known.
Further, in response to Mr. Walker’s email, Mr. Carney recognized the difficulties of electronics manufacturers in Texas and acknowledges that SMTC would have to “draw from resources other than [its] Texas corporation” to attempt to settle the Lease claim. Exh. P-117. Flextronics itself was shutting down operations in Texas and moving manufacturing to Mexico. Exh. D-31. See also, Newspaper Articles, supra.
Presuming that Flextronics did its due diligence, it was or at least should have been aware of the Lehman Loan and the lenders’ security interest because this information was available to the public through UCC-1 filings as well as the SEC 10-K filings. Given this awareness, its own express and documented understanding that electronics manufacturers were not making money in Texas, and its acknowledgment that SMTC Corporate would have to look beyond the Debtor’s assets to satisfy the Lease obligation, the Court cannot find that Mr. Walker was somehow concealing assets. Further, at the time the Debtor transferred the fixed assets, other assets remained on the Debt- or’s books. Exh. D-2, line 324, March and April 2003. Thus, the Court finds that the Trustee did not prove that the transfers were concealed.
Badge of Fraud k- Before the transfer was made or obligation was incurred, the debt- or had been threatened with suit
No. Flextronics did send the Debtor a demand letter on April 2, 2003. There was no evidence, however, that the transfers made by the Debtor after receipt of this letter were motivated by the desire to avoid paying a judgment to Flextronics. In fact, some of the transfers were made before Flextronics sent the demand letter. The evidence suggests that the challenged transfers were made due to the decision to shut down the business. Mr. Sommerville testified this was standard procedure when closing a subsidiary. Further, the value of the fixed assets at transfer was minimal.
Badge of Fraud 5: The transfer was of substantially all the debtor’s assets
No. Some of the assets transferred were not the Debtor’s, but leased by the Debtor. At most, these were transfers of all the remaining fixed assets of the Debtor. Other assets remained on the Debtor’s books up until December 2003. Those consisted mainly of accounts receivable and some inventory listed at approximately $13.9 million in March 2003 and $7 million in April 2003. Exh. D-2, line 324. The inventory and receivables appear to have been liquidated because the assets’ value decreased each month; however, they were not liquidated all at once but rather over a period of time, so that no transfer could be said to have been one of “substantially all the debtor’s assets.”
*315
Badge of Fraud 6: The debtor absconded
No. The Debtor ultimately closed its doors, but not until May of 2008. It then filed bankruptcy in December 2004.
Badge of Fraud 7: The debtor removed or concealed assets
No. See Badge of Fraud 3 above. This was a routine disposition upon closing.
Badge of Fraud 8: The value of the consideration received by the Debtor ivas reasonably equivalent to the value of the assets transferred or the amount of the obligation incurred
There is insufficient proof this badge existed. The Debtor did not transfer millions of dollars of fixed assets in shutting down. Rather, it transferred only approximately $301,000 worth of assets. The Debtor argues that in exchange for these assets, SMTC Mex and SMTC Canada assumed the Debtor’s portion of the Lehman Loan. As of March 2003, the book value of the Debtor’s fixed assets was approximately $5,386,000.00. Exh. D-233, Resp. SMTC 53674, Texas Fixed Asset Continuity. Of this amount, leasehold improvements made up approximately $2,672,000.00. Id. These leasehold improvements were not transferred, but abandoned back to Flextronics and should therefore be deducted from any transferred assets. The Bratton Lane land was not transferred (it was later included in the Debtor’s bankruptcy estate), and its book value of approximately $522,000.00 should also be deducted. Id. This leaves a net book value of approximately $2,192,000.00 in fixed assets that could have been transferred. As demonstrated by Exh. P-124 and the testimony of Mr. Desai, however, the market value of the assets actually owned by the Debtor and transferred was approximately $301,000.00, which is substantially less than the book value. Exh. P-124.
The testimony of Mr. Sommerville, Mr. Hartstein and Mr. Kingery is inconclusive as to what, if any, assets owned by the Debtor were actually transferred to SMTC Chihuahua and SMTC Canada and in no way provided the Court with the actual value of the assets at the time they were transferred. Testimony of the value of assets when they are purchased is totally irrelevant to the asset value upon transfer unless purchased and transferred contemporaneously. This did not happen. Likewise the outdated personal property tax appraisal reflecting furniture, fixtures and equipment valued as of January 29, 2002 of $4,212,334 is totally irrelevant to the value at the time the fixed assets were transferred to subsidiaries in March and April of 2003. The Trustee failed to provide an accurate value of the fixed assets upon transfer and therefore fails in his burden to prove no reasonably equivalent value.
With respect to the other side of the equation — the value the Debtor received for the assets it transferred — the Defendants argue that the Debtor’s sister companies’ assumption of its portion of Lehman Loan, evidenced by the subsequent restructuring and refinancing of the debt done by them without the Debtor’s participation, constitutes reasonably equivalent value for the transfer. Exh. D-110. Because the Trustee bore the burden of proof with respect to this issue, and the Court finds he failed to present adequate proof to meet that burden, the Defendants’ contentions need not be addressed and the Court declines to do so.
Badge of Fraud 9: The debtor ivas insolvent or became insolvent shortly after the transfer occurred or the obligation was incurred
Yes. The Court has found, above, that the Debtor was insolvent as early as January of 2002, and at all relevant times *316thereafter. These transfers were made in March and April of 2003.
Badge of Fraud 10: The transfer occurred shortly after a substantial debt was incurred
No. The Debtor became liable on the Lehman Loan back in 2000, and executed the Flextronics Lease in September of 2001. The transfers occurred in March and April of 2003, a year and a half after the Lease date. There was no evidence of any other “substantial debt” that the Debt- or incurred before these transfers.
Badge of Fraud 11: The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor
No. This badge is not applicable. Summary of Badges of Fraud on Fixed Assets Transfers
Because the Trustee proved only two badges of fraud-transfers to insiders and insolvency — with respect to the Fixed Assets Transfers, the Court finds he failed to provide sufficient circumstantial evidence that those transfers were made with actual intent to hinder, delay, or defraud the Debtor’s creditors.
Conclusions Regarding the Trustee’s Claims for Transfers Made with Actual Intent to Hinder, Delay or Defraud
The totality of the circumstantial evidence for each type of transfer is insufficient to support an inference of fraudulent intent. Therefore, the Trustee has failed to establish fraudulent intent by a preponderance of the evidence, and Defendants are entitled to judgment denying the Trustee’s § 24.005(a)(1) claims.
The Trustee’s Claims for Transfers Made with Constructive Fraud
To establish constructive fraud, the Trustee must prove the following elements for each transaction under § 24.005(a)(2) of TUFTA:
1) that the transactions constituted a transfer;
2) that the debtor received less than reasonably equivalent value in exchange for the transfer; and
3) one of the following:
(i) that the debtor was insolvent at the time of the transfer or as a result of the transfer;
(ii) that the debtor was left with unreasonably small capital after the transfer; or
(iii) that at the time of the transfer debtor intended to incur debts beyond its ability to pay.
Weaver v. Kellogg, 216 B.R. 563, 573 (S.D.Tex.1997).
In order to prevail under § 24.006(a) of TUFTA, the Trustee must prove the following elements for each transaction:
1) that the transaction constituted a transfer;
2) that debtor received less than reasonably equivalent value in exchange for the transfer; and that debtor was insolvent at the time of the transfer or as a result of the transfer.
Id.
Thus, the three elements the Trustee must have proven with respect to each transfer are that there was a transfer, that no reasonably equivalent value was received by the Debtor for that transfer, and that the Debtor was insolvent when that transfer occurred.
Constructive Fraud Elements as to Claim Category 1: The Inter-company Transfers
As discussed above, the Court has previously rejected the Defendants’ argument that the Debtor had no “assets” that could *317have been transferred at the time of the Intercompany Transfers, and so finds the Trustee established that “transfers” occurred. The Court has also previously found that the Debtor was insolvent during the entire period during which these transfers in question took place.
As discussed above in connection with the Court’s review of the circumstantial evidence (badges of fraud) of actual intent with respect to these transfers, the Court has previously found that reasonably equivalent value for the transfers ivas given, and for that reason finds that the Trustee has failed to prove constructive fraud with respect to the Intercompany Transfers.
Out of an abundance of caution and in the interest of completeness, however, the Court will address the issue of whether Debtor “was left with unreasonably small capital after the transfer or ... at the time of the transfer ... intended to incur debts beyond its ability to pay,” an alternative to the insolvency element.
There was no evidence that at the time of these transfers that the Debtor intended to incur debts beyond its ability to pay. The Debtor was shutting down. Mr. Alexander did testify that the Debtor was un-dercapitalized in his view, based on the operation of the cash management system. The Trustee claims that because of this system, the Debtor was not able to accumulate any cash. Any time it needed to pay an expense, it was required to obtain consent from HTM or SMTC Corporate, a procedure which provided these entities with absolute power and prevented the Debtor from operating as a stand-alone entity.
The Defendants, on the other hand, claim that the Debtor’s operations were adequately capitalized by virtue of the Lehman Loan joint credit facility. Because the extent of the credit granted by Lehman was limited by the consolidated assets of all the SMTC entities, the SMTC subsidiaries (including the Debtor) had to apportion the access to credit to fund its operations. See Exh. D-35, the Credit Agreement. As Mr. Hartstein and Ms. Markland testified, however, even if payment was delayed, SMTC Texas was never denied the funds needed to pay its vendors even after shutting down as reflected in the fact that only seven proofs of claim were filed in the Debtor’s bankruptcy case.
The fact that the Debtor was never permitted to accumulate cash does not mean it was undercapitalized. The reason SMTC Texas did not accumulate cash was that it was not profitable enough to pay off the financing it needed to start and maintain its operations. This fact is evidenced by the Lehman Loan balance which remained on SMTC Texas’s financial statements. Exh. D-2, line 342.
The Trustee has failed in his burden of proof with respect to the Intercompany Transfers. The evidence that was offered by the Defendants established that these transfers were made in the ordinary course of business, that they were made due to a legitimate business purpose, and that they were accurately documented on the books and records and other financial reports of the affected subsidiaries and other SMTC entities. The Court finds and concludes that there was no fraudulent conveyance under TUFTA § 24.005(a)(2) or under § 24.006(a) with respect to the $37 million Intercompany Transfers.
Constructive Fraud Elements as to Claim Category 2: The Expense Reallocations
The Expense Reallocations were obligations incurred by the Debtor, and so the requirement that there was a transfer of an asset or an obligation incurred is satisfied. The Court has previously found that *318the Debtor was insolvent during the period during which the Expense Reallocations took place.
However, as discussed above in connection with the Court’s review of the circumstantial evidence (badges of fraud) of actual intent with respect to the Expense Reallocations, it has previously found that the Trustee failed to prove that the Debt- or did not receive reasonably equivalent value for the incurrence of these obligations. Rather, the Defendants offered substantial evidence that the reallocated costs were assessed against the Debtor for legitimate business purposes and that the Debtor received reasonably equivalent value for them.
With respect to the issue of whether, at the time of or after the obligation was incurred, the Debtor was left with unreasonably small capital or intended to incur debts beyond its ability to pay (the alternative to the insolvency element), the Court’s findings and conclusions above with respect to constructive fraud and the Intercompany Transfers apply as well to the Expense Reallocations. Therefore, the Court finds that the Trustee failed to meet his burden of proof on this issue with respect to the Expense Reallocations, as well.
In summary, the Trustee failed to prove the Expense Reallocations were obligations fraudulently incurred within the meaning of either TUFTA § 24.005(a)(2) or § 24.006(a).
Constructive Fraud Elements as to Claim Category 3: The Net Balance Transfer
The Court has previously found that on and after March 1, 2003, the Debtor had no “assets” that could have been transferred and so for that reason the Net Balance Transfer transactions that occurred during that period ($3.9 million) are not avoidable “transfers” under, either TUFTA § 24.005(a)(2) or § 24.006(a).
With respect to reasonably equivalent value, the Court finds that the Trustee failed to carry his burden as his evidence failed to take into consideration the reconciliations made for the intercompany pay-ables and receivables that were handled at the HTM level and their effect on the value given.
The Court has previously found the Debtor was insolvent during the entire period during which the Net Balance Transfer occurred. Further, the Court finds that the Trustee failed to prove that the Debtor was left with unreasonably small capital after the Net Balance Transfer or, at the time of the Net Balance Transfer, intended to incur debts beyond its ability to pay. On the contrary, as discussed above, the Defendants established that the cash management system had been operating since 2000 when the loan facility was put in place and was required by Lehman, that the Debtor’s cash management transactions were well-documented through the bank records and/or its internal financial records, and that all company expenses incurred prior to the Debtor surrendering the Lease were paid except for certain tax payments, a few small unsecured claims, and future payments due under the Lease.
In summary, the Trustee failed to prove the $41.1 million Net Balance Transfer was a fraudulent transfer within the meaning of either TUFTA § 24.005(a)(2) or § 24.006(a).
Constructive Fraud Elements as to Claim Category 1¡,: The Fixed Assets Transfers
The Court has previously found that on and after March 1, 2003, the Debtor had no “assets” that could have been transferred and so for that reason the Debtor’s conveyances of its capital assets in March *319and April of 2003 are not avoidable “transfers” under either TUFTA § 24.005(a)(2) or § 24.006(a).
In addition, while the Court has previously found that these transfers were made while the Debtor was insolvent, for the reasons stated above it does not find that the Debtor was left with unreasonably small capital after these transfers or that at the time of these transfers it intended to incur debts beyond its ability to pay.
Finally, the Court finds that the Trustee failed to provide sufficient competent evidence regarding whether the Debtor received reasonably equivalent value with respect to these transfers. Rather, it was the Defendants which ultimately introduced the equipment list prepared by B.J. Desai, and called him as a witness, the only competent evidence on the issue.
In summary, the Court finds that the Trustee failed to prove the Fixed Assets Transfers were fraudulent conveyances under either TUFTA § 24.005(a)(2) or § 24.006(a).
The Trustee’s Veil Piercing Claims
The Trustee asserted veil-piercing claims against SMTC Corporate, HTM and SMTC Canada. As explained by the Texas Supreme Court in Lucas v. Texas Industries, Inc., 696 S.W.2d 372 (Tex.1984):
Generally, a court will not disregard the corporate fiction and hold a corporation liable for the obligations of its subsidiary except where it appears the corporate entity of the subsidiary is being used as a sham to perpetrate a fraud, to avoid liability, to avoid the effect of a statute, or in other exceptional circumstances. There must be something more than mere unity of financial interest, ownership and control for a court to treat the subsidiary as the alter ego of the parent and make the parent liable for the subsidiary’s tort. The corporate entity of the subsidiary must have been used to “bring about results which are condemned by the general statements of public policy which are enunciated by the courts as 'rules’ which determine whether the courts will recognize their own child.” The plaintiff must prove that he has fallen victim to a basically unfair device by which a corporate entity has been used to achieve an inequitable result.
Id. at 374 (citations omitted).
Additionally, as stated by the Texas Supreme Court in Castleberry v. Branscum, 721 S.W.2d 270 (Tex.1986), superseded on other grounds by Tex. Bus. Corp. Act. Ann. art. 2.21 A:
Alter ego applies when there is such a unity between corporation and individual that the separateness of the corporation has ceased and holding only the corporation liable would result in injustice. It is shown from the total dealings of the corporation and the individual, including the degree to which corporate formalities have been followed and corporate and individual property have been kept separately, the amount of financial interest, ownership and control the individual maintains over the corporation and whether the corporation has been used for personal purposes. Alter ego’s rationale is: “if the shareholders themselves disregard the separation of the corporate enterprise, the law will also disregard it so far as necessary to protect individual and corporate creditors.”
Id. at 272 (citations omitted).
Since 1993, Article 2.21 has provided the exclusive grounds for imposing liability on a corporation for the obligations of another corporation with which it is affiliated. See Tex. Bus. Corp. Act art. 2.21(B); SSP Partners v. Gladstrong Investments (USA) Corporation, 275 S.W.3d 444 (Tex. *3202008). This statute was enacted and amended several times, largely in response to the Texas Supreme Court’s decision in Castleberry to clarify and restrict the circumstances under which the corporate form could be disregarded. See Menetti v. Chavers, 974 S.W.2d 168, 173-74 (Tex. App.-San Antonio 1998, no pet.). The relevant portions of the statute provide:
A. A holder of shares ... or any affiliate thereof or of the corporation shall be under no obligation to the corporation or to its obligees with respect to:
(2) any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the holder, owner, subscriber, or affiliate is or was the alter ego of the corporation, or on the basis of actual fraud or constructive fraud, a sham to perpetrate a fraud, or other similar theory, unless the obligee demonstrates that the holder, owner, subscriber or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, owner, subscriber, or affiliate.
B. The liability of a holder, owner, or subscriber of shares of a corporation or any affiliate thereof or of the corporation for an obligation that is limited by Section A of this article is exclusive and preempts any other liability imposed on a holder, owner, or subscriber of shares of a corporation or any affiliate thereof or of the corporation for that obligation under common law or otherwise....
Tex. Bus. Corp. Act art. 2.21(B).
The Trustee has an obligation to show that each of SMTC Corporate, HTM, and SMTC Canada was guilty of (1) causing the Debtor to be used for the purpose of perpetrating an “actual fraud” on the Debtor’s creditors relating to the Flextron-ics Lease, (2) committing “actual fraud” with respect to the Flextronics Lease, and (3) doing so “primarily” for its own “direct personal benefit.” Id.; Solutioneers Consulting, Ltd. v. Gulf Greyhound Partners, Ltd., 237 S.W.3d 379, 387 (Tex.App.-Houston [14th Dist.] 2007, no pet.).
The Trustee provided insufficient evidence that each of these Defendants engaged in the requisite conduct or acted with the necessary intent. Without specific proof as to each of these Defendants on each of the three factors, the Trustee cannot use veil-piercing to impose liability against those entities, and judgment against the Trustee should be rendered accordingly. Specifically, the Trustee failed in his burden under each of the theories he urged, for the following reasons.
The Trustee’s Veil-Piercing Claim Based on Alter Ego
“Alter ego properly focuses upon the relationship between the corporation and its owners and not upon the relationship between the corporation and the claimant-creditor.” Gibraltar Savings v. LDBrinkman Corp., 860 F.2d 1275 (5th Cir.1988). A variety of factors must be evaluated to determine whether “management and operations are assimilated to the extent that the subsidiary” is nothing more than a mere adjunct of the parent. Edwards Co., Inc. v. Monogram Industries, Inc., 700 F.2d 994 (5th Cir.1983). Texas courts are loathe to merge the separate legal identities of parent and subsidiary unless the latter exists as a mere tool or “front” for the parent, or the corporate fiction is utilized to achieve an inequitable result, or to conceal fraud or illegality. Id.; Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d 571 (Tex.1975). Texas courts have been less reluctant to disre*321gard the integrity of related corporations in tort cases, as opposed to contract cases. This different treatment can be attributed in major part to the element of choice inherent in a contractual relationship. Texas Indus., Inc. v. Lucas, 634 S.W.2d 748 (Tex.App.-Houston 1982), rev’d on other grounds, 696 S.W.2d 372 (Tex.1984); Hanson Southwest Corp. v. Dal-Mac Constr. Co., 554 S.W.2d 712 (Tex.Civ.App.-Dallas 1977, unit ref'd n.r.e.).
Although the attitude toward judicial piercing of the corporate veil is more flexible in tort, the legal precepts governing both tort and contract suits are substantially the same. Hanson Southwest Corp., 554 S.W.2d 712. Proof of an identity of shareholders or of corporate directors and officers or of domination by the parent of its subsidiary’s affairs will not alone justify treatment of the two as one business unit. Gentry, 528 S.W.2d 571. Nor does the parent’s ownership of 100% of the subsidiary’s stock alone defeat their separate existence. Edwards Co., Inc., 700 F.2d 994.
Rather, one must look to the total dealings of the corporation and the parent/shareholder relationship, including:
1. the parent and subsidiary have common stock ownership,
2. common directors or officers,
3. the parent and subsidiary have common business departments,
4. the parent and subsidiary file consolidated financial statements,
5. the parent finances the subsidiary,
6. the parent caused the incorporation of the subsidiary,
7. the subsidiary operated with grossly inadequate capital,
8. the parent pays salaries and other expenses of subsidiary,
9. the subsidiary receives no business except that given by the parent,
10. the parent uses the subsidiary’s property as its own,
11. the daily operations of the two corporations are not kept separate, and
12. the subsidiary does not observe corporate formalities.
United States v. Jon-T Chemicals, Inc., 768 F.2d 686 (5th Cir.1985), cert. denied, 475 U.S. 1014, 106 S.Ct. 1194, 89 L.Ed.2d 309 (1986).
The Trustee claims that SMTC Corporate, led by Paul Walker, controlled all aspects of the Debtor including making its day-to-day operating decisions with respect to its vendors and customers. Mr. Hartstein was apparently almost fired by Paul Walker when Mr. Hartstein attempted to negotiate payment terms for one of the Debtor’s customers. The Trustee argues that the Debtor had to receive permission from SMTC Corporate before acting and/or that SMTC Corporate acted for the Debtor in at least certain key instances, such as making the decision for the Debtor to disengage from Dell and close. In addition, he claims his alter ego theory is further supported by the facts that the Debtor operated with no cash and was therefore dependent on SMTC Canada and HTM to fund it so that it could pay its expenses.
The Trustee asserts that this is sufficient evidence to find SMTC Corporate, HTM, and SMTC Canada liable on his alter ego claim. The resolution of alter ego issues must be based on a consideration of “the totality of the circumstances”; there is “no litmus test.” Id. at 694. Accordingly, although the facts stated above may be relevant to a totality of the circumstances inquiry, they are not dispositive. Even if all were found to be applicable, other circumstances might justify a refusal to pierce the corporate veil.
*322SMTC Corporate established the Debtor as an operating subsidiary in 1996. SMTC Corporate, HTM, and the other SMTC entities did have common stock ownership with each other, and there were common directors and officers. The entities filed consolidated financial statements. All of the entities’ operations were financed by the Lehman Loan and the processing for this Loan was centrally managed by HTM. That meant the Debtor did not operate with cash, and HTM disbursed the funds to the Debtor to enable it to pay its monthly expenses. This procedure is not equivalent, however, to the Debtor’s not having paid those monthly expenses. Rather, the Debtor’s requests for funds from HTM/SMTC Canada to pay its monthly expenses were routinely granted (although not always in a timely manner, depending upon the outstanding Lehman Loan balance and the cash needs of the other subsidiaries).
SMTC Corporate helped the Debtor locate customers, but testimony indicated that the Debtor itself also did some of its own marketing. The Debtor owned its own property—it held title to the land that the Trustee eventually sold in its bankruptcy case. SMTC Corporate, HTM, and SMTC Canada each had a separate business site from the Debtor.
There were no corporate minute books produced at trial so the Court does not know whether the Debtor observed all corporate formalities throughout the years of its existence. Cliff Ernst testified that he incorporated the Debtor. P-120. In 2000, Mr. Ernst opined that the Debtor was in good standing as a duly existing corporation. D-349. The Defendants produced several corporate documents also relevant to the Debtor’s corporate existence and good standing. See Exhs. D-350 through D-353. The Debtor maintained separate bank accounts in connection with its operations, it had a separate accounting department from SMTC Corporate, HTM, and SMTC Canada, and the Debtor’s accounting department paid its expenses and payroll and kept its own financial records and ledgers. It had a general manager, an on-site controller, and many other employees. The Debtor operated independently in Texas since 1996. It executed the Lease with Flextronics and operated in that building from September 2001 until May 2003, when it ultimately shut down.
Further, this is an alter ego claim based on a contract, not on a tort theory of liability. “In contract cases, fraud is an essential element of an alter ego finding.” Jon-T, 768 F.2d at 692. In a contract case, the creditor has willingly transacted business with the subsidiary. If the creditor wants to be able to hold the parent liable for the subsidiary’s debts, it can contract for this protection. Unless the subsidiary misrepresents its financial condition to the creditor, the creditor should be bound by its decision to deal with the subsidiary; it should not be able to complain later that the subsidiary is unsound. Id. at 693. Moreover,
where a party has contracted with a corporation and is sued upon the contract, neither is permitted to deny the existence or the legal validity of such corporation. To hold otherwise would be contrary to the plainest principles of reason and of good faith, and involve a mockery of justice. Parties must take the consequences of the position they assume.
Casey v. Galli, 94 U.S. 673, 680, 24 L.Ed. 168 (1876).
Flextronics entered into the Lease with the Debtor on September 1, 2001. This was a contractual relationship. Flextron-ics was a highly sophisticated business entity with subsidiaries and related entities operating worldwide, much like the Debtor *323was. There is no evidence in the record that the Debtor misrepresented its financial condition to Flextronics when it entered into the Lease. On the contrary, there is substantial evidence that Flextron-ics monitored the Debtor’s financials to such an extent that it became concerned about its operations and ultimately requested a parental guaranty of the Debt- or’s Lease obligations. That request, however, was made too late.
The weight of the evidence shows that it was the downturn in the computer industry that actually led to the demise of the Debtor and the Debtor’s decision to shut down. The Debtor was a subsidiary of a multinational corporation. The fact that SMTC Corporate, HTM, and SMTC Canada aided the Debtor in its operations and authorized certain of its actions and operations, considered with all other relevant facts and circumstances, is not sufficient to pierce the corporate veil under an alter ego theory. The Trustee failed to prove that any of the particular instances in which SMTC Corporate personnel acted on behalf of the Debtor or required acts on the Debtor’s part constituted an abuse of its corporate identity. To obtain economies of scale, multinational corporations often provide services to their subsidiaries such as obtaining financing and providing information technology, accounting, engineering, marketing, and other services. This in turn requires some exercise of control/leadership by the parent in connection with its subsidiary. Such leadership and guidance does not mean that the subsidiary is operating in such a manner that it does not maintain a separate existence.
Based on the evidence that was offered, the Court cannot find that the Debtor completely disregarded corporate formalities. Efforts were made to keep records of intercompany transactions, separate bank accounts were maintained, property and assets were not indiscriminately commingled, and there were differences in the business activities and offices of SMTC Corporate, HTM, SMTC Canada, and the Debtor.
In summary, the Court is persuaded that under these facts the Debtor’s operations were sufficiently independent of the control of SMTC Corporate, HTM, and SMTC Canada to preclude a judicial piercing of the corporate veil for purposes of alter ego. The Court thus concludes that the Trustee has failed in his proof of his alter ego claim.
The Trustee’s Veilr-Piercing Claim Based on Sham to Perpetrate a Fraud
The Trustee’s argues that the arrangement between the Debtor and SMTC Corporate that governed the Debtor’s financial operations was merely a sham to siphon money away from the Debtor, leaving it an empty shell with no assets for its creditors. Because the Debtor did not exist or operate as a separate legal entity, he claims, having the Debtor maintain a separate legal existence was merely a sham to perpetrate a fraud on the Debtor’s creditors.
This doctrine is typically applied where the controlling entity siphons off revenue and sells off much of the other entity’s assets or does other acts to hinder the on-going business and the ability of the corporation to pay off its debts. See In re JNS Aviation, LLC, 376 B.R. 500, 529 (Bankr.N.D.Tex.2007) (citing Castleberry v. Branscum, 721 S.W.2d 270, 273 (Tex. 1986)). As explained by the Fifth Circuit Court of Appeals in Fidelity & Deposit Co. v. Commercial Casualty Consultants, Inc., 976 F.2d 272 (5th Cir.1992):
The focus under the sham to perpetrate a fraud theory is on “injustice or unfairness to the claimant caused by the corporation and its owners.” For a claimant to establish such unfairness, he must *324ordinarily demonstrate that he relied on the financial backing of the owners. “Without reliance, the contract claimant cannot avoid the risk of insolvency that it originally accepted as part of the bargain.”
Id. at 275 (citations omitted). In spite of the apparent broadness of this equitable doctrine, the Court remains mindful that, “[njormally, the corporation is an insulator from liability on claims of creditors [and t]he fact that incorporation was desired in order to obtain limited liability does not defeat that purpose.” Anderson v. Abbott, 321 U.S. 349, 64 S.Ct. 531, 88 L.Ed. 793 (1944).
The Trustee claims that the evidence clearly establishes the Defendants’ “dishonesty of purpose” and “intent to deceive” as required by Article 2.21 of the Texas Business Corporation Act. As evidence of such purpose, he points to Mr. Woodard’s email of May 31, 2002, which discusses the option of bankrupting the Debtor and “walking away from the lease,” as well as Mr. Sommerville’s email, written after the Debtor defaulted on the Lease, in which Sommerville describes a visit to the Debtor’s plant by a Flextronics employee and reassures Mr. Walker that the facility appeared to be staffed during the visit so that it was “not obvious we are exiting next month.” Exhs. P-82, P-87.
Further evidence of a sham, the Trustee claims, is Mr. Walker’s response to Flex-tronics’s demand letter, in which he describes the Debtor as a “stand alone entity [that] doesn’t have any assets to speak of.” The Trustee argues that Mr. Walker used the Debtor’s separate corporate existence as a shield behind which he was able to hide the truth—that the Debtor had $15 million in assets, still had cash and, contrary to the email, had not been operated as a “stand alone entity” for the ten preceding months. This, claims the Trustee, benefited SMTC Corporate, HTM, and SMTC Canada, which were then able to siphon off all of the Debtor’s remaining assets without paying any more on the Lease.
The Trustee claims that after the Lease default in March 2003, all cash flowing into the Debtor’s account was siphoned to HTM and none was redirected to the Debtor to make the Lease payments. The Debtor requisitioned the March rent payment but was denied funding by the corporate offices. The Debtor then transferred all of its manufacturing equipment in March and April of 2003, and all of the accounts receivable and other assets were liquidated by the end of 2003. The Trustee argues that this evidence is sufficient to show that the siphoning of the cash and transfer of other assets with no notice to Flextronics amounted to a “sham to perpetrate a fraud” on Flextronics.
Even assuming that were true, the reliance component must also be met. Pace Corp. v. Jackson, 155 Tex. 179, 190, 284 S.W.2d 340, 351 (1955) (“Respondent was as well acquainted with the financial structure of Pace Corporation as were [the individual owners].”); Hanson Southwest Corp. v. Dal-Mac Constr. Co., 554 S.W.2d 712, 718 (Tex.Civ.App.-Dallas 1977, unit refd n.r.e.) (“[Entering voluntarily] into the contract [though] realizing that it [the ‘shell’] might not be financially sound and despite fruitless efforts to obtain a guarantee from the parent company [plaintiff construction company cannot now pierce the corporate veil].”); and Paine v. Carter, 469 S.W.2d 822, 827 (Tex.Civ.App.-Houston [14th Dist.] 1971, writ ref'd n.r.e.) (“[T]he contract recognizes and assumes the separate existence of [the companies], [The other party to the contract haring chosen] to deal with both ... in their separate legal capacities,” such party “is estopped to claim that the corporation is the alter *325ego of the individual (or the reverse thereof).”)- There is no evidence that Flextron-ics relied on the financial backing of the Debtor’s owners, HTM and SMTC Corporate, and its affiliate SMTC Canada, in deciding to do business with the Debtor. Where a party knows of the relationship between a corporation and its shareholder and chooses freely and voluntarily to deal with them in their respective capacities, he is estopped to claim that the corporate form should be ignored. Atomic Fuel Extraction Corp. v. Estate of Tom Slick, 386 S.W.2d 180, 191 (Tex.Civ.App.-San Antonio 1964, writ ref'd n.r.e) (“Atomic, with full knowledge, chose to deal with and continue to deal with the corporations to the exclusion of [the owner].”).
The evidence establishes that Flextron-ics had the ability to review certain financial data from the Debtor to evaluate if its position was secure with respect to the Debtor’s operations. It is apparent from the evidence that Flextronics was in the process of requesting a parental guaranty from SMTC Corporate when the Debtor closed its doors, a sign Flextronics was concerned about the Debtor’s financial situation. Flextronics was a sophisticated company and could have requested a guaranty when it entered into the Lease. It accepted the risk of only dealing with a subsidiary when it dealt solely with the Debtor. Given the evidentiary record, the Trustee again fails to sustain his burden of proof. The sham to perpetrate a fraud claim should be denied.
CONCLUSION
The Trustee’s overarching contention in this case has been that the Debtor attempted to defraud Flextronics when it walked away from Lease because it had no legitimate reason to do so. All of the witnesses were credible and their testimony, considered individually or as a whole, does not lead the Court to that conclusion. On the contrary, the evidence established that the default was as a result of the Debtor’s financial difficulty caused by the downturn in the technology sector in the early to mid-2000s. See Newspaper Articles, supra. Mr. Hartstein spoke frankly about how burdensome the Lease was once it became obvious that the Debtor was losing customers. Moreover, numerous witnesses, including Mr. Hartstein and the Trustee’s expert, testified that the Debtor was operating at a loss, was unprofitable, and did not have the business to generate income to sustain operations in Austin. Thus, the fact that the Debtor defaulted on the Lease is not evidence of any fraudulent intent of the Debtor to transfer assets to remove them from Flextronics’s reach. Nor does it transform the common, legitimate, and (in this case) lender-instituted and -maintained cash management system into a devious means of siphoning income away from the Debtor.
Flextronics took a risk in leasing the property to the Debtor considering the bursting of the tech bubble the year before, and without obtaining a parental guarantee. Flextronics, through the Trustee, is attempting to circumvent the risk it voluntarily assumed and avoid the resulting but not unforeseeable damages resulting from a downturn in the technology sector of the economy. As the Court in Jorn-T Chemicals, Inc., 768 F.2d at 693, noted:
[T]he creditor has willingly transacted business with the subsidiary. If the creditor wants to be able to hold the parent liable for the subsidiary’s debts, it can contract for this. Unless the subsidiary misrepresents its financial condition to the creditor, the creditor should be bound by its decision to deal with the subsidiary; it should not be able to complain later that the subsidiary is unsound.
*326In summary, the Court has found and concluded that the conveyances that occurred after March 1 of 2003 were not “transfers” within the meaning of TUFTA and for that reason cannot be avoided under that statute. It also has found that the Debtor did not defraud Flextronics. Further, SMTC Corporate, SMTC Canada, and HTM were not the alter egos of the Debtor. Finally, there was no evidence that when Flextronics entered into the Lease, it relied on the financial backing of SMTC Corporate or any other SMTC entity to ensure it would be made whole in the event of the Debtor’s default. The Trustee has not proven that Flextron-ics relied on the Debtor’s owner to support a claim for sham to perpetuate a fraud.
Consistent with these findings of fact and conclusions of law, as well as those previously stated with respect to the Defendants’ pre-trial dispositive motions, the Court will grant the Defendants’ Rule 52(c) Motion and enter a take nothing judgment against the Trustee.
. In addition to the named Defendants, there were other operating subsidiaries in California, Wisconsin, Massachusetts and Colorado (all together hereinafter referred to as the “SMTC entities”).
. Ms. Reinhart was disqualified from testifying as an expert witness at the trial because she had been employed on a contingency basis, and the Texas disciplinary requirements governing accountants prohibit an expert from being retained under compensation arrangement. Ms. Reinhart had originally reviewed certain financial data of the Debtor and Defendants and had compiled certain information regarding the data reviewed. The Court allowed her to testify not as an expert, but as a summary witness regarding certain exhibits she prepared for trial and which were admitted at trial.
. The issue in Xonics and most of the cases that follow it was insolvency, a determination of whether there is an excess of assets over total liabilities, in contrast to the issue here which is whether there is equity in a lender's collateral. No authority was cited by the Trustee, and the Court was unable to find any authority, applying the analysis of Xonics to the specific issue of whether property is an "asset” under TUFTA or under any other similarly worded fraudulent transfer statute. However, the two issues are virtually the same-both require a comparison of the value of assets to debt to determine the availability of assets to pay unsecured creditors. Therefore, the Court does not find Xonics to be distinguishable because it involved an insolvency analysis and not a determination of equity in collateral.
. That one case, In re Lloyd McKee Motors, Inc., 157 B.R. 484 (Bankr.D.N.M.1993), involved the question of whether the claim of the lender against the guarantor was contingent and therefore could be estimated at something less than its full value for voting purposes in a Chapter 11 case. To the extent the case involved more than the enforcement of the guarantee by the lender against the debtor/guarantor — i.e., to the extent it involved considerations of fairness to other creditors — the case may be seen as similar to the instant case. At worst McKee Motors is distinguishable from this case because it involved voting rather than allowance and payment of a creditor's claim in a bankruptcy case. In any event, the decision is not binding on this Court.
. One can find, however, examples of courts including contingent liabilities at their face value when determining solvency. K.O. Balmforth, Note, Estimating Contingent Liabilities to Detemiine Insolvency in Bankruptcy Proceedings: In re Xonics Photochemical, Inc., 1989 B.Y.U. L.Rev. 1315, 1322 '(1989) ("[A] line of cases has arisen under the Uniform Fraudulent Conveyance Act in which the practice of valuing contingent claims at their face amount was rigidly followed, with results that do seem, in the Xonics court's word, ‘absurd.’ ”) (footnotes omitted). The logic of the analysis in Xonics and of the results it produces, and the number of courts that have followed it, convince this Court that under the facts of this case it is not appropriate to include the full face value of the Debtor's contingent liability under the Guarantee in determining the extent of the lien encumbering its assets (and, as discussed below, in determining its solvency).
. "The Xonics formula is a useful authoritative statement of a procedure for reducing contingent liabilities^ b]ut it is, by no means, ... the procedure most consistent with proper accounting treatment of contingent liabilities.” K.O. Balmforth, Note, Estimating Contingent Liabilities to Determine Insolvency in Bankruptcy Proceedings: In re Xonics Photochemical, Inc., 1989 B.Y.U. L.Rev. 1315, 1331 (1989). However, nothing "suggests that using the Xonics rule and formula is improper in a legal setting, or even in accounting for that matterf, but rather i]t simply shows that industry standards in accounting do not militate for the use of the Xonics rule and formula as ‘proper accounting treatment’ of contingent liabilities.” Id. at 1322 (footnote omitted).
. In a later decision, however, the same court held that the proper formula was to apply the percentage of likelihood of payment to the full amount of the debt, not merely to the amount of the assets of the guarantor/co maker that would be available to pay it. Covey v. Commercial Nat'l Bank of Peoria, 960 F.2d 657, 660-61 (7th Cir.1992). The difference is immaterial in this case, however, inasmuch as the Trustee urges this Court to apply a factor of 0% as the appropriate percentage likelihood that the Debtor would have had to pay on the Guarantee. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494366/ | AMENDED MEMORANDUM OPINION
JAMES G. MIXON, Bankruptcy Judge.
On April 4, 2008, Mary Stewart (Debtor) filed a voluntary petition for relief under the provisions of Chapter 7 of the United States Bankruptcy Code. On September 11, 2008, the Trustee (Plaintiff) filed an adversary proceeding against JPMorgan Chase Bank, N.A. (Defendant) to avoid the mortgage lien and for turnover. The Defendant filed a response and a pre-trial brief. A hearing was held on August 25, 2009, after which the matter was taken under advisement. The Plaintiff and Defendant each filed post-trial briefs. The proceeding before the Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E) & (K). The following shall constitute the Court’s findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
I.
FACTS
On February 17, 2006, the Debtor borrowed $105,661.00 from the Defendant and executed and delivered a promissory note payable to the Defendant. On the same day, the Debtor granted a mortgage lien to the Defendant to secure the note. The first page of the mortgage is attached as Exhibit A. It states that the borrower is “Mary Stewart, A Single Woman.” An acknowledgment followed the mortgage’s signature page. The acknowledgment did not contain the Debtor’s name. Rather, there is simply a blank space. The pronoun “he” is also inserted in the acknowledgment. A copy of the acknowledgment is attached as Exhibit B. The mortgage was recorded in the office of Ouachita County Circuit Clerk on February 23, 2006.
II.
ARGUMENT
The Plaintiff argues that pursuant to Arkansas Code Annotated §§ 16-47-106 & *18816-47-101, the acknowledgment is defective on its face and, therefore, the mortgage lien is unperfected and should be avoided pursuant to the Trustee’s avoiding powers granted by 11 U.S.C. § 544(a) and § 550(a) of the Bankruptcy Code. The Plaintiff also asks for reasonable attorney fees pursuant to Arkansas Code Annotated § 16-22-308.
The Defendant argues that the lien is properly perfected because the acknowledgment is in substantial compliance with Arkansas law. In the alternative, the Defendant argues that Arkansas Code Annotated § 18-28-208 validates any defects and/or that the Defendant has an equitable lien on the property and is entitled to reformation of the mortgage.
III.
PERFECTION
Pursuant to 11 U.S.C. § 544(a) a trustee can avoid most pre-petition liens unless the liens were perfected under state law prior to the date the petition was filed. Shuster v. Doane (In re Shuster), 784 F.2d 883, 884 (8th Cir.1986); Hawkins v. First Nat’l. Bank (In re Bearhouse), 99 B.R. 926, 927 (Bankr.W.D.Ark.1989). In Arkansas, a mortgage lien is perfected by recording the mortgage in the office of the circuit clerk of the county where the land is located. Ark.Code Ann. §§ 18-40-101 & 18^40-102 (Michie 2003). In order for a mortgage to be recorded, the mortgage must contain an acknowledgment that complies with applicable state law. Ark. Code Ann. § 16-47-101 (Michie 2003); In re Bearhouse, 99 B.R. at 927. An instrument that is not properly acknowledged does not operate as constructive notice to third parties. Cumberland Building & Loan Ass’n. v. Sparks, 111 F. 647, 650 (8th Cir.1901); In re Bearhouse, 99 B.R. at 927(citations omitted). “ ‘An acknowledgment is a formal declaration or admission before an authorized public officer by a person who has executed an instrument that such instrument is his act and deed.’ ” In re Bearhouse, 99 B.R. at 927 (quoting Pardo v. Creamer, 228 Ark. 746, 751, 310 S.W.2d 218, 221 (1958)). A proper acknowledgment for a deed or instrument affecting real property is taken by the grantor appearing in person before the notary stating that he or she executed the deed or instrument. Ark.Code Ann. § 16-47-106(a)(Michie 2003); Jones v. Owen, No. 08-1436, 2009 WL 3400685, — S.W.3d -(2009).
An acknowledgment need not literally adhere to the statutory requirements, rather it will be sufficient if it substantially complies with the Arkansas statutes. In re Bearhouse, 99 B.R. at 927 (citing Bank of Hampton v. Wright, 35 F.2d 321, 322 (8th Cir.1929)). Courts will sustain a certificate of acknowledgment whenever it is possible to do so. 1 Am. Jur.2d Acknowledgments § 31 (citing Carpenter v. Dexter, 8 Wall. 513, 75 U.S. 513, 19 L.Ed. 426 (1869); In re Atlantic Smokeless Coal Co., 103 F.Supp. 348 (S.D.W.Va.1952)). The certificate and the instrument that it relates to may be read together in order to determine whether the certificate complies with the statute in question. 1 Am.Jur.2d Acknowledgments § 31.
In Bearhouse, this Court found an improperly acknowledged mortgage that is regular on its face will operate as constructive notice to third parties. In re Bear-house, 99 B.R. at 927. The Eighth Circuit Bankruptcy Appellate Panel, citing to Bearhouse, stated that “[w]hen an instrument is defective and the defect is apparent, either by reference to the acknowledgment alone or to the instrument as a whole, the instrument does not provide constructive notice to third parties under *189Arkansas law.” Williams v. Wells Fargo Financial Mississippi 2, Inc. (In re Rick’s Auto Outlet of Monticello, LLC), 327 B.R. 650, 653 (8th Cir. BAP 2005). The Bankruptcy Appellate Panel found that the instrument in question did not provide constructive notice because the party signing only identified themselves as signing individually and not as members of their LLC. In re Rick’s Auto Outlet of Monticello, LLC, 327 B.R. at 653. The court found, looking to the instrument as a whole, it was not clear that the signors were signing in their corporate capacity. See In re Rick’s Auto Outlet of Monticello, LLC, 327 B.R. 650.
Some courts have found that an acknowledgment with a blank appearing where the name should be will not render the acknowledgment ineffective if the name could be easily ascertained from the document as a whole. Morton v. Resolution Trust Corp., 918 F.Supp. 985, 992 (S.D.Miss.1995); Farm Bureau Finance Co., Inc. v. Carney, 100 Idaho 745, 750, 605 P.2d 509, 514 (1980)(citing O’Banion v. Morris Plan Indus. Bank, 201 Okla. 256, 204 P.2d 872 (1949); Gardner v. Inc. City of McAlester, 198 Okla. 547, 179 P.2d 894 (1946); Coates v. Smith, 81 Or. 556, 160 P. 517 (1916)). See also Estate of Dykes v. Estate of Williams, 864 So.2d 926, 931-932 (Miss.2003)(a defective acknowledgment will not be fatal when the information that was omitted can be filled in from the body of the deed.) On the other hand, in several cases in the Sixth Circuit, the omission of a name in an acknowledgment is a fatal flaw. See Biggs v. Ocwen Federal Bank, 377 F.3d 515 (6th Cir.2004); Geygan v. World Savings Bank, FSB, 383 B.R. 391, 396 (6th Cir. BAP 2008)(citing Select Portfolio Servs., Inc. v. Burden (In re Trujillo), 378 B.R. 526 (6th Cir. BAP 2007); MG Invs., Inc. v. Johnson (In re Cocanougher), 378 B.R. 518 (6th Cir. BAP 2007)).
In 1876, the Arkansas Supreme Court found that the omission of a grantor’s name in the acknowledgment did not make the acknowledgment insufficient. Magness v. Arnold, 31 Ark. 103, 1876 WL 1512, *3 (1876). The justice certified that the party that appeared before him was the grantor and this was enough according to the court to identify the party who acknowledged the deed “as fully as if John P. McKinney’s [the grantor’s] name had been inserted in the blank.” Magness, 31 Ark. 103, 1876 WL 1512, *2.
The omission of a pronoun or the use of the wrong number or gender is generally not regarded as a fatal error when the meaning and intent are not obscured as a result. Farm Bureau Finance Co., Inc. v. Carney, 100 Idaho 745, 750, 605 P.2d 509, 514 (1980)(citing Am.Jur., Acknowledgments s 39 (1962)).
Pursuant to Arkansas law, this Court finds that this acknowledgment did not provide constructive notice. The omission of the Debtor’s name alone would not have been fatal since the Debtor’s name is the only name that appears on the mortgage lien and one could look to the instrument as a whole and fill in the omitted information. However, the use of the pronoun “he” in the acknowledgment changes this result. The omission of the name plus the use of a different gender than the name appearing in the body of the mortgage leads to an ambiguity that requires extrinsic evidence. It is simply not clear, looking at the instrument as a whole, who is acknowledged. The instrument is defective by reference to the document as a whole and it does not provide constructive notice.
IV.
CURATIVE STATUTE
Arkansas Code Annotated § 18-12-208 provides:
*190AJI deeds, conveyances, deeds of trust, mortgages, marriage contracts, and other instruments in writing affecting or purporting to affect the title to any real estate or personal property situated in this state, which have been recorded and which are defective or ineffectual because ... [t]he officer who certified the acknowledgment or acknowledgments to such instruments omitted any words required by law to be in the certificate or acknowledgments ... shall be as binding and effectual as though the certifí-cate of acknowledgment or proof of execution was in due form, bore the proper seal, and was certified to by a duly authorized officer.
A curative act does not apply to a transaction that takes place after the passage of the act. Merchants & Planters Bank & Trust Co. of Arkadelphia v. Massey, 302 Ark. 421, 426, 790 S.W.2d 889, 892 (1990). The purpose of a validating statute is to cure past errors and omissions and to validate what was previously invalid. Merchants & Planters Bank, 302 Ark. at 426, 790 S.W.2d at 892.
This statute was passed in 1955 and the transaction in this case occurred in 2006. Arkansas Code Annotated § 18-12-208 will not operate to cure any defects in this deed.
V.
EQUITABLE LIEN
In Arkansas, reformation of instruments is an equitable remedy that is appropriate when the instrument evidencing the agreement does not reflect the terms of the agreement due to mutual mistake of the party. Rice v. First Arkansas Valley Bank (In re May), 310 B.R. 405, 420 (Bankr.E.D.Ark.2004)(citing Statler v. Painter, 84 Ark.App. 114, 133 S.W.3d 425, 428 (2003)). However, reformation will not operate to prejudice a subsequent bona fide purchaser. In re May, 310 B.R. 405, 420 (Bankr.E.D.Ark.2004) (citations omitted). 11 U.S.C. § 544(a)(3) gives the trustee the same rights and priorities in real property that a subsequent bona fide purchaser would have over an unperfected lien. In re Bearhouse, Inc., 99 B.R. at 927. The Plaintiffs right as a bona fide purchaser would be prejudiced by the imposition of an equitable lien. Accordingly, the Defendant is not entitled to reformation of the contract.
VI.
CONCLUSION
The acknowledgment is not in substantial compliance with the Arkansas Code and the lien is not properly perfected, the curative act does not apply to this transaction, and an equitable lien is not appropriate. Therefore, the Plaintiff is allowed to avoid the mortgage lien. The Plaintiff has asked for attorney fees pursuant to Arkansas Code Annotated § 16-22-308.1 It appears the Plaintiff is entitled to these fees and should submit a separate application for reasonable attorney fees.
IT IS SO ORDERED.
Exhibit A
*191[[Image here]]
Exhibit B
*192[[Image here]]
. Arkansas Code Annotated § 16-22-308 provides that "[i]n any civil action to recover on an open account, statement of account, account stated, promissory note, bill, negotiable instrument, or contract relating to the purchase or sale of goods, wares, or merchandise, or for labor or services, or breach of contract, unless otherwise provided by law or the contract which is the subject matter of the action, the prevailing party may be allowed a reasonable attorney's fee to be assessed by the court and collected as costs.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494367/ | MEMORANDUM OPINION AND ORDER
BARBARA J. HOUSER, Bankruptcy Judge.
Before the Court is the motion for summary judgment (the “Motion”) filed by Defendant ABF Freight System, Inc. (“Defendant” or “ABF”).The Court heard the Motion and a cross-motion for summary judgment (the “Cross-Motion”) filed by Plaintiff Carol W. Banner (“Debtor” or “Banner”) on September 21, 2009. At the conclusion of that hearing, the Court denied the Cross-Motion for the reasons stated on the record and took the Motion under advisement. Thereafter, the parties filed further briefs regarding the Motion.
This proceeding arises under the Bankruptcy Code and the Court has core jurisdiction over the Motion in accordance with 28 U.S.C. § § 1334 and 157(b). This *609Memorandum Opinion contains the Court’s findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052.
I. FACTUAL BACKGROUND
The following facts are, except where noted, largely undisputed. Banner began working for ABF as a sales representative in October, 2006. ABF is a freight transportation company operating all over the United States and in both Canada and Puerto Rico. ABF employed Banner at its facility in Dallas, Texas. All sales representatives at ABF were required to qualify for, obtain and maintain an American Express (“Amex”) corporate card in order to pay for work-related expenses for customer entertainment and travel. Banner qualified for and obtained such a card, which was issued in her name, and she was responsible for the payment of all charges to the card.
In January of 2008, Banner tried to pay for a client’s lunch with the Amex card, but the charge was refused. Banner contacted her sales manager, Cam Hill (“Hill”), and told him she had filed for bankruptcy in December of 2007 but “did not list the company card on [her] bankruptcy filing.” Pi’s App., p. 117. This was the first notice that ABF had that Banner had filed for bankruptcy.
Banner then called American Express, which told Banner that it had cancelled the card because a credit check had revealed that Banner had filed for bankruptcy. PI. ’s App., p. 127. In fact, Banner’s Amex card was cancelled because she filed for bankruptcy. PI. ’s App., p. 105.
ABF asserts that after being notified of the cancellation of Banner’s Amex card, her supervisors and several other management personnel reviewed Banner’s performance and tenure to determine whether an exception should be made to ABF’s Amex policy. Based on a review of her job performance and tenure, ABF determined not to make an exception to the policy and guarantee the card, but decided instead to terminate Banner’s employment. PI. ’s App., p. 32. ABF told Banner at the meeting at which she was terminated that “based on [your] recent bankruptcy filing causing [your] American Express card to be cancelled and reinstatement not being an option, we regretfully have no choice but to end your employment with ABF.” PI. ’s App., pp. 49, 79,102.
On 13 occasions since 2005, ABF has guaranteed an Amex card, with spending restrictions, for individuals whose Amex credit card application was declined due to a prior bankruptcy. On 3 occasions since 2005 (excluding Banner), ABF terminated the employment of employees who violated its Amex policy when their Amex cards were suspended. PI. ’s App., p. 107.
Banner asserts that the sales performance she achieved during her tenure was influenced by the fact that she “was a relatively new employee who was still learning her position, that the territory had been vacate for approximately two years; that her supervisor overloaded her territory with more accounts than she could productively handle; and that the territory had been stripped of its major accounts.” Brief in Supp. Of PI. ’s Resp. To Def’s Mot. For Summ. J., p. 8.
II. LEGAL ANALYSIS
A. Summary Judgment Standard
In deciding a motion for summary judgment, a court must determine whether the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.CivP. *61056(c).1 In deciding whether a fact issue has been raised, the facts and inferences to be drawn from the evidence must be viewed in the light most favorable to the non-moving party. Berquist v. Washington Mut. Bank, 500 F.3d 344, 349 (5th Cir.2007). A court’s role at the summary judgment stage is not to weigh the evidence or determine the truth of the matter, but rather to determine only whether a genuine issue of material fact exists for trial. Peel & Co., Inc. v. The Rug Market, 238 F.3d 391, 394 (5th Cir.2001) (“the court must review all of the evidence in the record, but make no credibility determinations or weigh any evidence.”) (citing Reeves v. Sanderson Plumbing Prods, Inc., 530 U.S. 133, 135, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000)); see also U.S. v. an Article of Food Consisting of 815/50 Pound Bags, 622 F.2d 768, 773 (5th Cir. 1980) (holding district court erred in “discounting evidentiary value.” When determining whether a genuine issue of any material fact exists, the court “should not proceed to assess the probative value of any of the evidence.... ”). A genuine issue of material fact exists “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Py-lant v. Hartford Life and Acc. Ins. Co., 497 F.3d 536, 538 (5th Cir.2007) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).
If the moving party makes an initial showing that there is no evidence to support the nonmoving party’s case, the non-moving party must come forward with competent summary judgment evidence of the existence of a genuine fact issue. Mat-sushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87,106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
B. Has Debtor Raised a Genuine Issue of Material Fact?
This is an action under the anti-discrimination provision of the Bankruptcy Code, 11 U.S.C. § 525(b), which provides that “[n]o private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title ... solely because such debtor ... (1) is or has been a debtor under this title.... ” Thus, in order to survive the Motion, the Debtor must present sufficient evidence to demonstrate that a material issue of fact exists as to whether ABF’s sole reason for terminating the Debtor’s employment was her bankruptcy filing. Stockhouse v. Hines Motor Supply, Inc., 75 B.R. 83, 85 (D.Wyo.1987). For the reasons explained more fully below, the Court concludes that the Debtor has failed to do so and, accordingly, the Motion must be granted.
ABF contends that there were two reasons for the Debtor’s termination&emdash;i.e., the Debtor’s (1) failure to comply with ABF’s policy that its sales representatives qualify for and maintain an American Express card for use in their sales and marketing efforts, and (2) poor job performance. As relevant here, the evidence is undisputed that there were problems with the Debt- or’s job performance. These problems were reflected in various ABF Monthly Sales Audit Reports (“MSARs”), which contained criticisms of the Debtor’s performance. See, e.g., Def’sApp. Ex. A-6 at pp. 63-66; pp. 70-72. Moreover, ABF’s summary judgment evidence includes various charts and graphs comparing the Debtor’s performance to the performance of other sales representatives in ABF’s *611Dallas branch. See Def.’s App. Ex. A-19-A22 at pp. 391-94. These charts and graphs demonstrate that the Debtor’s performance in her 15 months of employment with ABF was significantly worse than any other sales representative during the same time period.
In response, the Debtor contends that she was terminated solely because of her bankruptcy filing, which caused American Express to cancel her card and her to violate the ABF policy. In short, the Debtor contends that ABF has concocted a second reason for her termination — ie., her poor job performance, in order to avoid liability under § 525(b) of the Bankruptcy Code. Moreover, in response to ABF’s summary judgment evidence of her poor job performance, the Debtor points to certain comments made by Hill, her immediate supervisor, in certain of the MSARs, which were more positive about her performance and encouraged her to continue to develop her skills in order to better penetrate her territory. See, e.g., Pl.’s App., pp. 148, 200. In addition, the Debtor relies on Hill’s deposition testimony that on January 15, 2008, the day ABF terminated her, Hill did not believe that she should be terminated for her poor performance.2 The Debtor also offers various explanations for her poor performance, including that her assigned territory remained unoccupied for two years prior to her employment. Pi’s App., pp. 94, 95, 256. Finally, the Debtor’s summary judgment evidence establishes that she was never told that she was at risk of being fired due to her poor performance, or that she was being fired due to her poor performance. Pl.’s App., pp. 70, 105, 113, 243, 258.
While the Debtor’s summary judgment evidence certainly suggests that her job performance was not as bad as ABF contends, she has failed to present any summary judgment evidence demonstrating that her job performance was problem free. In other words, while the extent of the Debtor’s performance problems are in dispute in the summary judgment record, there is no dispute in the summary judgment record that the Debtor’s job performance was problematic and that ABF’s Director of Human Resources, Dan Griesse, and ABF’s Regional Vice President of Sales, John Evans, evaluated her performance in concluding that (1) ABF would not guarantee the Debtor’s Amex card, and (2) the Debtor should be terminated. Defs App., pp. 435, 438, 439, 450.
The Debtor cites several cases for the proposition that an employer’s evolving explanation for an employee’s termination may raise a genuine issue of material fact, sufficient to defeat the Motion. See, e.g., Burrell v. Dr. Pepper/Seven Up Bottling Group, Inc., 482 F.3d 408 (5th Cir.2007); Gee v. Principi, 289 F.3d 342 (5th Cir.2002). However, those cases were decided in the context of claims under Title VII of the Civil Rights Act of 1964. In that context, the law is well-developed that in cases involving circumstantial evidence of discrimination, there is a shifting burden of proof on a motion for summary judgment. In such a case, a plaintiff must demonstrate a prima facie case of discrimination; if the plaintiff does so, then the defendant must articulate a legitimate, nondiscriminatory reason for the termination. If the defendant meets this burden, then the plaintiff must offer sufficient evidence to create a genuine issue of material fact that either (1) the employer’s reason is a pretext or (2) that “the employer’s reason, while true, is only one of the rea*612sons for its conduct, and another ‘motivating factor’ is the plaintiffs protected characteristic.” Burrell, 482 F.8d at 411-412.
However, as relevant here, courts have generally rejected the notion that this sort of burden-shifting, made applicable in the Title VII context as described in McDonnell Douglas Corp. v. Green, 411 U.S. 792, 93 S.Ct. 1817, 36 L.Ed.2d 668 (1973), applies to cases brought under § 525(b) of the Bankruptcy Code. See, e.g. White v. Kentuckiana Livestock Market, Inc., 397 F.3d 420, 426 (6th Cir.2005); Laracuente v. Chase Manhattan Bank, 891 F.2d 17, 22 (1st Cir.1989). Moreover, the Title VII cases are distinguishable, because Title VII permits recovery where one motivating factor (among possibly several) for the adverse action is the plaintiffs protected characteristic. Section 525(b) is not so forgiving, and Banner must instead raise a genuine issue of fact that the sole motivating factor causing her termination is her bankruptcy filing.
Here, the evidence is undisputed that Amex cancelled Banner’s card because she filed for bankruptcy, and that ABF terminated Banner because she did not maintain an Amex card.3 However, it is also undisputed that in making its decision to terminate Banner, ABF considered whether it should make an exception to its policy by guaranteeing Banner’s Amex card, as it had done many times in the past for other employees, but that it determined not to do so based upon a review of Banner’s tenure and job performance. And, as noted previously, Banner’s job performance was problematic. Therefore, because the Debtor has failed to raise a genuine issue of material fact that the sole reason for her termination was her bankruptcy filing, the Debtor’s claim under § 525(b) fails as a matter of law. Accordingly, the Motion must be granted.
A separate judgment shall be concurrently entered.
SO ORDERED.
. Federal Rule of Civil Procedure 56 is made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7056.
. According to his deposition testimony, Hill thought the Debtor should be placed on a performance improvement plan that would result in her termination if her performance did not improve. Hill Depo, 87:9-21, App. Exhibit B at p. 400.
. The Court expresses no view on whether an employer could establish a policy to terminate employees which could be triggered only by the filing of a bankruptcy, and then escape § 525(b) liability by claiming that it was the violation of the policy, and not the bankruptcy filing, which caused the termination. That is not the case before the Court. First, an employee could fail to qualify for, or fail to maintain, an Amex card for reasons other than bankruptcy. Second, it is undisputed in this case that ABF did not terminate all employees who lost or were unable to obtain an Amex card due to a bankruptcy filing. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494368/ | ORDER ON RANSOME GROUP INVESTORS I, LLLP’S MOTION TO REQUIRE PETITIONING CREDITOR TO POST INDEMNITY
PAUL M. GLENN, Chief Judge.
THIS CASE came before the Court for hearing to consider the Motion to Require Petitioning Creditor to Post Indemnity. The Motion was filed by Ransome Group Investors I, LLLP (Investors).
On June 24, 2009, The Ransome Development Co., LLC (Development) filed an Involuntary Bankruptcy Petition against Investors.
Investors subsequently filed a Motion to Dismiss the Involuntary Petition on the grounds that (1) the Petition was filed in bad faith, and (2) Development’s claim against Investors is subject to a bona fide dispute within the meaning of § 303(b) of the Bankruptcy Code.
In the Motion presently under consideration, Investors asks the Court to require Development to post an indemnity bond pursuant to § 303(e) of the Bankruptcy Code, pending resolution of the issues raised in this case.
Section 303 of the Bankruptcy Code governs the filing of involuntary bankrupt*558cy cases. Subsections 303(e) and (i) provide as follows:
11 USC § 303. Involuntary cases
(e) After notice and a hearing, and for cause, the court may require the petitioners under this section to file a bond to indemnify the debtor for such amounts as the court may later allow under subsection (i) of this section.
(i) If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment—
(1) against the petitioners and in favor of the debtor for—
(A) costs; or
(B) a reasonable attorney’s fee;
(2) against any petitioner that filed the petition in bad faith, for—
(A) any damages proximately caused by such filing; or
(B) punitive damages.
11 U.S.C. § 303(e),(i)(Emphasis supplied),
The provision regarding the posting of a bond is intended to “discourage frivolous petitions as well as the more dangerous spiteful petitions, based on a desire to embarrass the debtor ... or to put the debtor out of business without good cause.” In re Reed, 11 B.R. 755, 757 (Bankr.S.D.W.Va.1981)(quoting H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 323 (1977), U.S.Code Cong. & Admin. News 1978, p. 5787.).
Petitioning creditors in involuntary cases should not be routinely required to post a bond upon the alleged debtor’s request, however, because the Bankruptcy Code does not impose a mandatory bond requirement. In re Reed, 11 B.R. at 757(quoted in In re Secured Equipment Trust of Eastern Air Lines, Inc., 1992 WL 295943, at *6 (S.D.N.Y.)). Section 303(e) provides only that the Court “may” require the petitioning creditors to post a bond, and that such a requirement should only be imposed upon the Court’s finding of “cause.”
Moreover, “It is clear that there is a presumption of good faith in favor of the petitioning creditor, and thus the alleged debtor has the burden of proving bad faith.” United States Fidelity & Guar., 58 B.R. at 1011. Therefore, although the parties and research have disclosed no case directly addressing the issue, it appears that the putative debtor must establish a prima facie case of bad faith before petitioning creditors may be required to post a bond under § 303(i)(2). See In re Contemporary Mission, Inc., No. 5-82-00916, slip op. (Bankr.D.Conn. Jan. 31, 1983) (“[T]he determination of whether to require a bond should not be turned into a de facto hearing on the merits; instead the involuntary petition’s lack of merit must be relatively clear.”) (quoting Norton Bankruptcy law and Practice § 9.12 at 27 (1981)).
In re Secured Equipment Trust of Eastern Air Lines, Inc., 1992 WL 295943, at *6.
In this case, Investors filed a Motion to Dismiss the Involuntary Petition on the grounds that (1) the Petition was filed in bad faith, and (2) Development’s claim is the subject of a bona fide dispute within the meaning of § 303(b) of the Bankruptcy Code.
Contemporaneously with this Order, the Court is entering an Order on Investors’ Motion to Dismiss. In the Order, the Court denies the Motion to Dismiss to the extent that Investors asserts that Development’s claim is the subject of a bona fide *559dispute. Specifically, the Court finds that “there is no objective basis to determine that a factual or legal dispute exists as to the validity of Development’s claim against Investors in the amount of $99,000.00.” (p. 16).
The second prong of Investors’ Motion to Dismiss relates to Development’s motive in filing the Involuntary Petition. A two-day trial has been scheduled by separate Order to consider whether the Petition was filed in bad faith. The Court finds that Development should not be required to post a bond pending the resolution of the bad faith issue.
It is clear that Investors commenced an action against Development and other defendants in the Circuit Court in Marion County, Florida seeking compensatory and punitive damages for fraud, conversion, civil theft, civil conspiracy, breach of fiduciary duty, and unjust enrichment. In support of its contention that the bankruptcy case was filed in bad faith, Investors primarily asserts that Development filed the Involuntary Petition for the sole purpose of frustrating the state court action. (Doc. 15, p, 11). According to Investors, other state law remedies are available to Development, and the bankruptcy Petition was filed simply to avoid the entry of a judgment against it by the State Court. (Doc. 15, pp. 11-12).
In response, Development asserts that it had a legitimate bankruptcy purpose in filing the Involuntary Petition. According to Development, Investors’ primary asset is undeveloped land in Ocala that is encumbered by a mortgage in the approximate amount of $20 million. Development further asserts that the mortgage is in default, and has the project has stalled. Consequently, Development contends that a bankruptcy trustee is needed in this case to evaluate Investors’ financial affairs and transactions. (Transcript of September 17, 2009 hearing, pp. 23-26).
Under these circumstances, the Court finds that the Motion to require Development to post a bond should be denied. Factual issues exist in this case regarding the Motion to Dismiss the Involuntary Petition. There is a presumption that the Petition was filed in good faith. In re E.S. Professional Services, Inc., 335 B.R. 221, 226 (Bankr.S.D.Fla.2005)(citing In re Smith, 243 B.R. 169, 194 (Bankr.N.D.Ga.1999)). Investors has not established “cause” to require Development to post a bond within the meaning of § 303(e) of the Bankruptcy Code.
Accordingly:
IT IS ORDERED that Ransome Group Investors I, LLLP’s Motion to Require Petitioning Creditor to Post Indemnity is denied, without prejudice. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494370/ | ORDER ON TRUSTEE’S MOTION TO ENJOIN THE LIGHT KOREAN PRESBYTERIAN CHURCH (IS-LINGTON) FROM VIOLATING THE AUTOMATIC STAY
PAUL M. GLENN, Chief Judge.
THIS CASE came before the Court for hearing to consider the Trustee’s Motion to Enjoin the Light Korean Presbyterian Church (Islington) from Violating the Automatic Stay.
*905On April 16, 2008, the Debtor, Mak Petroleum, Inc., filed a petition under Chapter 7 of the Bankruptcy Code.
In January of 2009, The Light Korean Presbyterian Church (Islington)(the Church) filed a Statement of Claim against the Debtor in the Superior Court of Justice in Ontario, Canada. The issue in this case is whether the prosecution of the Claim is a violation of the automatic stay that should be enjoined by the Court.
Background
The Debtor, Mak Petroleum, Inc., was engaged in the business of owning and operating a number of gas stations and convenience stores throughout Florida. (Doc. 1).
On November 18, 2006, the Debtor and the Church entered into an Agreement pursuant to which the Debtor agreed to purchase real property located in Ontario, Canada from the Church. Pursuant to the Agreement, the Debtor deposited the sum of $100,000.00 with Re/Max West Realty, Inc. in Ontario.
The sale of the property was not concluded.
On April 16, 2008, the Debtor filed a petition under Chapter 7 of the Bankruptcy Code.
On January 26, 2009, the Church filed a Statement of Claim against the Debtor in the Superior Court of Justice in Ontario, Canada. In the Claim, the Church seeks a “declaration that the deposit in the amount of $100,000 paid to, and currently held by, Re/Max West Realty Inc. is forfeited to the plaintiff and is to be paid to the plaintiff forthwith.”
In the Motion presently before the Court, the Trustee asserts that the Claim filed by the Church in Canada is a violation of the automatic stay, and requests that the Court enter an order prohibiting the Church from pursuing the action. (Doc. 30).
Discussion
The Trustee’s Motion to Enjoin the Church from Violating the Automatic Stay should be denied.
The Motion is predicated on the contention that the $100,000.00 deposit is property of the Debtor’s bankruptcy estate, and that the Court may therefore exercise its in rem jurisdiction over the fund. (Doc. 30, pp. 2-3). According to the Trustee, the “[protection of in rem jurisdiction is a sufficient basis for a court to restrain another court’s proceedings.” (Doc. 30, p. 3). The Trustee seeks the entry of an Order enjoining the Church from proceeding with the action in Canada in violation of the automatic stay.
In order to enjoin a party from commencing or prosecuting a foreign proceeding, however, the Court must be authorized to exercise personal jurisdiction over that entity pursuant to the Due Process Clause of the Fifth Amendment to the United States Constitution. See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985).
The rule requiring such personal jurisdiction applies in all cases in which a Court is asked to enter a binding judgment against a party, regardless of whether the case also involves property that is otherwise within the Court’s jurisdiction.
But even though the court may have in rem jurisdiction over the debtor’s property, in personam jurisdiction is required before the court may restrain a defendant from interfering with that property.
In re Travelstead, 227 B.R. 638, 655 (D.Md.1998).
In bankruptcy cases, therefore, it appears that the rule applies to requests *906by a trustee to prohibit a creditor or other entity from violating the automatic stay. See, for example, In re EAL (Delaware) Corp., 1994 WL 828320, at 16 (D.Del.(Unless the defendant had the “minimum contacts” required for personal jurisdiction, the automatic stay did not apply to its conduct), and Fotochrome, Inc. v. Copal Company, Limited, 517 F.2d 512, 516 (2d Cir.1975)(The automatic stay could not be effective “without in personam jurisdiction over the creditor who has begun an action in a foreign tribunal that is not within the jurisdiction of the United States.”).
In this case, the Court has found that it lacks personal jurisdiction over the Church. Contemporaneously with this Order, the Court is entering an Order on Motion to Dismiss Complaint in Adv. Pro. 3:09-ap-435-PMG. The adversary proceeding is an action commenced by the Trustee in this Court to recover the deposit paid by the Debtor prior to the filing of the Chapter 7 petition.
In the Order on the Church’s Motion to Dismiss the adversary proceeding, the Court determined that the Church lacked sufficient “minimum contacts” with the United States to support its exercise of personal jurisdiction. In reaching this determination, the Court evaluated an Affidavit submitted by the Church, in which Duk Keun Oh attested that (1) the Church was incorporated under the laws of Ontario, Canada, and has its principal place of business in Canada; (2) the Church operates one physical church, which is located in Canada; (3) the Church does not engage in any business or have an office in the United States; (4) the Church has not solicited any business or breached any contract in the United States; and (5) the Church has not engaged in any other activity in the United States. (Adv.Pro.09-435, Doc. 6).
The Affidavit was not refuted by the Trustee, and the Trustee has made no affirmative showing of any contacts that the Church has ever had with the United States. Consequently, based on the Affidavit and record, the Court found that it lacked personal jurisdiction over the Church, and dismissed the Trustee’s Complaint in Adv. Pro. 09-435.
Similarly, the Motion currently before the Court should be denied because the Court lacks the requisite personal jurisdiction over the Church for purposes of entering any injunctive relief against it.
This case is readily distinguishable from the decision in In re Rimsat, Ltd., 98 F.3d 956 (7th Cir.1996). Rimsat was cited by the Trustee for the proposition that a Bankruptcy Court’s in rem jurisdiction over property of the estate allows an international proceeding to be enjoined pursuant to the automatic stay. (Doc. 33, pp. 3-4). In Rimsat, however, the Court expressly found that the defendant was a United States citizen “incontestably within the jurisdiction” of the Bankruptcy Court.
In contrast to the defendant in Rimsat, the Church in this case never established or maintained any identifiable contacts with the United States, and therefore was not subject to the exercise of this Court’s personal jurisdiction. Absent the existence of such personal jurisdiction, the Court may not enter an order restraining the Church from prosecuting its Claim in Canada. In re Travelstead, 227 B.R. at 655.
Accordingly:
IT IS ORDERED that the Trustee’s Motion to Enjoin The Light Korean Presbyterian Church (Islington) from Violating the Automatic Stay is denied. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494371/ | ORDER ON MOTION TO DISMISS COMPLAINT
PAUL M. GLENN, Chief Judge.
THIS CASE came before the Court for hearing to consider the Motion to Dismiss Complaint filed by the Defendant, The Light Korean Presbyterian Church (Isling-ton)(the Church).
Gregory L. Atwater, as Chapter 7 Trustee (the Trustee), commenced this adversary proceeding by filing a Complaint to recover a deposit paid by the Debtor in connection with a Purchase and Sale Agreement. The Defendant is a Church located in Ontario, Canada.
In its Motion to Dismiss the Complaint, the Church asserts that it “does not have sufficient minimum contacts with the United States to subject it to the jurisdiction of this Court.” (Doc. 9, p. 3).
Background
The Debtor, Mak Petroleum, Inc., was engaged in the business of owning and operating a number of gas stations and convenience stores throughout Florida. (Main Case, Doc. 1).
The Defendant, The Light Korean Presbyterian Church (Islington)(The Church), is incorporated under the laws of Ontario, and has its principal place of business in Canada. (Doc. 6).
On November 18, 2006, the Debtor and the Church entered into an Agreement *909pursuant to which the Debtor agreed to purchase real property located in Ontario, Canada, from the Church. Pursuant to the Agreement, the Debtor deposited the sum of $100,000.00 with Re/Max West Realty, Inc. in Ontario. (Docs.l, 6).
The sale of the property was not concluded. (Docs.l, 6).
On April 16, 2008, the Debtor filed a petition under Chapter 7 of the Bankruptcy Code.
On August 21, 2009, the Trustee filed a Complaint against the Church to recover the deposit.
The Church subsequently filed a Motion to Dismiss the Complaint. (Doc. 9). In the Motion to Dismiss, the Church asserts that it “does not have sufficient minimum contacts with the United States to subject it to the jurisdiction of this Court.”
Discussion
The doctrine of personal jurisdiction places limits upon the Court’s power to impose a binding and enforceable judgment on a party. General Cigar Holdings, Inc. v. Altadis, S.A., 205 F.Supp.2d 1385, 1340 (S.D.Fla.2002)(citing McGee v. Int’l Life Insurance Company, 355 U.S. 220, 78 S.Ct. 199, 2 L.Ed.2d 223 (1957)). The doctrine recognizes the individual liberty interests of parties by protecting them from the “unreasonable demands of litigating in a faraway forum.” In re Gentry Steel Fabrication, Inc., 325 B.R. 311, 316 (Bankr.M.D.Ala.2005)(quoting Republic of Panama v. BCCI Holdings (Luxembourg) S.A., 119 F.3d 935, 943-44 (11th Cir.1997)).
In evaluating questions of personal jurisdiction, the Court must first determine whether a statute or rule provides a basis for the exercise of such jurisdiction. In re Tirex International, Inc., 395 B.R. 182, 188 (Bankr.S.D.Fla.2008); In re Federalpha Steel LLC, 341 B.R. 872, 886 (Bankr.N.D.Ill.2006).
In bankruptcy cases, the basis for the exercise of a court’s jurisdiction over a party is found in Rule 7004(f) of the Federal Rules of Bankruptcy Procedure. “Fed. R. Bankr.P. 7004(f) provides the procedural basis for personal jurisdiction over defendants in adversary proceedings pending before a bankruptcy court.” In re Maxon Engineering Services, Inc., 2009 WL 3052437, at *5 (Bankr.D.Puerto Rico). See also In re Tirex International, Inc., 395 B.R. at 188, and In re Federalpha Steel, LLC, 341 B.R. at 887.
Rule 7004(f) of the Federal Rules of Bankruptcy Procedure provides:
Rule 7004. Process; Service of Summons, Complaint
(f) PERSONAL JURISDICTION.
If the exercise of jurisdiction is consistent with the Constitution and laws of the United States, serving a summons or filing a waiver of service in accordance with this rule or the subdivisions of Rule 4 F.R.Civ.P. made applicable by these rules is effective to establish personal jurisdiction over the person of any defendant with respect to a case under the Code or a civil proceeding arising under the Code, or arising in or related to a case under the Code.
F.R. Bankr.P. 7004(f)(Emphasis supplied).
Pursuant to Rule 7004(f), therefore, personal jurisdiction over a defendant may be established by serving a summons “in accordance with this rule.” Service “in accordance with” Rule 7004 “may be made within the United States by first class mail postage prepaid.” Fed.R.Bankr.P. 7004(b). See also, Rule 7004(d) of the Federal Rules of Bankruptcy Procedure, which provides that a summons “may be served anywhere in the United States.” Fed.R.Bankr.P. 7004(d).
*910Second, in order to establish personal jurisdiction over a defendant pursuant to Rule 7004(f), the exercise of such jurisdiction must be “consistent with the Constitution and laws of the United States.” Under this provision, it is generally recognized that the exercise of personal jurisdiction must comport with the Due Process Clause of the Fifth Amendment to the United States Constitution. “In an adversary proceeding pending before a bankruptcy court, Federal Bankruptcy Rule 7004(f) authorizes personal jurisdiction over defendants to the extent allowed under the Due Process Clause of the Fifth Amendment.” In re Tirex International, Inc., 395 B.R. at 188. See also In re Maxon Engineering Services, Inc., 2009 WL 3052437, at *5, and In re Federalpha Steel LLC, 341 B.R. at 887.
The standard for determining whether a court’s exercise of personal jurisdiction satisfies the due process requirements of the Constitution is well-established:
Historically the jurisdiction of courts to render judgment in personam is grounded on their de facto power over the defendant’s person. Hence his presence within the territorial jurisdiction of court was prerequisite to its rendition of a judgment personally binding him. (Citation omitted). But now that the capias ad respondendum has given way to personal service of summons or other form of notice, due process requires only that in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend “traditional notions of fair play and substantial justice.” (Citations omitted).
International Shoe Co. v. State of Washington, Office of Unemployment Compensation and Placement, 326 U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945)(Emphasis supplied). “The basic inquiry is whether the defendant has established sufficient minimum contacts or some presence in the forum so that maintenance of the suit does not offend traditional notions of fair play and substantial justice.” In re Tirex International, Inc., 395 B.R. at 188.
In order to satisfy this standard for personal jurisdiction, the defendant’s contacts with the forum must be more than random, fortuitous, or attenuated. “Instead, the defendant must have ‘purposefully avail[ed] itself of the privilege of conducting activities within the forum ..., thus invoking the benefits and protections of its laws.... The ‘crucial inquiry’ is whether the contacts with the forum are such that the defendant ‘should reasonably anticipate being haled into court there.’ ” In re Federalpha Steel LLC, 341 B.R. at 887(quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985) and International Med. Group Inc. v. American Arbitration Ass’n, Inc., 312 F.3d 833, 846 (7th Cir. 2002)).
Finally, in bankruptcy cases, “the forum, for purposes of assessing minimum contacts, is the United States, and not the State where the court presides.” Glinka v. Abraham and Rose Company Ltd., 199 B.R. 484, 496-97 (D.Vt.1996). “A bankruptcy court may look beyond a non-resident defendant’s ‘minimum contacts’ with a particular forum state to the defendant’s aggregate contacts vdth the United States as a whole.” In re Tirex International, Inc., 395 B.R. at 188. See also In re Plassein International Corp., 352 B.R. 36, 38-39 (Bankr.D.Del.2006)(The relevant question is whether the defendant has “minimum contacts” with the United States, rather than a particular state.).
*911Application
In order to determine whether a defendant has established sufficient minimum contacts with the forum for due process purposes, “all of the facts must be considered in the aggregate. There is no mechanical or ‘talismanic jurisdictional formulas’ at the Court’s disposal.” In re Banco Latino International, 176 B.R. 278, 282 (Bankr.S.D.Fla.1994)(quoting Burger King, 471 U.S. at 485, 105 S.Ct. 2174.).
In this case, however, there is no indication in the record that the Church has had any contacts at all with the United States.
According to the Trustee’s Complaint, this adversary proceeding arises from a Purchase and Sale Agreement pursuant to which the Debtor agreed to buy certain real property from the Church. The real property is located at 312-314 Rexdale Boulevard, Etobicoke, Ontario. (Doc. 1). In the Complaint, the Trustee seeks to recover a deposit paid pursuant to the Agreement. The deposit was paid to Re/ Max West Realty, Inc. in Ontario, Canada. (Doc. 6, Paragraph 11).
In support of its Motion to Dismiss, the Church filed the Affidavit of Duk Keun Oh. (Doc. 6). Duk Keun Oh is the Elder and Treasurer of the Church. In the Affidavit, Duk Keun Oh attested:
1. The Church is incorporated under the laws of, and has its principal place of business in, Mississauga, Ontario, Canada. (Paragraph 2).
2. The Church operates one physical church which is located in Mississauga, Ontario, Canada. (Paragraph 3).
3. The Church does not operate, conduct, engage in, or carry on any business or business venture in the United States or have an office or agent in the United States. (Paragraph 4).
4. The Church has not committed a tortious act within the United States. (Paragraph 5).
5. The Church does not own, use, possess, or hold a mortgage or other lien on any real property in the United States. (Paragraph 6).
6. The Church has not contracted to insure any person, property, or risk located within the United States. (Paragraph 7).
7. The Church has not engaged in solicitation or service activities within the United States or processed, serviced or manufactured products, materials, or things used or consumed in the United States. (Paragraph 8).
8. The Church has not breached a contract in the United States by failing to perform acts required by the contract to be performed in the United States. (Paragraph 9).
9. The Church has not engaged in any other activity within the United States. (Paragraph 10).
(Doc. 6, Affidavit of Mr. Duk Keun Oh).
The Trustee has not disputed any of the statements set forth in the Affidavit of Duk Keun Oh. Further, the Trustee has not affirmatively presented any evidence, by way of affidavit or otherwise, of any contacts or associations that the Church has ever had with the United States. In fact, it is noteworthy that Khalid Mughal, the individual who signed the Chapter 7 petition as the president and sole owner of the Debtor, listed his personal address as 89 Willow Park Drive, Brampton, Ontario, Canada. (Main Case, Doc. 1, SOFA Questions 19, 21).
In response to the Church’s Motion to Dismiss, the Trustee asserts only that the deposit is property of the estate, and that the Court should therefore be entitled to exercise its in rem jurisdiction *912over the fund. As shown above, however, the Court retains the power to exercise in personam jurisdiction only over parties who have sufficient minimum contacts with the United States. Generally, federal courts lack the ability to require defendants who have no known contacts with the country to return property located across international borders. In re International Administrative Services, Inc., 211 B.R. 88, 93 (Bankr.M.D.Fla.1997).
In summary, the Church submitted an Affidavit stating that it has not engaged in any activity in the United States, and the Affidavit has not been disputed by the Trustee. “It goes without saying that, where the defendant challenges the court’s exercise of jurisdiction over its person, the plaintiff bears the ultimate burden of establishing that personal jurisdiction is present.” Oldfield v. Pueblo de Bahia Lora, S.A, 558 F.3d 1210 (11th Cir.2009). The Trustee has not met its burden in this case, and the Court finds that it lacks personal jurisdiction over the Church.
Accordingly:
IT IS ORDERED that:
1. The Motion to Dismiss Complaint filed by The Light Korean Presbyterian Church (Islington) is granted as set forth in this Order.
2. The Light Korean Presbyterian Church (Islington) is dismissed from this action. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494372/ | MEMORANDUM OPINION
MARK W. VAUGHN, Chief Judge.
The Court has before it Thomas F. DeSteph’s (the “Defendant”) motion to compel production of documents (Ct.Doc. No. 43) (the “motion to compel”) and motion to dismiss the complaint (Ct.Doc. No. 48) filed by Nancy Gembitsky (the “Plaintiff’) pursuant to Federal Rule of Civil Procedure 12(b)(6), and the Plaintiffs objections thereto. In the complaint, the Plaintiff seeks damages for: (1) violation of the Securities and Exchange Act of 1934, (2) securities fraud under the New Hampshire Uniform Securities Act, (3) violation of the Connecticut Unfair Trade Practices Act, (4) breach of contract, (5) fraud, (6) conversion, (7) constructive trust, and (8) negligent misrepresentation. In order to continue discovery, the Defendant filed a motion asking the Court to order the Plaintiff to produce certain documents. A hearing was held on the motion to compel on November 10, 2009, and a hearing was held on the motion to dismiss on January 5, 2010. After both hearings, the Court took the matters under advisement.
Jurisdiction
This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and the “Standing Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of New Hampshire,” dated January 18, 1994 (DiClerico, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).
Background
The Plaintiff and Defendant met in the fall of 2002 when the Plaintiff was introduced to the Defendant to discuss possible investment ideas. At various times, the Defendant conducted business as The DeSteph Agency and TDA Advantage Trust. Additionally, the Defendant offered financial and investment advice to clients including the Plaintiff. In January 2003, the Plaintiff gave the Defendant a check for $100,000 (the “$100,000 transfer”). Subsequently in March 2003, the parties signed a promissory note related to the $100,000 transfer, however, the parties disagree as to the terms and conditions of the promissory note. The Plaintiff alleges that the $100,000 transfer was an investment in the TDA Advantage Trust man*43aged by the Defendant. On the other hand, the Defendant claims the parties had a romantic relationship, and the $100,000 transfer was simply a loan given to the Defendant. According to the Plaintiff, the terms of the promissory note included provisions requiring the Defendant to pay the Plaintiff monthly interest payments on the $100,000 transfer and provided that the principal on the $100,000 transfer would be returned to the Plaintiff on or before January 2008.
In April 2009, the Plaintiff filed a complaint in the United States District Court for the District of New Hampshire against the Defendant alleging various counts under state and federal law and seeking damages in connection with the $100,000 transfer that took place between the parties. The Defendant filed for Chapter 13 bankruptcy on May 6, 2009, and the Plaintiff filed her complaint with this Court in the instant case on May 18, 2009. The Defendant has filed a motion to compel production of documents under Fed.R.Civ.P. 26 and a motion to dismiss the complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted because the Plaintiffs claims are time-barred.
Discussion
The Defendant filed a motion to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6). However, pursuant to Rule 12(b)(6), a motion to dismiss for failure to state a claim must be filed before a defendant files an answer. Fed.R.Civ.P. 12(b)(6). “Once a defendant files an answer, the pleadings are closed. At that time, a party may file a motion for judgment on the pleadings.” Dartmouth Hitchcock Medical Center v. Cross Country Travcorps, Inc., 2009 WL 2020204, *1 (D.N.H.2009) (citing Fed.R.Civ.P. 12(c)).1 A motion for judgment on the pleadings is considered in the same manner as a Rule 12(b)(6) motion to dismiss. Curran v. Cousins, 509 F.3d 36, 43-44 (1st Cir.2007). “Because [a Rule 12(c) ] motion calls for an assessment of the merits of the case at an embryonic state, the court must view the facts contained in the pleadings in the light most favorable to the nonmovant and draw all reasonable inferences therefrom.... ” Perez-Acevedo v. Rivero-Cubano, 520 F.3d 26, 29 (1st Cir.2008) (internal citations omitted). “Those facts may be derived from the complaint, from documents annexed to or fairly incorporated in it, and from matters susceptible to judicial notice.” Warren Freedenfeld Assoc., Inc. v. McTigue, 531 F.3d 38, 44 (1st Cir.2008). When judgment on the pleadings is premised on the running of a statute of limitations, the motion will only be granted if the facts “leave no doubt that an asserted claim is time-barred.” LaChapelle v. Berkshire Life Ins. Co., 142 F.3d 507, 509 (1st Cir.1998); accord Warren Freedenfeld Assoc., Inc., 531 F.3d at 44; Centro Medico del Turabo, Inc. v. Feliciano de Melecio, 406 F.3d 1, 6 (1st Cir.2005); Archdiocese of San Salvador v. FM Intern., Inc., 2006 WL 437493, *3 (D.N.H.2006).
The Defendant also moves the Court to enter an order compelling the Plaintiff to produce certain documents relating to discovery. The Defendant’s discovery request is governed under Fed.R.Civ.P. 26(b). Under Fed.R.Civ.P. 26(b)(1), discovery is generally available as to “any matter, not privileged, that is relevant to the claim or defense of any party....” The Court may limit the scope of discovery *44where “the burden or expense of the proposed discovery outweighs its likely benefit....” Fed-R.Civ.P. 26(b)(2)(iii). Further, “[t]he party seeking information in discovery over an adversary’s objection has the burden of showing its relevance.” Caouette v. OfficeMax, Inc., 352 F.Supp.2d 134, 136 (D.N.H.2005) (internal citations omitted).
I. Motion for Judgment on the Pleadings
The Defendant moves the Court to dismiss Counts I through VIII of the Plaintiffs complaint.2 The statute of limitations period governing Counts I through III can be found in specific statutes relating to the actions averred. Counts IV through VIII of the Plaintiffs complaint are personal actions. In New Hampshire, “[e]xcept as otherwise provided by law, all personal actions, except actions for slander or libel, may be brought only within 3 years of the act or omission complained of....” N.H.Rev.Stat. Ann. § 508:4, I. Section 508:4 incorporates the discovery rule. Under the discovery rule, “when the injury and its casual relationship to the act or omission were not discovered and could not reasonably have been discovered at the time of the act or omission,” a claim accrues within three years of the time when the plaintiff “discovers, or in the exercise of reasonable diligence should have discovered, the injury and its casual relationship to the act or omission complained of.” Archdiocese of San Salvador, 2006 WL 437493 at *3.
A. Count I: Securities Fraud under Section 10(b) of the Securities and Exchange Act of 1934
The first count of the Plaintiffs complaint alleges that the Defendant violated § 10(b) of the Securities and Exchange Act of 1934 (the “1934 Act”), 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.3 Section 10(b) of the 1934 Act makes it “unlawful for any person ... to use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j. Rule 10b-5 further proscribes fraud, untrue statements of material facts, and omissions in connection with the sale of any security. 17 C.F.R. § 240.10b-5.
In 1991, the Supreme Court established the statute of limitations and statute of repose for causes of action under the 1934 Act. Pursuant to the holding in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 360-363, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991), an action commenced under § 10(b) of the 1934 Act and Rule 10b-5 must be commenced within one year from the time the plaintiff discovers or should have discovered the cause of action and no more than three years from the date of the transaction. In 2002, Congress enacted the Sarbanes-Oxley Act (“Sarbanes-Oxley”) which effectively ex*45tended the statute of limitations period for certain securities violations. Under Sar-banes-Oxley, an action like the one alleged in the Plaintiffs complaint “may be brought not later than the earlier of (1) 2 years after the discovery [of] the facts constituting the violation, or (2) 5 years after such violation.” 28 U.S.C. 1658(b). Therefore, in 1984 Act cases, the cause of action accrues on the date the sale or purchase of a security took place.
The Plaintiff avers that the Defendant violated the 1934 Act by making material misrepresentations and omissions of material fact in connection with the $100,000 transfer. The Plaintiff alleges that she did not become aware of the facts constituting the violation until sometime in 2008. However, the complaint states that the Plaintiff tendered a check for $100,000 to the Defendant on January 13, 2003 in connection with the transaction at issue. Since the Plaintiff did not file her complaint until April 2009, more than five years had passed since the alleged violation and the statute of limitations has run on her action under the 1934 Act. The fact remains the same even if the Court were to consider the date the Defendant signed the promissory note (March 10, 2003) as the date of accrual. Accordingly, Count I of the Plaintiffs complaint for violations under the Securities Act of 1934 is dismissed.
B. Count II: Securities Fraud under New Hampshire’s Uniform Securities Act
The second count of the Plaintiffs complaint alleges that the Defendant violated New Hampshire’s Uniform Securities Act. N.H.Rev.Stat. Ann. §§ 421-B:3 and 421-B:5.4 New Hampshire’s Uniform Securities Act is similar to the 1934 Act. Sections 421-B:3 prohibits fraud, untrue statements, and omissions in connection with the offer, sale, or purchase of any security. Section 421-B:5 further prohibits manipulative or deceptive and fraudulent acts in connection with the sale or purchase of a security. That statute of limitations for actions brought under § 421 can be found in § 421-B:25. Pursuant to § 421-B:25, “[a] person may not recover under this section in actions commenced more than 6 years after his first payment of money to the broker-dealer or issuer in the contested transaction.” N.H.Rev.Stat. Ann. § 421-B:25, VII. A cause of action brought under chapter 421 begins to accrue at the time payment was made. By the Plaintiffs own allegations, payment was tendered to the Defendant in connection with the contested transaction on or about January 13, 2003. Since the Plaintiffs complaint was filed more than six years after this date, her action under § 421 is time-barred.
At the hearing, the Plaintiff argued that the discovery or fraudulent concealment rule found in N.H.Rev.Stat. Ann. § 508, supra, should apply to toll the limitations period for the § 421 count. Thus, the Plaintiff contends, the statute of limitations did not begin to run until sometime in 2008 when she became aware that her transaction with the Defendant was a sham. The purpose of the limitations period found in § 508 is to provide for “catchall” statute of limitations and tolling provisions, “and to ensure that more specific statutes found elsewhere remain controlling.” Doggett v. Town of North Hampton Zoning Bd. of Adjustment, 138 N.H. 744, 645 A.2d 673, 675 (1994). Where a potential conflict exists between the limitations period found in § 508 and the section under which a cause of action is brought, the latter controls. Id. (“[T]he purpose of RSA 508:1 is to preserve the vitality of *46limitations statutes found outside of RSA chapter 508.”) In the present case, the Plaintiffs claim falls squarely under § 421-B which contains a very specific limitations period making resort to § 508 unnecessary. See id. Based on the foregoing, Count II of the Plaintiffs complaint for violations of N.H.Rev.Stat. Ann. § 421-B is dismissed.
C. Count III: The Connecticut Unfair Trade Practices Act
Under Count III of the complaint, the Plaintiff alleges that the Defendant violated the Connecticut Unfair Trade Practices Act (“CUTPA”) when the Defendant committed certain acts in connection with trade or commerce in the State of Connecticut. CUTPA provides that “No person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.” Conn. Gen.Stat. Ann. § 42-110b(a). An action brought under CUTPA “may not be brought more than three years after the occurrence of a violation....” Id. at § 42 — 110g(f). Generally, the language of CUTPA precludes tolling of the limitations period, “but CUTPA’s statute of limitation may be tolled where the defendant’s course of conduct is continuing.” Kellogg v. Key Bank of Maine (In re Kellogg), 166 B.R. 504, 506 (Bankr.D.Conn.1994) (quoting Fichera v. Mine Hill Corp., 207 Conn. 204, 541 A.2d 472, 474 (1988)).
To support a finding of a ‘continuing course of conduct’ that may toll the statute of limitations there must be evidence of the breach of a duty that remained in existence after commission of the original wrong related thereto. That duty must not have terminated prior to commencement of the period allowed for bringing an action for such a wrong, and it may be found where there is a special relationship between the parties giving rise to a continuing duty, or later wrongful conduct by the defendant related to the prior wrongful act.
Id. at 508 (internal citations omitted). The test to determine whether there is a continuous course of conduct that will toll the time limitations of a CUTPA violation is “whether the defendant: (1) committed an initial wrong upon the plaintiff; (2) owed a continuing duty to the plaintiff that was related to the alleged original wrong; and (3) continually breached that duty.” Witt v. St. Vincent’s Medical Center, 252 Conn. 363, 746 A.2d 753, 757 (2000).
In the present case, the Plaintiffs complaint seems to allege that the misrepresentations by the Defendant included: (1) that the TDA Advantage Trust was a real business, (2) that the TDA Advantage Trust would pay the Plaintiff certain monthly payments, (3) that a limited partnership had been created, and (4) that the TDA Advantage Trust would return the principal on or before January 10, 2008. Further, the Plaintiff seems to claim that these misrepresentations were made in January or March of 2003, but the course of conduct had not completed until some time in 2008 either when the Defendant failed to complete the agreement or when the Defendant informed the Plaintiff that the “there was no money.” Although the Plaintiffs claim appears to have accrued as of January or March 2003, the facts presented support an inference of a continuing course of conduct. The complaint alleges that the parties entered into a broker-investor type relationship. The Plaintiff alleges that the Defendant committed an initial wrong by making misrepresentations when the parties entered into a transaction in 2003 for the investment of $100,000. According to the supposed agreement, the Defendant was to make monthly payments to the Plaintiff, return the principal on January *4710, 2008, and account for profits and losses. The Plaintiff claims the Defendant failed to make any payments and report on the performance of her investment. When the Plaintiff inquired about nonpayment and performance reports, the Defendant responded by stating that the payments were reinvested as was routine and that the parties’ agreement would be followed “to the letter.” Assuming the truth of the facts alleged, it is plausible that (1) the Defendant committed a wrong in relation to the $100,000 transfer; (2) the transaction entered into created a special relationship between the parties conferring a fiduciary obligation that imposed certain duties on the Defendant in relation to the $100,000; and (3) the Defendant breached those duties when, inter alia, he failed to make monthly payments, provide performance reports, and made misrepresentations to the Plaintiff. The Court rejects the Defendant’s defense, and the Plaintiff is allowed to proceed on Count III of the complaint.
D. Count TV: Breach of Contract
In the fourth count of the complaint, the Plaintiff claims damages for the Defendant’s alleged breach of contract in connection with the $100,000 transfer. The action accrues at the time of the breach. Pierce v. Metropolitan Life Ins. Co., 307 F.Supp.2d 325, 328 (D.N.H.2004). The complaint alleges that a contract was entered into between January and March of 2003 whereby the TDA Advantage Trust would (1) pay the Plaintiff monthly interest payments beginning in April 2003, and (2) would return the principal payment of $100,000 on or before January 10, 2008. Since the Defendant failed to make any payments under the contract, the Plaintiff alleges that the Defendant breached the contract. “[W]hen an obligation is to be paid in installments the statute of limitations runs only against each installment as it becomes due.... ” Id. (quoting Gen. Theraphysical, Inc. v. Dupuis, 118 N.H. 277, 385 A.2d 227 (1978)). Here, the Plaintiff maintains that no payments were received. The act or omission complained of, that is the breach of contract, occurred each time the Defendant failed to tender a monthly payment and the Plaintiff was aware of this fact each month she did not receive payment. Since the Plaintiff did not file her complaint until April 2009, the Plaintiff is barred for claims on payments relating to the three year period prior to the filing of the complaint in district court. However, the remainder of the Plaintiffs claim for breach of contract is still within the statute of limitations. As a result, Count VI is dismissed in part.
E. Count V: Fraud
Count V of the Plaintiffs complaint seeks damages for fraud. To make a claim for fraud, a plaintiff must show that “the defendant intentionally made material false statements to the plaintiff, which the defendant knew to be false or which he had no knowledge or belief were true, for the purpose of causing, and which does cause, the plaintiff reasonably to rely to his detriment.” Hair Excitement, Inc. v. L’Oreal U.S.A., Inc., 158 N.H. 363, 965 A.2d 1032, 1038 (N.H.2009) (internal citations omitted). The Plaintiff alleges that the Defendant committed fraud when he intentionally made the following misrepresentations in order to induce her to invest in the TDA Advantage Trust: (1) the Plaintiff would be investing in a limited partnership, (2) the Plaintiff would receive monthly interest payments on her investment, and (3) the Defendant would return the principle to the Plaintiff in January 2008. The Plaintiff also claims that the Defendant made these misrepresentations knowing he had no intention of paying the Plaintiff. These statements were suppos*48edly made in January or March 2003, but the Plaintiff contends they continued until July 2008. Moreover, the Plaintiff argues that she could not have known that the Defendant’s statements were untrue until July 2008 when the Defendant admitted he had no money to pay her. The facts presented lend to an inference that a fraud was committed in January or March 2003. However, because the complaint contends that the Defendant repeatedly assured the Plaintiff that the parties’ agreement would be followed, it is plausible that the Plaintiff did not discover or could not have reasonably discovered that she was the victim of fraud until sometime within the statute of limitations. The Plaintiff is permitted to proceed on Count V since the Court finds that the discovery rule is applicable to the Plaintiffs fraud claim.
F. Count VI: Conversion
The Plaintiff brings Count VI under the common law doctrine of conversion. The complaint provides no specific dates as to when the alleged conversion took place. Moreover, the Plaintiff only mentions that the Defendant took control of the Plaintiffs money and unlawfully converted it. Conversion is defined as “the intentional exercise of dominion or control over a chattel which so seriously interferes with the right of another to control it that the actor may justly be required to pay the other the full value of the chattel.” Muzzy v. Rockingham County Trust Co., 113 N.H. 520, 309 A.2d 893, 894 (1973). For the purposes of this motion, the Court must view the facts in the pleading in the light most favorable to the Plaintiff and draw all reasonable inferences therefrom. Assuming that the Plaintiff has a valid claim for conversion, the statute of limitations began as soon as the Defendant’s exercise of control over the Plaintiffs money became wrongful; that is, when the Defendant ignored the Plaintiffs request that her money be returned and continued to hold it in his custody. See Schomaker v. U.S., 2008 WL 2065918, *8 (D.N.H.2008). In the complaint, the Plaintiff alleges that on at least two occasions she demanded that the Defendant return her money, but he refused to do so. The first request was made in January 2003, more than three years prior to the filing of the complaint. Furthermore, the discovery rule cannot apply in the instant case as the Plaintiff was aware that her property remained in the Defendant’s custody despite her request that it be returned. See id. at *4 (equitable tolling only applies if the plaintiff “did not have, and could not have had with due diligence, the information essential to bringing suit.” (quoting Portsmouth Country Club v. Town of Greenland, 152 N.H. 617, 624, 883 A.2d 298 (2006))). Thus, the Plaintiffs claim seeking damages for conversion is time-barred, and Count VI of the complaint is dismissed.
G. Count VII: Constructive Trust
Count VII of the complaint involves an action to impose a constructive trust on property of the Defendant. The Plaintiff claims the Defendant violated a duty imposed by a fiduciary relationship when he failed to use the Plaintiffs money as instructed and instead purchased a condominium and minivan. As a result, the Plaintiff seeks to impose a constructive trust on the aforementioned property. As discussed under the analysis for the fraud claim, from the facts presented a plausible inference can be made that the Plaintiff had no knowledge, prior to some time within the limitations period prescribed under N.H.Rev.Stat. Ann. § 508:4, I, that the Defendant mishandled or misapplied the Plaintiffs investment. See Marcucci v. Hardy, 65 F.3d 986, 989 (1st Cir.1995) (holding that the limitations period for a *49constructive trust action was tolled where defendant’s conduct disguised the need for legal action).5 Hence, the Plaintiff is allowed to proceed on Count VII of the complaint.
H. Count VIII: Negligent Misrepresentation
In Count VIII of the complaint, the Plaintiff brings a cause of action for the Defendant’s negligent misrepresentation. The Plaintiff alleges that the Defendant negligently made certain misrepresentations and omissions in connection with the $100,000 transfer. The elements of a cause of action for negligent misrepresentation are (1) a negligent misrepresentation of a material fact by the defendant, and (2) justifiable reliance by the plaintiff. Snierson v. Scruton, 145 N.H. 73, 761 A.2d 1046, 1049-50 (2000). As outlined under the Court’s analysis of the fraud and constructive trust claims, it is plausible that the Plaintiff could not have discovered that the Defendant’s actions constituted negligent misrepresentation until sometime within the three year statutory time period for bringing such an action. Consequently, the Plaintiff is allowed to proceed on Count VIII of the complaint.
II. Motion to Compel Production of Documents
In accordance with discovery procedures, the Defendant filed a motion to compel production of documents as to certain requests made to the Plaintiff. The Defendant moves the Court to order the Plaintiff to produce the following: (1) tax returns from the time of the exchange of the $100,000 transfer through the present, (2) documentation from the estate of the Plaintiffs mother, (3) the mortgage application for the Plaintiffs current home, (4) documents related to the sale of Plaintiffs Connecticut home, (5) Sprint telephone bills issued to the Plaintiff, (6) bank accounts, and (7) a picture identifying a physical mark on the Plaintiffs body.
The Defendant asserts that he needs the Plaintiffs tax returns in order to show the manner in which the Plaintiff categorized the $100,000 transfer on her tax returns. The Defendant intends to show that the Plaintiff did not report the $100,000 on her tax returns. In the Plaintiffs objection to the Defendant’s motion and during the hearing on the motion, the Plaintiff stipulated that she did not make any reference to the $100,000 on her tax returns. Accordingly, production of the Plaintiffs tax returns are unnecessary.
The Defendant also requests documents relating to the estate of the Plaintiffs mother. The Defendant requests such documentation to show that the money for the $100,000 transfer did not come from an inheritance. First, the Plaintiff represented to the Court that there was no probate. Second, the Plaintiff states that she does not have any documents relating to her mother’s estate and, even if she did, the documents were destroyed when her basement flooded in both 2005 and again in 2008. Thus, there is no documentation available for production. The Defendant requests the Plaintiffs bank account for similar reasons. The Defendant provides no basis for the relevance of such requests. Because the Court finds no relevance in the origin of the exchanged money as to the claims or defenses in this case, it will *50not order the Plaintiff to produce her bank accounts or documents relating to the estate of the Plaintiffs mother.
The Defendant next requests that the Plaintiff produce the mortgage application for her current home. The Defendant maintains that the mortgage application is necessary for the same reasons as the tax returns, that is, to evidence the Plaintiffs characterization of the $100,000 transfer. Again, the Plaintiff stipulated that she did not list the $100,000 transfer on her mortgage application. Further, the Plaintiff stated she does not have the mortgage application in her possession. If the Defendant still wishes to obtain the mortgage application, the Plaintiff has agreed to sign a release in order to allow the Defendant to obtain the document. However, he can do so at his own expense since the stipulation makes production of the mortgage application unnecessary.
While the Defendant requests documents relating to the sale of the Plaintiffs Connecticut home, he provides no argument to meet his burden of showing the relevance of such a request over the Plaintiffs objection. Conversely, the Defendant established that his request for the Sprint telephone bills is relevant to his defense. The Defendant claims that the call logs on the Sprint telephone bill may evidence the Plaintiffs truthfulness or untruthfulness as to allegations made in the complaint. The Plaintiff states that she no longer is in possession of the telephone bills, but does not object to signing a release allowing the Defendant to obtain these bills. The Plaintiff does, however, object to bearing the cost of production. “[T]he presumption is that parties must satisfy their own costs in replying to discovery requests.” Dahl v. Bain Capital Partners, LLC, 655 F.Supp.2d 146, 146 (D.Mass.2009) (citing Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 358, 98 S.Ct. 2380, 57 L.Ed.2d 253 (1978)). Courts will shifts costs to the requesting party in limited circumstances such as when the responding party shows that production would cause an undue burden or cost. Id. These conditions are not present here. The Plaintiff has not identified how she will sustain an undue burden or cost in contacting her telephone provider for the requested bills. As such, the Court orders the Plaintiff to produce the Sprint telephone bills for October 2002-when the parties met-until March 2003 when the parties allegedly signed the promissory note.
Finally, the Defendant moves the Court to order the Plaintiff to produce a photograph that evidences a certain physical mark on the Plaintiffs body. The Plaintiff argues that the request is embarrassing, irrelevant, and unduly burdensome. The Court agrees. Although the Defendant claims that production of this photograph is necessary to show that the parties had an intimate relationship, he provides no convincing argument evidencing that the probative value of such a photograph outweighs the prejudice to the Plaintiff. Since the benefit of allowing the production of the photograph is outweighed by the burden of production, the request is denied.
Conclusion
For the reasons set out herein, the complaint is dismissed as to Counts I, II, and VI. The Plaintiff is permitted to proceed on Counts III, V, VII, and VIII. The Defendant’s motion for judgment on the pleadings is granted as to Count IV of the complaint as it relates to payments for the period prior to April 22, 2006, but is allowed as to all other claims. In addition, the Court orders the Plaintiff to produce *51her Sprint telephone bills for October 2002 until March 2003, however, the remainder of the Defendant’s motion to compel production of documents is denied. This opinion constitutes the Court’s findings and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. The Court will issue a separate order consistent with this opinion.
. While the motion to dismiss is procedurally defective and this issue was raised by counsel for the Plaintiff, the Plaintiff proceeded only noting that because of the timing of the motion to dismiss, it should be considered under Fed.R.Civ.P. 12(c) as a motion for judgment on the pleadings.
. The Defendant's motion to dismiss originally sought to dismiss all counts of the complaint, but the parties agreed that Counts I through VIII constituted causes of action, and the remaining counts were prayers for relief derivative of Counts I through VIII. Accordingly, the Court will only consider Counts I through VIII.
. The Defendant denies that the transaction involved a "security.” However, for purposes of a motion for judgment on the pleadings, the Court must assume that all allegations are true.
. See n. 3, supra.
. At the hearing on the on motion for judgment on the pleadings, the Plaintiff insisted that the Court consider the doctrine of laches to determine whether the constructive trust action was time-barred. The Court finds that the proper limitations period for a constructive trust action is found in N.H.Rev.Stat. Ann. § 508:4, I. Because the claim is not time-barred under § 508:4, analysis under the doctrine of laches is unnecessary. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494373/ | OPINION AND ORDER DENYING DEFENDANT ANDREW GARRETT INC.’S MOTION TO STAY PROCEEDINGS PENDING ARBITRATION
MARTIN GLENN, Bankruptcy Judge.
Pending before the Court is the motion to stay this adversary proceeding commenced by Albert Togut, the chapter 7 trustee (“Trustee” or “Togut”) of the debt- or, S.W. Bach & Co. (“S.W. Bach” or “Debtor”). Defendant Andrew Garrett, Inc. (“AGI”) moved to stay the adversary proceeding with respect to Count 9 of the Complaint (Bankruptcy Code § 548 fraudulent conveyance claim), and to compel arbitration of Counts 8 (aiding and abetting breach of fiduciary duty by defendant Scott Shapiro (“Shapiro”)) and 10 (restitution and unjust enrichment). (“AGI Stay Mot.,” ECF # 39.)1 The Trustee argues *83that Counts 8 and 10 are within the Court’s core jurisdiction and those claims (along with Count 9) should be adjudicated in this Court. For the reasons explained below, the Court declines to stay Count 9, the fraudulent conveyance claim. The Court concludes that Counts 8 and 10 are state law claims that the Trustee brings standing in the shoes of the Debtor; those claims are subject to mandatory arbitration and will not be adjudicated by the Court. Nevertheless, the Court concludes that Count 9, the fraudulent conveyance claim, arises from common issues of fact with the state law claims, and does not arise from or depend upon the resolution of the state law claims. The strong interest of the Trustee and the estate to assure a federal forum for the resolution of the federal statutory fraudulent conveyance claim supports the issuance of a stay of the arbitration pursuant to 11 U.S.C. § 105 pending this Court’s disposition of the fraudulent conveyance claim. Otherwise, there is a risk of inconsistent results and arguments about claim preclusion.
BACKGROUND2
A. The Parties
Debtor, a Georgia corporation, is a broker-dealer that provided, among other things, investment advice to customer account holders in exchange for advisory fees. (CompLIffl 44, 59.) From at least 2001, Shapiro was President of the Debtor. (ComplJ 46.) JAS Management is the sole shareholder of the Debtor. The Debt- or ceased operations in or about February 2007. (Comply 60.) On May 22, 2007, creditors of the Debtor filed an involuntary petition for relief against the Debtor in this Court under chapter 7 of the Bankruptcy Code, 11 U.S.C. § 101, et seq. (Comply 1.) The Court entered an Order for relief on June 29, 2007 and Togut was appointed as the Trustee.
Prior to the Debtor’s cessation of operations, the Debtor managed approximately 15,000 customer accounts (“Accounts”). (Comply 61.) Togut contends that the right to manage and to earn fees from the Accounts is the Debtor’s largest asset. (Comply 10.) RBC served as the clearing firm for the Accounts, providing various services to the Debtor including cashiering services, bookkeeping, custodial services and the distribution of dividends to customers of the Debtor. (Comply 66.) RBC provided clearing services to the Debtor pursuant to the terms of a clearing agreement executed on or about June 14, 2006 (“Clearing Agreement”). (Comply 67.)
Defendant AGI is a national broker-dealer offering, among other things, pri*84vate investment management services and investment banking services. (Comply 55.) AGI and RBC have had a business relationship since at least 2001. (Compl.1I 82.) AGI and the Debtor were member firms of NASD.3 (See AGI Stay-Mot. ¶ 1; Declaration of Stephen S. Flores, Esq., dated December 15, 2009 (ECF #70) (“Flores Dec.”), Ex. B). While members of NASD, AGI and the Debtor were subject to FINRA’s Rule 13200, by its terms applicable to all claims filed after April 16, 2007. (AGI Stay Mot. ¶ 1; Dec. of Joseph M. Heppt, dated October 13, 2009 (ECF # 39) (“Heppt October Dec”), Ex. C.)
FINRA Rule 13200 provides, in relevant part:
(a) Generally
Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among: Members; Members and Associated Persons; or Associated Persons.4
(Heppt October Dec., Ex. C.)
According to the Complaint, with RBC’s direction, assistance and involvement, Shapiro caused the Debtor to transfer all, or nearly all, of the Accounts to AGI, for which the Debtor received no consideration. (See Compl. ¶ 74.) The Trustee alleges this occurred because RBC’s president, Craig Gordon (“Gordon”), became aware of the S.W. Bach’s financial distress and wanted RBC to continue earning fees from the Accounts, which could only be accomplished if RBC or Gordon could convince Shapiro to transfer the Accounts to a current RBC customer such as AGI. (CompLUK 89, 91.) On or about March 2, 2007, AGI notified the Debtor’s customers by letter that their accounts had been transferred to AGI. (Compl.1t 118.)
AGI has not filed a Proof of Claim in this case. The Bar Date for non-governmental claims was April 11, 2008. (Case No. 07-11569, ECF # 36.)
B. Procedural Background
Togut filed the Complaint on June 15, 2009. He alleges that the facts support eighteen causes of action against RBC, Shapiro, JAS and AGI. The claims against AGI are asserted in Counts 8, 9 and 10, and are summarized below.5 Because the *85Trustee alleges that AGI and RBC Dain aided and abetted a breach of fiduciary duty by Shapiro, the breach of fiduciary duty claim against Shapiro (Count 6) and the aiding and abetting breach of fiduciary duty claims against RBC Dain (Count 7) are summarized as well.
Count # Cause of Action Elements
Count 6 Breach of Fiduciary Shapiro allegedly breached a duty to exercise due care and diligence in the Duty against management and administration of the affairs of the Debtor and in the use, Shapiro preservation, or disposition of its assets; fiduciary obligations of loyalty and candor, including a requirement that he exercise control of the Debtor in a fail’, just and equitable manner and to act in the best interests of the Debtor. Shapiro allegedly breached his duties by (1) failing to pursue a competitive bidding process for the Accounts; (2) failing to commission a proper valuation of the Accounts (including the right to manage them) to determine an appropriate sales price; (3) acting out of self interest and to enhance his reputation by using the Accounts to try to obtain future employment for himself, rather than maximizing return for the Debtor; (4) failing to reasonably investigate or learn material facts before causing the Debtor to transfer the Accounts; (5) failing to ensure a reasonable, prudent, orderly and/or equitable transfer of the Accounts; and (6) essentially surrendering the selection-process relating to the transfer of the accounts to RBC Dain thereby wasting a valuable corporate asset in the process, improper actions which were allegedly motivated by Shapiro’s desire to further his own pecuniary interests and were outside the scope of his agency relationship with the Debtor. (Compl.lffl 191-92,196-98.)
RBC allegedly knowingly provided substantial assistance to Shapiro in breaching his fiduciary duties to the Debtor. RBC allegedly (i) hand-picked AGI to be the next manager of the Accounts, (ii) told Shapiro to transfer the Accounts to AGI in the manner described in the Complaint, (iii) encouraged the disloyal acts of Shapiro, (iv) negotiated with AGI to facilitate the transfer of the accounts, and (v) provided the direct assistance, including the personnel and technology and know-how necessary to complete the transfer of the accounts, and misled Shapiro into thinking it would not charge a Termination Fee in connection with the transfer of the accounts. (Compl.M 203-04.) Count 7 Aiding and Abetting Shapiro’s Breach of Fiduciary Duties against RBC
AGI allegedly knowingly provided substantial assistance to Shapiro in breaching his fiduciary duties to the Debtor, including by: (i) inducing Shapiro to transfer the Accounts with the false promise of compensation and future employment, (ii) assisting with the transfer of the accounts; and (iii) accepting the transfer of the accounts under the circumstances described in the Complaint. (Comply 210.) Count 8 Aiding and Abetting Liability against AGI
*86Count 9 Avoidance and Recovery of Fraudulent Transfers to AGI The Debtor allegedly transferred the Accounts to AGI within two years of the Petition Date, for AGI’s benefit. The Debtor was (i) insolvent on the date the accounts were transferred, or became insolvent as a result of the transfer; and/or (ii) engaged in business or a transaction for which any property remaining with the Debtor was an unreasonably small capital at the time of, or a result of, the transfer of the accounts. (CompLW 214,217.)
Count 10 Restitution and AGI allegedly obtained the Debtor’s right to manage the Accounts prior to the Unjust Enrichment Petition Date, for which the Debtor received no consideration, and, as a result of against AGI which, AGI has earned substantial profits/fees, and from which AGI should not be permitted to continue profiting without compensating the Debtor and its estate. (Compl.lffl 221-23, 225.)
All of the defendants answered the Complaint on August 14, 2009. AGI asserted four affirmative defenses in its Answer (EOF # 14):(1) the litigation is not properly maintained under applicable and controlling industry rules; (2) AGI agreed to accept the transfer of the Accounts as part of the regulatory scheme, including SEC Rule 15c3-l, the “Net Capital Rule,” and Rule 15c3-3, the “Customer Protection Rule,” designed to protect customers of brokerage-firms that cease operations due to financial insolvency; (3) once the Debtor tendered its license to the NASD, it was prohibited from managing the Accounts as a matter of law and, therefore, the right to manage those Accounts was no longer an asset of the firm; (4) the Trustee’s damages, if any, were caused by the actions of individuals or entities over whom AGI exerted no control and for whom it bears no responsibility. (AGI Answer, at 33-34.)
AGI filed its motion to stay the adversary proceeding and compel arbitration on October 14, 2009. On November 23, 2009, the Court heard oral argument of AGI’s motion. The Court ordered Togut and AGI to submit supplemental briefs by December 15, 2009, which they did.
DISCUSSION
A. Introduction
“The Federal Arbitration Act (‘FAA’), see 9 U.S.C. § 1 et seq., requires a federal court to enforce arbitration agreements and to stay litigation that contravenes them.”6 Burns v. New York Life Ins. Co., 202 F.3d 616, 620 (2d Cir.2000) (internal citation omitted); see also 9 U.S.C. §§ 2 & 3; Kittay v. Landegger (In re Hagerstown Fiber Ltd. P’ship), 277 B.R. 181, 197 (Bankr.S.D.N.Y.2002) {“Hag-erstown ”).7 The FAA represents a “congressional declaration of a liberal federal policy favoring arbitration agreements,” and “any doubts concerning the scope of *87arbitrable issues should be resolved in favor of arbitration.” Hagerstown, 277 B.R. at 197 (citing Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)). However, “[l]ike any statutory directive, the [FAA’s] mandate may be overridden by a contrary congressional command.” Id. at 198 (quoting Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987)).
Accordingly, a bankruptcy court faced with a motion to compel arbitration must apply a four-part test:
[F]irst, it must determine whether the parties agree to arbitrate; second, it must determine the scope of that agreement; third, if federal statutory claims are asserted, it must consider whether Congress intended those claims to be nonarbitrable; and fourth, if the court concludes that some, but not all, of the claims in the case are arbitrable, it must then decide whether to stay the balance of the proceedings pending arbitration.
Bethlehem Steel Corp. v. Moran Towing Corp. (In re Bethlehem Steel Corp.), 390 B.R. 784, 789 (Bankr.S.D.N.Y.2008) (“Bethlehem Steel”) (quoting Oldroyd v. Elmira Sav. Bank, FSB, 134 F.3d 72, 75-76 (2d Cir.1998)).
AGI’s motion, while seeking to stay litigation pending completion of the arbitration of Counts 8 and 10, does not seek to compel arbitration of Count 9, the fraudulent conveyance claim.
Avoidance claims are not derivative of the debtor’s rights; rather, they are statutory claims created in favor of creditors that can only be prosecuted by a trustee or debtor in possession.... Claims that are derivative of a debtor’s rights may be subject to arbitration. Claims that belong exclusively to a trustee or debtor in possession belong to creditors who were not parties to the arbitration agreement and, therefore, are not subject to arbitration.
Bethlehem Steel, 390 B.R. at 791-92. See also Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1154-55 (3d Cir.1989) (“Hays”) (internal citations omitted). Accordingly, the issue here is whether Counts 8 and 10 are subject to mandatory arbitration under the factors enumerated in Bethlehem Steel, and, if so, whether arbitration of those claims should occur before or after this Court adjudicates the fraudulent conveyance claim.
B. Whether the Parties Agreed to Arbitrate
The parties do not dispute that AGI and the Debtor were members of FINRA and that FINRA Rule 13200 governing mandatory arbitration applies to the Debtor and AGI. (See Trustee’s Objection Mot. AGI Stay Proceedings Pending Arbitration, November 18, 2009; ECF # 53.)8
*88C. The Scope of the Arbitration Agreement
1. The Claims are Covered by the Broad Arbitration Provision
To determine the scope of an arbitration .agreement, the Court first examines whether the arbitration clause is “narrow” or “broad,” in light of the allegations of the complaint, not the legal theories espoused. Collins & Aikman Prods. Co. v. Bldg. Sys., Inc., 58 F.3d 16, 19 (2d Cir.1995); see also Bethlehem Steel, 390 B.R. at 789-90; Hagerstown, 277 B.R. at 198. The Second Circuit in Collins & Aikman Products Co. explained the relevance of the distinction between broad and narrow clauses:
In construing arbitration clauses, courts have at times distinguished between ‘broad’ clauses that purport to refer all disputes arising out of a contract to arbitration and ‘narrow’ clauses that limit arbitration to specific types of disputes. If a court concludes that a clause is a broad one, then it will order arbitration and any subsequent construction of the contract and of the parties’ rights and obligations under it are within the jurisdiction of the arbitrator.
Collins & Aikman Prods. Co., 58 F.3d at 21 (quoting McDonnell Douglas Fin. Corp. v. Pa. Power & Light Co., 858 F.2d 825, 832 (2d Cir.1988)) (emphasis in original).
In JLM Industries, Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 172 (2d Cir.2004), the Second Circuit held that a clause submitting to arbitration “[a]ny and all differences and disputes of whatsoever nature arising out of this Charter” was a broad form of clause. (Internal citations omitted). Similarly, in Mehler v. The Terminix International Co. L.P., 205 F.3d 44, 49 (2d Cir.2000), the Second Circuit determined that a clause referring to arbitration “any controversy or claim between [the parties] arising out of or relating to” an agreement was broad and justified a presumption of arbitrability. Still, “even with a broad form clause, if the claims present no questions in respect of the parties’ rights and obligations under [the agreements], they are outside the purview of the arbitration clause and are not arbitrable.” Bethlehem Steel, 390 B.R. at 790 (internal quotation marks and citation omitted).
Though not explicitly labeling the NASD Code/FINRA Rules as containing a “broad” or “narrow” arbitration provision, the court in McMahan Securities Co. L.P. v. Forum Capital Markets L.P., 35 F.3d 82, 88 (2d Cir.1994), in analyzing whether the plaintiffs’ claims were covered by the NASD code, noted it was “mindful that the federal policy favoring arbitration requires us to construe arbitration clauses as broadly as possible and that arbitration should be ordered unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.” (Internal quotation marks and citation omitted). Accordingly, the Court finds that the language in FINRA Rule 13200, that a dispute is arbitrable if it “arises out of the business activities of a member” is broad.
2. Congress Intended to Exclude Certain of the Disputes from Arbitration
Even if all the claims for which AGI seeks to compel arbitration were covered by the broad language in FINRA Rule 13200, the Court has discretion to deny arbitration of the claims. Bethlehem Steel, 390 B.R. at 793-94. The Supreme Court has acknowledged that “[l]ike any statutory directive, the Arbitration Act’s *89mandate may be overridden by a contrary congressional command. The burden is on the party opposing arbitration, however, to show that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue.” Id. (quoting Shearson/Am. Express, Inc., 482 U.S. at 226-27, 107 S.Ct. 2332). The court may deduce the intent “from [the statute’s] text or legislative history ... or from an inherent conflict between arbitration and the statute’s underlying purposes.” Shearson/Am. Express, Inc., 482 U.S. at 227, 107 S.Ct. 2332 (internal quotation marks and citations omitted).
“The issue of waiver predominates arbitration disputes involving bankruptcy claims.... ” Hagerstown, 277 B.R. at 198. Specifically, “[w]hen arbitration law meets bankruptcy law head on, clashes inevitably develop.” Id. at 199. The first indication of waiver is whether a claim is “core” or “non-core.” If a claim is “non-core,” the court generally lacks discretion and must refer the claim to arbitration. See U.S. Lines, Inc. v. American Steamship Owners Mut. Prot. and Indem. Ass’n, Inc. (In re U.S. Lines, Inc.), 197 F.3d 631, 640 (2d Cir.1999) (“U.S.Lines ”); Hagerstown, 277 B.R. at 200 (“[Notwithstanding the possibility of bifurcated or even trifurcated proceedings, or duplicative proceedings involving multiple parties, a court generally lacks the discretion to refuse to compel the arbitration of non-core claims”) (citing Hays, 885 F.2d at 1161).
If a claim is core, “the bankruptcy court must still carefully determine whether any underlying purpose of the Bankruptcy Code would be adversely affected by enforcing the arbitration clause,” and the “arbitration clause should be enforced unless [doing so] would seriously jeopardize the objectives of the Code.” Hagerstown, 277 B.R. at 200-01 (internal quotation marks and citations omitted). “Th[is] second step asks whether the underlying dispute concerns rights created under the Bankruptcy Code or non-Bankruptcy Code issues derivative of the debt- or’s pre-petition business activities. In the former situation, the bankruptcy court has discretion to refuse arbitration, but in the latter it does not.” Id. at 202 (internal citation omitted). In order to determine whether a claim is core or non-core, the court considers that:
[a] trustee in bankruptcy wears two hats. First, he stands in the shoes of the debtor, and may bring any suit that the debtor could have brought before bankruptcy. When the trustee sues as statutory successor to the debtor, his rights are limited to the same extent as the debtor’s under applicable non-bankruptcy law. If the debtor agreed in a pre-petition contract to arbitrate a dispute, the trustee, suing as successor to the debtor, is likewise bound by the arbitration clause. Second, under 11 U.S.C. § 544, the trustee also stands in the ‘overshoes’ of the creditors.... Section 544(b) ... puts the trustee in the creditors’ shoes, and allows him to assert claims that only they could assert outside of bankruptcy.
Id. at 206-07 (internal citations omitted).
“Core proceedings are matters arising under the Bankruptcy Code or arising in bankruptcy cases. Non-core proceedings are merely related-to bankruptcy cases.” Cibro Petroleum Prods. v. City of Albany (In re Winimo Realty Corp.), 270 B.R. 108, 119 (S.D.N.Y.2001) (‘‘Winimo Realty Corp.”) (citing 28 U.S.C. § 157(b) and (c); Pardo v. Akai Electric Co. Ltd. (In re Singer Co. N.V.), No. 00 CIV 6793 LTS, 2001 WL 984678, at *2 n. 5 (S.D.N.Y. Aug.27, 2001)) (internal quotation marks omitted). Section 157 of Title 28 of the United States Code sets out a non-exhaustive list of core bankruptcy proceedings, *90including, inter alia, “allowance or disal-lowance of claims against the estate” and “counterclaims by the estate against persons filing claims against the estate.” Furthermore, the Second Circuit has noted that “[cjlaims that clearly invoke substantive rights created by federal bankruptcy law necessarily arise under Title 11 and are deemed core proceedings. So too are proceedings that, by their nature, could arise only in the context of a bankruptcy case.” MBNA America Bank, N.A. v. Hill, 436 F.3d 104, 108-09 (2d Cir.2006) (internal citations omitted).
In many ways the issue here whether Counts 8 and 10 are core or non-core is made easier because AGI did not file a proof of claim in Debtor’s bankruptcy case. When a proof of claim has been filed, a court is often faced with the task of determining whether a trustee’s claim is a counterclaim to the proof of claim, rendering the entire dispute a core proceeding. See Iridium Operating LLC v. Motorola, Inc. (In re Iridium Operating LLC), 285 B.R. 822, 831 (S.D.N.Y.2002) (“Iridium Operating”) (internal citations omitted); Hagerstown, 277 B.R. at 203. Such claims are often denominated as “procedurally core.” But procedurally core claims may still be subject to mandatory arbitration. The fact that AGI did not file a proof of claim does not automatically mean that Counts 8 and 10 are non-core. Further analysis of the claims is required.
a. Procedurally Core Claims
Procedurally core claims are “garden variety pre-petition contract disputes dubbed core because of how the dispute arises or gets resolved.” Hagerstown, 277 B.R. at 203 (finding a breach of contract claim as procedurally core). “The arbitration of a procedurally core dispute rarely conflicts with any policy of the Bankruptcy Code unless the resolution of the dispute fundamentally and directly affects a core bankruptcy function.” Id. (internal citation omitted).
Courts in the Second Circuit have held that traditionally non-core claims against a creditor may turn into core claims after the creditor files a proof of claim since an adversary proceeding against such a creditor “would affect the allowance or disallowance of the creditor’s claim.” Iridium Operating, 285 B.R. at 831; see also Hagerstown, 277 B.R. at 203 (“Objections to proofs of claim and counterclaims asserted by the estate ... exemplify this type of [procedurally core] matter.”). If an otherwise non-core claim “aris[es] out of the same transaction as the creditor’s proof of claim,” or “the adjudication of the claim ... requirefs] consideration of the issues raised by the proof of claim ... such that the two are logically connected,” the claim is core. Northwest Airlines, Inc. v. City of Los Angeles (In re Northwest Airlines Corp.), 384 B.R. 51, 58 (S.D.N.Y.2008) (internal quotation marks and citations omitted) (finding that a claim was non-core because the proofs of claim did not arise out of or relate to the provisions of leases at issue in the adversary proceeding, but referred to charges for leases, landings and rejection damages). In Bankruptcy Services v. Ernst & Young (In re CBI Holding Co.), 529 F.3d 432, 462, 465 (2d Cir.2008) (“CBI Holding”), the Second Circuit found that a disbursing agent’s negligence, breach of contract and fraud claims filed in response to defendant’s proof of claim derived from the same operative facts as the defendant’s proof of claim and were core under 11 U.S.C. § 157(b)(2).9
*91Procedurally core claims may still be subject to mandatory arbitration if arbitration of the claims would not violate any bankruptcy policy. In Hagerstown, for example, Judge Bernstein found the breach of contract claims to be “procedurally core,” because they were “raised as counterclaims in connection with the trustee’s objection to [the creditor’s] proof of claim.” The court nevertheless concluded that it was required to refer the contract claims to arbitration. Hagerstown, 277 B.R. at 205. The contract claims arose from the parties’ prepetition contractual relationship, were procedurally core only, and arbitration of the claims would not interfere with any bankruptcy policy. Id.10
b. Substantively Core Claims
Conversely, claims that are “not based on the parties’ pre-petition relationship, and involve rights created under the Bankruptcy Code” are core for substantive reasons and are usually not arbitrable nor subject to a withdrawal of the reference. See id. at 203. As Judge Bernstein noted in Hagerstown, “such disputes will often fail the preliminary question of arbitrability because the parties did not agree to arbitrate them. Nevertheless, even if they are covered by the arbitration clause, it is more likely that arbitration will conflict with the policy of the Bankruptcy Code that created the right in dispute. The bankruptcy court enjoys much greater discretion to refuse to compel the arbitration of this type of dispute.” Id.
Though not explicitly distinguishing substantively core claims from procedurally core claims, the Iridium Operating court found that a setoff defense can be particularly important in regarding the claims as core, as “a setoff claim takes on particular importance in the context of bankruptcy, as it, in effect, ‘elevates an unsecured claim to secured status to the extent that the debtor has a mutual, pre-petition claim’ against the party asserting setoff....” Iridium Operating, 285 B.R. at 834 (quoting N. Am. Energy Conservation, Inc. v. Interstate Energy Res., Inc. (In re N. Am. Energy Conservation, Inc.), No. 00-40563(PCB), 00-2276, No. 00CIV4302 (SHS), 2000 WL 1514614, at *2 (S.D.N.Y. Oct. 12, 2000)). Furthermore, the Iridium Operating court distinguished situations in which defendants were “otherwise uninvolved in the underlying bankruptcy proceeding,” versus defendants “intimately involved” with the bankruptcy; by “filfing] several proofs of claim, several claims for administrative expenses, and a claim for setoff,” because “[t]he relationship [that] action has to the bankruptcy proceeding is more than simply a possible effect on the ultimate size of the bankruptcy estate.” Id.
At the same time, other courts have found that where the action has a signifi*92cant impact on the administration of the estate, though again, not explicitly distinguishing between a procedurally and substantively core claim, a claim can be “core.” See U.S. Lines, 197 F.3d at 638. In U.S. Lines, the court noted that while “contract claims are not rendered core simply because they involve property of the estate,” certain underlying insurance contract claims were “core,” as indemnity insurance contracts, particularly where the debtor is faced within substantial liability claims within the coverage of the policy, “may well be ... the most important asset of the [i.e. debtor’s] estate,” and resolving disputes will have a “significant impact on the administration of the estate,” not just “augment the assets of the estate for general distribution,” as the proceeds “represent the only potential source of cash available to that group uf creditors,” and “will not be made available until the Trust has paid the claims.” Id. at 637-38 (internal quotation marks and citations omitted).
The court addresses in turn each claim for which AGI seeks arbitration. The Court concludes below that the Trustee has failed to demonstrate that Counts 8 and 10 are either “procedurally core” or “substantively core,” such that they are not subject to mandatory arbitration. Even if Counts 8 and 10 were core, arbitration of the claims will not severely conflict with the policies of the Bankruptcy Code.
c. Count 8: Aiding and Abetting Breach of Fiduciary Duty Is a Nonr-Core Claim That Must Be Arbitrated
Much of the authority concerning whether claims for aiding and abetting breach of fiduciary duty are arbitrable is in the context of whether the district court should withdraw the reference of an action to the bankruptcy court. Courts consider other factors in addition to whether a claim is core or non-core with respect to withdrawing the reference that may not be especially relevant in the arbitration context. For example, to withdraw the reference under 28 U.S.C. § 157(d), a court also considers: “(1) whether the claims are legal or equitable [as a bankruptcy court cannot hold a jury trial in a non-core matter]; (2) judicial efficiency; (3) prevention of forum shopping; and (4) the uniformity in bankruptcy administration.” Iridium Operating, 285 B.R. at 834-35 (internal citations omitted). Nevertheless, these courts’ determinations are instructive whether aiding and abetting breach of fiduciary duty claims are core or non-core in the arbitration context.
Courts are split whether they find claims for aiding and abetting breach of fiduciary duty claims core when deciding to withdraw the reference. For example, the Iridium Operating court refused to withdraw the reference and found an aiding and abetting breach of fiduciary duty claim core for seemingly procedural reasons: the defendant was intimately involved in the bankruptcy, filed multiple proofs of claim, administrative claims, and asserted setoff defenses concerning the contract at issue in the adversary proceeding. Id. Also, in Cape Cod Mortgage Trust, Inc. v. Gee (In re Gee), No. 98 CIV 414 BSJ, 83327, 2000 WL 23251, at *3 (S.D.N.Y. Jan.12, 2000), the court found that breach of fiduciary duty claims against an individual debtor were core because the “breach of fiduciary duty would not have arisen, were it not for the debt- or’s bankruptcy filing. The Trustee’s Complaint against the [defendants] alleges breach of fiduciary duty owed by the chapter 11 debtor-in-possession to his creditors, breaches of fiduciary responsibility of professionals in dealing with estate property, and violations of the bankruptcy code’s provisions mandating equitable distribution of the property of the estate.”
*93Courts may find fiduciary duty claims core when they involve officers and directors of a debtor. For example, in Unsecured Creditors Committee of Debtor STN Enterprises, Inc. v. Noyes (In re STN Enterprises, Inc.), 73 B.R. 470, 480 (Bankr.D.Vt.1987), the creditors committee sought to bring an action for breach of fiduciary duty, unjust enrichment and fraudulent conveyance claims, among other claims, against the probated estate of the debtor’s sole stockholder, the stockholder’s wife, who was an officer, and another corporate officer, Wilkinson. The court noted that “28 U.S.C. §§ 157(b)(2)(A) and (0), ‘catchall’ provisions require something more than a mere bald and unilluminated self-serving declaration that a recovery would benefit the debtors’ estate to constitute a core proceeding.” Id. at 481. However, the court found the “entire proceeding” against Wilkinson core, including causes of action for surcharge under 11 U.S.C. §§ 327(a) and 328(c) and breach of fiduciary duty against Wilkinson for failure to trace or recover misappropriated corporate funds, as the court already had core, or, at the very least, related to jurisdiction over the surcharge action due to Wilkinson’s filing of a personal adversary proceeding against the estate for salary and expenses, even though that personal action did not “arise out of the same series of transactions” as the breach of fiduciary duty claim, “in the interest of judicial economy.” Id. at 483-84. Similarly, where the wife filed a declaratory action to recover certain pension proceeds, the court found that the Committee’s action to recover the pension proceeds for the estate on theories including unjust enrichment and breach of fiduciary duty, core, as they arose out of the same transactions and involved the same res as the committee’s causes of action. Id. at 493. The other causes of action against the wife were core as fraudulent conveyance proceedings under 28 U.S.C. §§ 157(b)(2)(F) and (H). See also In re Verestar, Inc., 343 B.R. 444, 485-86 (Bankr.S.D.N.Y.2006) (Judge Gropper decided motion to dismiss regarding breach of fiduciary duty claims against parent company of debtor, debtor’s officers and directors and financial advisor for debtor and allegedly parent company after district court had referred the action to the bankruptcy court).
Conversely, in Mirant Corp. v. The Southern Co. (In re Mirant Corp.), 337 B.R. 107, 117-18 (N.D.Tex.2006) (“Mir-ant”), the court found that an aiding and abetting breach of fiduciary claim against a former corporate parent was non-core because it was a “claim[ ] that could proceed in another court even in the absence of bankruptcy,” and was “based on a state-created right,” and, applying the withdrawal of the reference factors, determined “[t]he mere fact that plaintiffs filed proofs of claim in the title 11 case does not convert the legal claims into equitable claims.” (Internal citation omitted).11 Similarly, the court in In re SAI Holdings Ltd., Bankr.No. 06-33227, Adv. Pro. No. 08-3036(MAW), 2009 WL 1616663, at *9 (Bankr.N.D.Ohio Feb. 27, 2009), found that “[pjrepetition claims of breach of fiduciary duty [against contract counterparties and other members of holding company of which debtor was a part] are clearly not core proceedings.” (Citing Bliss Tech., Inc. v. HMI Indus., Inc. (In re Bliss Tech., Inc.), 307 B.R. 598, 608-09 (Bankr.E.D.Mich.2004) (“Bliss Tech. ”)). In Bliss Tech., 307 B.R. at 604, 607, 608-09, the court found that a state-law breach of fiduciary duty claim against officers and di*94rectors based on prepetition conduct in a leveraged buyout could not constitutionally fit within the catchall provisions of 28 U.S.C. § 157(b)(2)(A) and (0) even though Bankruptcy Code §§ 544 and 550 claims arising out of the leveraged buyout were core. And in Messinger v. Chubb Group of Insurance Co., Case No. 1:06MC00121, 2007 WL 1466835, at *2 (N.D.Ohio May 16, 2007), the court designated an aiding and abetting breach of fiduciary duty claim as non-core because it sought “to adjudicate primarily private causes of action, ... distinct from the restructuring of debtor-creditor relations, which forms the heart of the federal bankruptcy court’s jurisdiction.” (Internal citation omitted).12
Here, AGI did not file a proof of claim or assert a right to setoff in its affirmative defenses. Instead, the affirmative defenses asserted by AGI rely solely on “applicable and controlling industry rules,” SEC Rule 15c3-l and 15c-3-3, and law regarding the effect of the Debtor tendering its license to NASD and the conduct of individuals over whom AGI alleges it had no control. (AGI Answer, at 33-34.) Accordingly, the aiding and abetting breach of fiduciary duty claim is not procedurally core.
As to whether the claim is substantively core, the Trustee essentially relies on the argument that the claims against AGI involve the transfer of the most significant asset of the estate — the right to manage the accounts — and will have a significant impact on the administration of the estate. However, the aiding and abetting breach of fiduciary duty claim seeks to adjudicate a private cause of action against a non-creditor entity, for its alleged aiding and abetting in the breach of fiduciary duties by the Debtor’s principal. This does not affect the restructuring of debtor-creditor relations, nor does the aiding and abetting claim arise solely out of the Debtor’s obligations in bankruptcy. See Messinger, 2007 WL 1466835, at *2; In re Bliss Tech., Inc., 307 B.R. at 608-09.13 There are no allegations that AGI is the alter ego of the Debtor, or related to any principal of the Debtor in any degree close to that in In re STN Enterprises, Inc., 73 B.R. at 493. The aiding and abetting breach of fiduciary duty claim is based entirely on pre-petition conduct; while the *95Trustee asserts this conduct occurred within two years of the petition date as required for the transfer of the Accounts to constitute a fraudulent conveyance, the Trustee fails to demonstrate that this alleged breach arose out of anything other than a non-contractual, industry relationship between a non-creditor and a non-debtor individual for purposes of the aiding and abetting an alleged breach of fiduciary duty. The Debtor could pursue this claim against AGI absent the bankruptcy, just as the Debtor in Mirant, 337 B.R. at 117-18, could.
Furthermore, unlike in U.S. Lines, resolving the dispute whether AGI aided and abetted Shapiro in any breach of fiduciary duty -will not necessarily have a “significant impact on the administration of the estate,” as the Trustee alleges. In U.S. Lines, 197 F.3d at 638, the proceeds of the insurance policy at issue “represented] the only potential source of cash available to that group of creditors.” Here, the Trustee could at least recover some damages for estate for the transfer of the Accounts in the fraudulent conveyance proceeding in this Court, especially because, for the reasons explained below, the Court is staying the arbitration of Counts 8 and 10 pending its resolution of Count 9. Accordingly, the aiding and abetting breach of fiduciary duty claim here is non-core. Even if the aiding and abetting breach of fiduciary duty claim was core, arbitration of it will not conflict with important polices of the Bankruptcy Code. Arbitration of this claim will not “conflict with the trustee’s core obligation to marshal and liquidate the assets expeditiously,” and “investigate and report on the financial affairs of the debtor.” See Hagerstown, 277 B.R. at 210. The Court refers the aiding and abetting breach of fiduciary duty claim against AGI to arbitration.
D. Count 10: Restitution and Unjust Enrichment Is a Non-Core Claim That Must Be Arbitrated
As with the aiding and abetting breach of fiduciary duty claim, much of the jurisprudence concerning the core/non-core nature of the unjust enrichment and restitution claim is in the withdrawal of the reference context. Still, these decisions are instructive here. Some courts find unjust enrichment claims non-core, as they do not arise under the Bankruptcy Code. E.g., Miller v. Pierce, CIV-09-96-FHS, Bankr.No. 08-80228-M; Adv. Pro. No. 08039-M, 2009 WL 919441, at *1 (E.D.Okla. Mar.31, 2009) (“Counts ... (Ill) aiding and abetting a breach of fiduciary duty ... and (V) unjust enrichment, are related non-core proceedings”); I.E. Liquidation, Inc. v. Litostroj Hydro, Inc. (In re I.E. Liquidation, Inc.), Bankr.No. 06-62179, Adv. Pro. Nos. 08-6077, 08-6078, 2009 WL 1586706, at *8 (Bankr.N.D.Ohio Mar.18, 2009) (citing Access Care, Inc. v. Sten-Barr Network Solutions, Inc. (In re Access Care, Inc.), 333 B.R. 706, 711, 713 (Bankr.E.D.Pa.2005)); In re SAI Holdings Ltd., 2009 WL 1616663, at *8-9 (“To the extent [plaintiffs claim seeks reimbursement for pre-petition benefits conferred by Debtor’s services upon Defendant, it clearly does not involve a right created or determined by a statutory provision of title 11 and could have been pursued outside of bankruptcy. ... The court concludes that Plaintiffs unjust enrichment claim is related to Debtors’ chapter 11 case but is a not a core proceeding.”) (citing Hankin v. Auxiliary of the Winsted Mem. Hosp. (In re Winsted Mem. Hosp.), 236 B.R. 556, 561 (Bankr.D.Conn.1999)); In re Pennsylvania Gear Corp., Bankr.No. 02-36436DWS, Adv. Pro. Nos. 03-0940, 03-0942, 2008 WL 2370169, *5 (Bankr.E.D.Pa. Apr.22, 2008) (“the alternative *96count for breach of contract and unjust enrichment [are] clear non-core proceedings”) (internal citations omitted). The Second Circuit allowed district court findings that unjust enrichment claims were non-core and arbitrable to stand where a party did not appeal that portion of the district court’s ruling. See Hill, 436 F.3d at 107. Furthermore, in Liddle & Robinson, L.L.P. v. Daley (In re Daley), 224 B.R. 807, 313 (Bankr.S.D.N.Y.1998), the court refused to find core (though not ruling out that it might have related to jurisdiction) unjust enrichment and fiduciary duty claims brought by the debtor’s individual attorney’s former law firm against that attorney’s new law firm, concerning work performed by the attorney at the former law firm on behalf of the debtor; absent a disagreement over the priority of payment between the law firms, as the court only had jurisdiction to determine the “bona fides of the unsecured proofs of claim ... whether [debt- or’s] estate is liable for fees billed to him ... not claims that [one law firm] is asserting against [the other law firm].”
Even in In re I.E. Liquidation, Inc., 2009 WL 1586706, at *8, where the defendant had filed a proof of claim, the court found an unjust enrichment claim non-core, as “[t]he validity of [creditor-defendant’s] proof of claim will almost certainly turn entirely on the facts that will be litigated in the claims and counterclaims for breach of contract that Plaintiff and [creditor-defendant] will bring against one another in [foreign court],” and “[f]ew legal issues and even fewer factual issues appear likely to stand between the resolution of that non-core proceeding and the matter of allowing or disallowing [creditor-defendant’s claim against the estate.” Id.
On the other hand, other courts in this Circuit have considered unjust enrichment and restitution claims core, where the claims arose out of the same facts as the proof of claim. Caldor Corp. v. S Plaza Assocs., L.P. (In re Caldor, Inc.), 217 B.R. 121, 128 (Bankr.S.D.N.Y.1998) (where creditor claimed for rent due in proof of claim, debtor’s claim for unjust enrichment for debtor’s alleged overpayment of rent core); In re STN Enterprises, Inc., 73 B.R. at 493. In Navon v. Mariculture Prod. Ltd., 395 B.R. 818, 822 (D.Conn.2008), the court found, at the very least, “related to” bankruptcy jurisdiction over a debtor’s wife’s unjust enrichment claim against a corporation that was solely owned by a corporation controlled by an individual chapter 7 debtor to which the debtor’s wife was the lender on a promissory note. The claim was core because litigation of the unjust enrichment claim would affect one of the most elemental of all core bankruptcy functions: determining if a creditor may collect from a debtor’s estate. Id. Still, the court found in the alternative that “[a]t the very least, the proceeding is within the bankruptcy court’s ‘related to’ jurisdiction,” which is a broader test, and also found that the outcome would have a “significant impact on the administration of the estate.” Id. (internal quotation marks and citations omitted). While, on a motion to dismiss, at least one bankruptcy court dealt with an unjust enrichment claim against an individual who also purported to be the alter ego of the debtor, the court did not explicitly decide whether the claim was core or non-core. See Pereira v. Binet (In re Harvard Knitwear, Inc.), 153 B.R. 617, 625 (Bankr.E.D.N.Y.1993).
Other courts have found unjust enrichment claims core where they decided that other, related claims were core. In re 222 South Caldwell Street, Ltd. Partnership, 409 B.R. 770, 790 (Bankr.W.D.N.C.2009) (after determining that the decision whether an equitable lien was created was core, the court disagreed that “relief should be *97available under the doctrine of unjust enrichment”); The Official Comm. of Unsecured Creditors of Neumann Homes, Inc. v. Neumann (In re Neumann Homes, Inc.), 414 B.R. 383, 387-88 (N.D.Ill.2009). In In re Neumann Homes, Inc., 414 B.R. at 385, the court was deciding whether certain individual principals of an S-corporation debtor were entitled to tax refunds or whether those refunds had been fraudulently conveyed to the individuals. The court found that “[t]he crux of the ... complaint [sought] to avoid allegedly preferential and fraudulent transfers.” Id. at 388. The complaint also contained several state law claims, including breach of fiduciary duty and unjust enrichment, which the court found were “derived from the underlying core claims,” and, thus, were core because they “ar[o]se out of the same transaction as the creditor’s proof of claim such that the two claims are logically related,” and were “premised on the underlying action to avoid the ... fraudulent conveyances.” Id. Similarly, in Beal Bank, SSB v. Prince (In re Prince), Bankr.No. 197-11992, Adv. Pro. Nos. 108-0146, 108-0164, 2008 WL 4498948, at *3 (Bankr.M.D.Tenn. Aug.19, 2008), the court found that “state law theories of conspiracy, fraud, malicious prosecution, conversion, and unjust enrichment” stemmed from the debtors’ allegations in the adversary complaint that the defendants’ conduct violated a discharge injunction. Id. Accordingly, “[t]he violations of the discharge injunction and damages that flow[ed] therefrom [we]re core proceedings, and the state law action [wa]s intimately intertwined with that action” and the state law claims were core. Id.
Here, the unjust enrichment and restitution claim is pled in the alternative to the fraudulent conveyance claim, which AGI acknowledges is non-arbitrable. As noted supra, AGI has not filed a proof of claim in this action; nor does it assert any right of setoff. AGI has no contract with the Debtor. As noted supra, there are no allegations that it is the alter ego, or related to any principal of the Debtor in any degree close to that in other cases. See In re Harvard Knitwear, Inc., 153 B.R. at 625; In re STN Enterprises, Inc., 73 B.R. at 493. AGI’s affirmative defenses relate to industry standards and state law. The Trustee seeks reimbursement for pre-petition benefits (the right to manage the Accounts) conferred by a principal of the Debtor upon AGI, which “clearly does not involve a right created or determined by a statutory provision of title 11 and could have been pursued outside of bankruptcy.” In re SAI Holdings Ltd., 2009 WL 1616663, at *8.
While the “damages that flow” from the unjust enrichment may have some overlap with damages for the fraudulent conveyance claim, the unjust enrichment claim is not intimately intertwined with the fraudulent conveyance claim. See In re Prince, 2008 WL 4498948, at *3. Fraudulent conveyance claims under 11 U.S.C. § 548 relate to transfers that occurred within two years of the petition date while the debtor was insolvent. The Trustee asserts an unjust enrichment claim against AGI regardless of when the transfer of the Accounts occurred, or that the transfer occurred while the Debtor was insolvent. That both causes of action may involve findings that there was no consideration for the transfer is not dis-positive. The unjust enrichment claim, though pled in the alternative to the fraudulent conveyance claim, is derivative of the Debtor’s rights in prepetition business dealings; it relates to whether Shapiro sought benefits for himself, in violation of his fiduciary duties, by transferring the Accounts to AGI for no consideration in anticipation of a benefit Shapiro thought *98he would receive.14 The Trustee could pursue the unjust enrichment claims outside of bankruptcy even if the transfers had not occurred within two years of the petition date, and the debtor was not insolvent. Accordingly, the unjust enrichment/restitution claim is non-core. Even if the unjust enrichment and restitution claim is core, arbitration of this claim will not “conflict with the trustee’s core obligation to marshal and liquidate the assets expeditiously,” and “investigate and report on the financial affairs of the debtor.” See Hagerstown, 277 B.R. at 210. As it does for Count 8, the Court refers the unjust enrichment and restitution claim, Count 10, to arbitration.
E. Whether to Stay the Balance of the Proceedings Pending Arbitration
For the reasons explained below, though referring Counts 8 and 10 to arbitration, the Court declines to stay consideration of Count 9 in this court while staying the arbitration of Counts 8 and 10 until Count 9 is resolved.
Judge Bernstein in Hagers-town noted that non-arbitrable claims are not subject to the mandatory stay required by Section 3 of the FAA. Hagerstown, 277 B.R. at 199 n. 18 (citing Citrus Mkting. Bd. v. J. Lauritzen A/S, 943 F.2d 220, 225 (2d Cir.1991)). Instead, the decision to stay non-arbitrable claims is “committed to the court’s discretion.” Id. at 199 (citing Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 856 (2d Cir.1987)). A broad stay order should be issued where “the arbitrable claims predominate the lawsuit and the non-arbitrable claims are of questionable merit.” Id. (internal quotation marks and citations omitted). Also, broad stay orders are appropriate if the stay will “promote judicial economy, avoidance of confusion and possible inconsistent results” without working an undue hardship or prejudice against the plaintiff. Id. (citing Acquaire v. Canada Dry Bottling, 906 F.Supp. 819, 838 (E.D.N.Y.1995) (internal citation omitted); The Orange Chicken, L.L.C. v. Nambe Mills, Inc., No. 00 Civ. 4730, 2000 WL 1858556, at *9 (S.D.N.Y. Dec.19, 2000); Gen. Media, Inc. v. Shooker, No. 97 CIV 510(DAB), 1998 WL 401530, at * 11 (S.D.N.Y. Jul.16, 1998); Moore v. Interacciones Global, Inc., No. 94 Civ. 4789(RWS), 1995 WL 33650, at *7 (S.D.N.Y. Jan.27, 1995)). In Moore v. Interacciones Global, Inc., 1995 WL 33650, at *7, the court found that a broad stay was appropriate where there were common questions of fact among the non-arbi-trable and arbitrable claims, or when the arbitration was likely to dispose of issues common to the claims of the arbitrating and non-arbitrating defendants.
Still, section 105 of the Bankruptcy Code authorizes the court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title,” including enjoining proceedings in other forums against non-debtors. See 11 U.S.C. § 105(a); McHale v. Alvarez (In re The 1031 Tax Group, LLC), 397 B.R. 670, 674 (Bankr.S.D.N.Y. 2008) (‘Alvarez’’). In Alvarez, the Chapter 11 Trustee sought a preliminary injunction enjoining certain state court plaintiffs from prosecuting three state court actions against former employees of the debtors, involving claims of violations of a state consumer protection act, negligence, breach of fiduciary duty, fraudulent and negligent misrepresentation and non-*99disclosures, conspiracy and aiding and abetting misconduct. Id. at 674, 680. According to the Chapter 11 Trustee, the actions “threaten[ed] to undermine two [proposed] settlement agreements [‘Settlements’] the Trustee [] negotiated with certain of the [debtors’ former employees and also with several of its errors and omissions [‘E & O’] insurers.” Id. at 674. The Settlements involved (1) payment by certain former employees (“Former Employees”) to the estate, a waiver of certain claims they had against the estate, an assignment of their rights in the debtors’ E & 0 insurance policies, and an injunction against all third party litigation against those employees and, if necessary, a stay on all such litigation until a permanent injunction was obtained; and (2) payment by the E & 0 insurers (about 84% of the policy limits) and a channeling injunction to the bankruptcy court against any claims made against the E & 0 policies, which would apply the claims against a limited portion of the amount paid by the E & 0 insurers under the settlement, which would be segregated and held in trust to pay any claims of non-debtor insureds. Id. at 676-77. Two groups of the state court plaintiffs (one which had filed a proof of claim, and one which had not), filed a motion in state court seeking a writ of attachment or a preliminary injunction to take control of the assets of the Former Employees, which precipitated the filing of an adversary proceeding and the request for a temporary restraining order and preliminary injunction. Id. First, this Court found that breach of fiduciary duty claims against the former employees were derivative, and not direct, and belonged to exclusively to the Trustee; accordingly, the automatic stay under the Bankruptcy Code applied to the derivative claims in the state court actions. Id. at 680-81. The fraud claims, however, were direct claims, and could be “asserted by [the state court plaintiffs] without violating the automatic stay.” Id. at 682 (citing In re Granite Partners, 194 B.R. 318, 327 (Bankr.S.D.N.Y.1996) (“Granite Partners”)). However, this Court granted a preliminary injunction against state court plaintiffs from prosecuting their direct claims against the non-debtor former employees under Bankruptcy Code § 105(a) until this Court could consider approving one of the Proposed Settlements and to accommodate the Chapter 11 Trustee’s representation that he intended to propose a chapter 11 liquidation plan within several months. Id. at 686. In so doing, this Court stated:
Because 105(a) injunctions are authorized by statute, they do not need to comply with the traditional requirements of Fed.R.Civ.P. 65. Rather, the bankruptcy court may enjoin proceedings in other courts when it is satisfied that such a proceeding would defeat or impair its jurisdiction with respect to a case before it. To enjoin claims against non-debtors under 105(a), a bankruptcy court must find that the claims threaten to thwart or frustrate the debtor’s reorganization efforts, and that the injunction is important for effective reorganization .... [T]he courts have recognized that a stay should be provided to code-fendants when the claims against them and the claims against the debtor are inextricably interwoven, presenting common questions of law and fact, which can be resolved in one proceeding. [T]he court [in Granite Partners, 194 B.R. at 337] noted that a court should consider, among other relevant factors, whether the suits would (i) threaten the debtor’s insurance coverage, (ii) increase the debtor’s indemnification liability, (iii) result in inconsistent judgments, (iv) expose the debtor to risks of collateral estoppel or res judicata and (v) burden *100and distract the debtor’s management by diverting its manpower from reorganization to defending litigation.
Id. at 684 (internal quotation marks and other citations omitted).
The Court applies the Alvarez factors here in determining whether this Court should stay the arbitration of Counts 8 and 10 by the Trustee against non-debtor AGI until this Court has adjudicated Count 9. Granite Partners factors (i), (ii) and (v) are not present here because the claims are asserted by the Trustee against AGI, and not vice versa. However, as explained further below, Granite Partners factors (iii) and (iv) weigh strongly in favor of staying the arbitration of Counts 8 and 10 until this Court has adjudicated Count 9. Furthermore, the arbitration of Counts 8 and 10 before this Court rules on Count 9 would impair this Court’s exclusive jurisdiction with respect to the Debtor’s bankruptcy, and could thwart the Debtor’s bankruptcy proceeding by taking from this Court a fraudulent conveyance claim that clearly arises under the Bankruptcy Code. The outcome of the fraudulent conveyance claim does not depend on the outcome of the aiding and abetting breach of fiduciary duty and unjust enrichment/restitution claims.
With respect to Granite Partners factor (iv), whether the proceedings will expose the debtor to risks of collateral estoppel or res judicata, courts as are split whether, and when, an arbitration proceeding forms the predicate for collateral estoppel. For example, in Grafstrom v. Bear, Stearns & Co., No. 85 Civ. 3679(JFK), 1986 WL 13806, at *1-2 (S.D.N.Y. Nov.24, 1986), the court found “[t]he use of collateral estoppel to issues adjudicated in an arbitration is appropriate, despite the fact that arbitrators need not make detailed findings of fact.” (Internal citations omitted). It gave collateral estoppel effect to findings in an arbitration proceeding as to “whether the defendant committed fraud, made any misrepresentations, issued any fraudulent or misleading advertisement, or improperly retained the defendant’s funds” in an action for breach of fiduciary duties and violations of federal securities laws. Id.
In In re Zangara, 217 B.R. 26, 29 (Bankr.E.D.N.Y.1998) (“Zangara”), the bankruptcy court gave collateral estoppel effect to an arbitration panel’s findings that “[debtor] made unauthorized trades in his account, in violation of the Texas Deceptive Trade Practices Act (‘DPTA’) ... and Section 33 of the Texas Securities Act.” The other party to the arbitration also asserted alleged violations of Section 10(b) of the Securities Exchange Act of 1934, alleged violations of Sections 5 and 12(1) of the Securities Act of 1933, and alleged violations of the NASD Rules of Fair Practice against the debtor, but “the [ajrbitrators clearly indicated that their decision was not based” on those claims. Id. The bankruptcy court found that “the absence of specific factual findings and reasoning [in the arbitration award] [wa]s counterbalanced by the fact that the arbitrators have clearly enunciated the statutory basis for the Award [Texas Business and Commerce Code and Section 33 of the Texas Securities Act],” and “all three statutes relied upon by the Arbitration Panel in issuing the Award involved fraud by reason of making a false representation or a materially misleading statement on which the claimant relied to claimant’s detriment.” Id. at 29-30. The Zangara court found “a Texas court would give preclusive effect to the Arbitration Award insofar as it bars dischargeability of the debt pursuant to 11 U.S.C. § 523(a)(2)(A).” Id. at 32. Specifically, the court noted that certain findings under Texas state law implied certain facts necessary to establish all the elements of an 11 U.S.C. *101523(a)(2)(A) claim, and, thus, the “Arbitrators decided the identical issue in the Arbitration Proceeding that this Court is called upon to decide with regard to [plaintiffs] Section 523(a)(2)(A) cause of action.” Id. at 34. First, the award of punitive damages implied that “[debtor] made the false representation with an awareness of its falsity and committed the fraud described in Section 27.01(a), which satisfie[d] the first and second elements of Section 523(a)(2)(A),” and also indicated the debtor had the requisite intent to deceive, satisfying the third element of Section 523(a)(2)(A). Id. “The award of actual damages by the arbitrators demonstrate^] that [debtor’s] false representation was the proximate cause of [other party’s] loss.” Id. Lastly, “[s]ince the Arbitration Panel applied the standard of justifiable reliance in issuing the award, the fourth prong of the Section 523(a)(2)(A) nondischargeability test [wa]s met.” Id.; see also Hagerstown, 277 B.R. at 199 n. 19 (citing Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir.1998)). In Boguslavsky, 159 F.3d at 718, the court gave collateral estoppel effect to some findings in an earlier NASD proceeding on the same causes of action (violation of Rules 10b-5 and 10b-10, 17 C.F.R. §§ 240.10b-5, 240.10b-10 (1998), promulgated under the Securities Exchange Act of 1934 (the “1934 Act”)) as plaintiff attempted to later assert in the district court. However, in the district court, the plaintiff additionally added a claim “that his transaction with [defendant] was ‘unlawful and void’ under § 29 of the 1934 Act” and asserted claims against individual employees of the other party to the arbitration as “controlling persons” under § 20 of the 1934 Act. Id. The court would not give collateral estoppel effect to the arbitration decision with respect to these two claims, but noted the arbitration “precludefd] litigation of the issue of damages resulting from the underlying primary violation of Rules 10b-5 and 10b-10, which, in turn, may affect the ultimate disposition of [plaintiffs] § 20(a) action. [Plaintiff] brought his claims in both the NASD proceeding and the District Court action for the same injury. Thus, because under § 20(a) the defendants would be liable as controlling persons jointly and severally with the primary violators, [plaintiffs] possible recovery under § 20(a) cannot exceed the damages assessed by the arbitrators against the primary violators. The issue of compensatory damages, therefore, is totally precluded from reliti-gation in the District Court.” Id. at 721 (internal citation omitted).
Some courts also will apply collateral estoppel effect specifically to factual findings in arbitration proceedings. Doreen Ltd. v. Building Material Local Union 282, 299 F.Supp.2d 129, 145 (E.D.N.Y.2004) (internal citations omitted) (giving collateral estoppel effect to factual findings in confirmed arbitration decision that employer owed wages under collective bargaining agreements to local union drivers in RICO action brought by employer against union and certain employee benefit plan trustees).
Earlier Supreme Court cases, however, took a more conservative approach to whether collateral estoppel effect could apply to arbitration findings and conclusions. For example, in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 216, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), a party sought to compel the arbitration of numerous state law claims which were “intertwined” with other federal securities laws claims, which would remain in court. The Supreme Court noted that some circuit courts refuse to compel arbitration where “arbitration of an ‘intertwined’ state claim might precede the federal proceeding and the factfinding done by the arbitrator might thereby bind the federal court through collateral estoppel.” Id. at 217, *102105 S.Ct. 1238. The Court, while not fashioning a general rule as the arbitration had not yet occurred, noted “it is far from certain that arbitration proceedings will have any preclusive effect on the litigation of nonarbitrable federal claims.” Id. at 222, 105 S.Ct. 1238. In McDonald v. City of West Branch, Michigan, 466 U.S. 284, 292, 104 S.Ct. 1799, 80 L.Ed.2d 302 (1984), the Court refused to afford either res ju-dicata or collateral estoppel effect to an arbitration award in a 42 U.S.C. § 1983 context. The Court took into account that an “arbitrator may not ... have the expertise required to resolve the complex legal questions that arise in § 1983 actions”; that “arbitral factfinding is generally not equivalent to judicial factfinding”; that the “record of the arbitration proceedings is not as complete; the usual rules of evidence do not apply; and rights and procedures common to civil trials, such as discovery, compulsory process, cross-examination, and testimony under oath, are often severely limited or unavailable.” Id. at 290-91, 104 S.Ct. 1799 (internal citation omitted). Instead, “in a 1983 action, an arbitration proceeding cannot provide an adequate substitute for a judicial trial ... [and] according preclusive effect to arbitration awards in 1983 actions would severely undermine the protection of federal rights that the statute is designed to provide.” Id. at 292, 104 S.Ct. 1799.
The most recent Second Circuit case regarding the collateral estoppel effect of an arbitration decision is Bear, Stearns & Co., Inc. v. 1109580 Ontario, Inc., 409 F.3d 87, 91 (2d Cir.2005), which indicates that whether a court applies collateral estoppel regarding an arbitration decision in within the Court’s broad discretion:
[a]n arbitration decision may effect collateral estoppel in a later litigation or arbitration if the proponent can show with clarity and certainty that the same issues were resolved. Collateral estop-pel is permissible as to a given issue if (1) the identical issue was raised in a previous proceeding; (2) the issue was actually litigated and decided in the previous proceeding; (3) the party had a full and fair opportunity to litigate the issue; and (4) the resolution of the issue was necessary to support a valid and final judgment on the merits.
(internal quotation marks and citations omitted) (emphasis added). The court afforded collateral estoppel effect to an arbitration panel’s finding that a clearing broker had not aided and abetted securities fraud to similar claims arising out of the “same fraud,” where, in a later arbitration, an individual plaintiff sought to use collateral estoppel offensively to preclude the clearing broker from arguing certain defenses it had argued against the another individual plaintiff in an earlier arbitration. See id. at 93.
Some courts applying factors similar to the Bear, Stearns & Co., Inc. factors will not apply collateral estoppel where the “arbitrators never made or adopted any findings of fact,” as the court will “not infer the factual basis for the arbitrator’s decision and then use those inferences” for the purposes of collateral estoppel. In re Klein, Maus & Shire, Inc., 301 B.R. 408, 417 (Bankr.S.D.N.Y.2003).
Here, it is possible that collateral estop-pel would apply such that this Court would be deprived of its necessary jurisdiction over the 11 U.S.C. § 548 fraudulent conveyance claim, and, thus, as explained further below, Granite Partners factors (iii) and (iv) weigh heavily in favor of staying the arbitration of Counts 8 and 10 pending this Court’s resolution of Count 9. Conversely, the Hagerstown factors weighing in favor of a broad stay order are not applicable here.
*103A broad stay order is not appropriate here because Count 9 is not “directly connected” to Counts 8 and 10 as the fraudulent conveyance claim was to the breach of contract claim in Hagerstown. See Hagers-town, 277 B.R. at 208. Despite the fact that the Trustee pled the unjust enrich-meni/restitution claim (Count 10) in the alternative to the fraudulent conveyance claim (Count 9), the Trustee could still assert a claim for fraudulent conveyance against AGI even assuming, arguendo, that AGI did not aid and abet any breach of fiduciary duty by Shapiro and/or was not unjustly enriched by the transfer of the Accounts. The elements of the aiding and abetting breach of fiduciary duty claim, as pled in the Complaint, are “[1] Shapiro owed fiduciary duties of loyalty and candor to the Debtor, and he was required to control the Debtor in a fair, just and equitable manner, and he was obligated to act in furtherance of the best interests of the Debtor, its shareholders, and its creditors; [2][AGI] knew Shapiro owed fiduciary duties to the Debtor; [3][AGI] knowingly provided substantial assistance to Shapiro in breaching those fiduciary duties, including by [i] inducing Shapiro to transfer the Accounts with the false promise of compensation and future employment, [ii] assisting with the [transfer of the Accounts], and [iii] accepting the [transfer of the Accounts], to achieve a benefit for itself. (Compl.1ffl 208-211.) The elements of unjust enrichment, as pled in the Complaint, are [1] AGI obtained the right to manage the Accounts prior to the Petition Date; [2] the Debtor did not receive any consideration for the [transfer of the Accounts]; [3][AGI] has earned substantial profits/fees from managing the accounts, constituting an inequitable windfall to [AGI]’s benefit, and [4][AGI] should not be able to continue profiting from the Accounts without compensating the Debtor.” (Compl.lffl 221-226.) The Trustee seeks compensatory, consequential and punitive damages from AGI under Count 8, and “proper[ ], fair[ ] and equitabl[e]” compensation under Count 10. (Compl.1ffl 212, 226.)
Conversely, 11 U.S.C. § 548(a)(1)(B) provides, in relevant part (1) “The trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily — (B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or become insolvent as a result of such transfer or obligation .... ” The damages the Trustee seeks for Counts 8 and 10 are broader than, but arguably inclusive of, those it seeks for Count 9. The Trustee seeks damages in “an amount not less than the amount of the value of the Accounts Transfer, plus interest from the date hereof and the costs and expenses of this action including, without limitation, attorneys’ fees.” (Comply 219.)
While 11 U.S.C. § 548(a)(1)(B) permits a trustee to recover transfers “for less than a reasonably equivalent consideration,” the purpose of the trustee’s avoidance powers is to protect creditors, and arguably to encourage an equitable distribution of the debtor’s property to creditors, and, in turn, prevent a debtor from favoring one creditor or third party over other creditors, all of which go to the “heart of federal bankruptcy proceedings” of restructuring debt- or-creditor relations. See Messinger, 2007 WL 1466835, at *2; In re French, 440 F.3d 145, 152 (4th Cir.2006) (“[P]urpose of the Bankruptcy Code’s avoidance provisions ... is to prevent debtors from illegitimately disposing of property that should be *104available to their creditors.”); see also In re Richardson, 23 B.R. 434, 447 (Bankr.Utah 1982)(“[T]he function of Section 548 i[s] fostering an equitable distribution of the debtor’s property.”); but cf. In re United Energy Corp., 944 F.2d 589, 597 (9th Cir.1991) (“the policy behind section 548 is to preserve the assets of the estate. This policy differs from that which under-girds the law of preferences. The aim of preference law under the Bankruptcy Code is to guard all parties by promoting equal distribution of the debtor’s estate.”)(internal citations omitted). In any event, here, AGI is not a creditor. AGI neither filed any proof of claim nor asserted any right of setoff against the Debtor. AGI had no contractual relationship with the Debtor. Accordingly, the recovery of amounts by which AGI was allegedly unjustly enriched, or for its alleged aiding and abetting any breaches of fiduciary duty, do not have an effect on debtor-creditor relations.
Furthermore, the factors supporting the injunction against the state court proceedings against the non-debtors in Alvarez and Granite Partners weigh in favor of the court deciding Count 9 and staying the arbitration of Counts 8 and 10 pending the outcome of that proceeding. See Alvarez, 397 B.R. at 684. The elements of Counts 8, 9 and 10, as explained above, do not necessarily overlap as they did in Zangara. See Zangara, 217 B.R. at 32. However, because factual findings as to the amount (if any) AGI was unjustly enriched in the arbitration of Count 10 due to any lack of consideration for the transfer of the Accounts,15 the Court in turn could be bound as to whether AGI “received less than a reasonably equivalent value” in exchange for the rights to manage the accounts by the arbitration panel’s determination as to consideration, and its determination of the amount of the fraudulent conveyance could be limited by the arbitration panel’s decision regarding Count 10, even though it involves a different cause of action. See Boguslavsky, 159 F.3d at 720. The only damages at issue for Counts 8, 9 and 10 is the value of the rights to manage the Accounts. Accordingly, the arbitration of Counts 8 and 10 could interfere with this Court’s exclusive jurisdiction over deciding the amount of the fraudulent conveyance claim.
While the FINRA Panel may not make any findings of fact that would bind the Court with respect the issue whether AGI received less than reasonably equivalent value for purposes of the fraudulent conveyance claim (though AGI has been deemed to admit that there was no consideration for the transfer), the Court need not take the risk that it will, potentially leading to inconsistent results. Even if collateral estoppel effect will not apply to any arbitration awards regarding Counts 8 and 10, inconsistent judgments detrimental to the Debtor could result if the Arbitration Panel is permitted to decide the amount owed to the Trustee for any alleged Transfer of the Accounts before this Court decides the fraudulent conveyance claim within its core jurisdiction.
CONCLUSION
For the reasons explained above, AGI’s motion to compel arbitration of Counts 8 and 10 of the Complaint is GRANTED, however, arbitration of those claims is STAYED pending the outcome in this Court with respect to Count 9. AGI’s mo*105tion to stay this Court’s consideration of Count 9 is DENIED.
IT IS SO ORDERED.
. Originally, there were two motions filed to stay the adversary proceeding pending two separate arbitrations. One motion was filed by defendants RBC Dain Correspondent Services and RBC Capital Markets Corporation (together, "RBC Dain”), and one was filed by defendant AGI. The Trustee and RBC Dain have reached an agreement in principle to *83settle the adversary proceeding. A Rule 9019 motion to approve the settlement is on the calendar for presentment for March 15, 2010. (ECF # 100.). RBC Dain has withdrawn its motion to stay the action and compel arbitration without prejudice pending consideration of approval of the proposed settlement. Because the claims against AGI relate to alleged conduct of RBC Dain and defendant Shapiro, this opinion describes the allegations concerning RBC Dain and Shapiro to the extent relevant to the claims against AGI. Shapiro has answered the Complaint; he has not moved to compel arbitration. Another entity, JAS Management, Inc. ("JAS Management”), was also a defendant in this case, but its answer has been stricken and a default judgment entered against it. (ECF #91.) This opinion deals only with AGI's motion. References to facts relating to RBC Dain and Shapiro are taken from the Complaint and do not constitute findings of fact by the Court; the defendants filed answers denying the material allegations of the Complaint.
. The Court takes the facts from the Complaint and certain documents submitted by the parties. The Background discussion does not reflect any factual findings, and recognizes that AGI (and other defendants) denied certain factual allegations cited herein.
.The Debtor and AGI disagree whether the Debtor retained the ability to transfer the accounts following its tender of a Financial Industry Regulatory Authority ("FINRA”) Form BDW (Uniform Request for Broker-Dealer Withdrawal) ("BDW Form”) on February 23, 2007. (See Supplemental Mem. Supp. Trustee’s Objection Mot. AGI Stay Proceedings Pending Arbitration, ¶¶ 5-20 (ECF # 70); Supplemental Br. Supp. Mot. AGI Stay Proceedings Pending Arbitration, ¶¶ 2-9 (ECF #71).) However, without making any factual findings, the Court assumes that the Debtor's membership in NASD concluded on April 24, 2007, the date indicated as the date registration status was "terminated” on the Debtor's FINRA Registration Status History. (Flores Dec., Ex. 5.) FINRA Rule 13100 defines "member” as "any broker or dealer admitted to membership in FINRA, whether or not the membership has been terminated or can-celled.” (AGI’s Answer, 33.)
. AGI contends that defendant Shapiro is also an "Associated Person” registered with the NASD. However, Shapiro has not sought to arbitrate the claims asserted against him. The Court does not decide whether any of the claims against Shapiro are arbitrable.
. The Trustee also asserts causes of action for Disallowance of Bankruptcy Claims filed under 11 U.S.C. § 502(d) (Count 17) and Equitable Subordination/Disallowance underl 1 U.S.C. § 510(c) (Count 18), against all Defendants, including AGI. However, equitable subordination and recharacterization require filing a proof of claim: "[i]f a creditor has not filed a claim, there is nothing to subordinate *85nor any case or controversy to resolve." O’Connell v. Arthur Andersen LLP (In re AlphaStar Ins. Group Ltd.), 383 B.R. 231, 276 (Bankr.S.D.N.Y.2008) (Bernstein, C.J.) ("AlphaStar ”); Gold v. Winget (In re NM Holdings Co., LLC), 407 B.R. 232, 288 (Bankr.E.D.Mich.2009) (dismissing equitable subordination and disallowance claims against defendants who did not file proofs of claim, because “there is no debt to recharacterize and no claim to subordinate”). Accordingly, because AGI has not filed a proof of claim, Counts 17 and 18 cannot apply to AGI. Notably, AGI did not reference Counts 17 and 18 in its motion papers with respect to seeking arbitration or a stay of proceedings in this Court regarding Counts 17 and 18. (See AGI Stay Mot. ¶ 2.) Accordingly, the Court does not address the arbitrability or any stay of Counts 17 and 18 in this opinion.
The Court recognizes that in both AlphaStar and In re NM Holdings Co., LLC the bankruptcy courts also decided motions to dismiss regarding breach of fiduciary duty claims against Debtor’s former officers and directors, financial advisors, controlling shareholders, the CEO's family members, and/or certain alleged alter ego entities of a CEO, as well as unjust enrichment claims against certain of the same defendants in In re NM Holdings Co., LLC, outside of the arbitration context, and without determining the claims were core or non-core. See AlphaStar, 383 B.R. at 267-75; In re NM Holdings Co., LLC, 407 B.R. at 243-44. For the reasons explained further infra, the In re NM Holdings Co., LLC and AlphaStar courts had defendants before them with much closer relationships to the Debtors than AGI here, and, thus, those courts’ determinations that they could decide such claims do not change this Court's determinations that the aiding and abetting breach of fiduciary duty and unjust enrichment/restitution claims are arbitrable.
. The parties do not appear to dispute that the FAA applies to the parties’ obligations under FINRA Rules.
. Section 2 of the FAA provides: "A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Section 3 of the FAA provides: "If any suit or proceeding be brought in any of the courts of the United States upon any issues referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.”
. Even if the Debtor's membership in FINRA for purposes of the applicability of FINRA Rule 13200 was disputed, FINRA Rule 13100 defines "member” as “any broker or dealer admitted to membership in FINRA, whether or not the membership has been terminated or cancelled.” (AGI's Answer, at 33.) (emphasis in original). The Debtor’s registration status in FINRA was "terminated” as of April 24, 2007. (Flores Dec., Ex. 5, FINRA Registration Status History.) As noted, supra, the Debtor and AGI disagree whether the Debtor retained the ability to transfer the accounts following its tender of a Form BDW on February 23, 2007; however, neither the date of tender of the BDW form nor the date of termination are relevant under FINRA Rule 13100 in determining whether the Debtor was a "member” of FINRA and subject to FINRA Rule 13200. (See Supplemental Mem. Supp. Trustee's Objection Mot. AGI Stay Proceedings Pending Arbitration, December 15, 2009 ¶¶ 5-20 (ECF # 70); Supplemental Br. Supp. Mot. AGI Stay Proceedings Pending Arbitra*88tion, December 15, 2009, ¶¶2-9 (ECF # 71).) See also n. 3, supra.
. The CBI Holding court also, however, "expressed] no judgment on the question of when, if ever, a claim that does not qualify as core under § 15 7(b)(2)'s express language *91could be rendered core only on the grounds that it is based on the same transaction as a core proceeding.” Id. at 465 n. 19.
. More importantly, still, for present purposes, Judge Bernstein concluded "that the fraudulent transfer claims should be stayed against all defendants pending the conclusion of the arbitration.” Hagerstown, 277 B.R. at 208. The rationale for doing so, however, was that the trustee’s claims against the defendant "[we]re contractual in nature, relating to [the defendant’s] performance under the [contract] and resulting liability.... The fraudulent conveyance claims are directly connected to the contract disputes, and present alternative theories of disaffirmance.” Id. As explained further below, the fraudulent conveyance claim in this case is not directly connected to the performance of any contract between the Debtor and AGI — indeed, there was no contract between S.W. Bach and AGI. The fraudulent conveyance claim stands on its own; the outcome does not depend the outcome of otherwise arbitrable claims.
. The decision in Mirant was criticized for its characterization of an alter-ego/veil piercing claim as legal, determining that such claims have both legal and equitable roots. See In re Kollel Mateh Efraim, LLC, 406 B.R. 24 (Bankr.S.D.N.Y.2009).
. Arguably, aiding and abetting breach of fiduciary duty would also be a compulsory counterclaim under a traditional Fed.R.Civ.P. 13 analysis, but, not necessarily under Fed. R. Bankr.P. 7013. See Rossi v. Wohl, 633 F.Supp.2d 270, 286 (N.D.Tex.2009) (breach of fiduciary duty claim, based in part on attorney’s alleged misrepresentation regarding a client's liability for expert fees where the client was sued for breach of contract regarding the fees, was compulsory counterclaim). As the court noted in J.T. Moran Financial Corp. v. American Consolidated Financial Corp. (In re J.T. Moran Financial Corp.), 124 B.R. 931, 940 (S.D.N.Y.1991), "Rule 7013 differs from Fed.R.Civ.P. 13 in that a party sued by a trustee or a debtor in possession need not assert as a counterclaim any claim against the trustee or debtor in possession or the estate unless the claim arose after the order for relief.” Here, however, this analysis is irrelevant. AGI has not filed a proof of claim, and there are no compulsory counterclaims the Trustee would be required to assert against AGI under Fed.R.Civ.P. 13 or Fed. R. Bankr.P. 7013.
. That the Trustee contends Shapiro owed a fiduciary duty to creditors is not sufficient for the Court to find that the aiding and abetting claims arise solely out of the Debtor’s obligations in bankruptcy. At the very least, as this Court has noted before in this matter, the extent of fiduciary duties owed to creditors of an insolvent entity is a question of complicated state law, and does not arise out of the Bankruptcy Code. See Togut v. RBC Dain Correspondent Serv. (In re S.W. Bach & Co.), Bankr.No. 07-11569(MG), Adv. Pro. No. 09-01278(MG), 2010 WL 681000, at *6 (Bankr.S.D.N.Y. Feb. 24, 2010) (internal citations omitted).
. AGI has admitted that it paid no consideration to the Debtor for the transfer of the Accounts by virtue of its failure to timely respond to the Trustee’s First Requests for Admission. In re S.W. Bach & Co., 2010 WL 681000, at *7.
. As noted supra, AGI has admitted in discovery there was no consideration for the transfer of the Accounts. See n. 13, supra. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494376/ | MEMORANDUM OPINION
MARK W. VAUGHN, Chief Judge.
This matter comes before the Court on a motion to dismiss the complaint for lack of subject matter jurisdiction (Ct.Doc. No. 39) pursuant to Federal Rule of Civil Procedure 12(b)(1) filed by Fremont Investment & Loan (“Fremont”), and the Plaintiffs objection thereto. In the complaint, the Plaintiff seeks to rescind her mortgage and collect damages pursuant to N.H.Rev. Stat. Ann. § 358-A, 15 U.S.C. §§ 1635, 1638, and 1639, and common law claims of breach of contract, intentional misrepresentation, breach of the covenant of good faith and fair dealing, unjust enrichment, and fraud. On February 1, 2010, the Court held a hearing on the motion and took the matter under advisement.
Background
In November 2006, the Plaintiff entered into a residential refinancing agreement *199secured by a mortgage (the “Loan and Mortgage”) with Fremont. Fremont General Corporation1 is the parent company of Fremont, and The New York Mortgage Company, LLC brokered the Loan and Mortgage between the Plaintiff and Fremont. Deutsche Bank National Company now claims to be the current holder. The Plaintiff has defaulted on her obligations under the Loan and Mortgage. Subsequently, on October 28, 2008, the Plaintiff filed her Chapter 13 petition in bankruptcy. The Plaintiff brings the current action against all of the named defendants for joint and several liability asserting that Fremont and The New York Mortgage Company, LLC, violated several state and federal laws by engaging in predatory lending, failing to provide material disclosures, misrepresenting facts, committing fraud, and breaching contracts. The Plaintiff asserts that the actions of Fremont and The New York Mortgage Company, LLC, entitle her to rescind her mortgage, and collect actual damages. The Plaintiff failed to set forth the jurisdictional statements in her complaint, and Fremont filed a motion to dismiss the complaint for lack of subject matter jurisdiction.
Discussion
Although Fremont’s motion is filed as one to dismiss for lack of subject matter jurisdiction, Fremont’s arguments both within the motion and at the hearing actually frame the issue as whether the Court has “core” or “non-core” jurisdiction. Fremont argues that all of the claims asserted in the Plaintiffs complaint are “non-core,” and Fremont has not asserted a claim against the bankruptcy estate. Accordingly, Fremont moves the Court to abstain from adjudicating the claims pursuant to 28 U.S.C. § 1334(c).
Jurisdiction of the bankruptcy court is governed by 28 U.S.C. § 1334 and 28 U.S.C. § 157(a). Under Section 1334, district courts are conferred with “original and exclusive jurisdiction of all cases under title 11,” and “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(a), (b). Section 157 gives the district court the power to refer “all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11” to the bankruptcy court. 28 U.S.C. § 157(a).
Cases that “arise under” title 11 involve causes of actions created or determined by a statutory provision of the bankruptcy code. Steele v. Ocwen Federal Bank (In re Steele), 258 B.R. 319, 321 (Bankr.D.N.H.2001). “Arising in” proceedings do not fall under an express right created by the bankruptcy code, but would have no existence outside of the bankruptcy. Marotta Gnnd Budd & Dzera LLC v. Costa, 340 B.R. 661, 666 (D.N.H.2006). “Actions ‘arising under’ title 11 or ‘arising in’ a case under title 11 are referred to as ‘core’ proceedings.” Newfound Lake Marina, Inc. v. Sumac Corp. (In re Newfound Lake Marina, Inc.), 2008 WL 4868885 *1, 2 (Bankr.D.N.H.2008). All of the claims in the Plaintiffs complaint are not “core proceedings” since the claims are neither created by nor determined by the bankruptcy code, and they can be pursued outside of bankruptcy.
Bankruptcy courts may still have jurisdiction over proceedings under the court’s “related to” jurisdiction, if the ae-*200tions could have an effect on the administration of the bankruptcy estate. In re Newfound Lake Marina, 2008 WL 4868885 *at 2; In re Steele, 258 B.R. at 322. “Related to” proceedings are referred to as “non-core proceedings.” The Plaintiffs complaint involves state and federal claims regarding a Loan and Mortgage in connection with her residence. As such, the outcome could alter the Plaintiffs rights and liabilities and have an effect on the administration of the bankruptcy estate. Therefore the Plaintiffs claims fall within the Court’s “related to” jurisdiction.
Section 157(c)(1) provides that if a proceeding is non-core, but otherwise related to a case under title 11, a bankruptcy court may hear the proceeding but can only submit proposed findings of fact and conclusions of law to the district court unless all parties consent to a final order or judgment by the bankruptcy court. Fremont explicitly denies consent to the Court entering final judgment. In cases where the bankruptcy court has non-core, related jurisdiction, the court has discretionary power to abstain from hearing the case. Section 1334(c)(1) provides that “[njothing in this section prevents a district court in the interest of justice, or interest of comity with State court or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.” 28 U.S.C. § 1334(c)(1). “Although section 1334(c)(1) grants discretionary abstention power to the ‘district court,’ there is authority for the position that such power is also granted to the bankruptcy courts.” Ford v. Clement (In re Beckmeyer), 1999 WL 33457767 *1, 2 (Bankr.D.N.H.1999). The Court believes that abstention is appropriate where, as here, the claims largely concern state law and can be more properly and efficiently adjudicated in another forum.
Conclusion
For the reasons set out herein, the Court will abstain from hearing this adversary proceeding as against Fremont. This opinion constitutes the Court’s findings and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. The Court will issue a separate order consistent with this opinion.
. Fremont General Corporation was originally named as a defendant in this case, but was subsequently dismissed as a party defendant. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494378/ | OPINION
1
BRENDAN LINEHAN SHANNON, Bankruptcy Judge.
Before the Court are motions to dismiss, or, in the alternative, to abstain (collectively, the “Motions to Dismiss”), filed by numerous named defendants herein who are producers of oil and gas (the “Producers”).2 The Producers are Samson Re*86sources Company, et al. (“Samson”),3 New Dominion, L.L.C. (“New Dominion”),4 and a significant number of other producer-defendants.5 The Motions are opposed by plaintiffs who purchased oil and gas (the “Downstream Purchasers”) from the Debtors prepetition in the ordinary course of business, including ConocoPhillips Company (“Conoco”), J. Aron & Company (“J. Aron”), B.P. Oil Supply Co. (“B.P.”), and Plains Marketing, L.P. (“Plains”). For the reasons detailed below, the Court will deny the Motions to Dismiss.
I. INTRODUCTION6
The Motions presently before the Court raise a simple question: Does this Court have jurisdiction to hear and decide these four adversary proceedings? Before that question can be answered, however, attention must be given to the long, complex and convoluted history of the legal battles between the parties in order to place the issues in the proper framework.
The litigation originates from a series of transactions that are not in material dispute. The Producers own or operate oil and gas wells. In the summer of 2008 (before the Petition Date), they delivered millions of dollars worth of product to the Debtors. The Debtors then sold or transferred some of that oil and gas to the Downstream Purchasers. The Debtors did not pay the Producers for any of the oil and gas delivered in the seven weeks leading up to the Petition Date.
The Producers have asserted that, under various state laws, they have the legal right to seek payment directly from the Downstream Purchasers because they have not been paid for oil and gas they delivered to the Debtors. In essence, the Producers contend that the transfer of “their” oil and gas from the Debtors to the Downstream Purchasers occurred subject to the Producers’ state law lien claims and/or trust rights.
The Downstream Purchasers contend that they purchased the product free and *87clear of any liens, claims and encumbrances. They have offset the Debtors’ liabilities to them against the amounts they owe the Debtors, and seek to tender the net amounts to the Debtors in full and final satisfaction of their obligations relating to the prepetition sales. The Downstream Purchasers have commenced these adversary proceedings (hereinafter collectively referred to as the “Tender Adversaries”) seeking declaratory judgment that, once these net funds are tendered to the Debtors, they will have no further liability to the Debtors, the Producers or any other party.
The Producers have now moved to dismiss the Tender Adversaries on the ground that they allege that this Court lacks subject matter jurisdiction to adjudicate the respective rights of the Producers and the Downstream Purchasers. In the alternative, the Producers ask that this Court abstain from hearing the Tender Adversaries in favor of having the dispute addressed in litigation the Producers have commenced in Oklahoma, Texas, Kansas and New Mexico.
The Court concludes that it possesses subject matter jurisdiction to hear and decide the Tender Adversaries. The Court further determines that abstention is not appropriate. Accordingly, the Motions to Dismiss will be denied.
II. BACKGROUND
A. General Background
Founded in February 2000, the Debtors were engaged in a number of different businesses, each related to the energy industry. Included among the Debtors are several corporations which engage in the business of purchasing various forms of energy products, such as crude oil and natural gas, from producers and then subsequently reselling these products to refiners and other resellers in various types of sale and exchange transactions. The consolidated revenues of the Debtors during fiscal year 2007 (the last full fiscal year before their Chapter 11 cases) were approximately $13.2 billion.
In the ordinary course of their business, several of the Debtors entered into agreements with many Producers located in at least eight different states to purchase oil and gas. During the months leading up to the commencement of these Chapter 11 cases, the Producers produced, and the Debtors purchased, oil and gas from thousands of wells. Under general terms between the parties, the Debtors were obligated to pay for this oil and gas production on July 20 and July 25, 2008, for June sales, and on August 20 and 25, 2008, for July sales.
Historically, the amounts owed under these contracts had been paid by the Debtors without incident in accordance with the above payment schedule. The Debtors’ liquidity crisis and bankruptcy filings in the summer of 2008, however, changed this pattern.7 When the Debtors filed their Chapter 11 petitions on July 22, 2008 (the “Petition Date”), the Producers had yet to receive payment for hundreds of millions of dollars worth of oil and gas they had sold to the Debtors between June 1, 2008 and the Petition Date.
The Debtors’ failure to pay the amounts owed on these contracts left the Producers demanding payment and seeking to determine in this Court what rights, if any, they had in the oil and gas they had sold to the Debtors (or the proceeds from the Debt*88ors’ sale of such product) between June 1 and the Petition Date under the laws of their respective states.
B. The Producers’ Actions in This Court
The Producers sought to assert their claims and interests not only against the Debtors, but also against parties who had purchased oil and gas from the Debtors during the relevant period. As discussed in greater detail below, the Producers contend that any party acquiring oil and gas from the Debtors did so subject to superi- or rights and interests of the Producers until and unless the Producers were paid in full for such production.
Within the month following the Petition Date alone, hundreds of reclamation demands were made upon the Debtors. Many separate adversary proceedings relating to these reclamation demands or purported liens on the oil and gas in question were commenced.8 A number of emergency motions, seeking either injunc-tive relief to prevent the sale or disposition of the oil and gas in question or a lifting of the automatic stay to proceed to recover it, also were filed in this Court within weeks of the Petition Date.
In order to manage the multiple adversary proceedings and motions filed by Producers seeking essentially identical relief (viz., segregation and payment of proceeds attributable to oil and gas production between June 1, 2008 and the Petition Date), the Court directed that representatives of the Debtors, the Producers and the Debtors’ secured lenders (hereinafter, the “Banks”) meet and confer to develop a set of procedures that could be used to resolve the priority dispute in an efficient and economical manner. The parties presented them joint proposal to the Court for approval on September 17, 2008, and the Court subsequently entered two orders (the “Producer Claims Procedure Orders”)[Case No. 08-11525, Docket Nos. 1425 and 1557].
The structure approved by the Court called for the Producers to initiate one adversary proceeding (each, a “Producer Adversary”) against the Debtors for each state in which Producers had sold oil or gas to the Debtors, a total of eight states. The purpose of these adversary proceedings was to obtain declaratory judgments establishing (i) what rights, if any, are afforded by eách respective state’s law to a producer of oil or natural gas who sells oil or natural gas to a first purchaser, such as the Debtors here, and (ii) the priority of these rights relative to the Banks’ asserted security interests in the Debtors’ cash and inventory. Any party who sold oil and gas to the Debtors was free to participate in this litigation, and the Producer Claims Procedures Orders expressly provided that the results of the litigation would be binding upon all such oil and gas producers irrespective of whether they actively participated in this process.
New Dominion was the lead plaintiff in the Oklahoma action, and Samson was the lead plaintiff in three others. The Downstream Purchasers moved to intervene in the Producer Adversaries and that motion was granted on February 26, 2009 [Adv. Case No. 08-51445, Docket No. 116]. The Downstream Purchasers sought declaratory relief establishing that they acquired or *89purchased oil and gas from the Debtors free and clear of all liens, claims and interests pursuant to, inter alia, the terms of their oil and gas sale contracts with the Debtors, industry custom and applicable state and federal law.
Producers from Oklahoma argued that Oklahoma’s Production Revenue Standards Act (“PRSA”), Okla. Stat. tit. 52, § 570.1 et seq., imposes a resulting, implied or constructive trust in favor of the Producers for the oil and gas they sold to the Debtors. In an opinion dated June 19, 2009, this Court held that the PRSA does not impose such a trust, and that the Banks’ prior perfected security interests are superior to the rights and interests the Producers asserted under the PRSA. See Samson Resources Co. v. SemCrude, L.P., 407 B.R. 140 (Bankr.D.Del.2009).
Certain Producers from Texas argued that § 9.343 of the Texas Business & Commerce Code grants them automatically-perfected purchase money security interests superior to any created under Article 9’s usual perfection scheme. Also by opinion dated June 19, 2009, this Court held that a prior duly-perfected security interest is superior to a security interest perfected only in Texas pursuant to § 9.343 of the Texas Business & Commerce Code. See Arrow Oil & Gas, Inc. v. SemCrude, L.P., 407 B.R. 112, 139 (Bankr.D.Del.2009). Finally, in a third opinion, this Court likewise held that a duly perfected security interest arising under Article 9 is superior to one created by a Kansas law purportedly granting automatic perfection to that state’s oil and gas producers. See Mull Drilling Co., Inc. v. SemCrude, L.P., 407 B.R. 82, 110 (Bankr.D.Del.2009).
C. The Commencement of these Adversary Proceedings by J. Aron, Conoco, B.P. and Plains
During the pendency of the Producer Adversaries described above, but more than six months before the Court issued its three opinions determining that the Producers’ lien and trust claims were subordinate to the Banks’ prior perfected security interests, each of the plaintiffs herein sought to offset their obligations to and from the Debtors, and then to pay over to the Debtors the net amount due. Because each of the plaintiffs (all of which are Downstream Purchasers) was concerned about potential double liability in the event the Producers were successful in asserting their lien and trust claims, the Downstream Purchasers each sought declarations from this Court that the tender of its net settlement amount to Debtors would constitute full performance and that it would have no other obligation to any other party, including to the Producers, for the oil and gas it received.
The Downstream Purchasers’ asserted netting rights arise under their respect contracts with the Debtors. Each Downstream Purchaser was party to an ISDA master agreement and associated documents (the “Trading Agreements”), which governed the purchase, sale and trading of energy commodities between the respective Downstream Purchasers and the Debtor. See, e.g., Case No. 08-11525, Docket No. 3174, Ex. 1. Under the Trading Agreements, all individual transactions between each Downstream Purchaser and the Debtors are aggregated, with the party owing the greater amount in any given month obligated to pay the difference between the amount it owed versus the amount it was entitled to receive for that month. A bankruptcy filing of either party constitutes an event of default and allows the non-defaulting party to terminate the contract and determine a net settlement amount for all outstanding transactions. Upon default, the defaulting party’s obligations under the agreements are “ac-*90eelerated, terminated, or cancelled.... ” Case No. 08-11525, Docket No. 3174, Ex. 1, Schedule Part 7(e)(i)(B). The Trading agreements also provide rights of indemnification9 and warranties of good title.10
The Debtors’ bankruptcy filing constituted an event of default under these Trading Agreements. Through the Tender Adversaries, the Downstream Purchasers now seek declaratory judgment that performance under these agreements — -that is, termination of the agreement and payment of the net amount owed by them to the Debtors — will free them from any further obligation to any other party, including the Producers. The Producers oppose such relief and contend that the Downstream Purchasers remain on the hook to pay the Producers for oil and gas transferred to the Downstream Purchasers until the Producers are paid in full.
On October 6, 2008 Conoco filed a complaint (the “Conoco Complaint”)[Adv. No. 08-51457, Docket No. 1], initiating the above-captioned adversary proceeding number 08-51457. The same day, Conoco filed a “Motion to Tender” [Case No. 08-11525, Docket. No. 1666] seeking authority to pay Conoco’s net settlement amount of approximately $11.6 million in full satisfaction of Conoco’s obligations to the Debtors under their various agreements. In connection with the Motion to Tender, the Conoco Complaint seeks, inter alia, (i) a declaration from this Court that tender of the net settlement amount constitutes full performance under its Trading Agreements, (ii) a determination of the validity, priority and extent of any interest in the $11.6 million net settlement amount, and (iii) a declaration that Conoco has “no obligations to any persons or entities other than SemCrude with respect to [its Trading Agreements] or arising out of or in connection with the performance thereof.” (Conoco Complaint 12). The Debtors were and are defendants to that action. The Conoco Complaint was amended on February 2, 2009, to add Samson as a defendant [Adv. No. 08-51457, Docket No. 3].
B.P. initiated its adversary proceeding on February 4, 2009 [Adv. No. 09-50105, Docket No. 1]. Naming the Debtors and the Producers as defendants, B.P. likewise sought, inter alia, a declaration from this Court that the tender of its approximately $10.6 million net settlement amount to the Debtors would constitute full performance under its Trading Agreements.
Plains, having already tendered to the Debtors the majority of the amount it claims it owed under its Trading Agreements, initiated its adversary proceeding on May 29, 2009, seeking, inter alia, a declaration that tender of the remaining amounts due under those Trading Agreements (approximately $2.3 million) would constitute full performance [Adv. No. 09-51003, Docket No. 1].
*91Finally, J. Aron filed a complaint on January 20, 2009, thereby initiating a Tender Adversary (as amended, the “J. Aron Complaint”)[Adv. No. 09-50038, Docket No. 2851]. J. Aron sought, inter alia, declarations from this Court that its proposed roughly $90 million tender would absolve it of any further obligation under its Trading Agreement to the Debtors or any other relevant party.
D. The Tender Orders
The Debtors filed answers and counterclaims to the Downstream Purchasers’ complaints on March 30, 3009.11 The Debtors asserted that this Court has jurisdiction over the Tender Adversaries and that the matter is a “core proceeding under 28 U.S.C. § 157(b)(2) because the matters at issue herein concern, without limitation, the administration of the Debtors’ estate, counterclaims by the Debtors’ estate, orders to turn over property of the Debtors’ estate, and determination of the validity, extent, or priority of liens.” See, e.g., Adv. No. 09-50105, Docket No. 27 ¶¶ 3-4. The Debtors also counterclaimed that the Downstream Purchasers’ failure to immediately tender their respective net settlement amounts harmed the Debtors and constituted breach of contract.
First in the J. Aron Tender Adversary, and then in the other Tender Adversaries, the parties conferred and ultimately agreed that the Downstream Purchasers would turn over to Debtors the amounts they owed under their Trading Agreements. This Court entered orders accordingly (the “Tender Orders”), directing each Downstream Purchaser to turn over such amounts (the “Tendered Funds”).12 This was to be done “without prejudice to [the Downstream Purchasers’] claims against the Debtors for indemnity, breach of warranty, attorneys fees and other expenses pursuant to the [parties’ Trading Agreements].” (Tender Orders, 1). The Downstream Purchasers retained their rights and priorities in the Tendered Funds, and the Court ordered that the Tendered Funds were not to be “released or distributed to any person without further order of the Court.” (Tender Orders, 2).
Nevertheless, on September 15, 2009, Debtors filed a motion in aid of confirmation [Case No. 08-11525, Docket No. 5656] requesting the release of the Tendered Funds to fund distributions under the Debtors’ proposed plan of reorganization (the “Plan”). The Downstream Purchasers vigorously objected, arguing that such a release would violate the Tender Order.
E. The Confirmation Order
Shortly before the October 26, 2009 plan confirmation hearing, the Producers, Debtors, B.P., Conoco, and J. Aron reached a settlement. That settlement is adopted into the confirmation order which this Court entered on October 28, 2009 [Case No. 08-11525, Docket No. 6347](the “Confirmation Order”). Under the settlement, the Downstream Purchasers agreed that the Tendered Funds would be released to fund distributions pursuant to the Plan. With respect to jurisdiction, the Confirmation Order provides as follows:
This Court shall retain and have exclusive jurisdiction of all matters arising out of, or related to, the Chapter 11 Cases or the Fourth Amended Plan ... including, without limitation, ... (b) The Court, to the full extent appropriate un*92der applicable law, hereby retains jurisdiction over the Tender Adversaries] ... and the Third Party Producer Liti-gations ... and will assume jurisdiction of the District Court Third Party Producer Litigations ... in the event such litigations were to be transferred to the Court.
Confirmation Order ¶¶ 42 & 65(b).
The Confirmation Order also preserves, as a general unsecured claim against the Debtors, the Downstream Purchasers’ claims for “breach of warranty, indemnity, and attorney’s fees for which [the Downstream Purchasers] would have a claim against SemGroup under the terms of the [Trading Agreements].” (Confirmation Order ¶¶ 65(f), 67(e)). Finally, the Confirmation Order requires the Debtor to “cooperate in any discovery” in “any other litigation by oil and gas producers against [the Downstream Purchasers] relating to oil and gas [the Downstream Purchasers] purchased from the Debtors.” Id.
F. Oklahoma and Other State Court Actions
The Producers have now filed nearly 30 separate lawsuits against the Downstream Purchasers (the “Producer-Downstream Purchaser Actions”). These suits have been filed in state and federal courts in Oklahoma, Texas, and New Mexico. Samson alone has filed 24 such suits. All have been removed to federal court. These Producer-Downstream Purchaser Actions seek payment from the Debtors’ customers for oil and gas those customers bought from the Debtors and for which production the Debtors have not paid the respective Producers.
The Downstream Purchasers moved in the respective federal district courts to transfer each of the Producer-Downstream Purchaser Actions to this Court. Each of the courts to rule on those motions — and the record before the Court reflects that only the New Mexico has not yet ruled — has granted the motion to transfer the case to this Court.13 In so ruling, those courts have cited, among other considerations, the risk of inconsistent rulings and the desirability of efficient administration. See, e.g., New Dominion, L.L.C. v. B.P. Supply Co., Case No. 09-cv-75 (E.D.Okla. May 11, 2009)(citing “duplication of effort and the risk of inconsistent rulings”).
G. Relief Presently Sought
The Producers now ask this Court to dismiss, or, in the alternative, abstain from presiding over the Tender Adversaries. The Producers would like the courts of OHahoma, Texas and New Mexico to instead determine the validity of their liens and attendant claims against the Downstream Purchasers. The Producers argue that this Court lacks subject matter jurisdiction over a dispute between non-debtors, because the matter at hand is neither a “core” proceeding under 28 U.S.C. § 157(b)(2) nor is it “related to” the bankruptcy proceeding under 28 U.S.C. § 1334(b). In the alternative, they urge the Court to abstain from hearing the case, either by operation of mandatory or permissive abstention.
III. STANDARD OF REVIEW
“When subject matter jurisdiction is challenged under Rule 12(b)(1), the plain*93tiff must bear the burden of persuasion.” Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1409 (3d Cir.1991). The Downstream Purchasers thus bear the burden of establishing that subject matter jurisdiction is proper in this Court.
In the Third Circuit, the leading case on dismissal under Rule 12(b)(1) is Gould Elecs., Inc. v. United States, 220 F.3d 169 (3d Cir.2000). Under Gould, “a Rule 12(b)(1) motion may be treated as either a facial or factual challenge to the court’s subject matter jurisdiction.” Id. at 176. Facial attacks challenge the sufficiency of the facts in the complaint, which the court must accept as true. Id. In reviewing a facial challenge to the court’s subject matter jurisdiction, the court must “accept all well-pleaded allegations in the complaint as true and view them in the light most favorable to the plaintiff.” In re Kaiser Group Int’l Inc., 399 F.3d 558, 561 (3d Cir.2005). Factual attacks go beyond the allegations in the complaint and challenge the facts upon which subject matter jurisdiction depends. Id. Where there has been a factual attack, a court is free to “weigh the evidence and satisfy itself as to the existence of its power to hear the case.” Mortensen v. First Federal Loan Ass’n, 549 F.2d 884, 891 (3d Cir.1977).
IV. DISCUSSION
The Motions to Dismiss require the Court to consider two questions: (i) whether the Court has subject matter jurisdiction over the Tender Adversaries; and (ii) if jurisdiction lies with this Court, whether the Court should abstain from hearing the Tender Adversaries in favor of allowing the Producer-Downstream Purchaser Actions to go forward in Oklahoma, Texas and New Mexico.
A. The Court’s Subject Matter Jurisdiction
1. Bankruptcy Jurisdiction Generally
The subject matter jurisdiction of bankruptcy courts is governed by 28 U.S.C. § 1334 and 28 U.S.C. § 157. The general scheme is this: “Section 1334 vests broad primary jurisdiction over bankruptcy proceedings in the District Courts. District Courts may, however refer bankruptcy matters falling within their jurisdiction to the Bankruptcy Courts under 28 U.S.C. § 157. District Courts have exercised this power by routinely referring most bankruptcy cases to the Bankruptcy Courts.” Halper v. Halper, 164 F.3d 830, 836 (3d Cir.1999)(internal citations omitted).14
More specifically, § 1334(b) vests jurisdiction in the district court for matters “arising under title 11, or arising in or related to a case under title 11.” 28 U.S.C. § 1334(b). Matters “arising under title 11” for purposes of 28 U.S.C. § 1334(b) are those in which “a claim is made under a provisions of title 11.” H.R. Rep. No. 595, 95th Cong., 1st Sess. 445 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5963, 6401. In other words, the “cause of action is created by title 11.” 1 Collier on Bankruptcy § 3.01[3][c][i] (Alan N. Resnick et al. eds., 16th ed.2009). Matters “arising in” a bankruptcy case are typically “administrative matters that arise *94only in bankruptcy cases.” In re Eastport Assocs., 985 F.2d 1071, 1076 (9th Cir.1991). Finally, as will be discussed at greater length below, proceedings “related to” a case under title 11 are those whose outcome “could conceivably have any effect on the estate being administered in bankruptcy.” Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984, 994 (3d Cir.1984)(over-ruled on other grounds).
2. Core Jurisdiction in This Court
Section 157 divides bankruptcy matters into two categories: core and non-core. A bankruptcy judge has power to “hear, decide and enter final orders and judgments” in a core proceeding. Halper, 164 F.3d at 836; see 28 U.S.C. § 157(b)(1). A bankruptcy judge also has power to hear non-core proceedings: “A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11.” 28 U.S.C. § 157(c)(1). A bankruptcy court’s power over non-core proceedings is limited to submitting proposed findings of fact and conclusions of law to the district court. Id.
A non-exhaustive list of core matters is provided in 28 U.S.C. § 157(b)(2). For purposes of this case, the relevant enumerated core matters include “matters concerning the administration of the estate”, “determinations of the validity, extent, or priority of liens”, and “other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship. ...” 28 U.S.C. § 157(b)(2)(A), (K) and (O).
In addition, the Third Circuit has held that a matter is core if it “invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.” In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, 267 (3d Cir.1991). A court “must examine each of the [ ] claims presented to ascertain if it is core, non-core, or wholly unrelated to a bankruptcy case.” Halper, 164 F.3d at 837. Thus, the Court must consider whether each claim in the Tender Adversary complaints is a core claim enumerated in 28 U.S.C. § 157(b)(2) or a claim that “could arise only in the context of a bankruptcy case.” Any claim failing those tests is not core, and must then be analyzed to determine whether it is “related to” the Debtors’ bankruptcy case at all.
Taking the J. Aron Complaint as an example, the Downstream Purchasers seek the following declarations:
(i) “[T]he Trading Agreement is valid and enforceable”;
(ii) J. Aron’s “rights to deduct from the Tendered Amount and to recover continuing legal fees and costs ... are valid and enforceable”;
(iii) “[T]he Trading Agreement provides rights of netting and recoupment to determine the sum total amount of any and all of J. Aron’s financial obligations” to the Defendants, “and that J. Aron has no obligation to pay any more than the Tendered Amount or any portion thereof’;
(iv) “Defendants have no lien or trust rights nor any other actionable claims (including, without limitation, claims against sums received by J. Aron upon its sale of oil acquired from SemGroup) as a matter of law and of fact, and that J. Aron has complete defenses to any such lien, trust or other claims, or such claims are unenforceable against J. Aron”;
(v) J. Aron’s rights arising under its Trading Agreement are “superior to those of any Defendant or other creditor, whether secured or unsecured”;
*95(vi) J. Aron’s “Tendered Amount constitutes full and faithful performance under the Trading Agreement, and shall be the sole amount due, in full satisfaction thereof, and thereby extinguishes and resolves without further recourse any contingent or non-contingent claims or any other cause of action against J. Aron by [any other party], that J. Aron has no obligation to pay more than once the Tendered Amount or any portion thereof.”
J. Aron Compl. ¶¶ 26-31.
Insofar as each of these counts relate to the Debtors and their secured lenders, they are core matters arising in a bankruptcy case pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2). Each declaration would directly alter the Debtors’ obligations to the Downstream Purchasers and would implicate property of the estate. Considering the Downstream Purchasers’ counts for declaratory judgments of their rights vis-á-vis the Producers, however, the impact of each of these declarations upon the Debtors’ estates is much less direct, and therefore is not a core matter. Turning to the specific claims against the Producers, the Downstream Purchasers seek a declaration that the Producers have no lien or trust rights, or that the Downstream Purchasers have complete defenses to such rights. At first blush, this relief seems to fit within § 157(b)(2)(K)’s “determinations of the validity, extent, or priority of liens.” The question of the Producers’ lien and trust rights against Debtors and the Banks has largely been resolved by this Court’s opinions in the Producer Adversaries. See Mull Drilling Co. v. SemCrude, L.P., 407 B.R. 82 (Bankr.D.Del.2009); Arrow Oil & Gas, Inc. v. SemCrude, L.P., 407 B.R. 112 (Bankr. D.Del.2009); Samson Resources Co. v. SemCrude, L.P., 407 B.R. 140 (Bankr.D.Del.2009)(collectively ruling that the Producers do not possess trust rights over sold oil and gas, and further holding that Texas and Kansas state law gives Producers, at best, lien rights subordinate to duly perfected article 9 security interests asserted by Banks). What remains is primarily a determination of the Producers’ lien and trust rights vis-a-vis the Downstream Purchasers. These parties are all non-debtors. To the extent the dispute could affect Debtors’ estates, such a determination may provide a basis for related-to jurisdiction under § 157(a), but it does not constitute a core matter.
The same logic counsels against a broad reading of “other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship” in § 157(b)(0) and “matters concerning the administration of the estate” in § 157(b)(A). An overly broad reading of these sections could result in a standard no different than PacoPs “conceivable effect” standard, which is intended to be a less stringent standard for non-core matters merely “related to” a bankruptcy case. Pacor, 743 F.2d at 994. Insofar as they relate to the Producers, the essence of all of the declarations sought by the Downstream Purchasers is that the Downstream Purchasers are not obligated to the Producers for any oil or gas they bought from the Debtors, in excess of the net settlement amount calculated under their respective Trading Agreements. Any relationship this dispute bears to the estate is too attenuated to be called core.
In addition, the Tender Adversaries are not based on claims that could arise only in a bankruptcy case, but theoretically could arise in a typical purchase and subsequent resale of oil and gas that is purportedly subject to trust rights of liens under the various state laws at issue here. In re Marcus Hook Dev. Park, 943 F.2d at 267. *96Based upon the foregoing, the Court finds that the claims relating to an adjudication or declaration of the rights of the Downstream Purchasers vis-a-vis the Producers, which are the subject of the pending Motions to Dismiss, are not core proceedings under 28 U.S.C. § 157(b).
3. Related-to Jurisdiction
a. Related-to Jurisdiction Generally
Because the Tender Adversaries involve disputes between non-debtors about state law issues, the Court’s subject matter jurisdiction is at best non-core, related-to jurisdiction pursuant to 28 U.S.C. § 1334(b). The Producers argue that this Court lacks subject matter jurisdiction to hear these adversary proceedings. The seminal case in this Circuit on the subject is Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984 (3d Cir.1984)(overruled on other grounds). Under Pacor, related-to jurisdiction exists if “the outcome of [a] proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Id. at 994. This includes a proceeding “whose outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.” Id. The Third Circuit has recently clarified that “[bjroadly worded as [the Pacor test] is ... related-to jurisdiction ‘is not without limitation’.” W.R. Grace & Co. v. Chakarian (In re W.R. Grace & Co.), 591 F.3d 164, 171 (3d Cir.2009).
b. Time-of-filing
Before this Court can apply the Pacor test, it must determine the appropriate point in time to which the test should relate. In other words, should the Court assess the conceivable effect on the estate as it stands today, or the conceivable effect on the estate at the time the Tender Adversaries were filed?
The general rule is that subject matter jurisdiction is based on the state of facts that existed at the time an action is filed. “It has long been the case that ‘the jurisdiction of the court depends upon the state of things at the time of the action brought.’ This time-of-filing rule is horn-book law (quite literally) taught to first year law students in any basic course on federal civil procedure.” Grupo Dataflux v. Atlas Global Group, L.P., 541 U.S. 567, 570-71, 124 S.Ct. 1920, 158 L.Ed.2d 866 (2004)(quoting Mollan v. Torrance, 9 Wheat. 537, 22 U.S. 537, 6 L.Ed. 154 (1824))(applying time-of-filing rule in a diversity jurisdiction case); see also Freeport-McMoRan, Inc. v. K N Energy, 498 U.S. 426, 428, 111 S.Ct. 858, 112 L.Ed.2d 951 (1991)(same); Keene Corp. v. United States, 508 U.S. 200, 207, 113 S.Ct. 2035, 124 L.Ed.2d 118 (1993)(applying time-of-filing rule in a federal question case); Vianix Del. LLC v. Nuance Commc’ns, Inc., 2009 WL 1364346, at *2 (D.Del. 2009)(same).
The Producers point the Court to two cases from this Circuit in which courts declined to apply the time-of-filing rule in federal question cases. See New Rock Asset Partners, L.P. v. Preferred Entity Advancements, Inc., 101 F.3d 1492 (3d Cir. 1996); Enterprise Bank v. Eltech, Inc. (In re Eltech, Inc.), 313 B.R. 659 (Bankr.W.D.Pa.2004). They argue that this Court should assess its subject matter jurisdiction as it stands now, post-confirmation, rather than at the time the Tender Adversaries were filed.
In New Rock, the Third Circuit declined to apply the time-of-filing rule in a federal question case, noting that “the letter and spirit of the rule apply most clearly to diversity cases.” 101 F.3d at 1503. The *97underlying dispute in New Rock was a state law claim. Entry of the Resolution Trust Corporation (“RTC”) as a party gave rise to federal-question jurisdiction under the Financial Institutions Reform, Recovery, and Enforcement Act (“FIR-REA”). See 12 U.S.C. § 1441a(1) (extending federal jurisdiction to “any civil action, suit, or proceeding to which the [RTC] is a party”). The RTC was then dismissed from the case and a private party was substituted for it. Because federal jurisdiction was premised entirely upon the RTC’s presence in the case, the Third Circuit held that it no longer had continuing jurisdiction under FIRREA. 101 F.3d at 1501. In so holding, the court noted that “courts have not hesitated to abandon [the time-of-filing rule] where appropriate” and that “merely citing the time-of-filing rule is not enough to support jurisdiction in this case.” Id. at 1504. New Rock rejects an “absolute time of filing requirement”, but nowhere prohibits its application where appropriate. Id.
Indeed, Supreme Court decisions subsequent to New Rock demonstrate the continuing vitality of and justifications for the time-of-filing rule. See Grupo Dataflux, 541 U.S. at 582, 124 S.Ct. 1920 (“We decline to endorse a new exception to a time-of-filing rule that has a pedigree of almost two centuries. Uncertainty regarding the question of jurisdiction is particularly undesirable, and collateral litigation on the point particularly wasteful.”). In 2003, the Supreme Court recited the rule while upholding subject matter jurisdiction in a federal question case. Dole Food Company v. Patrickson, 538 U.S. 468, 478, 123 S.Ct. 1655, 155 L.Ed.2d 643 (2003)(“[J]u-risdiction of the Court depends upon the state of things at the time of the action brought.”).
The Producers also cite a recent decision from the Bankruptcy Court for the Western District of Pennsylvania for the proposition that plan confirmation or other similar events may divest a bankruptcy court of subject matter jurisdiction. In re El-tech, Inc., 313 B.R. 659 (Bankr.W.D.Pa.2004). In Eltech, the court found that it no longer had subject matter jurisdiction over a Chapter 11 case after it converted to a no-asset Chapter 7 case. See Eltech, 313 B.R. at 661. Notably, however, the court held that it “did not possess[ ] subject matter' jurisdiction over the instant adversary proceeding when the [complaint was filed].” Id. at 666. The same is true of a case upon which Eltech expressly relied. See In re Spree.com Corp., 295 B.R. 762, 768 (Bankr.E.D.Pa.2003)(“[I]t is not subsequent events that divest this court of jurisdiction, but rather the subsequent revelation of facts that were in existence with the [action] was commenced that show jurisdiction was lacking at the proceeding’s inception.”).
Certain of the Producers have also urged this Court to take a narrow view of its post-confirmation subject matter jurisdiction under Geruschat v. Ernst Young LLP (In re Seven Fields Dev. Corp.), 505 F.3d 237 (3d Cir.2007) and Binder v. Price Waterhouse Co. (In re Resorts Int’l, Inc.), 372 F.3d 154 (3d Cir.2004). Those cases held that a stricter standard — the “close nexus” standard — “applies for the purposes of determining whether a federal court has jurisdiction over a non-core ‘related-to’ proceeding in the post-confirmation context.” Seven Fields, 505 F.3d at 260 (citing Resorts, 372 F.3d at 167-71). But those cases limit application of the “close nexus” test to a “claim or cause of action filed post-confirmation.” Seven Fields, 505 F.3d at 265 (emphasis added).
The Tender Adversaries were filed in the thick of Debtors’ main bankruptcy case, ranging from ten months (J. Aron) to two months (Plains) before plan confirma*98tion. They are based on pre-petition agreements and conduct. They are only being adjudicated now, post-confirmation, because the Downstream Purchasers’ complaints for declaratory judgment yielded to the urgent collective exercise of reorganizing a large and complex group of debtors before confirmation. The heightened scrutiny required by Seven Fields and Resorts is therefore inapplicable to this case. See Newby v. Enron Corp. (In re Enron Corp. Sec.), 535 F.3d 325 (5th Cir.2008)(“[Plaintiffs] cannot point to a single case in which we have held that a plan confirmation divests a District Court of bankruptcy jurisdiction over pre-confirmation claims based on pre-confirmation activities that properly had been removed pursuant to ‘related-to’ jurisdiction. We likewise find none.”).
For the foregoing reasons, the Court will apply the Pacor test to the facts as they stood at the time the Tender Adversaries were filed.
c. Application
The most recent controlling decision construing the bounds of related-to jurisdiction under Pacor is the Third Circuit’s ruling in the W.R. Grace case. In re W.R. Grace & Co., 591 F.3d 164 (3d Cir.2009). The parties to these Tender Adversaries disagree about the import of the W.R. Grace holding, each claiming that it supports their position. It is therefore worthwhile to review the facts of W.R. Grace and compare them to the facts of this case, bearing in mind that the Court assesses its jurisdiction as of the time the Tender Adversaries were filed.
W.R. Grace (“Grace”) was a debtor in possession in this Court. Prior to Grace’s bankruptcy filing, certain plaintiffs brought suit in Montana state courts claiming the State of Montana was negligent for failing to warn them of risks of asbestos in Grace’s mine. Montana asked the Bankruptcy Court to lift the automatic stay so that Montana could implead Grace as a third-party defendant in the Montana lawsuits. Grace objected and responded with a motion requesting that the Bankruptcy Court expand its preliminary injunction to enjoin suits against the State of Montana. Grace argued that it shared an identity of interests with the State of Montana such that a suit against Montana was essentially a suit against Grace, because Montana could potentially bring suit against Grace for common law indemnity for any losses it sustained. Id. at 168. The question the Bankruptcy Court faced was whether it possessed subject matter jurisdiction over the Montana lawsuits sufficient to expand the injunction. The Bankruptcy Court held that it lacked subject matter jurisdiction to enjoin the Montana lawsuits, and therefore declined to expand its preliminary injunction to cover those lawsuits. Id. at 169.
The Third Circuit agreed. Reviewing Pacor and its progeny, the Third Circuit noted that “in Pacor, we were clear that an inchoate claim of common law indemnity is not, in and of itself, enough to establish the bankruptcy court’s subject matter jurisdiction.” 591 F.3d at 171. The Third Circuit also observed that in In re Federal-Mogul Global, Inc., 300 F.3d 368 (3d Cir.2002), it had interpreted the Pacor test to require that a related lawsuit could conceivably affect the bankruptcy proceeding “without the intervention of another lawsuit.” W.R. Grace, 591 F.3d at 172 (quoting Federal-Mogul, 300 F.3d at 382). In other words, “there is no related-to jurisdiction over a third-party claim if there would need to be another lawsuit before the third-party claim could have any impact on the bankruptcy proceedings.” Id.
In order for the Montana state court actions to affect Grace’s bankruptcy proceedings, Montana would have had to *99bring a separate lawsuit against Grace and prevail on a claim for common law indemnity. The Third Circuit distinguished that case from its earlier decision in W.R. Grace, where it had expanded a preliminary injunction to cover Grace’s insurer, MCC:
It bears re-emphasis that MCC and Grace were parties to a contract in which Grace had agreed to indemnify MCC against any future asbestos-related claims filed against MCC that arose out of Grace’s asbestos liability. Thus, MCC had a clear contractual right to indemnity, which may have presented a more direct threat to Grace’s reorganization. In the present case, by contrast, Montana has only a ‘potential common law indemnification claim against Debtors pending the outcome of the state action, which falls far short of direct or automatic liability....’
591 F.3d at 173-74 (quoting In re W.R. Grace & Co. v. Libby Claimants, 2008 WL 3522453, 2008 U.S. Dist. LEXIS 61361 (D.Del.2008)). While the W.R. Grace decision clearly supports the relevancy of the distinction between common law and contractual indemnification, it did “not mean to imply that contractual indemnity rights are in themselves sufficient to bring a dispute within the ambit of related-to jurisdiction.” 591 F.3d at 174 n. 9. That determination must be “developed on a fact-specific, case-by-case basis.” Id.
The Downstream Purchasers in this case retained certain contractual indemnification and breach of warranty of title claims against the Debtors. They argue that a suit against them will necessarily affect Debtors’ estate. The Producers, on the other hand, argue that enforcement of these indemnification claims will require “intervention of another lawsuit,” thus defeating related-to jurisdiction under W.R. Grace. 591 F.3d at 172.
The Downstream Purchaser’s Tender Adversary complaints seek declarations that they have “rights of netting and re-coupment,” that they have “no obligation to pay any more than the Tendered Amount or any portion thereof,” and that their rights in the purchased oil are “superior to those of any Defendant or other creditor.” See, e.g., J. Aron Compl. ¶¶ 26-31. The effect of any such declarations would be to adjust the amount of money owed by and to the Debtors’ estate. The Tender Adversaries seek the resolution of the competing claims of the Producers, the Debtors, and the Downstream Purchasers in the same res. If the Court were to disallow netting or recoupment, for example, or were it to order that the Downstream Purchasers tender more or less than they proposed, the Debtors’ estate would be directly affected. Any determination of the Downstream Purchasers’ claims will necessarily affect the distribution to which other creditors are entitled under the Plan. The potential effect on the Debtors’ estate thus goes far beyond the inchoate common law indemnity claims found insufficient in W.R. Grace.
The facts of this case are almost identical to those of a recent Fifth Circuit case, In re TXNB Internal Case, 483 F.3d 292 (5th Cir.2007). Using the same “conceivable effect” standard as is used in the Third Circuit, the Fifth Circuit held that the bankruptcy court had jurisdiction because (substituting our parties for theirs) “someone owes [the Producers] money for the gas; if it is not [the Downstream Purchasers], it is [Debtors]. If it is [the Downstream Purchasers], then [the Downstream Purchasers] will have discharged a liability of the debtors and ... will probably file a claim against the debtors’ estates for reimbursement.” TXNB, 483 F.3d at 298.
*100The Producers urge that this case is more like the Third Circuit case Quattrone Accountants, Inc. v. IRS, 895 F.2d 921 (3d Cir.1990). In that case, the IRS assessed a 100% penalty against Quattrone Accountants, which was a business debtor, and a separate 100% penalty against Philip Quattrone, part owner of Quattrone Accountants, for withholding taxes. Philip Quattrone argued that his case was related to the debtor’s bankruptcy case because any amount collected against him would reduce the amount the debtor would owe the IRS. The court disagreed, noting that Philip Quattrone’s liability to the IRS was “entirely separate and distinct” and that the debtor was jointly and severally liable for 100% of the penalty regardless of what was collected from Philip Quattrone. Id. at 926. Here, it cannot be said that the Downstream Purchasers’ liability will “in no way affect the debtor’s liability” to the Producers. Id. Instead, whatever the Producers recover against the Downstream Purchasers will likely have a direct effect on the estate’s obligations to the Downstream Purchasers. Unlike Quattrone, the Tender Adversaries involve competing claims over the estate’s assets. Quattrone is therefore inapposite.
In addition to the above-mentioned effects the Tender Adversaries may have on the Debtors’ estate, two additional considerations deserve mention. First is that the Tender Adversaries will likely require this Court to construe its own prior orders and rulings, including the Tender Orders, the settlements incorporated into the Plan and the three opinions issued in the Producer Adversaries. Second, the Debtors are required under the Confirmation Order to “cooperate in any discovery” in “any other litigation by oil and gas producers against [the Downstream Purchasers] relating to oil and gas [the Downstream Purchasers] purchased from the Debtors.” (Confirmation Order ¶¶ 65(f), 67(e)). The ongoing costs of defending the Tender Adversaries will have a considerable effect on the Debtors’ estate. And, as discussed further below in connection with abstention, the likely effect of this Court’s denial of jurisdiction or abstention from hearing the Tender Adversaries would be to scatter the litigation relating to the issues raised in the Tender Adversaries to numerous courts around the country. The effect on Debtors’ estate would then be multiplied.
Accordingly, the Court finds that subject matter jurisdiction exists in this Court under 28 U.S.C. § 1334 because the Tender Adversaries are “related to a case under title 11.”
B. Abstention
Having determined that the Court did and does have subject matter jurisdiction over the Tender Adversaries, the Court now considers whether it must or should abstain from hearing these matters in favor of allowing the Producer-Downstream Purchaser Actions to go forward in Oklahoma, Texas and New Mexico.
1. Mandatory Abstention
The Producers first argue that this Court is required to abstain from hearing the Tender Adversaries under 28 U.S.C. § 1334(c)(2). Under § 1334(c)(2), there are six requirements for mandatory abstention: (i) the motion to abstain is timely; (ii) the action is based upon a state law claim or cause of action; (iii) an action has been commenced in state court; (iv) the action can be timely adjudicated; (v) there is no independent basis for federal jurisdiction which would have permitted the action to be commenced in federal court absent bankruptcy; and (vi) the matter is non-core. See In re LaRoche Indus., Inc., 312 B.R. 249, 252-253 (Bankr. *101D.Del.2004). A party moving for mandatory abstention “must meet all the requirements of mandatory abstention for relief to be granted.” In re Mobile Tool Int’l, Inc., 320 B.R. 552, 556 (Bankr.D.Del.2005).
Samson was the first Producer to file a motion for this Court to abstain from hearing the Tender Adversaries. See Adv. No. 09-50038, Docket No. 6. At that time, no state action was pending. Only after J. Aron pointed out the deficiency did Samson file its numerous state court actions. In addition, the various state court actions do not appear to contain all of the parties and all of the causes of action encompassed by the Tender Adversaries, calling into question whether “an action” has been “commenced” for purposes of § 1334(c)(2). See In re Nationwide Roofing & Sheet Metal, Inc., 130 B.R. 768 (Bankr.S.D.Ohio 1991)(“[A]lthough the state court proceeding does contain some of the same parties and some of the same causes of action which are present in this adversary, the state court proceeding could not, if [plaintiff) prevailed, provide the relief which Nationwide could obtain in this adversary. ...”); see also Indian River Homes, Inc., 1993 U.S. Dist. LEXIS 2521 (D.Del.l993)(following Nationwide Roofing and holding that amendment of the pleadings to add parties and causes of action would not satisfy the previous state action requirement). Because it appears that a state action has not properly been commenced for purposes of 28 U.S.C. § 1334(c)(2), mandatory abstention is not appropriate.
2. Permissive Abstention
The Producers also urge this Court to exercise its discretionary authority to abstain pursuant to 28 U.S.C. § 1334(c)(1).15
Courts have identified the following twelve factors as relevant to permissive abstention:
(1) the effect on the efficient administration of the estate; (2) the extent to which state law issues predominate over bankruptcy issues; (3) the difficulty or unsettled nature of applicable state law; (4) the presence of a related proceeding commenced in state court or other non-bankruptcy court; (5) the jurisdictional basis, if any, other than section 1334; (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case; (7) the substance rather than the form of an asserted “core” proceeding; (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court; (9) the burden on the court’s docket; (10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties; (11) the existence of a right to a jury trial; and (12) the presence of non-debtor parties.
In re Mobile Tool Int’l, 320 B.R. 552, 556-57 (Bankr.D.Del.2005).
A number of these factors weigh in favor of abstention. For example, the Court will be called upon to interpret state laws and regulations governing the oil and gas industry, including questions which appear largely unsettled. The Tender Adversaries involve many non-debtor parties, and this Court’s subject matter jurisdiction is (as discussed above) predicated solely upon 28 U.S.C. § 1334(b). The Producers *102have made a demand for a jury trial.16 On the other hand, determination of these issues will likely require construction of this Court’s prior orders and rulings. Additionally, with all due respect to our sister courts, it appears that this Court is well-positioned to provide for the efficient administration of the cases, as it is familiar with the factual background and the parties, and provides a unified forum to consider all claims.
Given these countervailing considerations, if this Court was considering permissive abstention on a blank slate, it would perhaps be a close question whether to keep the matters pending here or send them to other courts for adjudication. The Court does not write on a blank slate in this regard, however. At last count, six federal judges have transferred venue of the Producer-Downstream Purchaser Actions, including Judges Payne and White of the Eastern District of Oklahoma,17 Judges Frizzell and Kern of the Northern District of Oklahoma,18 Judge Heaton of the Western District of Oklahoma,19 and Judge Robinson of the Northern District of Texas.20
Judge Payne, the first to so rule, ordered the actions transferred to this Court to avoid “duplication of effort and the risk of inconsistent rulings” and also cited “the interest of justice” and “the convenience of the parties.” Order, New Dominion, L.L.C. v. B.P. Supply Co., Case No. 09-cv-75 (E.D.Okla. May 11, 2009). Judges Frizzell and White cited similar concerns. Order, Samson Res. Co. v. BP Oil Supply Co., Case No. 08-cv-753 (N.D.Okla. June 11, 2009); Order, New Dominion, LLC v. J. Aron & Co., Case No. 09-cv-007 (E.D.Okla. June 30, 2009). Judge Kern of the Northern District of Oklahoma transferred three cases to this Court “for the same reasons espoused by Judge Frizzell, Judge Payne and Judge White.... ” Order, Samson Res. Co. v. J. Avon & Co., Case No. 08-cv-752 (N.D.Okla. July 14, 2009). Finally, Judge Heaton of the Western District of Oklahoma transferred 15 cases to this Court, reasoning as follows:
*103Transfer avoids the duplication of effort by litigants and witnesses and the risk of inconsistent rulings, while conserving judicial resources and promoting the efficient administration of the bankruptcy estate. The significant disputes between the parties as to the interpretation of the confirmed plan are a further indication that the issues presented in these cases would most appropriately be heard by the Bankruptcy Court.
Order, Samson Res. Co. v. Valero Mktg. & Supply Co., Case No. 09-cv-807 at 7 (W.D.Okla. Nov. 19, 2009).21
These holdings are nearly dis-positive of the permissive abstention question before this Court under the doctrine of law of the case. “The doctrine of the law of the case posits that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.” Arizona v. California, 460 U.S. 605, 618, 103 S.Ct. 1382, 75 L.Ed.2d 318 (1983). While the Court acknowledges that the doctrine of the law of the case is a “prudential rather than a jurisdictional restriction on a court’s authority to reconsider an issue,” Women’s Equity Action League v. Cavazos, 906 F.2d 742, 751 n. 14 (D.C.Cir.1990), it also notes that application of the doctrine to transfer decisions is especially important: “Indeed, the policies supporting the doctrine apply with even greater force to transfer decisions than to decisions of substantive law; transferee courts that feel entirely free to revisit transfer decisions of a coordinate court threaten to send litigants into a vicious circle of litigation.” Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 816, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988). “Perpetual game[s] of jurisdictional ping-pong” waste time and court resources. Id. at 832, 108 S.Ct. 2166. Further, the likely alternative to litigation in this Court would be multiple suits in various courts in at least four states. This would deplete the assets of the estate and could result in inconsistent rulings. The Court therefore declines to abstain from hearing the Tender Adversaries.
V. CONCLUSION
For the foregoing reasons, the Court finds that it has subject matter jurisdiction over the Tender Adversaries. The Court will not abstain from hearing the Tender Adversaries. Accordingly, the Motions to Dismiss are denied.
An appropriate order follows.
. This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to Federal Rule of Bankruptcy Procedure 7052. To the extent that this Court's jurisdiction is determined to be within the parameters of 28 U.S.C. § 157(c)(1), this Opinion and the accompanying Order shall be deemed to be the Court’s proposed findings of fact and conclusions of law.
. See Adv. No. 08-51457, Docket No. 5; Adv. No. 09-50038, Docket. Nos. 7, 80, 184 and 180; Adv. No. 09-50105, Docket Nos. 9 and 17; Adv. No. 09-51003, Docket No. 5.
. The Samson parties are as follows: Samson Resources Company, Samson Lone Star, LLC, and Samson Contour Energy E & P, LLC. See Adv. No. 08-51457, Docket No. 5; Adv. No. 09-50038, Docket. No. 7; Adv. No. 09-50105, Docket No. 9; Adv. No. 09-51003, Docket No. 5.
. See Adv. No. 09-50038, Docket No. 7; Adv. No. 09-50105, Docket No. 17.
. These other producer-defendants are as follows: Arrow Oil & Gas, Inc.; Chesapeake Energy Marketing, Inc.; Special Energy Corporation; DC Energy, Inc.; Thunder Oil and Gas, LLC; Veenker Resources, Inc.; Lance Ruffel Oil & Gas Corp.; JMA Energy Company, LLC; LCS Production, Co.; Murfin Drilling Company, Inc.; Vess Oil Corporation; LD Drilling, Inc.; Davis Petroleum, Inc.; RAMA Operating Co., Inc.; Mull Drilling Company, Inc.; D E Exploration, Inc.; Braden-Deem, Inc.; Dunne Equities, Inc.; Lario Oil & Gas Company; McCoy Petroleum Corporation; W.D. Short Oil Co., L.L.C.; Short & Short, L.L.C.; Tempest Energy Resources, L.P.; Calvin Noah; CMX, Inc.; L & J Oil Properties, Inc.; McGinness Oil Company of Kansas, Inc.; Daystar Petroleum, Inc.; F.G. Holl Company, L.L.C.; GRA EX, L.L.C.; V.J.I. Natural Resources, Inc.; J. & D. Investment Company; Landmark Resources, Inc.; Mid-Continent Energy Corporation; Molitor Oil, Inc.; Osborne Heirs Company; Pickrell Drilling Company, Inc.; Platte Valley Oil Company, Inc.; Midwest Energy, Inc.; Red Oak Energy, Inc.; Ritchie Exploration, Inc.; Thoroughbred Associates, L.L.C.; Viking Resources, Inc.; Vincent Oil; Wellstar Corporation; White Exploration, Inc.; and White Pine Petroleum Corporation.
The Court will include with this group another set of producer-defendants who filed separate briefs but whose arguments for present purposes are substantially similar. These include IC-CO, Inc., W.E.O.C., Inc., and Reserve Management. See Adv. No. 09-50038, Docket No. 80.
. Capitalized terms used in this Introduction are defined infra.
. For a more substantial discussion of the facts and circumstances leading up to the filing of the Debtors' Chapter 11 cases, see Samson Resources Co. v. SemCrude, L.P., 407 B.R. 140, 143-48 (Bankr.D.Del.2009).
. Samson and New Dominion were among those who commenced such actions. Samson Resources v. Eaglwing, L.P., Adv. No. 08-51146, Docket No. 1 ¶ 9; see also New Dominion, L.L.C. v. SemCrude, L.P., Adv. No. 0851147, Docket No. 1. Asserting that this Court had jurisdiction over the matter as a core proceeding pursuant to 28 U.S.C. § 157(b)(1) and (2), they asked this Court to direct that the Downstream Purchasers segregate any proceeds attributable to the Producers, and to direct that such funds be paid to them.
. By way of example, the J. Aron Trading Agreement provides that the defaulting party will:
on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees ... incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party is a party or by reason of the early termination of any Transaction including, but not limited to, costs of collection.
Case No. 08-11525, Docket No. 3174, Ex. 1, § 11.
. The parties adopted, as part of the Trading Agreements, Conoco's General Provisions [for] Domestic Crude Oil Agreements (the "Conoco General Provisions"). They provide that "all crude oil delivered hereunder shall be free from all royalties, liens, encumbrances and all applicable foreign, federal, state and local taxes.” Case No. 08-11525, Docket No. 3174, Ex. 2, Conoco General Provisions ¶6.
. See Adv. No. 08-51457, Docket No. 16; Adv. No. 09-50038, Docket No. 30; Adv. No. 09-50105, Docket No. 27; Adv. No. 09-51003, Docket No. 11.
. See Adv. No. 08-51457, Docket No. 51; Adv. No. 09-50038, Docket No. 77; Adv. No. 09-50105, Docket No. 59; Adv. No. 09-51003, Docket No. 52.
. See, e.g., Order, New Dominion, L.L.C. v. B.P. Supply Co., Case No. 09-cv-75 (E.D.Okla. May 11, 2009); Samson Res. Co. v. BP Oil Supply Co., Case No. 08-cv-753 (N.D.Okla. June 11, 2009); Order, Samson Res. Co. v. Valero Mktg. & Supply Co., Case No. 09-cv-807 (W.D.Okla. Nov. 19, 2009); Order Granting Mot. to Transfer, Samson Lone Star LLC v. ConocoPhillips Co., Case No. 09-cv-12 (N.D.Tex. Sept. 2, 2009).
. In relevant part, 28 U.S.C. § 1334 provides as follows:
(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.
(b) Except as provided in subsection (e)(2), and notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.
. 28 U.S.C. § 1334(c)(1) provides, in relevant part: "[NJothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.”
. As the court noted in Mobile Tool, however, "even if [these proceedings] proceed to trial and even if the Individual Defendants have a right to a jury trial, the adversaries can proceed in [the District Court] in Delaware.” 320 B.R. at 559.
. Order, New Dominion, L.L.C. v. B.P. Supply Co., Case No. 09-cv-75 (E.D.Okla. May 11, 2009); Order, New Dominion, LLC v. J. Aron & Co., Case No. 09-cv-007 (E.D.Okla. June 30, 2009); Order, IC-CO Inc. v. J. Aron & Co., Case No. 09-cv-122 (E.D.Okla. June 30, 2009); Order, Degge v. ConocoPhilips Co., Case No. 09-cv-161 (E.D.Okla. June 30, 2009); see also New Dominion, LLC v. 1. Aron & Co., Case No. 09-cv-478 (D.Del. July 1, 2009); IC-CO Inc. v. I. Aron & Co., Case No. 09-cv-477 (D.Del. July 1, 2009); Degge v. ConocoPhilips Co., Case No. 09-cv-479 (D.Del. July 1, 2009).
. Samson Res. Co. v. BP Oil Supply Co., Case No. 08-cv-753 (N.D. Okla. June 11, 2009); Order, Samson Res. Co. v. I. Aron & Co., Case No. 08-cv-752 (N.D.Okla. July 14, 2009); Order, Samson Res. Co. v. ConocoPhillips Co., Case No. 09-cv-21 (N.D.Okla. July 14, 2009); Order, Hope Partners, Inc. v. BP Oil Supply Co., Case No. 09-cv-222 (N.D.Okla. July 14, 2009); see also Samson Res. Co. v. J. Aron & Co., Case No. 09-51520 (Bankr.D.Del. July 20, 2009) (Shannon, J.); Samson Res. Co. v. ConocoPhillips Co., Case No. 09-51518 (Bankr.D.Del. July 20, 2009)(Shannon, J.); Hope Partners, Inc. v. BP Oil Supply Co., Case No. 09-51519 (Bankr.D.Del. July 20, 2009) (Shannon, J.).
. Order, Samson Res. Co. v. Valero Mktg. & Supply Co., Case No. 09-cv-807 (W.D.Okla. Nov. 19, 2009).
. Order Granting Mot. to Transfer, Samson Lone Star LLC v. ConocoPhillips Co., Case No. 09-cv-12 (N.D.Tex. Sept. 2, 2009); Order Denying Mot. to Remand or Abstain, Samson Lone Star LLC v. ConocoPhilips Co., Case No. 09-CV-12 (N.D.Tex. Sept. 2, 2009).
. Judge Heaton also concluded that this Court possessed subject matter jurisdiction over the cases. Order, Samson Res. Co. v. Valero Mktg. & Supply Co., Case No. 09-cv-807 at 4 (W.D.Okla. Nov. 19, 2009)(“The court has little difficulty in concluding these cases are 'related to' the SemGroup bankruptcy.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494379/ | MEMORANDUM-DECISION AND ORDER
MARGARET CANGILOS-RUIZ, Bankruptcy Judge.
The pending objection before the court presents a question of apparent first impression in this Circuit as to whether a reimbursement claim for unemployment insurance compensation benefits paid to former employees of the Debtor filed as claim number 179 by the New York State Department of Labor, Unemployment Insurance Division (“New York” or “State”), is entitled to priority status under section 507(a)(8) of title 11 of the United States Code.1 This court has core jurisdiction to determine the issue pursuant to 28 U.S.C. § 157(b)(2)(B), 28 U.S.C. § 1334 and the standing reference by the district court of bankruptcy cases to this court as authorized by 28 U.S.C. § 157(a) and implemented by Rule 76.1 of the Local Rules of Practice for the United States District Court for the Northern District of New York. The following constitutes the court’s findings and conclusions pursuant to Federal Rule of Bankruptcy Procedure (“Fed. R. Bankr.P.”) 7052 as made applicable by Fed. R. Bankr.P. 9014(c).
BACKGROUND FACTS
The underlying facts are not in dispute. On April 3, 2009, The Albert Lindley Lee Memorial Hospital, a/k/a A.L. Lee Memorial Hospital (“Hospital” or “Debtor”), an acute care, nonprofit general hospital operating in Fulton, New York, filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. The Debtor, which had operated at the same location since 1910, became subject to mandatory closure based upon recommendations regarding *286the status of hospitals and other health care providers in New York State that were contained in a report issued on November 28, 2006, by the Commission on Health Care Facilities in the 21st Century, commonly referred to as the “Berger Commission Report.” The purpose of the Hospital’s chapter 11 filing was to effect an orderly wind-down of operations and close an asset purchase agreement pursuant to which Oswego Hospital would take over certain services to ensure that Fulton-area residents have ready access to medical care. At the time of filing, the Debtor had approximately 319 active employees. Soon after filing, the Debtor began to terminate many of these employees.
The claims bar date for governmental units to file proofs of claim was set for September 30, 2009. In August 2009, New York timely filed two claims: claim number 144 and claim number 145.2 Debtor objected to claim number 144, which was asserted as a priority claim in the amount of $12,126.51 for “unemployment insurance taxes” due for the period from April 1, 2009, through April 3, 2009. On March 11, 2010, New York amended this claim by filing claim number 179 in the amount of $1,131,303.27 (the “Claim”). The Claim covers the last three quarters of 2009 and the first quarter of 2010 through March 8, 2010, and represents the amount the State paid in unemployment compensation benefits to Debtor’s former employees. The Debtor’s liability for the benefits paid is based upon an election it made some years ago to make reimbursement payments in lieu of contributions. As more fully discussed below, this is an option afforded a nonprofit organization under New York law. The State asserts the Claim is for unpaid, unemployment insurance taxes entitled to priority under Bankruptcy Code section 507(a)(8)(D) or, alternatively, (E).
The Debtor does not take issue with the amount of the Claim. Rather, the Debtor contends that the payments in lieu of contributions owed to the State’s unemployment insurance fund are not taxes entitled to priority and should be treated as a general unsecured claim.
FEDERAL UNEMPLOYMENT TAX ACT, NEW YORK’S UNEMPLOYMENT INSURANCE FUND AND NONPROFIT ENTITIES
The Federal Unemployment Tax Act, 26 U.S.C. §§ 3301 et seq. (“FUTA”) imposes an excise tax on employers, calculated on total wages paid by them during the year, to support the federal unemployment compensation system. Employers are given credit for contributions made to a state unemployment fund, provided that the state unemployment compensation law is certified as meeting the requirements of federal law. Id. §§ 3302 and 3304. As such, FUTA is the overall framework pursuant to which individual state unemployment compensation systems are organized and governed.
The unemployment insurance law is set forth in Article 18 of the New York Labor Law (“Unemployment Insurance Law”). Section 530 of the Unemployment Insurance Law designates the commissioner of labor (“Commissioner”) as the agent of the State responsible for administration of the unemployment insurance law.3 The *287Commissioner’s responsibilities include administration of unemployment insurance benefits, which are paid from New York’s Unemployment Insurance Fund (“Fund”). § 550.
The Unemployment Insurance Law requires New York employers to contribute to the Fund by remitting quarterly payments. § 570. However, there is an exception to this general requirement. FUTA requires states to permit nonprofit employers to make payments in lieu of contributions. 26 U.S.C. § 3309(a)(2). Accordingly, New York allows nonprofit organizations to “elect to become liable for payments in lieu of contributions.” § 563(4). If the election is made, instead of contributing to the Fund every quarter, the nonprofit organization reimburses the Fund in an amount equal to what the Fund has actually paid out in benefits to its former employees in the prior quarter. A New York nonprofit organization that has elected to make payments in lieu of contributions must continue to file returns on a quarterly basis reflecting the total number of its employees and the remuneration paid in each calendar quarter.4 As noted above, the Debtor made this election, as an operating, nonprofit hospital, years before it filed for bankruptcy.
The Fund consists of moneys, including but not limited to all contributions, interest, penalties, payments in lieu of contributions from nonprofit entities, and moneys credited to the State under the Federal Social Security Act. §§ 550(1) and 563(5). The Fund is “administered in trust and is used solely to pay benefits, except that moneys credited to the fund pursuant to the Federal Social Security Act may be used for the administration of the Unemployment Insurance Law.” 3 New York Employment Law § 39.02 (Jonathan L. Sulds, ed, 2009). See § 550. The Commissioner is required to maintain employer accounts5 within the Fund for every employer6 liable to the Fund. Contribution payments as well as payments in lieu of contributions are deposited into the Fund and are collectively pooled so as to be available for disbursement of unemployment insurance benefits. § 581(l)(d).
New York Labor Law classifies its unemployment insurance system as an “experience rating” system; it outlines how employer tax rates are annually determined based upon prior employment and unemployment experience, how contributions are calculated and how employer payments, whether by contributions or reimbursement, are applied. § 581. Under New York law, payments in lieu of contributions are assessed and collected in the same manner and are subject to the same conditions as contributions due from employers. § 563(7).
PRIORITY TAX STATUS UNDER BANKRUPTCY CODE § 507
It is established law within the Second Circuit and in other jurisdictions that have addressed the issue that liabilities for state unemployment insurance contributions are “taxes” entitled to priority under both the *288former Bankruptcy Act of 1898 and the Bankruptcy Code. See, e.g., State of New York v. United States (In re Independent Automobile Forwarding Corporation), 118 F.2d 537 (2d Cir.1941), aff'd in part, rev’d in part, on other grounds; In re Cal-Test Enter., Inc., No. 82-10178 M, slip op. at 8 (Bankr.W.D.N.Y. Aug. 8, 1985); In re Ball, No. 81-01683, slip op. at 5 (Bankr. N.D.N.Y. Nov. 10, 1983); 4 Collier on Bankruptcy § 507.11[5] (15th ed.). The Debtor argues, however, that these cases are inapposite because liabilities for contributions by for-profit entities are fundamentally distinct from liabilities for reimbursement of paid benefits by nonprofit entities. Since there is no Second Circuit precedent that addresses the priority in bankruptcy of claims for reimbursement, this court shall examine the statute and the respective policies underlying the priority scheme of the Bankruptcy Code and those underlying the unemployment insurance compensation benefits system.
Section 507 of the Bankruptcy Code lists the order of priority to be accorded certain expenses and claims. These priorities are interpreted mindful of the Bankruptcy Code’s objectives to afford equal treatment to similarly situated creditors and are deemed to apply to a class of claims only as “clearly authorized by Congress.” Howard Delivery Serv., Inc., v. Zurich Am. Ins. Co., 547 U.S. 651, 655, 126 S.Ct. 2105, 165 L.Ed.2d 110. See also Trustees of the Amalgamated Ins. Fund v. McFarlin’s, Inc., 789 F.2d 98, 100 (2d Cir.1986) (“If one claimant is to be preferred over others, the purpose should be clear from the statute,” citing Nathanson v. N.L.R.B., 344 U.S. 25, 29, 73 S.Ct. 80, 97 L.Ed. 23 (1952)). Bearing this in mind, Code section 507(a)(8) grants an eighth priority to governmental units’ unsecured claims and provides, in pertinent part, as follows:
(a) The following expenses and claims have priority in the following order: ... (8) Eighth, allowed unsecured claims of governmental units, only to the extent that such claims are for — ...
(D) an employment tax on a wage, salary, or commission of a kind specified in paragraph (4) of this subsection earned from the debtor before the date of the filing of the petition, whether or not actually paid before such date, for which a return is last due, under applicable law or under any extension, after three years before the date of the filing of the petition;
(E) an excise tax on (i) a transaction occurring before the date of the filing of the petition for which a return, if required, is last due, under applicable law or under any extension, after three years before the date of the filing of the petition; or (ii) if a return is not required, a transaction occurring during the three years immediately preceding the date of the filing of the petition;
11 U.S.C. § 507(a)(8)(D) and (E). The success of the State’s reliance on either of the above two alternative sections to accord its Claim priority status depends initially upon its Claim being characterized as a “tax.”
Whether an obligation is a “tax” for bankruptcy purposes is a question of federal law determined independently of whether or not it is denominated as such in the statute from which it arises. City of New York v. Feiring, 313 U.S. 283, 285, 61 S.Ct. 1028, 85 L.Ed. 1333 (1941); New Jersey. v. Anderson, 203 U.S. 483, 491-92, 27 S.Ct. 137, 51 L.Ed. 284 (1906). In general, taxes are levied without the consent or voluntary action of the taxpayer, Anderson, 203 U.S. at 492, 27 S.Ct. 137, in contrast to a fee which has been held “incident to a voluntary act.” Nat’l Cable Television Assoc. v. United States, 415 *289U.S. 336, 340-41, 94 S.Ct. 1146, 39 L.Ed.2d 370 (1974) (comparing taxes to fees). Although the determination of a tax for bankruptcy purposes is governed by federal law, the state law which creates an obligation may be examined “to ascertain whether its incidents are such as to constitute a tax,” within the meaning of the applicable bankruptcy provision. Feiring, 313 U.S. at 285, 61 S.Ct. 1028. As defined by the Supreme Court, taxes are “pecuniary burdens laid upon individuals or their property, regardless of their consent, for the purpose of defraying the expenses of government or of undertakings authorized by it.” Feiring, 313 U.S. at 285, 61 S.Ct. 1028 (citing Anderson, 203 U.S. at 492, 27 S.Ct. 137).
In United States v. Reorganized CF & I Fabricators of Utah, Inc., et al., 518 U.S. 213, 220, 116 S.Ct. 2106, 135 L.Ed.2d 506 (1996), the Supreme Court had before it the issue as to whether an underfunded pension liability constituted an excise tax within the priority provision of the Bankruptcy Code. In writing the majority opinion for the court, Justice Souter explained that in determining whether a particular exaction was properly characterized as a “tax,” the Court “looked behind the label placed on the exaction and rested its answer directly on the operation of the provision.” CF & I Fabricators, 518 U.S. at 220, 116 S.Ct. 2106. The Court characterized the analysis employed as a “functional examination” that “turn[s] on the actual effects of the exactions.” CF & I Fabricators, 518 U.S. at 224, 221, 116 S.Ct. 2106 (citing United States v. New York, 315 U.S. 510, 514-17, 62 S.Ct. 712, 86 L.Ed. 998 (1942)). Utilizing this approach, the Court found that the exaction of an additional charge on the underfunding of certain pension plans equal to ten per cent of the funding deficiency7 was punitive in nature and, therefore, not properly characterized as an excise tax. Id. at 226, 116 S.Ct. 2106.
The Lorber Test
Prior to CF & I Fabricators, the Court of Appeals for the Ninth Circuit enunciated a four-part test to determine whether a debtor’s obligation to a government unit is a tax. County Sanitation Dist. No. 2 of L.A. County v. Lorber Indus. of Cal. Inc. (In re Lorber Indus. of Cal), 675 F.2d 1062 (9 Cir.1982). In Lor-ber, the question was whether a surcharge assessed against the debtor for sewer use fees constituted a tax for bankruptcy purposes. Citing favorably to an earlier district court opinion, (In re Farmers Frozen Food Co., 221 F.Supp. 385 (N.D.Cal.1963)), which first employed the analysis, the Lor-ber court cited the following four elements which characterized the exaction of a “tax” under Section 64, subdivision (a)(4) of the former Bankruptcy Act of 1898:
(a) An involuntary pecuniary burden, regardless of name, laid upon individuals or property;
(b) Imposed by, or under authority of the legislature;
(c) For public purposes, including the purposes of defraying expenses of government or undertakings authorized by it;
(d) Under the police or taxing power of the state.
Lorber, 675 F.2d at 1066.8
The Second Circuit affirmatively adopted the Lorber test in considering *290whether obligations under the Coal Act that required an employer to contribute to the health and benefit plan of retired coal miners involved the exaction of a tax. LTV Steel Co., Inc., et al. v. Shalala (In re Chateaugay Corp.), 53 F.3d 478 at 498 (2d Cir.1995). In doing so, the Second Circuit noted that although Lorber was decided under the former Bankruptcy Act, the Lorber test is equally applicable under the Bankruptcy Code. The Second Circuit applied the Lorber criteria and found that Coal Act obligations should be characterized as “taxes’ due to their overwhelmingly involuntary nature, their explicitly stated public purpose, and their obvious potential to be imposed pursuant to the taxing power.” 9 Chateaugay, 53 F.3d at 498.
Refinement of Lorber
The Sixth Circuit was circumspect to adopt the Lorber criteria outright. Prior to the Second Circuit’s adoption of Lorber in Chateaugay, the Sixth Circuit had occasion to identify in two separate opinions, what it perceived as a weakness in applying the Lorber criteria to obligations owed to the government. The Sixth Circuit opined that all money collected by the government arguably goes toward a “public purpose” to defray the expenses of government and expressed concern that every inquiry would be reduced to whether “money demanded by the Government is to be put toward ‘public purposes,’ including ‘defraying the expenses of government.’ ” Yoder v. Ohio Bureau of Workers’ Comp. (In re Suburban Motor Freight, Inc.), 998 F.2d 338, 341 (6th Cir.1993) (“Suburban I”). Concerned that under the original Lorber criteria, the government would always obtain priority for all moneys it was owed, the Sixth Circuit upon next addressing the issue articulated two refinements to the public purpose test of Lorber by further requiring: “(1) that the pecuniary obligation be universally applicable to similarly situated entities; and (2) that according priority treatment to the government claim not disadvantage private creditors with like claims.” Ohio Bureau of Workers’ Comp. v. Yoder (In re Suburban Motor Freight, Inc.), 36 F.3d 484, 488 (6th Cir.1994) (“Suburban II ”). In applying the refined criteria to its analysis of the estate’s liability for workers’ compensation awards after the debtor failed to pay its workers’ compensation premiums, it denied the claim priority status. The Sixth Circuit found that the liabilities did not qualify as taxes because (1) Suburban’s liability arose from its own default in paying premiums and was, therefore, not universally applicable to similarly situated entities, and (2) private creditors with like claims, including sureties that issued bonds so that the debtor could be self-insured, would be disadvantaged by the government claim being accorded priority status. Suburban II, 36 F.3d at 488.
It is noteworthy that the Second Circuit did not reference the Suburban I decision (decided June 29,1993) nor adopt the analysis employed in Suburban II (decided September 21, 1994) when it issued its decision in Chateaugay, which was decided on April 17, 1995. Lorber is still good law *291in this Circuit which, together with the functional examination required by United States Supreme Court precedent, will guide this court’s analysis in determining the pending objection to the priority status of the State’s claim.
UNDERLYING POLICY OF UNEMPLOYMENT INSURANCE COMPENSATION BENEFITS AND EXACTION OF REIMBURSEMENTS
As noted previously, as with other states’ unemployment insurance compensation laws, New York’s law falls under guidelines mandated by FUTA. In this respect, its stated public policy is aligned with the interests of the federal government to cushion the economic impact of serious unemployment. The public policy of the State in enacting the Unemployment Insurance Law is clearly articulated in the New York Labor Law which provides, in pertinent part, as follows:
Economic insecurity due to unemployment is a serious menace to the health, welfare, and morale of the people of this state. Involuntary unemployment is therefore a subject of general interest and concern which requires appropriate action by the legislature to prevent its spread and to lighten its burden, which now so often falls with crushing force upon the unemployed worker and his family.
UNEMPLOYMENT InsuranCE Law § 501. The foregoing stated policy resonates as clearly today when the need is great and jobs are few in Central New York as in 1931 when the joint legislative committee on unemployment was appointed.10 Notwithstanding an election by a nonprofit entity to opt for reimbursement in lieu of contributions, the exaction of reimbursements, which are pooled with contributions in the Fund, is clearly intended and serves to replenish the Fund that stands ready to make disbursements to the next qualified claimant.
Debtor relies heavily on decisions from the First and Third Circuits, Commonwealth of Mass. Div. of Employment and Training v. Boston Reg’l Med. Ctr., Inc. and Official Comm. of Unsecured Creditors (In re Boston Reg’l Med. Ctr., Inc.), 291 F.3d 111 (1st Cir.2002) and The Reconstituted Comm. of Unsecured Creditors of the United Healthcare Sys., Inc. v. State of N.J. Dep’t of Labor (In re United Healthcare Sys., Inc.), 396 F.3d 247 (3rd Cir.2005) to support its contention that the reimbursements in lieu of contributions due in this case are not taxes and should not be accorded priority status. Presented with an issue similar to the one before this court, in interpreting respectively, the Massachusetts and New Jersey statutory schemes each court separately concluded that reimbursement payments in lieu of contribution payments do not constitute taxes.11. The court notes that the conclu*292sions reached by the First and Third Circuits have not been widely adopted12 and that no published opinion by a federal district court or bankruptcy court in the Second Circuit has cited to either case.13 As noted previously, under Chateaugay, the proper examination in the Second Circuit remains the Lorber analysis.
Application of the Lorber and Suburban Factors
In its Reply Memorandum supporting its objection to Claim, Debtor argues that the reimbursement payments due to New York do not satisfy the Lorber and Suburban II tests. (Debtor’s Reply Mem. 12). In its memorandum, the State argues that the liabilities satisfy Lorber as well as the Suburban II factors, if the latter were deemed to apply in this Circuit. (State’s Resp. Mem. 9-11). At oral argument, the Debtor was hard-pressed not to concede that each of the Lorber and Suburban II factors was met.
1. Involuntary pecuniary burden
With respect to the first factor, the court finds that the liability for reimbursement payments is an involuntary pecuniary obligation. All subject employers in New York must pay into the Fund. Whether Debtor, as a nonprofit organization, elected the reimbursement method or paid quarterly contributions, Debtor was required to commit to be liable to the Fund. That Debtor in this case elected to reimburse the Fund for the amount that the Fund paid out to Debtor’s former employees does not change the involuntary nature of the obligation. Debtor did not have an election available to opt out of New York’s system entirely. New York’s system of unemployment insurance requires that all subject employers participate and file returns at specified intervals. As an employer in New York, Debtor’s obligation to the State is involuntary and the first Lor-ber factor is satisfied.
2. Imposed by, or under authority of the legislature
New York’s unemployment insurance system is laid out in the Unemployment Insurance Law which was enacted by the State legislature. The court finds that the second Lorber factor is satisfied.
8. For public purposes, including the purposes of defraying expenses of government or undertakings authorized by it
The third Lorber factor is easily met. The public purpose of this exaction is to provide for employees whose employment is terminated through no fault of their own. It is not for the personal benefit of the nonprofit employer but redounds to the benefit of discharged employees of the nonprofit Hospital as well as discharged employees of all entities. Replenishment of the Fund through reimbursement payments supports the government’s undertaking of disbursing unemployment insurance compensation benefit payments to every eligible claimant.14
*2934. Under the police or taxing power of the state.
The assessment and enforcement of amounts due to the State are within the police or taxing power of the State. The court finds the fourth Lorber factor is met.
5. The pecuniary obligation be imiver-sally applicable to similarly situated entities
All New York “employers”15 are required to make payments into the Fund. Nonprofit organizations that opt out of making quarterly contribution payments are universally obligated to make reimbursement payments. In contrast, in Suburban II, the claim at issue related to awards made by the State of Ohio on workers’ compensation claims after the debtor, a state fund participant, defaulted as a self-insured employer. Suburban II, 36 F.3d at 487-88. Of particular importance in the Sixth Circuit’s determination was the fact that the debtor’s liability arose “solely by virtue of its default,” and was not a liability “universally applicable to similarly situated persons or firms.” Id. at 489. In this case, the Hospital’s liability for reimbursement payments did not arise from any default by the Debtor and the pecuniary obligation to make reimbursement payments is universally applicable to similarly situated nonprofit entities. Accordingly, the court finds the first Suburban II factor to be met.
6.Granting priority status to the government would not disadvantage private creditors with like claims
A second distinction between the New York statute and the Ohio statutory scheme under consideration in Suburban II, is the fact that there is no option for self-insurance in New York’s unemployment insurance system. The State is responsible for the outlay to former employees eligible to receive unemployment insurance compensation benefits whether the employer organization pays quarterly contributions or makes reimbursement payments. Since the New York unemployment insurance system is monopolistic, there is no similarly situated private creditor with like claims that could be prejudiced.
Some courts have considered whether a surety may function as a similarly situated creditor with a like claim. In Boston Regional, the fact that Massachusetts could require a surety from nonprofit organizations that opted for reimbursement payments in lieu of contributions “tipped the scales” in deciding the case. Boston Reg'l Med. Ctr., 291 F.3d at 127. In United Healthcare, the Third Circuit referenced the bankruptcy court’s earlier decision, which discussed whether “a surety with the same claim as the government claim could be disadvantaged if the government claim received priority.” United Healthcare, 396 F.3d at 257 (citing In re United Healthcare Sys., Inc., 282 B.R. 330, 340-41 *294(Bankr.D.N.J.2002)). New York argues that in all the cases relied on by the Debt- or, which found that payments in lieu of contributions were not taxes entitled to priority the states’ statutory schemes gave the government “the discretion to require that non-profit employers file a surety bond as a condition for utilizing the benefit of the reimbursement method for payment of liabilities.” (State’s Resp. Mem. 13-14). Debtor argues that the State’s reliance on this distinction is misplaced because FUTA authorizes states to “provide safeguards” to secure payment by an electing nonprofit organization, and that New York, like Massachusetts, voluntarily chose not to provide itself with any security. 26 U.S.C. § 3809(a)(2); (Debtor’s Reply Mem. 10-11).
Although FUTA does authorize states to provide safeguards, and the legislatures of New Jersey, Massachusetts and Michigan specifically enacted measures that enable these states, in their discretion, to require a surety in the form of a bond or deposit from an electing nonprofit organization, New York’s legislature has not enacted any such measure. N.J.S.A. § 43:21-7.2(h); Mass. Gen. Laws ch. 151 A, § 14A(e); Mich. Comp. Laws § 421.13a(4). Without authority from the state legislature, the Commissioner in New York has no discretion to require a surety from a nonprofit entity that makes the election. For this and the reason cited above, there is no similarly situated creditor with like claims in New York that would be prejudiced by granting priority status to the government.
Having found that the liability for reimbursement payments meets the original Lorber factors and also satisfies the additional criteria set forth in Suburban II, to the extent relevant in the Second Circuit, this court finds that the liability constitutes a tax. The court must next determine whether the tax is entitled to priority under Bankruptcy Code section 507(a)(8)(D) and/or alternatively, (E).
PRIORITY AS AN EMPLOYMENT TAX UNDER CODE § 507(a)(8)(D)
The State alleges that since the reimbursement obligation was based on wages paid to the Debtor’s employees and these wages were used by the State to calculate the benefits payable to employees, the amount of which directly corresponds to the amount of the reimbursement obligation, the tax should have priority as an “employment tax on a wage, salary, or commission” pursuant to Code section 507(a)(8)(D). The Bankruptcy Code does not define the key phrase, “employment tax on a wage, salary, or commission.” Bankruptcy courts have found that unemployment compensation contribution payments qualify as an employment tax under this section. See Matter of Lackawanna Detective Agency, Inc., 82 B.R. 336 (Bankr.D.Del.1988); In re Skjonsby Truck Line, Inc., 39 B.R. 971 (Bankr.D.N.D.1984); In re Continental Minerals Corp., 132 B.R. 757, 758-759 (Bankr.D.Nev.1991). Other courts have found that unemployment insurance contributions are entitled to priority under either Code section 507(a)(8)(D) or (E). In re Cal-Test Enter., Inc., No. 82-10178 M, slip op. at 8 (Bankr.W.D.N.Y. Aug. 8, 1985); In re Cottage Grove Hosp., 265 B.R. 241 (Bankr.D.Or.2001).
It is arguable that for a tax to be classified as an “employment tax” pursuant to Code section 507(a)(8)(D), that it be limited to a tax which is capable of calculation based upon, or part of an individual’s wages, salary or commission. Courts that have specifically focused on this genre of tax, namely, the obligation to make payments in lieu of contributions, have honed in on the contingent nature of the tax and *295the fact that when the tax obligation is no longer contingent, that it may be totally divorced in time from the time the employment wages were paid and after the employee has been discharged. The bankruptcy court’s opinion in In re Boston Reg’l Med. Ctr., 256 B.R. 212 (Bankr.D.Mass.2000) concluded that payments in lieu of contributions do not qualify for priority under Code section 507(a)(8)(D), a position with which this court agrees. In re Boston Reg’l Med. Ctr., 256 B.R. at 226-227, aff'd, Mass. Div. of Employment & Training v. Boston Reg’l Med. Ctr. (In re Boston Reg’l Med. Ctr.), 265 B.R. 838 (1st Cir. BAP 2001), rev’d, Mass. Div. of Employment & Training v. Boston Reg’l Med. Ctr. (In re Boston Reg’l Med. Ctr.), 291 F.3d 111 (1st Cir.2002).16
PRIORITY AS AN EXCISE TAX UNDER CODE § 507(a)(8)(E)
The State alternatively characterizes the Debtor’s reimbursement liability as an “excise” tax. Again, the Bankruptcy Code is silent as to the definition of either “excise” or “excise tax.” CF & I Fabricators, 518 U.S. at 220, 116 S.Ct. 2106. However, when assessing priority status, many courts have found that an excise tax is “a pecuniary burden laid upon individuals or their property, regardless of their consent, for the purpose of defraying the expenses of government or of undertakings authorized by it.” City of New York v. Feiring, 313 U.S. 283, 61 S.Ct. 1028 (1941) (citing New Jersey v. Anderson, 203 U.S. at 491, 27 S.Ct. 137 (1906)). The Fourth Circuit defined “excise tax” as being an “indirect tax, one not directly imposed upon persons or property” and “one that is imposed on the performance of an act, the engaging in any occupation, or the enjoyment o[f] [sic] a privilege.” New Neighborhoods Inc. v. W. Va. Workers’ Comp. Fund, 886 F.2d 714, 719 (4th Cir.1989) (citing In re Beaman, 9 B.R. 539, 541 (Bankr.D.Or.1980); In re Tri-Manufacturing and Sales Co., 82 B.R. 58, 60 (Bankr.S.D.Ohio 1988)). The court finds that the Claim at issue satisfies the foregoing definitions. The Debtor’s reimbursement obligation represents an excise tax imposed on the incident of conducting a business and a transactional cost arising from the act of employing workers. The employment that generated the obligation and upon which the liabilities were assessed occurred pre-petition. Accordingly, the Debtor’s reimbursement obligation is found to be an excise tax entitled to priority under the Bankruptcy Code.
CONCLUSION
For the foregoing reasons, the Debtor’s Objection to Claim No. 179 is overruled and the Claim is allowed as a priority claim under the provisions of 11 U.S.C. section 507(a)(8)(E).
So ordered.
. 11 U.S.C. §§ 101-1532 ("Bankruptcy Code" or "Code”).
. New York amended claim number 145 in February, 2010 by filing claim number 177; subsequently, New York withdrew both claim number 145 and claim number 177, rendering any objection to these claims moot. Accordingly, these claims are not addressed in this decision.
. Hereinafter, unless otherwise noted, all sectional references are to the Unemployment Insurance Law.
. 12 N.Y.C.R.R. § 472.4(b).
. The accounts enable the State to account for contributions and payments in lieu of contributions as well as the charges resulting from prior benefit claims. Although funds paid by employers are credited to each respective employer's account, all of the moneys in the employer funds are pooled and available to pay benefits. Unemployment Insurance Law § 581 (l)(d).
.The term “employers” as used in section 570 includes nonprofit organizations that have paid $1,000.00 or more in remuneration in any calendar quarter or have employed four or more persons on each of twenty calendar days in a year. §§ 512(2) and 563(3).
. The statute imposing the exaction under consideration by the Court in was 26 U.S.C. § 4971.
. In Lorber, the Ninth Circuit found that the charges before it were triggered by the debt- or's decision to discharge large amounts of industrial wastewater, making the pecuniary *290burden a voluntary one and, therefore, not a tax. Lorber, 675 F.2d at 1067.
. Chateaugay was decided by the Second Circuit prior to the issuance of the Supreme Court's decision in CF & I Fabricators. In a later proceeding in In re CF & I Fabricators of Utah, Inc., following the Supreme Court’s CF & I Fabricators decision, the Tenth Circuit, in addressing the applicable standard for determining whether a claim should be accorded priority tax status, adopted the Lorber analysis and cited to the Second Circuit's decision in Chateaugay. Pension Benefit Guar. Corp. v. CF & I Fabricators of Utah, Inc., et al. (In re CF & I Fabricators of Utah, Inc.), 150 F.3d 1293, 1297-98 (10th Cir.1998).
. See Unemployment Insurance Law § 501. "After searching examination of the effects of widespread unemployment within the state, the joint legislative committee on unemployment appointed pursuant to a joint resolution adopted April ninth, nineteen hundred thirty-one.”
. The court in Boston Regional found the issue a very close question but recited that "What tips the scales ... is the option that the [Massachusetts] Employment and Training Law ... give(s) the Division to require a nonprofit employer to provide a surety bond. A taxing authority is given preferred treatment because it is an involuntary creditor of the debtor. It cannot choose its debtors, nor can it take security in advance of the time that taxes become due.' ” Boston Regional, 291 F.3d at 122 (citing the basis for the priority accorded as noted in the legislative history contained in H.R.Rep. No. 95-595 at 190 (1977), U.S.Code Cong. & Admin.News 1978, p. 5963). Although the New Jersey statute also allowed the state to require a bond, the Third Circuit in United Healthcare did not base its conclusion on this factor, noting that under *292New Jersey law, the state "may require a bond for the payment of a state tax.” United Healthcare, 396 F.3d at 258 n. 21.
. The well-reasoned dissent by Chief Judge Scirica in United Healthcare suggests adequate reasons as to why the holdings should not be extended. United Healthcare, 396 F.3d at 261-65.
. The single court within the boundaries of the Second Circuit that has cited to United Healthcare is the Supreme Court of New York County. Kessler v. Hevesi, 824 N.Y.S.2d 763 (N.Y.Sup.2006) (listed in a table). The court cited United Healthcare as part of a string cite regarding the characteristics of taxes specifically benefitting the public. Id.
. The Third Circuit in United Healthcare drew the distinction that since reimbursement payments only compensate for the exact amount paid out in benefits by the state Department of Labor, the payments "do not raise funds to support a general government undertaking.” The court disagrees that this distinction has any bearing in New York where quarterly contributions and payments in lieu of contribution are pooled and used only to pay benefits. Unemployment Insurance Law § 550(3). In any event, the court finds that a nonprofit entity’s replenishment of the Fund through reimbursement payments sufficiently supports the government’s general undertaking of providing benefits and satisfies the third prong of the Lorber test.
. "Employers” is defined by statute in § 570.
. The Bankruptcy Appellate Panel ("BAP”) for the First Circuit affirmed the bankruptcy court's holding. Mass. Div. of Employment & Training v. Boston Reg’l Med. Ctr. (In re Boston Reg’l Med. Ctr), 265 B.R. 838 (1st Cir. BAP 2001). The BAP agreed that payments in lieu of contributions constitute a tax, and that those payments were not entitled to priority as being an employment tax under Bankruptcy Code section 507(a)(8). The First Circuit Court of Appeals reversed the bankruptcy court’s finding that payments in lieu of contributions constitute taxes. Mass. Div. of Employment & Training v. Boston Reg’l Med. Ctr. (In re Boston Reg’l Med. Ctr), 291 F.3d 111 (1st Cir.2002). As a result, the First Circuit opinion never addressed what constitutes a tax "on a wage, salary, or commission” within the meaning of Code section 507(a)(8)(D). Although the bankruptcy court decision was reversed and does not reflect the law in the First Circuit, this court adopts as sound, the reasoning of that court on the issue of what constitutes an employment tax. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494380/ | OPINION ON CASH COLLATERAL MOTIONS
BRUCE A. MARKELL, Bankruptcy Judge.
Table of Contents
I. INTRODUCTION .322
II. Facts.322
*322A. Background . CO to co
B. Industrial Revenue Bond Financing. CO to co
C. LVMC’s Indebtedness Under the Financing Agreement CO to ^
D. Cash Flow Under the Indenture. CO to or
III. The Legal Position of the PARTIES . CO to cn
A. The General Rules Regarding Cash Collateral. CO to cn
1. Adequate Protection . CO to os
2. Identification of “Cash Collateral”: The Two Components CO to -3
3. Burdens of Establishing What is Cash Collateral and of Providing Adequate Protection.
B. Security Interests and Liens in Favor of the Bondholders.
Statutory Lien ,
Consensual Security Interests.
a. Role of Contract Law.
b. Role of Article 9.
3. Interpreting the Financing Agreement Under Nevada Law
a. Contract Rights Under Franchise Agreement.
b. Deposit Accounts and Funds.
c. Net Project Revenues.
C. The Identification and Extent of the Trustee’s Interests in Cash Collateral .'. 05 CO CO
IV. Adequate PROTECTION of the Trustee’s Interests in Cash COLLATERAL o CO
A. Adequate Protection of Cash and Deposit Accounts Held as of the Petition Date. CO o
B. Adequate Protection of Postpetition Cash Flows. CO to
1. What Law Determines the Content of “Proceeds” as Used in Section 552(b)?. CO to
2. Are Ongoing Revenues Proceeds of the Trustee’s Prepetition Security Interest?. CO 'sF CO
a. Net Project Revenues as Proceeds. CO CO
b. Deposit Account Proceeds. •’sF -5# CO
3. Are There Equitable Considerations that Section 552(b) Would Allow the Court to Consider That Would Restrict the Trustee’s Security Interests in Proceeds?. CO
V. Summary .
VI. CONCLUSION. .346
I. Introduction
Las Vegas Monorail Company (“LVMC”), the debtor in possession in this case, filed its chapter 11 case on January 13, 2010. Almost immediately, its secured creditor sought adequate protection for its cash collateral; in response, LVMC made an offer of adequate protection that was rejected. This opinion resolves the dispute.
II. Facts
After filing, both LVMC and its secured creditor moved for orders regarding cash collateral. Under Fed. R. Baner.P. 4001(b)(2), the court held an interim hearing on January 22, 2010, at which time the court approved the parties’ provisional stipulation regarding cash collateral use. In addition to outlining LVMC’s permissible interim use of cash collateral, this stipulation preserved the parties’ rights pending a final hearing, which the court scheduled for February 17, 2010. Both parties then commenced discovery.
At the February 17, 2010 hearing, the court admitted into evidence various decía-*323rations and exhibits from all sides, and heard testimony. The court took the matter under submission after the parties agreed to extend their interim stipulation until the court’s final ruling.
A. Background1
LVMC owns and operates a 3.9 mile long monorail which connects nine hotels along and near the Las Vegas “Strip.” LVMC’s ridership has never met projections; it is not overly convenient (it does not connect to the local airport or to the Las Vegas downtown area), and many of its potential patrons use other transportation services.
This is not to say, however, that LVMC cannot cover its operating expenses; to the contrary, its revenues exceed its operating expenses, leaving more than $5 million in annual profits before debt service. LVMC’s operating expenses consist mainly of obligations under an operating agreement with Bombardier Transit Corporation (“Bombardier”), which operates and services LVMC’s trains. Under this agreement, LVMC pays Bombardier, on average, approximately $900,000 per month.
This positive cash flow, however, is barely enough to cover 10% of LVMC’s scheduled debt service. The vast majority of LVMC’s debt service arises from a type of financing variously called conduit financing or industrial revenue bond financing or special revenue financing. This type of financing is a common way to finance municipal infrastructures. It allows local government to build and operate beneficial projects with private money and without local government having to increase tax burdens.
B. Industrial Revenue Bond Financing
Conduit financing addresses an essential tension — while local government can issue debt which bears tax-free interest, and thus is sought after by tax-conscious investors, it rarely wants its taxpayers to bear the full risk of construction and operation. In conduit or industrial revenue bond financing such as is present here, a local government issues bonds to the general public under an indenture (the way most public debt is issued). The local government then lends the bond proceeds to a private party willing to build or operate the project. This loan is usually secured by the project or by its revenues. The key aspect of this type of financing, at least for local government, is its nonrecourse nature; the local government’s obligation to repay the bonds is limited to the collateral pledged. And that collateral generally consists of all the government’s rights under the loan agreement with the private party.2
All of these transactions happen simultaneously. At the conclusion of the transaction, tax-conscious investors have bonds, *324the interest on which is tax-free. Repayment of the bonds is secured by the project built with the bond proceeds, and nothing else. The private company has the advantage of a lower rate of interest on its construction loan, since municipal bond rates generally are lower than construction loan rates. And the local government has provided its citizens with new projects designed to improve community life.
C. LVMC’s Indebtedness Under the Financing Agreement
In this case, the industrial revenue bond financing took the following form. In 2000, the Director (“Director”) of the Nevada Department of Business and Industry (“Department”) sponsored the issuance of approximately $650 million of municipal bonds (“Bonds”).3 Specifically, the Bonds were issued under an indenture (“Indenture”) between Wells Fargo Bank (“Trustee”) 4 and the Director. As outlined above, the Director simultaneously lent the bond proceeds to LVMC pursuant to a separate financing agreement between LVMC and the Director (the “Financing Agreement”). Under the Financing Agreement, LVMC agreed to repay the loan, and supported this promise with, among other things, a grant of a security interest in LVMC’s “Net Project Revenues” (but not in any of its tracks or trains).5
A key component of the transaction, known to all, was that the State of Nevada would not be liable on the Bonds. Indeed, the Director and other public officials assured the public that no tax revenues would be used to acquire or operate the monorail.6 Structurally, this promise was honored by making the Bonds nonrecourse as to the State of Nevada. This was explicit in the offering; the only recourse for bondholders was the collateral the Director assigned to the Trustee, and the insurance mentioned below.
As a result, those buying the Bonds did so knowing that the primary source of repayment on the Bonds was the Financing Agreement — and the security interests it contained — which the Director had as*325signed to the Trustee. The only other source of repayment was insurance purchased from Ambac Assurance Corp. (“Ambac”), which insured payment of principal and interest on the first series of the Bonds.7
D. Cash Flow Under the Indenture
Most of LVMC’s revenue arises from the sale of tickets to riders. During 2009, ticket receipts averaged approximately $74,000 per day. Patrons buy tickets to ride the monorail at one of LVMC’s 42 Ticket Vending Machines (“TVM”). These allow customers to pay in cash or coin, or with a debit or credit card. Brink’s U.S. (“Brink’s”) collects all receipts from the TVMs. After collection, Brink’s is responsible for counting the TVM cash receipts and depositing them with the Trustee.
Once delivered to the Trustee, the deposits are processed and applied according to the Indenture. Under that document, the Trustee established a “Collection Fund” as a separate account at Wells Fargo Bank. Every day for almost last three years,8 the Trustee has swept all Collection Fund money into another account established under the Indenture called the “Revenue Fund.” The Trustee contends that it holds all funds in the Revenue Fund in trust for the benefit of the holders of the Bonds.9
Sometime in October 2009, however, LVMC began diverting daily receipts away from the Trustee. Acting on LVMC’s instructions, Brink’s began depositing TVM cash receipts into a deposit account maintained by LVMC at Bank of America. This was soon discovered — in large part because LVMC told the Trustee when asked. The Trustee was understandably angered, because such a diversion was a breach of the Indenture’s provisions on cash flow, and it frustrated the Trustee’s performance of its duties under the Indenture. Much was made at the evidentiary hearings about who knew what was happening, and when, with respect to the diversion. Yet the Trustee took no legal action in state court.
The end result of all this maneuvering was that, on the petition date, the Bank of America account contained approximately $971,000. The Trustee held another $225,000 in its accounts under the Indenture. Brink’s held $65,000 in coin and $162,000 in cash, some of which was on its way to be deposited, and some of which was held by Brink’s as a reserve to stock TVMs.10
III. The Legal Position of the Paeties
A. The General Rules Regarding Cash Collateral
Section 363 of the Bankruptcy Code governs the estate’s use of cash collateral.11 Here, LVMC’s funds in Brink’s pos*326session and on deposit in the various bank accounts are potentially cash collateral. The Trustee also argues that LVMC’s present and future collections of revenue are also cash collateral. Under the Code, LVMC may not use cash collateral unless either “(A) each entity that has an interest in such cash collateral consents; or (B) the court, after notice and a hearing, authorizes such use, sale, or lease_”11 U.S.C. § 363(c)(2). Indeed, unless the debtor in possession obtains consent or a court order, it “shall segregate and account for any cash collateral in the trustee’s possession, custody, or control.” 11 U.S.C. § 363(c)(4). See generally Marathon Petroleum Co., LLC. v. Cohen (In re Delco Oil, Inc.), 599 F.3d 1255, 1258 (11th Cir.2010).
The Trustee has not consented to LVMC’s use of cash collateral.12 To authorize use over the dissent of the secured party, the Code directs “the court, with or without a hearing, [to] prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest.” 11 U.S.C. § 363(e). The court must thus “prohibit or condition” LVMC’s use of cash collateral based upon whether LVMC has adequately protected the Trustee’s interest in such cash collateral.
1. Adequate Protection
Adequate protection, in turn, is a concept that Section 361 of the Code illustrates, but does not define. That section recognizes that, to the extent that use of cash collateral “results in a decrease in the value of such entity’s interest in such property,” adequate protection may consist of cash payments or replacement liens. 11 U.S.C. § 361(1), (2). In addition, the estate may provide other forms of adequate protection so long as they “will result in the realization by [the secured party] of the indubitable equivalent of such entity’s interest in such property.” 11 U.S.C. § 363(3).
LVMC is an operating business that needs to use the cash proceeds of its operations to continue to produce income. The Trustee, however, contends that this operating cash is subject to its security interests and liens, and demands adequate protection for such use. These opposing positions are not new. As noted by the Bankruptcy Appellate Panel of the Ninth Circuit, “ ‘[t]here is an inherent tension between a debtor’s need to use its cash to continue operating and a secured creditor’s right to preserve its security interest in the debtor’s cash proceeds.’ ” Security Leasing Partners, LP v. ProAlert, LLC (In re ProAlert, LLC), 314 B.R. 436, 441 (9th Cir. BAP 2004) (quoting Stephen A. Stripp, Balancing the Interests in Orders Authorizing the Use of Cash Collateral in Chapter 11, 21 Seton Hall L.Rev. 562, 565-66 (1991)).
The general purpose of adequate protection is to ensure that the secured creditor ultimately receives what it would have received had not bankruptcy intervened. “ ‘Although stripped of the right to immediate possession of its property, the creditor receives assurances that the value it could have received through foreclosure will not decline.’ ” In re ProAlert, 314 B.R. at 441-42 (quoting 3 James F. Queen-*327AN, JR. ET. AL, CHAPTER 11 THEORY AND PRACTICE § 16.03 (1994)).
2. Identification of “Cash Collateral”: The Two Components
Providing these assurances, however, requires determination as to what property is actually cash collateral. There are two components to cash collateral. The first component identifies the type of property. Section 363(a) states that “ ‘cash collateral’ means cash, negotiable instruments, ... deposit accounts, or other cash equivalents whenever acquired.... ” The contenders for this type of cash collateral here, as outlined above, consist in deposit accounts at the Trustee and at Bank of America, and the funds held by Brink’s.
But there are more types of property which qualify. Cash collateral also “includes the proceeds, products, offspring, rents, or profits of property ... as provided in section 552(b) of this title....”13 Section 552(b) is an exception to bankruptcy’s rule, found in Section 552(a), that after-acquired clauses in security agreements are not given effect in bankruptcy even though authorized by Article 9 of the UCC. See UCC § 9-204(a).
Section 552(b) states that:
[I]f the debtor and an entity entered into a security agreement before the commencement of the case and if the security interest created by such security agreement extends to property of the debtor acquired before the commencement of the case and to proceeds, products, offspring, or profits of such property, then such security interest extends to such proceeds, products, offspring, or profits acquired by the estate after the commencement of the case to the extent provided by such security agreement and by applicable nonbankruptcy law....
11 U.S.C. § 552(b). This exception allows lenders to follow their legitimate interests in transmuted forms of their collateral; a security interest in a receivable generated prepetition is not lost in bankruptcy simply because it was paid in cash after filing. Roughly speaking, this section parallels the similar protections under state law afforded by UCC § 9-315, protections which are automatically provided to every secured creditor without the need to request it. UCC §§ 9 — 203(f); 9-315. With respect to Section 552(b), the parties have focused on whether LVMC’s postpetition *328revenues are proceeds of the Trustee’s prepetition collateral.14
The second component of cash collateral is that it must be property “in which the estate and an entity other than the estate have an interest.” 11 U.S.C. § 363(a).15 This typically means that the party seeking protection with respect to cash collateral has some ownership or property interest in the disputed cash collateral. This component is satisfied if the “interest” is a security interest or lien recognized under nonbankruptcy law. This recognition can take the form of a lien granted by statute, such as a mechanic’s lien on a car brought in for repairs, or a consensual security interest such as that governed by Article 9 of the Uniform Commercial Code (“UCC”).16
3. Burdens of Establishing What is Cash Collateral and of Providing Adequate Protection
In sorting out these two components for each type of property, the Bankruptcy Code assigns various burdens. Section 363(p) states: “In any hearing under this section — (1) the trustee17 has the burden of proof on the issue of adequate protection; and (2) the entity asserting an interest in property has the burden of proof on the issue of the validity, priority, or extent of such interest.” 11 U.S.C. § 363(p).
This section, particularly paragraph (2), requires the Trustee to establish the existence and the extent of its interest in the property it claims as cash collateral. See Textron Fin. Corp. v. Rebel Rents, Inc. (In re Rebel Rents, Inc.), 307 B.R. 171, 183 (Bankr.C.D.Cal.2004); Kondik v. Ebner (In re Standard Foundry Prods., Inc.), 206 B.R. 475, 478 (Bankr.N.D.Ill.1997). The Ninth Circuit has held that a party seeking to establish the “extent” of its interest in property under § 363(p)(2) must satisfy a two-prong test:
First, as a preliminary matter, the party must prove that it holds a perfected security interest in post-petition revenues to which its liens still rightly attach. (Citations omitted). Second, a party must prove the amount of money to which its liens attach.
Chequers Inv. Assocs. v. Hotel Sierra Vista Ltd. P’ship (In re Hotel Sierra Vista Ltd. P’ship), 112 F.3d 429, 434 (9th Cir.1997). Cf. In re Rebel Rents, 307 B.R. at 183 (holding that revenues related to post-petition receivables from equipment leases were not cash collateral because proceeds, under pre-2001 definition, did not extend to such receivables); In re GOCO Realty *329Fund I, 151 B.R. 241, 252 (Bankr.N.D.Cal.1993) (holding that creditor did not have a perfected security interest in rental proceeds transferred to an attorney as a retainer); In re 1726 Wash., D.C. Partners, 120 B.R. 1, 2 (Bankr.D.D.C.1990) (holding that post-petition rents were not cash collateral where the mortgagee’s security interest in rents was unperfected).
B. Security Interests and Liens in Favor of the Bondholders
Against this background, the Trustee takes a starkly maximalist view of its rights. It believes that “all of the [LVMC’s] money, wherever held, is the cash collateral of’ the Trustee. LVMC, not surprisingly, disputes this, as well as almost everything else the Trustee says. The Trustee’s position is not without problems; if adopted, it would require LVMC to give the Trustee adequate protection for every dollar LVMC spends postpetition. This would lead to an almost impossible adequate protection burden — if LVMC has to give dollar-for-dollar adequate protection payments to the Trustee, it would have to have a profit margin of at least 100% just to break even. Neither it nor any other bankruptcy debtor could meet that requirement; debtors with 100% profit margins rarely need bankruptcy protection.
Presumably in partial recognition of this problem, the Trustee asked for adequate protection in the form of replacement liens on LVMC’s cash flow, and of new hens on LVMC’s previously unencumbered physical assets. It also wants strict adherence to the provisions of the Indenture related to LVMC’s collection and deposit of its revenues.
As the Trustee has the burden of establishing the existence and extent of its security interest, 11 U.S.C. § 363(p)(2), the resolution of this dispute turns on whether the Trustee can establish that it has valid liens and security interests, and whether those interests inhere in any of LVMC’s cash or other property covered by Section 363(a). In this respect, the Trustee points to three sources of security interests and liens: two provisions of the Financing Agreement (which the Trustee has the benefit of by way of assignment from the Director), and a statutory lien.
1. Statutory Lien
The Trustee focuses first on its claimed statutory lien under Nev.Rev.Stat. § 349.620(1).18 That section provides as follows:
The principal of, the interest on and any prior redemption premiums due in connection with the bonds issued pursuant to NRS 349.400 to 349.670, inclusive, are payable from, secured by a pledge of, and constitute a lien on the revenues out of which the bonds have been made payable .... 19
The interpretive question here is whether the “revenues out of which the bonds have been made payable” refers to revenues *330from the Financing Agreement — the sole source of the Director’s funds to pay the Bonds — or to LVMC’s gross revenues such as the coin and cash collected daily by Brink’s.
Given the statute’s focus on items the Director may use as sources of repayment, the best interpretation of the statute is that it refers only to the proceeds or revenues that originate with the Director; that is, from the Financing Agreement. That is the only source of repayment that the Director could offer the bondholders. The Department does not operate the monorail, and thus the direct receipts of that operation — such as might be represented by TVM collections- — could not be property that it, as issuer and nominal obligor on the Bonds, could control directly. To push the argument further would be to extend the statutory lien to the money in the pockets of the monorail’s patrons.
Moreover, the limited interpretation is the only interpretation that does not make the phrase “out of which the bonds have been made payable” surplusage. Had the Nevada Legislature intended that all revenues would be collateral, they could have omitted this phrase. But by adding it, they indicated that the Director had discretion in structuring the transaction so that certain revenues would not be earmarked for bond payment.20
With respect to the monorail’s financing, the Director exercised that discretion by limiting the security interest granted, as will be seen below. The Director did not take a blanket security interest in all revenues, wherever and whenever found. Rather, through measured provisions in the Financing Agreement, LVMC granted a security interest in only a subset of its revenue.
As a result, the language added by the legislature made the statutory lien granted derivative upon other agreements. Put another way, the statutory lien attaches only to money that would be payable under or encumbered by the Financing Agreement. Therefore, before the court can consider the scope of the statutory lien, it must consider what consensual security interests LVMC’s granted in favor of the Director and, by assignment, in favor of the bondholders.
2. Consensual Security Interests
The Financing Agreement is a consensual contract that creates property rights in the form of security interests to secure repayment of the loan from the Director. See, e.g., UCC § 1-201(35); Nev.Rev.Stat. § 104.1201(2)(ii) (“‘Security interest’ means an interest in personal property or fixtures which secures payment or performance of an obligation.”).21 As a contract,*33122 the Financing Agreement is subject to all the rules of contract interpretation, including a subset of rules provided by Nevada’s version of Article 9 of the UCC.
Interpretation of the Financing Agreement between LVMC and the Director is critical; that agreement was the only security agreement LVMC signed; there is no privity of contract between LVMC and the Trustee, and hence there is no direct grant of a security interest from LVMC to the Trustee either. The Trustee’s only rights against LVMC’s property are as an assign-ee of the Director, and thus the Trustee must look to the Financing Agreement for any recourse.
a. Role of Contract Latv
To determine the validity and extent of the security interests and liens the Trustee claims, and to determine if LVMC’s use of cash constitutes diminution of cash collateral, the court must first determine the extent of the security interests and lien by examining the documents the parties signed when the bonds were issued. These include the Indenture, the Financing Agreement and LVMC’s Franchise Agreement with Clark County under which LVMC obtained local governmental permission to operate the monorail (the “Franchise Agreement”). Each of these are contracts subject to interpretation under Nevada law.23 See UnitedHealth Group Inc. v. Wilmington Trust Co., 548 F.3d 1124, 1128 (8th Cir.2008) (an indenture is construed under principles of contract interpretation); Pride Hyundai, Inc. v. Chrysler Fin. Co., L.L.C., 369 F.3d 603, 612 (1st Cir.2004) (construing a financing agreement using contract interpretation principles).
In Nevada, “when the facts are not in dispute, contract interpretation is a question of law.”24 Federal Ins. Co. v. American Hardware Mut. Ins. Co., 184 P.3d 390, 392 (Nev.2008). Although the court has grave doubts about the general quality of many of the deal documents in this matter, it must construe these contracts, as it would any other contract, to give meaning to the plain language of the contract. State ex rel. Masto v. Second *332Judicial Dist. Court ex rel. County of Washoe, 125 Nev. 5, 199 P.3d 828, 832 (2009) (“in interpreting a contract, [a court applying Nevada law must] construe a contract that is clear on its face from the written language, and it should be enforced as written.”).
Part of this task is to ensure that the contract is interpreted as a whole without giving undue weight to any particular clause beyond that which a reasonable third-party would when reading the provision. As stated by the Nevada Supreme Court, “[a] court should not interpret a contract so as to make meaningless its provisions.” Phillips v. Mercer, 94 Nev. 279, 282, 579 P.2d 174, 176 (1978). See also Anvui, LLC v. G.L. Dragon, LLC, 123 Nev. 212, 215, 163 P.3d 405, 407 (2007); Mohr Park Manor, Inc. v. Mohr, 83 Nev. 107, 424 P.2d 101 (1967).
b. Role of Article 9
Although there are some generally accepted interpretive conventions under Article 9, “[a] security agreement is to be interpreted the same as any other contract.” 8A Laky Lawrence, LawrenCe’s ANDERSON ON THE UNIFORM COMMERCIAL Code § 9-203:51 (3d. ed.2009). See also Barkley Clark; & Barbara Clark, The Law of Seoured Transactions Under the Uniform COMMERCIAL Code ¶ 2.02[3][b] (rev. ed.2009).25 As a result, interpretation of the Financing Agreement is not substantively different from interpreting any other contract under Nevada law.
3. Interpreting the Financing Agreement Under Nevada Law
Although the rules are somewhat straightforward, discovering the meaning of the words used to grant the security interest is not. The grant of security in the Financing Agreement is not a model of clarity. Section 3.1(b) of the Financing Agreement reads as follows:
As security for the payment of any and all amounts due hereunder, the Borrower [LVMC] hereby grants, assigns and pledges to the Director a security interest in all of the Borrower’s right, title and interest in, to and under the following (hereafter, the “Collateral”):
(i) contract rights of the Borrower under the Purchase Agreement, the Design-Build Agreement, the Operation and Maintenance Agreement, the Management Agreement, and the Franchise Agreement and any amendment or successor agreement thereto,
(ii) the Net Project Revenues, and
(iii) all amounts held in any funds or accounts created under the Senior and Subordinate Indentures or this Agreement (except the Rebate Fund and the Indemnification Account of the Contingency Fund),
whether now owned by the Borrower or hereinafter acquired and whether now existing or hereinafter coming into exis*333tence and all money, deposits, funds and balances, whether or not evidenced by any certificates of deposit, passbooks or other documents and all revenues, income, interest, dividends, issues and profits added to earned or accrued on any deposit of the Net Project Revenues; and all present and future claims, demands, causes and choses in action in respect of any or all of the foregoing and all payments on or under and all proceeds of every kind and nature whatsoever in respect of any or all of the foregoing, including all proceeds of the conversion, voluntary or involuntary, into cash or other liquid property, all cash proceeds, accounts, accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit accounts, insurance proceeds, rights to payment of any and every kind and other forms of obligations and receivables, instruments and other property which at any time constitute all or part of or are included in the proceeds of any of the foregoing.26
Although long and somewhat convoluted, this grant essentially covers three types of collateral: (i) contract rights in the Franchise Agreement; (ii) all funds on deposit with the Trustee; and (iii) “Net Project Revenues.”
a. Contract Rights Under Franchise Agreement
The Trustee believes that this grant of a security interest in the “contract rights” of LVMC “under the ... Franchise Agreement” renders all money derived from the operation of the monorail as “proceeds” of the Franchise Agreement. Its argument turns on the statutory definition of “proceeds,” which Section 9-102(a)(64) of the UCC defines as:
(64) “Proceeds”, except as used in Section 9 — 609(b), means the following property:
(A) whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral;
(B) whatever is collected on, or distributed on account of, collateral;
(C) rights arising out of collateral;
(D) to the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral; or
(E) to the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral.
According to the Trustee, since LVMC could not run the monorail or collect fares without the Franchise Agreement, all fares must be “collected on, or distributed on account of’ the Franchise Agreement, UCC § 9-102(a)(64)(B), or must be “rights arising out of the collateral” under UCC Section 9-102(a)(64)(C).27
*334The Trustee contends that CLC Equip. Co. v. Brewer (In re Value-Added Commc’s, Inc.), 139 F.3d 543 (5th Cir.1998) “is on all fours with the present case” and thus settles the matter. The court disagrees. In Value-Added, a company had leased a telephone system and then installed it in Minnesota prisons. As part of the process, it granted the lessor a security interest in its agreement with the Minnesota prison system. When the lessee filed bankruptcy, the lessor discovered that the financing statement covering the Minnesota system only covered equipment, and not the site license agreements with Minnesota under which Minnesota was obligated to pay the debtor. Id. at 544-45. The court ultimately held that the payments from Minnesota were not proceeds of the equipment covered by the filed financing statements. Id. at 546.
The Trustee analogizes the site licenses in Value-Added to the Franchise Agreement here, and contends that the Fifth Circuit’s implicit holding that those site licenses were the sole source of the funds means that the grant of “contract rights ... under” the Franchise Agreement includes LVMC’s gross revenues.
This analogy is not complete or persuasive. The site licenses in Value-Added were direct rights under a contract that had matured and were liquidated — accounts in the parlance of Article 9. But these types of rights are quite different than what the Trustee seems to want to argue; the Trustee’s argument seems to assume that “contract rights ... under” the Franchise Agreement include intangible rights of permission. And that’s where the analogy breaks down. Fully earned receivables as in Value-Added are not the same as a general grant of the right to operate.
Value-Added might help the Trustee if Clark County owed money to LVMC under the Franchise Agreement’s terms; that is, if there were any contract provisions under the Franchise Agreement that, if followed, would result in money flowing to LVMC. But the Trustee has not shown the existence of any such terms or provisions. So the analogy fails.
But even if “contract rights ... under” the Franchise Agreement were connected in some way to the revenues LVMC takes in from the monorail’s operations, Value-Added would still be of dubious value in finding that the connection equated to “proceeds” under Article 9. As stated in Value-Added:
The funds collected from the prisoners were the product of the use of the equipment. Use is not a disposition of the collateral within the meaning of the definition of “proceeds”. If fruits and products from the use of collateral were treated as proceeds, every creditor with a security interest in equipment would have a security interest in all items produced from the equipment as well as the revenues earned by the equipment. The revenues earned from the inmate’s use of the equipment were the proceeds of the Site Leases.
Id. at 546.
Properly applied, Value-Added would seem to hold that the fares for the use of LVMC’s trains and track, to which the Trustee has no claim, “were the product of the use of the equipment,” id., and not the proceeds of the intangible rights to run the business in the first place. The Trustee has thus not met its burden of establishing the extent of its interest in any of LVMC’s cash from operations as proceeds of its security interest in contract rights.
In addition, the Trustee’s position diminishes to the vanishing point when the terms of the Financing Agreement are read in context; the placement of the *335grant of the security interest tells a lot about the parties’ objective intent as to its scope. The grant is found last in a list of other agreements, all of which relate to the construction of the monorail’s extension. This list and its placement would lead a reader to believe that the grant was to allow the Trustee to step in and take over the monorail if the planned expansion did not occur or if it faltered; the limitation in each case to the contract rights (as opposed to intangible or other rights) reinforces this conclusion.28 When read together, the intent that emerges is one of a series of security interests designed for a contingency that did not occur: the failure of the extension. Other provisions were left to deal with operations of the completed track.
Policy reasons also support LVMC’s position. If the Trustee were correct, its interpretation would make every single dollar that LVMC generates proceeds, thus rendering the remaining grants of security interests in Section 3.1(b) superfluous.29 Under Nevada law, interpretations that swallow other clauses, evidently drafted for some purpose, are to be avoided. See Phillips, 94 Nev. at 282, 579 P.2d at 176 (“A court should not interpret a contract so as to make meaningless its provisions.”).
All of this leads to the conclusion that LVMC’s grant of a security interest in the contract rights of the Franchise Agreement must be a security interest in a subset of the more general rights that flow from LVMC’s franchise to operate the monorail. Put differently, the Debtor granted a security interest in certain rights — “contract rights” — contained within the Franchise Agreement, but not in all the entitlements and privileges represented by that agreement.30 State ex rel. Masto, 199 P.3d at 832 (“In interpreting a contract, [a court applying Nevada law must] construe a contract that is clear on its face from the written language, and it should be enforced as written.”).31
*336As this discussion demonstrates, “contract rights under” the Franchise Agreement are not the same as the Franchise Agreement itself; rather, like a security interest in the proceeds of any sale of an FCC license, LVMC’s grant of a security interest in its contract rights under the Franchise Agreement gave the Director a limited subset of rights. As LVMC has not implicated those rights, LVMC’s cash is not proceeds of the security interest granted in those contract rights.
b. Deposit Accounts and Funds
Section 3.1(b) also grants a security interest in “all amounts held in any funds or accounts created under the Senior and Subordinate Indentures or this [Financing] Agreement (except the Rebate Fund and the Indemnification Account of the Contingency Fund).” Read literally, this grant means that all funds delivered to the Trustee and kept by it in its deposit accounts (except for the few excluded accounts) are immediately subject to a perfected security interest.32
Although deposit accounts as original or initial collateral were outside the scope of Article 9 when the parties signed the Financing Agreement, Nevada’s version of Revised Article 9 — which brought deposit account collateral as original collateral into Article 9 when it became effective in 2001 — picks up and validates this security interest nonetheless. Wiersma v. O.H. Kruse Grain and Milling (In re Wiersma), 324 B.R. 92, 107 (9th Cir. BAP 2005), rev’d on jurisdictional grounds, 483 F.3d 933 (9th Cir.2007).33 And for present purposes, even if it did not, the Trustee’s setoff rights as to the accounts would have accomplished the same thing, as setoff rights are treated as secured claims in bankruptcy. See 11 U.S.C. § 506(a). See also Contrail Leasing Partners, Ltd. v. Executive Serv. Corp., 100 Nev. 545, 550, 688 P.2d 765, 768 (1984) (citing Korlann v. E-Z Pay Plan, Inc., 247 Or. 170, 428 P.2d 172 (1967) (en banc)) (recognizing that banks have, at common law, a setoff right against their depositors).
*337As a result, the Trustee has a perfected security interest in all deposit accounts which it maintains, and in which LVMC had balances.
c. Net Project Revenues
LVMC also granted a lien to the Director in “Net Project Revenues.” Financing Agreement § 3.1(b)(ii). This grant mirrors one aspect of the typical security interest taken in project financing — the lender gets an interest in the stream of revenue that its loan helped create.34 But that interest is typically in gross revenues, and that is not the case here. As will be seen, “Net Project Revenues” are just that: the net amount left after certain operating expenses are deducted from gross revenues.
Taking a security interest in net revenues is a definitional nightmare. Does the security interest attach to revenues only after payment of operating expenses? Is this a form of delayed attachment under UCC § 9-203(a)? Does it matter how often those expenses are scheduled to be paid, or if different kinds of operating expenses are paid under different schedules? What is the status of the revenues between the time they are generated and the time the operating expenses are paid? What happens if, after normal payments of operating expenses are made, the parties discover a bill that went unpaid, or a rebate that went uncashed?
Well-drafted security agreements generally resolve these questions; here, the security agreement — the Financing Agreement — confuses more than it clarifies. To understand what was granted, one has to go through a maze of cross-references. The starting point is the language of the Financing Agreement. Section 3.1(b)(ii) states that: “As security for the payment of any and all amounts due hereunder, the Borrower hereby grants, assigns and pledges to the Director a security interest in all of the Borrower’s right, title and interest in, to and under ... (ii) the Net Project Revenues.” Net Project Revenues is a defined term, but Section 1.1 of the Financing Agreement directs the reader to the Indenture for its definition.
Section 1.01 of the Indenture contains a long list of alphabetized definitions. On page 17, “Net Project Revenues” are stated to mean “Project Revenues less Operation and Maintenance Costs.” These two additional definitions are also defined in Section 1.01. “Project Revenues” are defined as “all gross income and revenue received or receivable by [LVMC] from the ownership, operation or use of the Project... ,”35 Section 1.01 of the Indenture defines “Operation and Maintenance Costs,” the key definition for this analysis as:
[A]ny and all amounts due under the Operation and Maintenance Agreement and the Management Agreement and any reasonable and necessary costs paid or incurred by [LVMC] for maintaining and operating the Project, including all reasonable expenses of management and repair and other expenses necessary to maintain and preserve the Project in good repair and working order ... all administrative costs of [LVMC] that are charged directly or apportioned to the *338operation of the Project, such as salaries and wages of employees, legal and accounting fees, insurance, overhead, taxes (if any), fees ... 36
The upshot of this excursion through the dark corners of the Indenture is that LVMC’s grant of a security interest in the Financing Agreement was a grant of a security interest in whatever was left over after paying Bombardier and other operating and maintenance expenses. This conclusion follows the cash flow under the Indenture; in lieu of obtaining a security interest in gross revenues, the Trustee and the Director opted instead to have their security interest follow the Indenture’s cash flow covenants. If there was no default, the security interest did not attach until after payment of Operation and Maintenance Costs, and the testimony was that such payments occurred approximately every thirty days. This conclusion tracks the equation set forth in the Indenture’s definition of “Net Project Revenues.” An objective reading of the Financing Agreement thus demonstrates that the referent of the grant of the security interest — Net Project Revenues — cannot and does not come into existence until after the subtraction — that is, until after the payment — of Operation and Maintenance Costs from gross revenues.
If there is a default, however, the Indenture channels the flow of funds to the Trustee, whose possession effects both attachment and perfection of a security interest in the revenues it receives and maintains. The Trustee, however, took the property interest in the funds subject to an obligation to pay Operation and Maintenance Costs before paying any principal or interest on the Bonds. Indenture, § 7.03(2) (after a default, Trustee directed to pay first expenses necessary to protect the interests of the Bondholders and Trustee’s fees, and then to pay Operation and Maintenance Costs, all before any payment of principal or interest on the Bonds). See also Financing Agreement § 4.1(b) (“in the event of default, ‘all payments permitted or required to be paid from the Collection Fund for Operation and Maintenance shall be paid by the Trustee from the Revenue Fund upon written direction of the Borrower. . . .’ ”).
No one apparently seriously believed LVMC would upset this arrangement, breach its contract, and not deposit all revenues with the Trustee after default. This belief seems odd in hindsight.37
*339
C. The Identification and Extent of the Trustee’s Interests in Cash Collateral
To veterans of Article 9, all this may seem more than passing strange. The Indenture creates a world in which operating expenses have priority over a secured creditor’s debt payments, a world upside down from the normal loan structure. An adroit and hardnosed bank lawyer would have insisted on a security interest in all revenues whenever acquired that would attach as soon as the debtor acquired the revenues, with no guaranties of payment to any other creditor. And he or she would have insisted on procedures within its control to maintain perfection at all times.
But the Indenture cannot be read to mean what the bondholders wish they could have or should have negotiated; this court can read it only as it is written.38 And that means that no security interest attaches in any of LVMC’s revenues until the earlier of: (i) possession or control of the revenues by the Trustee; or (ii) after payment of Operation and Maintenance Costs, with a balance remaining.39 Until *340the security interest attaches, the Trustee cannot hold an “interest” in the property as required by Section 363(a) for such property to be cash collateral. The Trustee’s legitimate interests in cash collateral are thus restricted to: (i) cash in accounts maintained at its branches as of LVMC’s filing; and (ii) other cash or deposit accounts to the extent not necessary for Operation and Maintenance Costs.
As a practical matter, however, the only cash collateral as of the petition date would be the amounts then on deposit with the Trustee, or an amount approximating $225,000. As the Trustee has the burden of establishing the extent of its interest, 11 U.S.C. § 363(p)(2), and as it did not introduce any evidence of the Operation and Maintenance Costs paid from the Bank of America account, it has failed to carry its burden of establishing that any portion of the Bank of America account constituted cash collateral.40
IV. Adequate PROTECTION of the Trustee’s Interests in Cash Collateral
As the Trustee has established that it has some cash collateral interests to protect, the question then turns to what actions and procedures should be taken to adequately protect those interests. At the conclusion of the hearing, the court requested, and the parties provided, proposed orders regarding their respective positions on adequate protection. Both sides agreed, in one form or another, to follow the Indenture with respect to the collection, deposit, and processing of revenues from LVMC’s operations. Both sides agreed that, to the extent necessary, LVMC would grant a replacement lien in LVMC’s postpetition “Net Project Revenues.” The point of departure was that the Trustee demanded liens on all of LVMC’s unencumbered property, including its tracks and its trains. LVMC offered no liens on items not previously encumbered.
A. Adequate Protection of Cash and Deposit Accounts Held as of the Petition Date
The Trustee, as indicated above, has not been able to carry its burden on whether cash and funds on deposit with it or with Bank of America represent Net Project Revenues. Nonetheless, because of the Trustee’s interest in deposit ac*341counts, LVMC must give the Trustee some protection of that interest. Both LVMC’s and the Trustee’s adequate protection offers required LVMC to follow the cash deposit and disbursal procedures in the Indenture. This process, as it both requires LVMC to turn over cash to the Trustee, and the Trustee to honor legitimate Operation and Maintenance Costs, both adequately protects the Trustee’s interest in the deposit accounts and the estate’s interest in smooth operations.41 This process preserves the parties’ bargain with respect to the dedication of revenues to Operation and Maintenance Costs, and keeps the monorail running for the benefit of all parties.
Moreover, LVMC’s use of the cash it generates in its operations is itself a form of adequate protection. This is because LVMC’s continued investment in, and operation of, the monorail will increase, or at least maintain, the collateral’s value. A shuttered monorail will not generate any revenue, but every additional rider on the monorail will generate additional cash for distribution to the noteholders, after LVMC pays reasonable expenses. The Trustee has offered no evidence that monorail ridership is decreasing, as it would have needed to obtain additional adequate protection of its prepetition interests. This follows from the Supreme Court’s decision in United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). In that case, the Court held that when collateral was not diminishing in value, the mere passage of time did not warrant adequate protection. See id. at 382, 108 S.Ct. 626; In re Integrated Health Services, Inc., 260 B.R. 71, 74 (Bankr.D.Del.2001) (denying adequate protection or stay relief because the creditor failed to provide sufficient evidence showing that the value of the collateral was declining); In re Elmira Litho, Inc., 174 B.R. 892, 902 (Bankr.S.D.N.Y.1994); In re Continental Airlines, Inc., 134 B.R. 536, 544 (Bankr.D.Del.1991) (citing Timbers for the proposition that: “An underse-eured creditor is only entitled to adequate protection payments if its collateral is declining in value.”). Rather, the Debtor’s expenditures keep the monorail running and preserve the Trustee’s expectation in net revenues as their primary collateral.
In a similar manner, other courts have found that a debtor’s use of cash collateral to maintain properties from which rents are being generated is a sufficient form of adequate protection. See Federal Nat’l Mortg. Ass’n v. Dacon Bolingbrook Assocs. Ltd. P’ship. 153 B.R. 204, 214 (N.D.Ill.1993) (“[T]he required adequate protection of Rents is satisfied to the extent the Debtor reinvests the rents in the operation and maintenance of the property because the value of the secured creditor’s interest in its collateral will thereby be increased.”); In re 499 W. Warren Street Assocs., Ltd. P’ship, 142 B.R. 53, 58 (Bankr.N.D.N.Y.1992) (allowing the use of cash collateral to maintain property); McCombs Prop. VI, Ltd. v. First Texas *342Sav. Ass’n (In re McCombs Prop. VI, Ltd.), 88 B.R. 261, 267 (Bankr.C.D.Cal.1988) (holding that rents could be spent to make repairs or renovations that would increase rent flow even without equity cushion); In re Stein, 19 B.R. 458, 460 (Bankr.E.D.Pa.1982).
B. Adequate Protection of Postpetition Cash Flows
These procedures will also help to adequately protect the Trustee’s interest, if any, in postpetition cash flows, including any Net Project Revenues. Under Section 552(a) of the Bankruptcy Code, the Trustee may no longer enforce the after-acquired property provisions of the Indenture against LVMC’s estate. Section 552(b), however, creates an exception from this termination by recognizing security interests in proceeds of prepetition collateral, as opposed to security interests taken by virtue of the after-acquired property clause.
Here, several questions arise. First, what law determines the content of “proceeds” in Section 552(b)? Second, are ongoing revenues really “proceeds” of the Trustee’s prepetition position? Finally, if there are proceeds, does the “equities” exception found at the end of Section 552(b) apply to restrict or reduce the Trustee’s interest?
1. What Law Determines the Content of “Proceeds” as Used in Section 552(b)?
It is generally assumed that when the Bankruptcy Code, or any other federal statute for that matter, uses terms borrowed from nonbankruptcy law, the intent is that those terms retain the meaning given to them by nonbankruptcy law, at least to the extent that there is no overriding federal policy. As the Supreme Court has stated when analyzing whether to incorporate state law understandings into federally defined terms:
Our cases indicate that a court should endeavor to fill the interstices of federal remedial schemes with uniform federal rules only when the scheme in question evidences a distinct need for nationwide legal standards, see, e.g. Clearfield Trust Co. v. United States, 318 U.S. 863, 366-367, 63 S.Ct. 573, 574-575, 87 L.Ed. 838 (1943), or when express provisions in analogous statutory schemes embody congressional policy choices readily applicable to the matter at hand. See, e.g., Boyle v. United Technologies Corp., 487 U.S. 500, 511-512, 108 S.Ct. 2510, 2518-2519, 101 L.Ed.2d 442 (1988); DelCostello v. Teamsters, 462 U.S. 151, 169-172, 103 S.Ct. 2281, 2293-2295, 76 L.Ed.2d 476 (1983). Otherwise, we have indicated that federal courts should “incorporate] [state law] as the federal rule of decision,” unless “application of [the particular] state law [in question] would frustrate specific objectives of the federal programs.” United States v. Kimbell Foods, Inc., 440 U.S. 715, 728, 99 S.Ct. 1448, 1458, 59 L.Ed.2d 711 (1979).
Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 98, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991); Dzikowski v. N. Trust Bank of Fla. (In re Prudential of Fla. Leasing, Inc.), 478 F.3d 1291, 1298 (11th Cir.2007) (issue of whether understanding of “single satisfaction” under Florida law informs interpretation of § 550(d)); Americredit Fin. Servs., Inc. v. Penrod (In re Penrod), 392 B.R. 835, 843 (B.A.P. 9th Cir.2008) (discussing incorporation of “purchase money security interest” from UCC into Section 1325(a) of the Bankruptcy Code). Moreover,
[t]he presumption that state law should be incorporated into federal common law is particularly strong in areas in which private parties have entered legal rela*343tionships with the expectation that their rights and obligations would be governed by state-law standards. See [Kimbell Foods, 440 U.S.] at 728-729, 739-740, 99 S.Ct., at 1458-1459, 1464-1465 (commercial law)....
Kamen, 500 U.S. at 98, 111 S.Ct. 1711.
As a result, unless there are good reasons to depart from it, the UCC satisfies these requirements; it is, for the most part, a unifying code governing commercial transactions across and among the states that have adopted it. We thus start with the presumption that “proceeds” in Section 552(b) should be construed consistently with the same term as in the UCC.
While the court adopts that rule, it still does not answer a central question here: what version of Article 9 applies? At the time the Indenture was signed, the pre-2001 version of Article 9 was in effect. This might matter, since it is beyond doubt that the drafters of Revised Article 9 intended to expand the scope of “proceeds.” State law has answered this question; even though the parties signed the Financing Agreement before the effective date of Revised Article 9, Revised Article 9 applies to its interpretation and enforcement, and not pre-2001 law. UCC § 9-702; In re Wiersma, 324 B.R. at 107.
Whether this should be the federal rule, however, depends on whether, in Kamen’s words, the revised definition of proceeds would “frustrate specific objectives of the federal programs.” Here, although one could construct a case in which the change in definition frustrated the rehabilitative goals of title 11, this is not such a case. The differences in scope are not such that they would disturb normal commercial expectations; indeed, a case can be made that the state law sets or at least shapes such expectations. As a result, this court will follow the revised definition of proceeds contained in Revised Article 9.
2. Are Ongoing Revenues Proceeds of the Trustee’s Prepetition Security Interest?
As indicated above, the Trustee has an automatically attached and perfected interest in most proceeds under Article 9 of the UCC. But are LVMC’s postpetition revenues “proceeds” of the Trustee’s prepetition collateral? As quoted above, the extent of proceeds is quite broad. But the two sources of original collateral that the Trustee has—Net Project Revenues and deposit accounts—lead to different results with respect to proceeds.
a. Net Project Revenues as Proceeds
From the discussion above, the security interest in Net Project Revenues is somewhat ephemeral for purposes of cash collateral. Being the balance left over after all operating and maintenance costs are paid, Net Project Revenues are thus kept by the Trustee and applied as the Indenture instructs. This is key—no Net Project Revenues cycle back into LVMC’s operations, or are used to fund its activities. Future revenues cannot be said to be “acquired upon the sale, lease, exchange or other disposition of the collateral,” UCC § 9-102(a)(64)(A), nor can they be said to be collected on, or distributed on account of, collateral, UCC § 9-102(a)(64)(B).
To see this point more clearly, imagine that LVMC’s total revenues exactly equaled its Operation and Maintenance Costs. There would be no Net Project Revenues, and hence no collateral, even though LVMC could continue to operate. Thus, future Net Project Revenues are not proceeds of prior Net Project Revenues, and no adequate protection need be given.
LVMC has, however, offered to protect any potential interest in Net Project Reve-*344núes by granting a replacement lien under 11 U.S.C. § 361(2) in its postpetition Net Project Revenues, and the court accepts that offer.
b. Deposit Account Proceeds
If the Indenture is followed, then another proceeds argument arises. Post-petition, LVMC will deposit all funds into accounts maintained at the Trustee. Under the UCC, the Trustee’s interest in such funds, as stated earlier, would simultaneously attach and perfect upon such deposit. See UCC § 9 — 203(b) (attachment); 9-104(a)(l) (perfection). Yet Section 552(a) operates with respect to attachment of funds in a deposit account in the same manner it acts with respect to any other postpetition attachment pursuant to a prepetition security agreement. It precludes attachment, thus lessening the Trustee’s interests. One method of protecting this interest is to grant a replacement lien under Section 361(2) in all funds deposited into accounts maintained at the Trustee, and the court shall impose such a replacement lien.
While this replacement lien may cover funds that are on deposit with the Trustee, it does not address the proceeds interest the Trustee may obtain in whatever LVMC receives upon expenditure of such funds.42 This proceeds interest arises because LVMC will pay all of its bills and expenses from deposit accounts maintained at the Trustee. Since these expenses, especially payments on the contract with Bombardier, contribute to LVMC’s revenues, such revenues could be proceeds — actually, proceeds of proceeds — which maintain their character as cash collateral deserving of protection. In this scenario, payments to Bombardier would satisfy LVMC’s obligation to it under the operating agreement. With payment, Bombardier would then have no excuse not to perform its obligations under the operating agreement, which in turn lead to LVMC’s revenues. The best link between this performance and LVMC’s gross revenues would be UCC Section 9-102(a)(64)(B), which defines proceeds to include anything “collected on, or distributed on account of, collateral [here, Bombardier’s performance].” UCC § 9-102(a)(64)(B). Even if this linkage is appropriate — and it may not be as it is clangs on the ear to say that performance on a contract is “collected” or “distributed” — the Bankruptcy Code may interpose limitations on this proceeds interest.
3. Are There Equitable Considerations that Section 552(b) Would Allow the Court to Consider That Would Restrict the Trustee’s Security Interests in Proceeds?
The last clause of Section 552(b) states that even if a security interest in proceeds survives, it may be limited to the “extent that the court, after notice and a hearing and based upon the equities of the case, orders otherwise.” Here, a real question exists as to an equitable division of the revenues between the initial cash subject to the Trustee’s security interest in deposit accounts, and the revenues produced. The funds on deposit are undoubtedly necessary, but also assuredly not sufficient; many other aspects of LVMC’s operations contribute to revenue production.43
In such cases, courts have often adopted methods of allocation of contributions be*345tween the collateral and the other efforts of the debtor. See generally 4 James J. White & Robert S. Summees, Uniform Commercial Code § 32-8 (6th ed.2010). But often the efforts of the estate in generating the income predominate the allocation. As the Bankruptcy Appellate Panel has noted, “revenue generated by the operation of a debtor’s business, post-petition, is not considered proceeds if such revenue represents compensation for goods and services rendered by the debtor in its everyday business performance.... Revenue generated post-petition solely as a result of a debtor’s labor is [also] not subject to a creditor’s pre-petition interest.” Arkinson v. Frontier Asset Mgmt. LLC (In re Skagit Pacific Corp.), 316 B.R. 330, 336 (9th Cir. BAP 2004) (citing In re Cafeteria Operators, 299 B.R. 400, 405 (Bankr.N.D.Tex.2003)). See also In re Wabash Valley, Power Ass’n, Inc., 72 F.3d 1305, 1322 (7th Cir.1995) (no proceeds argument made when lender had a blanket lien on power generation assets and rights; post-petition income not treated as collateral). See also Groenwegen, supra note 2 (“Although certain components of the debtor’s revenue might be classified as ‘rent’ or ‘proceeds,’ postpetition operating income will be beyond the reach of the secured claim.”)
Here, however, LVMC has sought to incorporate the gist of this provision by providing enhanced reporting and disbursement procedures. The Trustee has mirrored this request in its demand. This confluence of procedures indicates agreement on adequate protection of any interest the Trustee may have in LVMC’s cash flow, and thus the court does not have to allocate any interest the Trustee may have in proceeds interest across LVMC’s revenues.
V. Summaey
The Trustee has met its burden with respect to establishing the extent of its security interest in the $225,000 in accounts maintained at the Trustee as of the filing. It has also shown that it has a proceeds interest stemming from its original security interest in LVMC’s deposit accounts maintained by the Trustee. It has not established a security interest in the $971,000 in the Bank of America account, nor has it established a security interest in the $65,000 in coin and the $162,000 in cash held by Brink’s.44
As the Financing Agreement limited the Trustee’s ongoing interest to Net Project Revenues, that is all to which the statutory lien found in Nev.Rev.Stat. § 349.620 could attach since its reach is limited to “the revenues out of which the bonds have been made payable.” As a result, no statutory lien attached to or fixed upon any of the funds in the Bank of America account or in the cash held by Brink’s.45
Adherence to the procedures and obligations for handling and applying cash contained in the Indenture will protect the Trustee’s legitimate and proven interests in its collateral. The court will thus separately enter an order requiring LVMC to *346follow those procedures. Should revenues consistently fall below historic levels and the amounts of cash collected threaten to materially lessen these protections, the court will consider amending the order, or will consider a request by the Trustee under 11 U.S.C. § 507(b).46
VI. CONCLUSION
The Trustee is the assignee of a security interest in bank accounts held by the Trustee, Net Project Revenues, and contract rights under the Franchise Agreement. Undoubtedly, and with hindsight, this combination of interests falls short of what the Trustee asserted, and probably short of what it might have thought it received. But application of contract interpretation principles designed to give the parties’ words their most reasonable meaning demonstrates that the Trustee’s interests are not particularly robust. Nevertheless, the parties basically agree that adherence to the procedures embodied in the Indenture, and replacement liens, will preserve the Trustee’s position at filing throughout this case. And that is the goal of adequate protection.
This opinion shall constitute the court’s findings of facts and conclusions of law in accordance with Fed. R. BanKR.P. 7052, made applicable to this contested matter by Fed. R. BanerP. 9014(c). The court will enter a separate order regarding the daily implementation of this opinion.
. Within hours of its filing, other demands were made; the insurer of the Bonds moved to dismiss the case alleging that LVMC was a municipality under the Bankruptcy Code, and was thus ineligible to file for chapter 11 relief. Concurrently with the issuance of this opinion, the court is denying that motion. Reference is made to the dismissal opinion for many of the background facts of this case.
. The National Federation of Municipal Analysts have provided standard form provisions for such financings, albeit directed at public hospital financings. See National Federation of Municipal Analysts, Recommended Term Sheet and Legal Provisions for Hospital Debt Transactions (2005), available at http://data. memberclicks.com/site/nfma/DG.BP.rbp_ hosp_term_sheet.doc.pdf (last visited April 20, 2010) (the “Model Term Sheet”), See also Paul Groenwegen, “Revenues" as Collateral: The Limits of the Revenue Pledge As a Security Device, 39 U.C.C. L.J. Art 4 (Spring 2007).
. The Bonds were issued in series. The first series has an aggregate principal amount of approximately $450 million, and have the benefit of private insurance. Two junior series of the Bonds make up the remainder of the original $650 million financing. These junior series are not insured and in some respects are contractually subordinate to the first series. US Bank has been appointed as an Indenture Trustee to represent the interests of the holders of the two junior series of Bonds.
. US Bank has a junior security interest in the same collateral as is encumbered in the Trustee’s favor, and accordingly U.S. Bank joined in the Trustee’s adequate protection request. This request drew little response, however, as it that there is little doubt that, as of the filing of LVMC’s case, the collateral’s value is less than the amount of the Bonds outstanding under the senior Indenture. This opinion thus focuses solely on the senior Trustee's interests as an undersecured creditor. To the extent relevant, however, references to the “Trustee” and the collateral should be taken to be references to U.S. Bank and to the collateral it holds.
. The Trustee perfected its interest and the Director’s interest by filing a financing statement with the Nevada Secretary of State on September 20, 2005. That statement was amended on October 4, 2007 to change the description of the collateral.
. So fervent were the protestations that no public money would be used on the monorail that LVMC established an account with the Trustee which contains about $7.9 million for use in demolishing the monorail structure over public right of ways should the need arise. This reserve account, called the "Removal Fund Account,” is in the name of and under the sole control of Clark County, the county in which the monorail operates.
. Ambac’s insurance policy obligates it to pay principal face value as well as the interest on the bonds if LVMC does not. Ambac estimates that its current exposure over the life of the bond issue is about $1.16 billion on an undiscounted basis.
. The process described in the body of the opinion is the process the parties used after LVMC’s default in June 2006.
. This contention does not withstand analysis. See note 38, infra.
. There was also about $30,000 in credit card receivables owed to LVMC from its merchant bank as of the date of the petition. Although LVMC sells ad space on the sides of its trains and in other locations, there were no outstanding receivables related to advertising revenue on the petition date.
. Cash collateral initially is defined as "cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest....” 11 U.S.C. § 363(a).
. In the Ninth Circuit, a debtor in possession seeking to use cash collateral is required to obtain the “affirmative express consent” of each entity having an interest in the cash collateral. Freightliner Mkt. Dev. Corp. v. Silver Wheel Freightlines, Inc., 823 F.2d 362, 368-69 (9th Cir.1987) (finding that implied consenl is insufficient to satisfy the requirements of § 363(c)(2), without deciding whether the secured creditor either impliedly consented to the use of its cash collateral or was estopped from denying that it had consented). As a result, silence is not a secured party’s consent. Id. at 368-69.
. The full language is:
In this section, “cash collateral'’ means cash ... and includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a security interest as provided in section 552(b) of this title, whether existing before or after the commencement of a case under this title.
There is an argument, based on the somewhat awkward wording of the last part of Section 363(a), that this language only extends to proceeds that are hotel or motel revenues, given that Congress did not use any modifier to link "property” back to the first part of the definition and the antecedent "as provided in section 552(b)” would appear to modify only motel and hotel revenues.
This interpretation ignores the historical evolution of the section; the hotel language was added in 1994. Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, § 214(b) (1994) (adding "and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties” to Section 363(a)). That legislation did not evince any intent to restrict the scope of proceeds coverage under the cash collateral section.
There still remains, however, an argument as to the effect of the 2001 amendments to the UCC on the scope of “proceeds,” and this is discussed later in this opinion. See Section IV.B.l, infra.
. If they are, and are thus presumptively cash collateral under Section 552(b), LVMC then argues, as discussed later, that the last clause of Section 552(b) exempts some or all of those revenues from the general inclusion of proceeds in Section 552(b).
. It was a central tenet of the 1978 Bankruptcy Code that property subject to a security interest was to be included as property of the estate in the debtor's case. Thus, unlike other countries' bankruptcy systems, see Bob Wessels, et. al„ International Cooperation in Bankruptcy and Insolvency Matters 26-27 (2009), encumbered property is part of the bankruptcy estate under the Code and is subject to bankruptcy court jurisdiction.
. Nevada has, together with every other state in the nation, adopted Article 9 of the UCC. It is found in Nev.Rev.Stat. § 104.9101 et. seq. Citations will generally be to the national version of the UCC unless there is a Nevada variation.
. The Bankruptcy Code uses the term "trustee” to refer generally to the estate representative, which could be a trustee in bankruptcy or a chapter 11 debtor in possession. Here, LVMC is a debtor in possession with the full powers of a bankruptcy trustee, 11 U.S.C. § 1107(a). As a result, references in the Bankruptcy Code to "trustee” can be read as references to a debtor in possession such as LVMC.
. Strategically, the Trustee would prefer the revenues to be subject to a statutory lien because such liens are not subject to Section 552(a)’s nullification of after-acquired property clauses with respect to property the estate acquires postpetition. 5 Collier on Bankruptcy ¶ 552.01[2] (Alan Resnick & Henry J. Som-mer, eds., 15th ed. rev.2010). That is, were LVMC’s revenues subject to the lien of Section 349.620, that lien would be unaffected by the filing of the bankruptcy case, and would encumber all of LVMC's revenues without regard to the time of attachment. Cf. 11 U.S.C. § 928 (preserving such statutory liens in Chapter 9 municipal bankruptcy cases, but subordinating them to "necessary operating expenses.”).
. That the Bonds were issued pursuant to Nev.Rev.Stat. §§ 349.400 to 349.670 is not disputed.
. This view is also supported by the broad definition of revenues in the relevant statute. Section 349.520 states that " ‘[rjevenues' of a project, or derived from a project, include payments under a lease, agreement of sale or financing agreement, or under notes, debentures, bonds and other secured or unsecured debt obligations of an obligor executed and delivered by the obligor to the Director or his or her designee or assignee (including a trustee) pursuant to such lease, agreement of sale or financing agreement, or under any guarantee of or insurance with respect to any of these.” Nev.Rev.Stat. § 349.520. Clearly, payments by LVMC are "revenues” under this definition. By using this definition in the statutory lien section, and by adding the limiting qualification that such revenues must be revenues “out of which the bonds are payable,” the legislature likely meant that the Director (or other issuer) could limit those revenues to only a portion or type of revenue generated.
. Nevada adopted Revised Article 1 in 2005. It is found in Nev.Rev.Stat. § 104.1101 et. seq. As with citations to Article 9, future citations in this opinion will be to the national version of Article 1.
*331Under the UCC, an agreement which creates a security interest is a security agreement. UCC § 9102(a)(71) (definition of security agreement). "Agreement," in turn is "the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade...." UCC § 1-201(3). Definitions from Article 1 apply to terms used in Article 9 unless the context indicates otherwise. UCC § 9-102(c).
Under the Bankruptcy Code, a security agreement is an "agreement that creates or provides for a security interest.” 11 U.S.C. § 101(50). A security interest under the Code is a "lien created by agreement,” 11 U.S.C. § 101(51), and a lien is "charge against or interest in property to secure payment of a debt or performance of an obligation.” 11 U.S.C. § 101(37). Given the closeness of definition, a security agreement under Article 9 will likely be a security agreement under the Bankruptcy Code
. Under the UCC, the term "contract” means "the total legal obligation that results from the parties' agreement as determined by the Uniform Commercial Code as supplemented by any other applicable laws.” UCC § 1-201(12). Since no party has argued that the agreement' — that is the bargain in fact' — ■ contained in the Financing Agreement is not enforceable, the two terms mean essentially the same thing in this case.
. Section 12.07 of the Indenture and Section 10.5 of the Financing Agreement each states that the respective document "shall be governed exclusively by and construed in accordance with the applicable laws of the State of Nevada.”
. For present purposes, since the court sits as factfinder as well as judge, this distinction does not matter. It would matter, of course, on appeal.
. The Clark treatise, usually a solid reference, states that "[bjecause the security agreement is the bilateral contract by which the debtor grants to the creditor a security interest in collateral, the court’s role is to determine the mutual intent of the parties.” Of course, the court's role in determining intent is not so subjective; " 'intent' does not invite a tour through [a party's] cranium.” Skycom Corp. v. Telstar Corp., 813 F.2d 810, 814 (7th Cir.1987). As noted by the late Professor Farnsworth: "By the end of the nineteenth century, the objective theory had become ascendant and courts universally accept it today.” E. Allan Farnsworth, Contracts § 3.6, at 117 (3d ed.1999). As a consequence, an objective reading of what the parties signed generally determines intent. As to the subjective description used by Clark — well, quan-doque bonus dormitat Homerus. See Horace, Ars Poetica v. 359.
. The presentation of this clause is as it appears in the amended Financing Statement, which the court takes to be some evidence as to how this clause is to be parsed. See note 5, supra. In the Financing Agreement, there are no line breaks and the text appears as one continuous blob.
. Since the Franchise Agreement is not diminished or reduced by the collection of fares, LVMC’s business income cannot be something that is received upon the "sale, lease, license, exchange, or other disposition of” the Franchise Agreement. Section § 9-102(a)(64)(A) accordingly does not apply. Similarly, since there is no loss or insurance involved, UCC § 9-102(a)(64)(D) and (E) do not apply.
. The parties may have been influenced by the fact that when the Financing Agreement was signed, Article 9 did not apply to contracts which were nonassignable by operation of law or other nonconsensual restriction. See UCC § 9-406 cmt. 6. Although the rules under Revised Article 9 regarding attachment are broader and the limitations on assignment narrower, taking a security interest in "contract rights” in the Franchise Agreement'— likely an account under Article 9 — would probably not allow the Trustee to operate the monorail following any foreclosure. UCC § 9 — 408(d); see also 11 U.S.C. § 365(c)(1).
. The court asked the parties if the construction of this clause of the Financing Agreement would be influenced by the fact that the monorail does not just traverse over public property, but also covers purely private grounds (which it does). To the extent that this question goes to the extent of the security interest, the burden was on the Trustee to answer this question. 11 U.S.C. § 363(p)(2). In this regard, the Trustee did not meet its burden of demonstrating if the clause distinguishes between money derived from rights under the Franchise Agreement, which would relate receipts associated with public rights of way, and money which the monorail receives from operating over private property, which would not necessarily be related to the Franchise Agreement. See Philip Morris Capital Corp. v. Bering Trader, Inc. (In re Bering Trader, Inc.), 944 F.2d 500, 502 (9th Cir.1991).
. Before 1972, “contract rights” was a defined term in Article 9 referring to "any right to payment under a contract not yet earned by performance and not evidenced by an instrument or chattel paper,” UCC § 9-106 (1962 version). See CLARK, supra, ¶ 1.04[1], at n. 2. To the extent that the drafters of the Financing Agreement were influenced by this out-of-date definition, it would appear that the grant would be to funds payable to LVMC under the Franchise Agreement — such as refunds or adjustments to the franchise fee — as opposed to the general right to charge the public for transit services.
. So what subset of rights might this grant of a security interest in "contract rights” rep*336resent? One possibility would be the rights to receive payment for a sale of the monorail's business — or at least that portion of any payment allocable to the Franchise Agreement. In this regard, "contract rights” under the Franchise Agreement may resemble similar rights in broadcast licenses granted by the Federal Communication Commission ("FCC”) to operate radio and television stations. The FCC has ruled that “a broadcast license, as distinguished from the station's plant or physical assets, is not an owned asset or vested property interest so as to be subject to a mortgage, lien, pledge, attachment, seizure, or similar property right.” In re Merkley, 94 F.C.C.2d 829, (1983). Despite this FCC ruling, courts have found that lenders can perfect a valid security interest (as a general intangible) in any remuneration that a broadcast licensee is entitled to as a result of the transfer of its FCC license. See In re Ridgely Commc'ns, Inc., 139 B.R. 374, 376 (Bankr.D.Md.1992).
. Under Revised Article 9, deposit accounts may be taken as original collateral in non-consumer transactions. UCC § 9 — 109(d)(13). Perfection is by control, UCC § 9-104. In this circumstance, control is established by the fact that the accounts in question are maintained at the Trustee. UCC § 9-104(a)(1).
. Revised Article 9 applies even when, as here, the security interest was created before the revision took effect. UCC § 9-702 ("this article as amended applies to a transaction or lien within its scope, even if the transaction or lien was entered into or created before the amendments to this article take effect.”). Revised Article 9 also applies even if there was a change in the law as to the treatment of the type of collateral involved. UCC § 9-703 (with respect to security interests perfected on effective date); UCC § 9-704 (with respect to security interests unperfected on effective date).
. See, e.g., Model Term Sheet, supra note 2, at 1-4.
. There were some small but important exclusions. The Construction Fund, Contingency Fund and Rebate Fund, among others, were excluded.
"Project” is defined to essentially mean the current 3.9 mile reach of LVMC's monorail.
. Indenture, § 1.01, p. 17. The "Operation and Maintenance Agreement” refers to the operating agreement with Bombardier. Id.
. Ignoring basic traits of others has long been a puzzling feature of human existence. The ancient fable of the Scorpion and the Frog is apt. A Scorpion needed to cross a river, and asked a Frog to assist it. The Frog demurred, claiming that the Scorpion would sting and kill it. The Scorpion countered that any sting would doom it as well as the Frog. So the Frog agreed, and the Scorpion climbed aboard the Frog’s back, and they began to cross the river. Half way across, the Scorpion stung tire Frog. As the Frog slipped into unconsciousness, and as the Scorpion was drowning, the Frog asked why the Scorpion had stung him. "I can’t help it,” replied the Scorpion. "It’s just my nature.”
It is in the nature of most debtors to take whatever means are necessary to ensure their financial survival, even to the point of breaching their contracts. Indeed, part of the purpose of taking security is the judgment that the debtor’s unsecured obligation to repay is insufficiently reliable; as a consequence, there is little force to the argument that the Trustee relied on the unsecured promise of LVMC to transfer its revenues to the Trustee. In retrospect, the Trustee should have respected this elemental nature and provided for different controls, or (and maybe it did this) priced the Bonds to account for this known risk.
. Although not always. The Trustee argues that, under the Indenture, deposit of funds with it means that the funds are placed in the Revenue Fund, "in which LVMC does not hold an ownership interest.” If the Trustee is arguing that LVMC loses all interest in such funds when they are deposited, it is mistaken. While Sections 5.01 to 5.03 of the Indenture are consistent with this argument, Article 9 is not. It applies to “a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract.” UCC § 9-109(a)(1). This is the classic substance over form argument of secured transactions; parties cannot defeat its application by contract. See UCC § 9-109, cmt. 2 ("When a security interest is created, this Article applies regardless of the form of the transaction or the name that parties have given to it.”). Thus, the most that the Trustee obtains upon deposit of such funds is a security interest, a property interest which recognizes residual ownership in the debtor. Moreover, were the Trustee to take the Indenture seriously, take substantial funds from the debtor and then hold them without applying them to the outstanding indebtedness, such a transaction would raise serious fraudulent transfer issues.
. To show perfection of its security interests, the Trustee resorts to equitable arguments to establish by operation of law what it failed to obtain by contract and practice. These theories are, however, contrary to the general notion that Article 9 generally supplanted such theories in favor of one simple system. See In re Schwalb, 347 B.R. 726, 738 (Bankr.D.Nev.2006). Moreover, theses theories are not applicable on the facts.
Constructive trust theories are unavailable because the lender-borrower relationship is not a confidential one under controlling Nevada law, see Yerington Ford, Inc. v. General Motors Acceptance Corp., 359 F.Supp.2d 1075, 1089-91 (D.Nev.2004) (finding no fiduciary or confidential relationship generally in debtor-creditor relations), off d in part, rev’d in part on other grounds, Giles v. Gen. Motors Acceptance Corp., 494 F.3d 865, 882 (9th Cir.2007), and Nevada law requires such a confidential relationship to establish a constructive trust. See Waldman v. Maini, 195 P.3d 850, 857 (Nev.2008) (quoting Locken v. Locken, 98 Nev. 369, 372, 650 P.2d 803, 804-05 (1982) (in turn citing Schmidt v. Merriweather, 82 Nev. 372, 375, 418 P.2d 991, 993 (1966))).
Estoppel is also not available. The Trustee could not show the required detrimental reliance on any act or assertion of LVMC, and the Trustee's did not take prompt action once it learned of the diversion. See NGA # 2 LLC v. Rains, 113 Nev. 1151, 1160-61, 946 P.2d 163, 169 (Nev.1997); Cheqer, Inc. v. Painters and Decorators Joint Comm., Inc., 98 Nev. 609, 614, 655 P.2d 996, 998-99 (Nev.1982).
Finally, the Trustee is not entitled to an equitable lien. A critical component of an equitable lien, if permissible at all given Article 9, is that "the creditor has done all it reasonably can do to perfect its lien, but nevertheless is thwarted by the uncooperativeness of the debtor.” Rushton v. Dean Evans Chrysler-Plymouth (In re Solar Energy Sales and Services), 4 B.R. 364, 369 (Bankr.D.Utah 1980). See also Peters v. WFS Financial, Inc. (In re Glandon), 338 B.R. 103, 107-108 (Bankr.D.Colo.2006); In re O.P.M. Leasing Services, Inc., 23 B.R. 104, 119 (Bankr.*340S.D.N.Y.1982). Here, however, the Trustee made a conscious choice to leave to LVMC the task of collecting and transferring it revenues, thus taking the risk of diversion and breach. It also took no affirmative action for at least two months after it learned of the diversion. It has thus has not done all it could have reasonably have done. See note 37 supra.
. If the cash at Bank of America were cash collateral, the Trustee's interests would likely be unperfected as there was no evidence of any control agreement with Bank of America. See UCC § 9-104(a)(2). Even though the Trustee’s interests in such cash and deposits would be unperfected, LVMC's use of that cash would still be subject to the cash collateral restrictions contained in Section 363, see, e.g., Scottsdale Medical Pavilion v. Mutual Benefit Life Ins. Co. (In re Scottsdale Medical Pavilion), 159 B.R. 295, 302 (BAP 9th Cir. 1993), aff'd, 52 F.3d 244 (9th Cir.1995) (adopting BAP's reasoning as its own); In re Kaneohe Custom Design, Ltd., 41 B.R. 298, 301 (Bankr.D.Hawai'i1984). Such protection might be different tiran granted in this opinion; "[i]f the creditor’s interest in cash collateral is unperfected and therefore subject to avoidance under § 544, the interest to be protected is tenuous, and not deserving of much in the way of adequate protection.” Scottsdale Medical Pavilion, 159 B.R. at 302. But cf. G & B Aircraft Mgmt. v. Smoot (In re Utah Aircraft Alliance), 342 B.R. 327, 338 (10th Cir. BAP 2006) (requiring extraordinary circumstances — which could include morally culpable conduct or conduct tipping balance of equities in favor of the creditor — to justify adequate protection of an unperfected lien).
. These expenses likely will include the Trustee's attorney's fees and costs, as the Indenture contemplates that such fees and costs are within the definition of Operation and Maintenance Costs. Indenture, p. 17. Although this arguably raises an issue under 11 U.S.C. § 506(b), since the Trustee is undersecured, LVMC on behalf of the estate has offered and agreed to these payments. Moreover, because LVMC is obligated to deposit all revenues with the Trustee, the difference would be in whether the estate receives a credit against the Bond indebtedness for the amounts paid in respect of attorneys’ fees, an issue of relevance for junior classes only. Given the Trustee's dominating position as an unsecured creditor with respect to its deficiency, however, the net difference to the estate is de min-imis.
. The recipient of such funds, such as Bombardier, takes such funds free of the Trustee’s security interest, absent any showing of collusion. UCC § 3-332.
. The same argument would apply to the extent that the revenues are proceeds of the Trustee’s interest in the Franchise Agreement.
. This finding is for purposes of the cash collateral motions only. Any attempt by an estate representative to obtain a final order with respect to the extent of the Trustee’s liens and security interests would require an adversary proceeding. See Fed. R. Bankr.P. 7001(2).
. As the credit card receivables are accounts which were not cash collateral as of the date of LVMC’s filing, they need not be protected as cash collateral, see Philip Morris Capital Corp. v. Bering Trader, Inc. (In re Bering Trader, Inc.), 944 F.2d 500, 501 (9th Cir.1991). In addition, although likely paid at least in part, there was no evidence showing payment offered at the hearing.
. The Trustee requested that the court enter an order now granting it protection under Section 507(b). That request is premature. As stated by Collier, "this priority claim is for the loss or shortfall not covered by adequate protection.” 4 Collier, supra, at ¶ 507.12. Until such a loss has been established, there is no need to presage such a superpriority claim. See id. at ¶ 507.12[l][c], | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494381/ | Memorandum Opinion
CRAIG A. GARGOTTA, Bankruptcy Judge.
On June 29 through July 2, 2009, came on for trial the above-styled and numbered adversary proceeding.1 After the trial the Court took the matter under advisement. After review of the evidence and arguments, the Court now issues this Memorandum Opinion, as its written findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052, in support of its Judgment entered contemporaneously herewith.
This proceeding includes both core and related claims. This Court has jurisdiction to enter a final order with regard to all matters presently under submission in light of the parties’ consent and pursuant to 28 U.S.C. § 1334(a), (b) and (d), 28 U.S.C. § 157(a) and (b), 28 U.S.C. § 151 and the Standing Order of Reference of Bankruptcy Matters entered by the United States District Court for the Western District of Texas. See Amended Notice of Removal (docket entry # 8) and Defendants’ Statement Regarding Core Proceedings Following Removal (docket entry #12).
I.
Pre-Petition Historical Background
The Plaintiff, Texas Architectural Aggregate, Inc. (“TAA”) began doing business in 1959, mining for building materials such as limestone in Llano, San Saba and Comanche Counties, Texas. Its primary business is mining and crushing limestone that has metamorphosed into hard lime*385stone or marble. It markets the material as terrazzo, which is used in mosaic flooring, especially in public buildings. The company also mines quartz for use as exposed aggregate exterior wall panels on buildings. Joe Royce Williams, Sr. was the founder and, until his death in 2005, the president and chairman of the board of the company. (PL’s Exh. 194, p. TAA-013082.)
In 1963 or 1964, TAA bought the property near the city of Van Horn in Culber-son County that is the subject of this suit. (Pl.’s Exh. 194, p. TAA 013085.) TAA originally bought 40 acres in fee simple. In 1982, it was discovered that, because of a surveying error, TAA was actually mining on the State of Texas’ land to the east of TAA’s 40 acres. (D. Williams Test. 6/29.) After the discovery, TAA and the Texas General Land Office (“GLO”) reached a resolution of the problem and the State leased the mineral rights on its property to TAA. That lease, which is not in evidence, prohibited subleasing or partial assignments. TAA later acquired a lease to the mineral rights on 175 acres to the east of its 40 acres from the State of Texas. The mineral rights lease, together with the 40 acres TAA owned in fee and the 180 acres it held under mining patents are hereinafter referred to as “Marble Canyon” or the “Property.”
TAA built and operated a coal mine on the Property, thirty to sixty feet below the surface. The coal had a significant amount of ash in it, which TAA sold to Kaiser Cement. TAA also built a plant to remove the sulfur and ash to make limestone.
When Marble Canyon was bought, both the seller and TAA believed it contained a deposit of just white marble. (D. Williams Test. 6/29.) TAA intended to, and did, use that marble in its own business. (PL’s Exh. 194, p. TAA 013085; PL’s Exh. 194, p. TAA-013086.) In 1964, however, it was determined that the mineral deposit was in fact brucitic marble. (D. Williams Test. 6/29.) Reserves were later estimated at more than 10 million tons of ore. (PL’s Exh. 12.)
TAA became interested in developing the brucitic marble deposit for the production of magnesium oxide/magnesium hydroxide as early as 1969. (D. Williams Test. 6/29; PL’s Exh. 194, p. TAA013087.)
Robert C. McCreless (“McCreless”), principal of both of the defendants in this suit, approached TAA and proposed that he and TAA come to an arrangement that took advantage of the chemical component of the brucitic marble at the Property. (PL’s Exh. 194, p. TAA-013025.)
McCreless’ connection with TAA was his father, Robert H. McCreless (“RHM”). RHM had been elected as an alternate director on TAA’s board in February of 1976 and four years later he was elected as a regular director. (PL’s Exh. 194, pp. TAA-013092, 013094.) In September 1986, McCreless drove RHM and two other directors from Fort Worth, Texas to an emergency board meeting in San Saba, Texas.2 With permission from the officers of the board, Robert McCreless attended the meeting. After the meeting, McCreless introduced himself to Joe Williams, Sr. and offered to do some market research on brucite for TAA. Joe Williams, Sr., accepted the offer.
The first business entity through which McCreless tried to work with the deposit at Marble Canyon was W & M Mining Interest, Inc. (‘W & M”), which was incor*386porated in the 1980s. W & M entered into letter agreements with TAA, and the board unanimously wanted W & M to pursue a market for the chemical aspect of brucite. To that end, W & M received leases, subleases, and partial assignments from TAA. McCreless pursued W & M for some years.
In 1988, however, the arrangement under the agreement fell apart. The GLO reviewed the 175-acre partial assignment, with respect to the 175 acres TAA leased from the state, and determined that that TAA could not convey a partial lease assignment to W & M. Efforts were made to draft around the dilemma. (Pl.’s Exh. 194, pp. TAA 013074-75 (describing David Williams’ meeting with W & M and its attorneys “for the purpose of attempting to gain a clearer understanding of TAA’s contractual requirement for conveyance of mineral interests in view of the GLO’s demand to review any assignment, including any re-assignment to TAA by W & M” and describing discussions regarding TAA giving W & M an “operating contract on the state lease with option to obtain assignment if production were obtained.”)) Ultimately, however, the 1987 agreement between TAA and W & M was abandoned, but not until 1996. (Pl.’s Exh. 194, p. TAA 013079 (showing the board resolving that “the option of W & M Mining Interests, Inc. with the corporation has terminated and is hereby declared to be null and void and that an affidavit to that effect should be placed of record in Culberson County, Texas.”))
After the failure of W & M, McCreless continued to develop market applications for brucitic marble. He also began to sell crushed and milled brucitic marble powder to the carpet industry as a fire retardant and filler. For these sales, McCreless purchased the materials from TAA. He also had TAA crush the materials.
At some point, McCreless began looking at acid neutralization in wastewater treatment because the carpet industry needed fewer mineral fillers as fire retardants, due to the Environmental Protection Agency’s (“EPA”) changing regulations.3 In late 1997 or early 1998, the Sanitation Districts of Los Angeles County told McCreless they were interested in a second source of magnesium product for their sewer system. This conversation spurred McCreless to form Applied Chemical Magnesias Corporation (“ACM”) in July 1998 as an S-corporation in Colorado.
In 1998, McCreless flew to Texas and told David Williams that he would be getting significant, long-term contracts in the wastewater industry. The two men discussed structuring another agreement, this time between TAA and the newly-formed ACM. Phone calls, emails, and other negotiations between McCreless and TAA, primarily through David Williams, culminated in an April 2, 1999 letter agreement (“Letter Agreement”). (PL’s Exh. 120.)
The Letter Agreement provides that it is an agreement “for the granting of an exclusive mineral lease to ACM of bru-cite/calcite/dolomite (“brucitic marble”) and the construction of a brucitic marble separation/milling facility at or near the entrance to the referenced Marble Canyon mine owned and operated by TAA on lands *387(“Subject Lands”) described in Exhibit A ...” (Pl.’s Exh. 120 at 1.) The agreement grants ACM a period of six months to conduct a feasibility study to determine whether “the construction of a facility to beneficíate the brucitic marble which would produce a high-purity magnesium hydroxide power for a variety of markets.”
After the completion of the feasibility study, the Letter Agreement provides that ACM could elect to give TAA written notice of its intent to “begin construction of a separation/milling facility capable of producing 30,000 tons per year of high-purity Mg(OH)2 powder on the Subject Lands.” Once ACM elected to begin building the facility and paid TAA $5,000, the agreement states that “TAA shall cause recordable leases of mineral and surface rights in the Subject Lands, appropriate to the project contemplated herein, to be delivered to ACM.” (Pl.’s Exh. 120 at 1-2.) Once the leases were obtained, ACM would have six months to construct the facility. (PL’s Exh. 120 at 2.)
To ineentivize production, the Letter Agreement requires ACM to pay TAA $200,000 annually “in advance as royalty beginning twelve (12) months from the date of delivery of its notice to construct a separation/milling facility....” The advance would then be credited to any royalties due to TAA during the following twelve month period. The Letter Agreement also requires ACM to pay royalties “in an amount equal to ten percent (10%) of the gross revenues (excluding sales, use, or excise taxes) paid to ACM for all of the products sold by it from the Marble Canyon properties.” (Pl.’s Exh. 120 at 3.)
Under the Letter Agreement, TAA retained the right to mine for its own purposes and agreed not to interfere with the operations of ACM. (PL’s Exh. 120 at 2.) ACM promised not to compete with TAA in “any market which TAA is currently supplying without prior written approval of TAA.” . TAA also promised not to compete with ACM. The parties are in disagreement as to the enforceability of the Letter Agreement and the appropriate interpretation of the Letter Agreement’s terms.
From 1999 on, TAA and ACM attempted to reach an agreement that would be acceptable to both parties and would not violate the GLO’s prohibition on partial assignment of leases. During these discussions, the parties considered entering into a hard mineral mining agreement. The negotiations took place primarily between McCreless, David Williams, and Samuel McDaniel, the Plaintiffs attorney. On December 4, 1999, McCreless sent TAA an email asking about the status of the conveyances under the Letter Agreement. (Def.’s Exh. 6(a)). On January 5, 2000, David Williams emailed McCreless and informed him that instead of a mineral rights lease, TAA wanted to enter into a Hard Mineral Mining Agreement (“HMMA”) and a document that leased ACM 40 acres for the mill site. (Def.’s Exh. 6(b)). On February 4, 2000, MeCreless emailed back and stated, “it appears to us that the Hard Mineral Mining Agreement (HMMA) document does not reflect the intent of the Letter of Agreement....” (Def.’s Exh. 6(c)). McCreless was concerned that the Letter Agreement contemplated an “exclusive mineral lease to ACM,” while the HMMA conveyed a non-exclusive right. He also expressed concern that the “tone of the HMMA does not reflect an attitude that was present in the original W & M lease documents (from which I assumed would be the standard to work.)” David Williams responded that they needed to avoid a mineral lease because of the GLO’s stance on partial assignments, which caused the failure of the W & M project. (Def.’s Exh. 6(d)). David Williams and McCreless continued to dis*388cuss the problem, but never reached agreement on the terms of the HMMA or ACM’s right to exclusive mineral leases. Nevertheless, on November 21, 2000, ACM and TAA entered into the Mine Mill Site Lease (“Lease”). (Pl.’s Exh. 102.) The Lease conveys a lease interest in the west half of the forty acres that TAA owns in fee simple. This ground lease is the only lease ACM received from TAA.
Specifically, the Lease states that TAA grants ACM “the exclusive right, in association with other certain agreements between the parties hereto of equal date herewith, to establish a processing mill for the purpose of on-site processing of brucitic marble and associated substances, on the west one-half (W 1/2) of a certain 40 acre tract of land situation in Culberson County Texas....” (Pl.’s Exh. 102 at 1.) The Lease then describes the exact location of the leased land by metes and bounds. The Lease provides that it will last for 20 years and could continue for another 20 years at the option of ACM, so long as ACM had not breached the Lease. (Pl.’s Exh. 102 at 2.)
As consideration, the Lease requires ACM to pay $600 for rent annually during the first five years. The Lease also provides that on December 28, 2004, the annual rent would be subject to “increase for the next five (5) year term in accordance with changes in the United States Consumer Price Index for Urban Wage Earners and Clerical Workers.... ” Under the Lease, rent would be re-evaluated for each successive five year period.
The parties continue to negotiate. During the negotiations, TAA pushed for a HMMA and ACM continued to request conveyance of the mineral leases that McCreless contended were required by the Letter Agreement. (Def.’s Exh. 13(d) (letter from McDaniel stating, “An exclusive mineral lease to ACM and recordable leases of mineral and surface rights are a problem because of the policies of the State of Texas and the issue of control.”)) In March 2001, on the advice of CPAs and attorneys, McCreless formed ACM-Texas, LLC (“ACM-Texas”) as a wholly-owned subsidiary of ACM, and began selling membership units to raise capital to allow further market research. (See Pl.’s Exh. 248, p. 013244-45.) McCreless testified that the total amount of capital and loans raised between ACM and ACM-Texas was roughly $10,000,000 over ten years.
At some point, the relationship between TAA and ACM deteriorated. In 2002, Sam McDaniel, acting as TAA’s counsel, communicated to McCreless that the legal enforceability of the Letter Agreement was questionable. In June of 2002, Joe Williams, Sr. sent McCreless a fax instructing him not to bring a drill to Marble Canyon. (Pl.’s Exh. 178.) McCreless continued to ask for recordable leases per the Letter Agreement. TAA and ACM continued to negotiate, but on August 7, 2003, TAA returned a royalty check submitted by ACM and stated that there was no viable agreement between ACM and TAA. (Def.’s Exh. 17.) The next month, ACM’s attorney, Douglas M. Dumler, sent a letter to TAA demanding the recordable leases as per the 1999 Letter Agreement. (PL’s Exh. 118.)
From that point on both parties proceeded to seek relief from various courts. First, ACM filed a complaint for re-entry before the Culberson County Justice of the Peace, Precinct Number Three. The complaint is not in evidence. On April 28, 2004, the Justice of the Peace ordered TAA to “provide immediate and temporary possession of the premises identified in the Mine Mill Site Lease ... to ACM.” The Order also notified TAA that it had a right to a hearing on ACM’s sworn complaint for re-entry. (Def.’s Exh. 24.) Whether or *389not the hearing was conducted is unknown, as the information is not in evidence. Next, on December 14, 2005, the Judge in Culberson County entered a Temporary Restraining Order against TAA after hearing ACM’s Sworn Petition for Injunctive Relief. The Petition for Injunctive Relief is not in evidence. The Court ordered that TAA provide ACM with immediate possession of the Mine Mill Site Lease property, refrain from blocking access to the Mine Mill Site Lease property, and refrain from blocking access to the Marble Canyon property. (Def.’s Exh. 25.)
On December 20, 2005, TAA filed suit against ACM in the District Court of Cul-berson County, Texas. On April 5, 2006, the District Court granted TAA’s Petition for Permanent Injunction and enjoined ACM from removing any brucitic marble mined or shot by TAA. (Def.’s Exh. 26.)
On July 31, 2007, the United States De-' partment of Labor, Mine Safety and Health Administration (“MSHA”) issued citations to both ACM and TAA which stated, “[t]he civil dispute taking place at this mining operation has resulted in imminent danger to mining personnel employed by the two separate mine operators currently reporting employee man hours to MSHA at this underground mine. The mine operators are engaged in disagreement regarding their individual rights to mine at this property resulting in tactics that could lead to employee injury.” (Pl.’s Exh. 317.) Both levels of the underground mine were closed until the order was lifted on January 26, 2009. (Pl.’s Exh. 318.)
On November 1, 2007, the District Court entered an order enjoining TAA from placing barriers across the entrances to the lower portals of the mine to bar access to ACM. The Court further enjoined TAA from placing barriers on ACM’s leased property. (Def.’s Exh. 27.)
On February 5, 2008, MSHA again issued a citation to TAA finding that it set off a blast on January 29, 2008 that caused “fly rock” to damage ACM’s building and the windshield of ACM’s drill. (PL’s Exh. 315.) It also found that ACM’s employees were in the building at the time it was punctured by the fly rock. The citation was later vacated because ACM’s miners were warned that TAA was prepared to blast and did not leave the area. (PL’s Exh. 316.)
On July 24, 2008, TAA filed an Amended Complaint for Forcible Detainer. (PL’s Exh. 320.) In its Complaint, TAA argued that it has not cashed any of ACM’s $600 rental checks since January 1, 2003. Under the terms of the Mine Mill Site Lease, ACM was to pay TAA $600 a year in rent in exchange for the lease of the west half of TAA’s 40 acres. (Def.’s Exh. 10, ¶ 3.) Paragraph three of the lease also included a clause that allowed for an increase in rent for the five year term following December 28, 2004. TAA stated that in August of 2005, it notified ACM that the $600 payment was not sufficient under the terms of the lease and that TAA cancelled the lease for non-payment of rent. Then, in August of 2006, TAA gave ACM notice to vacate the leased premises. ACM did not move out. TAA asked the District Court to find ACM guilty of forcible de-tainer and grant TAA a writ of possession. ACM filed an answer generally denying the allegations in the forcible detainer complaint, but did not appear at the hearing on the complaint. On December 8, 2008, ACM-Texas filed its bankruptcy petition in this Court. In March of 2009, the District Court found in favor of the TAA on its Forcible Detainer Complaint and ordered that ACM give TAA possession of the leased premises and pay restitution in the amount of $2,438.38 plus court costs. (PL’s Exh. 323.)
*390II.
Parties Contentions
Summarized below are the numerous claims and counter-claims asserted by TAA and ACM. In its Fifth Amended Petition, TAA plead the following causes of action: (1) lack of contrad/breach of contract; (2) fraud; (3) unjust enrichment; (4) accounting and damages; (5) conversion; (6) trespass; (7) tortious interference; (8) negligence; and (9) TAA asks for a declaratory judgment regarding the rights, status and legal relations under the April 2, 1999 Letter Agreement.
Specifically, TAA first contends that the April 1999 Letter Agreement is not a contract or, in the alternative, that if it is a contract then ACM breached that contract. TAA argues the Letter Agreement does not contain all the essential elements required for a mineral lease. TAA also contends the Letter Agreement is void as it is an agreement to make an agreement and therefore not enforceable. In the alternative, TAA argues ACM did not follow the requirements of the Letter Agreement and therefore breached the agreement. The Letter Agreement required ACM to give information regarding an economic feasibility study to TAA. TAA argues that ACM never delivered that information. TAA contends that the Letter Agreement contemplated the creation of a “separation/milling facility” that beneficiates and separates brucitic marble and the facility ACM created did not beneficíate or separate the brucitic marble. The Letter Agreement required ACM to pay $200,000 annually as an advance royalty which TAA argues ACM never paid. TAA also argues that ACM violated the provision in the Letter Agreement that disallowed ACM from competing in the same markets as TAA. Finally, TAA argues that if the Letter Agreement is a contract, ACM breached it because of a failure of consideration in that ACM did not separate or beneficíate the brucitic marble as was required under the Letter Agreement.
Second, TAA argues that the Letter Agreement was procured both by common law and statutory fraud. TAA argues that McCreless, represented to Joe Williams, Sr. that ACM would separate and beneficíate brucitic marble. TAA argues this was a false, material statement, and ACM either knew the statement was false or made the representation recklessly without knowledge of its truth. TAA argues ACM made the statement with the intent that TAA would rely on the false statement and that TAA relied on the statement by signing the Letter Agreement. TAA contends the resulting fraud gave ACM access to TAA’s property, and ACM used this access to take roughly $10,000,000 worth of brucitic marble from TAA and to interfere with TAA’s use of its own property. TAA alleges this interference resulted in great expense, loss of business, and other damages totaling approximately $500,000.
Third, TAA argues it should be entitled to recover money from ACM under the theory of money had and received or under the theory of unjust enrichment. TAA alleges ACM took TAA’s property, the brucitic marble, and then sold it. TAA argues that because brucitic marble was owned by TAA, the money from its sale should rightfully be TAA’s. TAA alleges the total value of all the property sold was approximately $8,806,501.70.
Fourth, TAA argues that ACM had no contractual right to mine but, nevertheless, has done so. TAA argues that if the Letter Agreement is held to be a contract, and is also held to grant ACM the right to mine, then TAA is owed the $200,000 advance annual royalty and the amount of the additional actual royalty required under the Letter Agreement. In order to *391determine the amount of the actual royalty, TAA argues it is entitled to an accounting of all brucitic marble shipped by ACM from the mine in Culberson County, Texas.
Fifth, TAA alleges ACM used its rights under the Mine Mill Site Lease to take the marble mined by TAA. This taking, argues TAA, was a conversion of its property. Specifically, TAA alleges it owned or had legal possession of the property, ACM took control over TAA’s property to the exclusion of TAA’s rights in the property, TAA demanded return of the property, ACM refused to return the property and finally, ACM’s acts manifested a clear repudiation of TAA’s rights. TAA also alleges the conversion was done with malice, and therefore TAA should be entitled to exemplary damages. TAA alleges the total amount of material taken has a fair market value greater than $158,400 and that TAA should not recover less than the actual amount for which the converted material was sold. TAA argues that because the injuries are continuing and the property involved is unique and irreplaceable, it will be impossible to measure the damages in monetary terms. Therefore, TAA argues it has no remedy at law and asks the court to permanently enjoin ACM from moving any material mined by TAA, and requests that all materials be returned.
Sixth, TAA alleges that since June of 2002 there was a disagreement over the rights ACM had in the property. TAA alleges that ACM knew TAA did not agree that ACM had a right to mine. TAA claims that despite this knowledge, ACM chose to act at its peril and mined without a lease or permission to do so. TAA argues that ACM’s mining was a trespass against its property.
Seventh, TAA argues that it had a contract with the GLO regarding the lease in Culberson County. TAA alleges ACM willfully and intentionally interfered with that contract by showing the GLO that ACM mined thousands of tons of material from the land without paying royalties. TAA alleges the amount reported was inflated to impose a higher royalty payment onto TAA. The goal of this, TAA argues, was to get the GLO to terminate the lease with TAA, in the hopes the GLO would later lease the land to ACM.
Eighth, TAA argues that ACM negligently, grossly negligently, maliciously, and with intent to harm, caused MSHA to close TAA’s underground mine. TAA first argues ACM had no right to be in the mine, had no MSHA approved plan to mine underground, and that ACM did not have personnel qualified to work on the underground mine. TAA next alleges ACM drilled holes in the mine and then set off explosives which broke up the brucitic marble and caused MSHA to close the mine. TAA contends that from July 31, 2007 onward, TAA has been unable to access the mine to either mine brucite or to get the material TAA previously stored in the mine. TAA alleges this caused lost business and increased expenses which totaled $500,000.
Lastly, TAA asks for a declaratory judgment to determine the rights of both parties under the Letter Agreement. TAA contends that both parties have done some things envisioned under the Letter Agreement but have also chosen not to do some things required by the Letter Agreement. TAA argues that the agreements made between 1999 and 2003, to jointly work on the mineral deposits, are distinct from the Letter Agreement and that both parties have largely abandoned the Letter Agreement.
In its Second Amended Original Answer, ACM counter-claimed: (1) breach of contract; (2) breach of mine mill site lease; (3) tortious interference with property rights; (4) wrongful eviction; (5) fraudu*392lent misrepresentation and inducement; (6) fraud by non-disclosure; (7) detrimental reliance/promissory estoppel; (8) trespass/misappropriation of business information; (9) theft; (10) trespass by TAA onto defendant’s property; (11) theft of defendant’s mineral property; (12) specific performance; (13) credit and or offset; (14) ACM asks the court to enjoin TAA from harming employees and equipment; and (15) ACM asks the court to enter a declaratory judgment establishing its mineral, surface, and leasehold rights at Marble Canyon.
First, ACM alleges the Letter Agreement was a contract that granted ACM an exclusive mineral lease for brucitic marble and the right to construct a brucitic marble separation/milling facility in Marble Canyon. ACM alleges TAA materially breached the contract by repeatedly prohibiting ACM from fully utilizing its mineral rights. ACM also alleges TAA breached the contract by not providing the recordable leases required by the Letter Agreement. ACM argues this caused, and continues to cause, ACM substantial monetary damages. ACM requests both monetary damages for the breach and specific performance of the Letter Agreement.
Second, ACM alleges TAA materially breached the Mine Mill Site Lease by repeatedly interfering with ACM’s property rights. ACM contends TAA prohibited ACM from accessing and using the leased property and this, and other interferences, caused ACM to incur monetary damages.
Third, ACM argues TAA materially and tortiously interfered with ACM’s property rights regarding the Lease. TAA has already been temporarily enjoined from disallowing ACM access to the leased property. ACM also argues that the forcible detainer action was an attempt by TAA to wrongfully seize possession of the leased property.
Fourth, ACM contends the interference by TAA with access to property leased to ACM under the Lease constitutes a constructive eviction of ACM. ACM also alleges that this is a wrongful eviction, and has caused ACM to incur substantial damages, legal expenses, and interfered with ACM’s ongoing business.
Fifth, ACM alleges TAA fraudulently induced ACM to enter into the Letter Agreement. ACM argues TAA materially misrepresented its ability and intentions to cause recordable leases of mineral and surface rights to be delivered to ACM as required by the Letter Agreement. ACM alleges each of TAA’s representations was material, false, and that TAA knew they were false. In the alternative, ACM alleges TAA made the representations recklessly as a positive assertion without knowledge of the truth. ACM also alleges TAA made the representations with the intent that ACM rely and act upon the representations. ACM alleges the reliance was reasonable, and this reliance proximately caused ACM significant damages as well as potential exposure to additional damages from ACM’s numerous clients.
Sixth, ACM alleges that TAA failed to disclose material facts regarding TAA’s inability or lack of intent to cause recordable leases required by the Letter Agreement to be delivered to ACM. TAA had a duty to disclose this information because, ACM argues, TAA knew that ACM was ignorant of material facts as TAA purposely misled and expressly misrepresented its intent and ability to convey the leases. ACM argues it did not have an equal opportunity to discover the truth as TAA failed to disclose it, and took affirmative steps to conceal the material information. ACM alleges TAA intended to induce ACM to enter into the Letter Agreement and the Lease and that ACM relied on the nondisclosure and was injured as a result.
*393Seventh, ACM alleges it relied on the promises contained in the Letter Agreement, the Lease, and TAA’s initial actions in conformity with those documents. ACM argues it took reasonable and foreseeable stops consistent with those agreements. These steps included development of the mill, hiring employees, entering into business agreements, and raising capital. ACM argues that as a result of its reliance on TAA’s promises, it has suffered recoverable injuries.
Eighth, ACM claims TAA trespassed onto ACM’s property as part of an attempt to take ACM’s confidential or proprietary business information. ACM alleges it had a right to the real property, TAA entered into ACM’s property, the entry was intentional, and that the trespass caused injury and actual damage.
Ninth, ACM alleges that Andrew Speyrer (“Speyrer”), a onetime business associate of ACM, acting at the behest of TAA examined and/or removed ACM’s business records. ACM alleges the information was invaluable and that TAA could profit from receiving this information. ACM claims it would be difficult, if not impossible, for TAA to duplicate the information independently. ACM also raises a trespass claim as it alleges the property Mr. Speyrer entered was lawfully owned by ACM.
Tenth, ACM alleges that while ACM and TAA were operating in Marble Canyon, TAA took brucitic marble stockpiles owned by ACM. ACM alleges the mineral was taken without permission or compensation. ACM claims that TAA’s wrongful exercise of dominion over the marble caused ACM to suffer economic damages totaling the lost value of the converted marble.
Eleventh, ACM requests specific performance to the Letter Agreement, including conveyance of recordable leases as well as unfettered access to ACM’s mining/milling plant. ACM also alleges it is entitled to specific performance under the mine mill site lease.
Twelfth, ACM prays for an offset to TAA’s alleged damages for the fair market value of the material belonging to ACM and used by TAA. ACM also asks for an offset of TAA’s damages equal to the amount of ACM’s damages proximately caused by TAA.
Thirteenth, ACM requests the court to enjoin TAA from mining, blasting, or doing anything that creates any life threatening conditions. ACM claims that TAA mined and blasted fully aware that these activities would cause debris to shower ACM’s property and personal. ACM alleges this created numerous holes in its property. ACM alleges these actions caused irreparable harm and created a risk of injury or death. Because these dangers are not easily measured, ACM claims it is therefore entitled to injunctive relief.
Finally, ACM requests declaratory relief to validate the Letter Agreement between TAA and ACM, and to validate the 20-year Mine Mill Site Lease. It also alleges TAA has a duty to provide recordable leases as envisioned under the Letter Agreement and a duty not to interfere with the leasehold conveyed to ACM under the Lease.
The Court notes that ACM’s civil conspiracy claim was dismissed upon TAA’s 52(c) Motion for Summary Judgment because the Court found the evidence could not show a meeting of the minds between Andrew Speyrer and any agent of TAA.
III.
ProCedural History of the Adversary Proceeding
As previously mentioned, ACM-Texas, one of the defendants and counter-plaintiffs in the aforementioned suit, filed for *394Chapter 11 bankruptcy relief pursuant to Title 11, United States Bankruptcy Code— In re: ACM-Texas, LLC, Case No. 08-70200. The case was converted from a Chapter 11 to a Chapter 7 proceeding on December 17, 2008. On December 11, 2008, TAA requested that the suit be removed from the 205th District Court for Culberson County, Texas and transferred to the Bankruptcy Court for the Western District of Texas, pursuant to 28 U.S.C. § 1452(a), Fed. R. Bank. P. 9027 and Local R. Bank. P. 9027. The proceeding thus came under the jurisdiction of the Bankruptcy Court for the Western District of Texas as an adversary proceeding.
On February 24, 2009, TAA filed a Motion for Partial Summary Judgment and asked the Court to find that the April 2, 1999 Letter Agreement is not an enforceable contract. On June 9, 2009, the Court issued its Memorandum Opinion In Support of Order Granting in Part, and Denying in Part, Plaintiffs Motion for Summary Judgment. In the Memorandum and Order, the Court denied summary judgment as to the enforceability of the April 2, 1999 letter, but found that Defendants’ counterclaims for breach of contract and for specific performance of the April 2, 1999 letter, including any defensive use of those claims, to be time-barred. It further denied summary judgment as to the Plaintiffs statute of limitations defense as to all other counterclaims.
IV.
EvidbnCe Presented at Trial
Summarized below are the portions of testimony and exhibits that the Court found most relevant to the issues of fact, claims, and counter-claims raised by each party.
David Williams. David Williams has been on the board of TAA since 1975, was chairman since February 2005, and was secretary from 1986 until at least the date of the trial. David Williams and Joe Williams, Jr. are the sons of Joe Williams, Sr., the founder of TAA.
According to David Williams’ testimony, TAA recognized the value of producing magnesium oxide at the time the deposit of brucitic marble at Marble Canyon was identified, and TAA became interested in developing the deposit for the production of magnesium oxide/magnesium hydroxide as early as 1969. (PL’s Exh. 194, p. TAA013087.) David Williams explained that from 1969 through 1986, TAA was involved in research regarding methods of extracting magnesium oxide from brucitic marble and the feasibility of commercial production from the Marble Canyon Mine through various research institutions, metallurgists, and engineering firms. (D. Williams Test. 6/29; Pl.’s Exh. 49; Pl.’s Exh. 50; Pl.’s Exh. 54; see also PL’s Exh. 194, pp. TAA-013023.)
According to David Williams, through the mid-1960s the only way magnesium hydroxide had been extracted from brucitic marble was through calcining. (D. Williams Test. 6/29.) David Williams seemed to indicate in his testimony that the principal reason TAA began working with McCreless was to separate the brucitic marble. David Williams testified that McCreless, through his company W & M Mining Interests, Inc. (“W & M”), proposed to lease the Marble Canyon Mine from TAA for the purpose of producing magnesium oxide by using “heavy medium separation,” a method that had been used in other mineral production, but never for extracting magnesium oxide. (D. Williams Test. 6/29; PL’s Exh. 194, p. TAA-013035.)
In April of 1987, TAA made a counter proposal to W & M’s proposal to lease. (PL’s Exh. 194, p. TAA-013037.) The draft counter-proposal provided that, when *395accepted by W & M, it would be a “Letter of Engagement.” The proposal’s subject matter was described as “the investigation by W & M into and the leasing and subleasing by TAA to W & M of the lands ... described in” an exhibit, which was not attached to the document nor, to the Court’s knowledge, otherwise introduced into evidence. In summary, W & M was to “undertake to investigate and explore the feasibility of liberating magnesium hydroxide, caustic magnesium oxide, magnesium oxide and other magnesium products from brucitic limestone in the Subject Lands, and, after such studies, if [W & M] desire[d] to continue the project, to develop a magnesium separation system, including mining, milling, separation and marketing of the magnesiums and by-products ... of the mining and separation processes.... ” There was to be a six month feasibility period, and within thirty days after the end of that period, W & M was to “give TAA written notice of whether or not [it] desire[d] to obtain an exclusive working interest covering magnesium ... in recordable form ... covering so much of the Subject Lands as W & M shall have specified in its notice.” In exchange for that working interest, W & M was to pay TAA $10,000. (Pl.’s Exh. 194, pp. TAA-013040-41.)
The TAA draft proposal led to another presumably similar one, not in evidence, under which the parties apparently proceeded because W & M engaged “a noted metallurgical engineer and magnesium expert,” and reported to TAA that he recommended a process “of heavy liquid separation followed by calcining of the MgOH.” (D, Williams Test. 6/29; Pl.’s Exh. 194, p. TAA-013049.) W & M also reported to TAA that “results so far show an average of 97% beneficiation of the VanHorn deposit and [its] preliminary investigation shows a $3.06/ton separation cost ... and a $12.50/ton BTU cost for calcining the beneficiated portion.” (Pl.’s Exh. 194, p. TAA-013050.) Although expressing some concern over whether the by-product of the process, which would contain small amounts of impurities, could be used because of the “highly toxic agents it would contain,” TAA nevertheless expressed its general satisfaction with W & M’s progress and results, pronouncing that the proposed beneficiation process “will satisfy the board for purposes of the six month investigation if W & M pursues this direction with the pilot study.”
Williams testified that the relationship with W & M ended because the GLO’s requirement of an absolute conveyance of TAA’s interest in the 175 acres would mean TAA and W & M would essentially be operating on the land as a joint venture. This was not acceptable to TAA because TAA did not want to lose control of its Marble Canyon operations which constituted 60% of its business. (D. Williams Test. 6.29.) David Williams testified that a release, not in evidence, was actually executed by W & M in connection with the termination of the agreement.
In regard to the intent to build a separation facility, Williams testified that McCreless shared at least some information about his efforts researching and developing markets for magnesium hydroxide to be produced from the Marble Canyon Mine. For example, in December of 1988, McCreless sent David Williams lists of competing products, samples of carpet in which magnesium hydroxide was used as a fire retardant or smoke suppressant, an analysis of that market, and other information on other markets such as magnesium oxide or magnesium hydroxide as an ingredient in cattle feed and paint. (Pl.’s Exhs. 5-8.)
In November of 1989, McCreless wrote a memorandum to TAA again regarding *396the market for use in carpets, noting that a producer of a competing product was undercutting his price (TAA at this time was selling brucitic marble to McCreless for use in carpets) and therefore “it has been much tougher sledding than we first thought.” (D. Williams Test. 6/29; Pl.’s Exh. 9.) About that same time, McCreless also discussed with TAA a market for using “higher purity Mg(OH)2 in the industrial waste water/acid neutralization markets” (sewage treatment), noting that those “markets continue to show promise” and that they “could turn out to be our largest market for separated brucite.... ” (Pl.’s Exh. 10.) In conducting that research, McCreless used material from a deposit he had in Arizona, and indicated that he was attempting to reduce the particle size to one more effective.
Also included in the materials presented to TAA. by McCreless is an undated memo providing “Technical Data” on a product referred to as “HMR 93.” (Pl.’s Exh. 10, p. TAA 00110.) David Williams testified that this referred to a product that would be 93% pure magnesium oxide, and that this document implied that McCreless would be separating the brucite to that purity. David Williams also indicated in his testimony that the flow sheet attached to the January 20, 2000 letter to Joe Williams from Bobby McCreless appears to describe a separation process. Williams agreed with his counsel that this indicates a separation process was still in discussion at this time in early 2000. To David Williams’ knowledge, there was never any high purity magnesium hydroxide produced at Marble Canyon.
According to David Williams, separation as an objective of the agreement “went out of the picture” at a 2001 meeting with McCreless, when it was suggested that no separation would take place. David Williams admitted at trial that the parties continued to negotiate after 2002, but not to fulfill the objectives of the Letter Agreement because by 2001 it was understood that McCreless was not separating the brucitic marble. Although this was understood, TAA was willing to consider working out an arrangement with ACM because McCreless’ father had been a board member of TAA, and because McCreless had threatened to sue TAA with “the mother of all lawsuits” and bankrupt TAA. Additionally, David Williams admits that the relationship between the two parties had “an amicable beginning” and that from 1999 to 2003, TAA allowed ACM to be on the Marble Canyon property while the parties worked on an agreement.
When testifying about the enforceability of the 1999 Letter Agreement, David Williams acknowledged that McCreless consistently represented that he thought the Letter Agreement was a binding document, but found its terms ambiguous and wanted to draft a new agreement. David Williams testified that there was no indication in the Letter Agreement as to what specific lands would be given. In 2002, Sam McDaniel, TAA’s attorney, sent a letter to McCreless indicating that there was uncertainty as to the validity and enforceability of the 1999 Letter Agreement. David Williams testified that by the time McDaniel had sent this letter, he had already indicated to McCreless that the Letter Agreement was legally unenforceable. David Williams likewise indicated that the fax sent by his father in 2003, which instructed McCreless not to bring a drill to Marble Canyon, was intended to indicate that there was no agreement between the parties and that the email/fax was an attempt to get ACM-Texas to leave the Property. Williams also testified that the reason TAA took no further actions before filing this lawsuit in Culberson County Court was that the Courts had issued in*397junctions maintaining the status quo until the matter could be decided in Court, and did not allow any further actions to be taken.
As to the unpaid and underpaid GLO royalties TAA seeks from ACM and ACM-Texas, David Williams testified that TAA is not seeking GLO royalties from ACM and ACM-Texas pursuant to the Letter Agreement or any other agreement. Instead, Williams testified that TAA is entitled to royalty payments from ACM as a matter of law. In fact, David Williams testified that the $200,000 figure was “pulled out of thin air,” and did not reference any prior agreement. Williams does admit, however, that there were discussions following the Letter Agreement as to how to pay royalties to the GLO, but stated that the parties never reached a resolution.
Williams testified that royalty checks were tendered to TAA by ACM-Texas, but maintained that TAA did not cash or deposit the checks. He acknowledged, however, that TAA at some point paid royalties directly to the GLO. David Williams testified that the GLO performed a 2005 audit that indicated the royalties due the GLO for materials mined and sold by ACIWACM-Texas were unpaid or underpaid. According to David Williams, the audit revealed that ACM was paying $0.67 per ton, instead of paying the appropriate percentage of the market value of the rock. Williams testified that TAA was unable to pay GLO the royalties it was due because TAA did not know at what price ACM was marketing its materials, and because ACM had ceased paying TAA sales commissions on the rock it sold.
Louise Williams. Louise Williams is Joe Williams, Sr.’s widow and mother to David Williams and Joe Williams, Jr. She testified that she has been active in the business of TAA since its inception. She presides over the bookkeeping, billing, and shipping from TAA’s San Saba office. She testified to explain how TAA calculated the damages ACM owed TAA for TAA’s crushing services between September 1, 2000 and July 1, 2001. (See generally Pl.’s Exh. 336 (invoices for ACM’s open account with TAA.)) Louise Williams testified that McCreless asked to be billed at $6.00 per ton of rock crushed. (See also Pi’s Exh. 131.) Ms. Williams testified that, originally, TAA billed McCreless at this rate. Joe Williams, Sr., however, informed Ms. Williams that this was not the proper rate. The amounts McCreless paid at the rate of $6.00 per ton of material crushed were then credited to his balance, and McCreless was charged for the loading, transporting, labor, preparation, and crushing costs that were necessary to crush McCreless’s materials on a cost-plus basis. (Pi’s Exh. 336, p. TAA0013576.) A cost-plus basis calculates overhead and profit, which is calculated as a percentage of the hourly rates for labor and use of equipment. Ms. Williams testified that TAA only rented out its equipment, including its crusher, loader, bagger, and other equipment, for custom crushing jobs on a cost-plus basis. The hours of labor and hours of machine use were recorded by the mining engineer who faxed them to Ms. Williams’ office weekly. The unit price for labor was determined from the payroll. The unit price for use of the machines was determined by using the monthly rates from Sierra Machinery, Inc. for a particular machine, and then divided into hourly rates. Ms. Williams testified that McCreless was only charged for the time used.
Louise Williams admits that there was some controversy or disagreement as to the invoices sent to McCreless by her office in San Saba. McCreless originally asked Ms. Williams to bill him at a rate of $6.00 per ton. (Pl.’s Exh. 131.) Upon Joe *398Williams’ instruction, Ms. Williams corrected his balance to reflect billing on a cost-plus basis, with a 15% rate for profit and overhead. Upon McCreless’s complaints, TAA lowered the rate for profit and overhead to 10%. Ms. Williams testified that McCreless eventually agreed to be billed for equipment and labor on a cost-plus basis, but that he disputed the invoices he received. There is no written agreement pertaining to these transactions.
Additionally, Ms. Williams testified that McCreless owed TAA the cost of repair to a Tamrock drill, which was repaired upon request. Ms. Williams testified that McCreless asked several times that the cost of the repair be billed to him. (See PL’s Exh. 129 (email from McCreless to Joe Williams regarding ACM paying to have TAA’s drill refurbished, dated April 22, 2000.))
Joe Royce Williams, Jr. Joe Williams, Jr. is the President, CEO, and General Manager of TAA, as well as the son of its founder Joe Williams, Sr. In the 1970s, he designed and oversaw the construction of a fines mill at TAA’s Burnet operation. After building the mill, he stayed in Burnet to operate the Bilbrough Marble Division, a wholly-owned subsidiary of TAA. In December, 2004 at a stockholder’s meeting, Joe Williams, Jr. became the president and CEO of TAA. His father passed away the following February. Before coming to the Marble Canyon mine in 2005 to oversee operations, Joe Williams, Jr. had visited the property several times to load shot rock.
At trial, Joe Williams, Jr. testified to McCreless’s failure to meet the provisions of the 1999 Letter Agreement. According to Joe Williams, Jr.’s testimony, McCreless did not live up to his obligations under the Letter Agreement. Specifically, Joe Williams, Jr. testified that in 2001, he became aware that ACM was competing with TAA, in violation of the Letter Agreement, when Third Coast Imports, Inc. contacted Joe Williams, Jr., asking for a better price on a brucitic marble pool mix ACM was marketing. Joe Williams, Jr. testified that TAA was also already engaged in selling pool mix.
Additionally, Joe Williams, Jr. testified regarding the issue of separation or bene-ficiation of the brucitic marble mined at Marble Canyon. According to his testimony, ACM’s equipment at TAA’s Marble Canyon plant could make mined materials smaller but could not separate brucite from calcium carbonate.
As to the issue of whether ACM converted material mined by TAA, Joe Williams, Jr. testified that he was informed by Manuel Baeza, TAA’s mining foreman at Marble Canyon, that ACM was taking TAA’s rock from its stockpiles. When TAA contacted the local sheriff, however, it had trouble convincing the sheriff which rock belonged to TAA because they were not visually distinct. To solve this problem, Joe Williams, Jr. testified that he purchased a GPS unit for Baeza to operate. According to his testimony, Joe Williams, Jr. helped Baeza log and document all of TAA’s stockpiles at Marble Canyon, using the GPS unit to locate the stockpiles. Joe Williams, Jr. testified that he relied on Baeza to locate TAA’s stockpiles when he came to Marble Canyon in 2005. For information about TAA’s stockpiles before 2005, he relied on S.K. Choudhury’s records. While Joe Williams Jr. admitted to not knowing where ACM placed or kept its materials, he testified that he had seen ACM stockpiles around ACM’s mill site on both sides of the road. (Pl.’s Exh. 195 (Manuel Bae-za’s field notes.))
Joe Williams, Jr. testified about an additional harm caused by ACM’s actions, the *399hole ACM allegedly created in the floor of TAA’s underground mine on July 16, 2007. (See Pl.’s Exh. 218 (maps showing upper and lower levels of mine from 2005 survey.)) According to this testimony, the large hole precluded traffic in the mine and impacted the ability of TAA’s miners to advance to lower levels of the mine. Joe Williams, Jr. testified that TAA incurred $10,500 of expenses mucking out and cleaning up the hole. Additionally, he testified that repairing the mine will cost TAA two weeks of labor, valued at $20,000, and 750 yards of Diablo White material, which costs $50.00 per ton, for a total of $27,000. (See Def.’s Exh. 35 (TAA price lists show price of Diablo White as $6.60 per 100-pound bag.)) Thus, according to Joe Williams, Jr.’s testimony, repairing the mine will cost TAA another $47,000. Joe Williams, Jr. also testified that when ACM created this hole, ACM removed 1,098 tons of material from TAA’s underground mine. Joe Williams, Jr. did not testify to the value of this material. Joe Williams, Jr. also testified that the explosion creating the hole came at a critical time for TAA because TAA was in the process of fulfilling a large order for Jet Blue Airlines. He testified that TAA had at least 45,000 pounds of Sierra White to be mined and delivered to Jet Blue when ACM created a hole in the floor of the mine. Plaintiffs exhibit 226, regarding the Jet Blue deal, was not admitted at trial.
As to TAA’s 2008 blasting that ACM claims damaged its buildings and equipment, Joe Williams, Jr. testified that TAA’s mine foreman, Manuel Baeza, reported the blasting incident to MSHA, who was at Marble Canyon within twenty minutes. Joe Williams, Jr. also testified that he called the insurance company to put them on notice of possible claims of harm to ACM’s property resulting from TAA’s blasting.
Drake Johnson. Drake Johnson is an attorney living in Fort Hood, Colorado who was a business associate of ACM, acting as legal counsel, salesman, and board member to ACM. (See Pl.’s References to Evidence Exh. 34.)
Johnson met McCreless socially in Colorado shortly after graduating law school in 1989. In the spring of 1999, McCreless approached Johnson about working for him. Specifically, McCreless offered to pay Johnson a finder’s fee for any investors for a company that would mine brucite and sell it within the wastewater industry, which Johnson viewed as a recession-proof industry. Johnson, as well as his parents, sisters, parents-in-law, and friends, invested in McCreless’s young business. In fact, Johnson testified that he knew of $1,600,000 invested in ACM by investors in Fort Collins, Colorado. In the fall of 1999, Johnson began employment as a part-time salesperson to sell the calcium carbonate that would be produced in a separation process which would isolate magnesium hydroxide. He stopped working for ACM in April or May, 2001 and left the Board in September 2001 when his term expired.
Johnson testified that he had personally visited the Marble Canyon mining site. Johnson also testified that McCreless represented to Johnson that there would be a separation process of the brucitic marble mined at Marble Canyon, which would be put in place after a machine was purchased from Separation Technologies Inc.4 at a price of $1,000,000. Johnson testified that McCreless represented to him that ACM *400planned to purchase the separation machine in early 2000 and then install it in Texas. According to Johnson’s testimony, however, a separation process was never put in place during his time with ACM. He testified that in a President’s Report dated October 1 2001, McCreless made it clear that the separation process had been put on hold. (Pl.’s Exh. P-248, p. 013239 (President’s report indicating there is value in unseparated brucitic marble.))
Johnson stated that he objected to the formation of ACM-Texas, LLC in 2001 on several grounds, including the fact that the formation of the entity allowed McCreless to raise more money while maintaining absolute majority control of ACM. Nevertheless, ACM-Texas, LLC was formed over Johnson’s objections.
Additionally, Johnson testified that his father filed a lawsuit against ACM and McCreless in Colorado. Johnson was added to the lawsuit as a third party by McCreless. Johnson admitted that he had bad feelings toward McCreless because Johnson believed McCreless took money from people on false pretenses. Johnson contacted other investors and encouraged them to file complaints if they felt comfortable doing so and also contacted an SEC investigator. He also represented to the Court that he understands that the SEC undertook an investigation of ACM, but subsequently deferred to an IRS investigation. Johnson testified that he was aware of no charges filed against ACM.
As to the money Johnson loaned to McCreless, he testified that from September 1999 through September 2006, McCreless made interest payments on the note, but that the payments stopped after January 2007. Johnson testified that he had no direct role in negotiating the 1999 Letter Agreement and only found out about TAA shortly before the ACM shareholders meeting in 2007.
Rick Reaves. Reaves is McCreless’ first cousin and was employed by ACM-Texas, LLC. He worked in sales and marketing in a territory covering the southern half of Texas and extending to Pensacola, Florida. His work for ACM-Texas LLC involved finding places to sell ACM’s product and finding new uses for the product. Reaves effectively ceased to work for ACM-Texas, LLC in 2002, when McCreless ceased payment. He did not formally resign, however, until May 2004.
In addition to working to find new uses and markets for brucitic marble, Reaves invested $100,000 of his own money and was a voting member of ACM-Texas, LLC at the time of trial. He testified that there had not been a meeting pertaining to the Texas entity since he had been associated with it. According to Reaves’ testimony, McCreless raised approximately $5,500,000 from selling units of the partnership to somewhere between 125 and 150 total shareholders/partners.
Reaves testified that as of the date of trial, there was a lawsuit pending in El Paso between Reaves and McCreless. Reaves testified that in the lawsuit McCreless contended that Reaves stole a trade secret, the use of brucitic marble powder as an insecticide, but he believes McCreless had dropped such a cause of action. Reaves stated that he filed a provisional patent for the use of brucitic marble powder as insecticide in 2004, before he had formally resigned from ACM-Texas, LLC. Reaves admits to have gained knowledge of this use of brucitic marble powder while working at ACM-Texas, LLC.
Manuel Baeza. Baeza testified that he is TAA’s mining foreman at Marble Canyon and has been working for TAA since 1982. He worked in mining even before he began working for TAA. He stated that his MSHA qualifications include a certifi*401cate allowing him to mine underground, instructor certification, and certification of mine rescue team qualifications.
Baeza primarily testified as to what took place at Marble Canyon. He testified that ACM had between four and six people working at Marble Canyon at a time, and that he believed Abel Becerra, a former employee of TAA, worked as ACM’s mining foreman.
One of the issues Baeza testified about was ACM taking rock from TAA’s stockpiles at Marble Canyon. Baeza testified that ACM’s mining crew took the rock that Baeza and his crew had mined and stacked. Baeza testified that he and his crew placed material they had milled in a specific location as part of his duties as foreman. He testified that he recorded when ACM’s mining crew took TAA’s materials and how much ACM’s crew took, at the time the materials were taken. Based on his notes, he stated that the total tonnage of the material ACM took from TAA was 2,503 tons between November 17, 2003 and June 2007. (Pl.’s Exh. 195.) Baeza testified that he had personally seen ACM take material three times. In addition, he informed Becerra that ACM was taking TAA’s materials. Baeza stated that he had not personally witnessed ACM take TAA’s materials more often because those incidents occurred when TAA’s crew was not working. He testified that TAA’s crew only worked four days per week and ACM had access to the mine and a key to the gate. He reported each incident to Joe Williams, Jr. According to his testimony, Baeza also reported several incidents to the local sheriff, who came to Marble Canyon three to five times, but never made any arrests.
Baeza testified that he could tell the rock had been taken because there were tracks on the ground indicating that TAA’s materials had been dragged to ACM’s plant and because TAA’s milling produced a larger final material than did ACM’s milling. According to Baeza, the size of the material indicated what material belonged to which mining operation.
Baeza additionally testified that Abel Becerra offered to pay Baeza under the table for TAA’s rock. Baeza testified that he refused Becerra’s offer, and told Joe Williams, Sr. about the incident by telephone. He did not, however, record the incident.
At trial, Baeza reviewed citations MSHA issued him in response to the allegation that the January 2008 blasting damaged TAA’s building. (Pl.’s Exhs. 315-316.) According to his testimony, he received a citation because it was reported that he set off dynamite and damaged ACM’s building. (PL’s Exh. 315.) He testified that following this citation, MSHA gave Baeza a continuation of the citation, based on additional information that Baeza had in fact warned ACM of the blasting. (PL’s Exh. 316.) While Baeza admits setting off dynamite on the day in question, he testified that ACM had ceiling holes on its plant prior to the blasting and that he does not know whether or not the fly rock caused any damage to ACM’s building or equipment. Baeza testified that dropping dynamite into a drilled hole and then exploding the dynamite is the only way to mine, and that both TAA and ACM engage in dynamite blasting. Baeza testified that on the date of the incident at issue, he gave a customary warning to ACM.
Baeza also testified to the damage ACM caused to TAA’s mine. According to his testimony, Joe Williams had told Baeza to barricade the entrance to TAA’s underground mine to prevent ACM from entering the mine. Baeza thus placed a large truck in front of the mine so that it blocked the entrance. Baeza testified that ACM’s mining crew moved the truck and *402extracted materials from TAA’s underground mine. During this procedure, ACM damaged the mine by lowering the floor. Baeza explained that lowering the floor in the mine created a safety hazard because the floor and ceiling in TAA’s underground mine were separated by 45-50 feet. Once the floor was lowered, TAA’s machines could no longer reach the ceiling to scale off rocks that might fall and endanger the miners.
Baeza testified that several days after this incident, MSHA issued a closure order to both TAA and ACM. Both parties were ordered to stop work at the underground mine in Marble Canyon. (PL’s Exh. 317.)
Jacinta Claire Williams. Ms. Jacinta Williams is the office manager at the Bur-net Bilbrough Marble Division plant and she oversees bookkeeping at both of TAA’s plants. She has been a bookkeeper since 1975, before she married Joe Williams, Jr., and she has worked continuously in the family business since her marriage. She testified as to her familiarity with invoices, invoicing, bills of lading, and shipping.
In order to determine how much material ACM mined at Marble Canyon, Ms. Williams explained that she compared ACM’s bills of lading to its invoices in both total tonnage and total dollar amount. (See Pl.’s Exh. 257 (ACM’s Invoices); PL’s Exh. 262, 265, 268, 272, 274, 277, 281, 282, 284, 291, 293, 297 (ACM’s Bills of Lading)). Ms. Williams testified that ACM’s invoices indicated that ACM shipped 17,843 tons between 2000 and 2008 and that ACM’s bills of lading show that during that same time ACM shipped 26,245 tons. This produces a discrepancy of 8,411 tons. Ms. Williams also used the invoices from ACM and bills of lading to calculate a dollar discrepancy. ACM’s invoices totaled $4,998,149, and using the same pricing projection from the invoices and taking into account what type of material was being shipped, Ms. Williams calculated that the bills of lading totaled $7,052,053.
Dr. Terrance Patrick McNulty. McNulty is a consulting metallurgical engineer. (T. McNulty Test. 6/30; PL’s References to Evidence Exh. 14, at 5.) He has a bachelor’s degree in chemical engineering from Stanford University, a master’s degree in metallurgical engineering from what used to be the Montana School of Mines, and a doctorate in extractive metallurgy from Colorado School of Mines. He has been working in metallurgical engineering since 1966. (PL’s References to Evidence Exh. 14, at 6.) He is a member of the American Institute of Mining Metallurgical and Petroleum Engineers. (PL’s References to Evidence Exh. 14, at 8.) He has published roughly 40 articles. (PL’s References to Evidence Exh. 14, at 9.) McNulty has run his own consulting company since 1989. (PL’s References to Evidence Exh. 14, at 12.) McNulty testified that he worked with Paul Chamberlin, Plaintiffs second expert, in the past and that he believed Chamberlin was reliable.
McNulty was initially contacted by TAA to answer two specific questions: (1) what is the industrial meaning of the word bene-ficiation and (2) what is the meaning of high purity as it is applied to magnesium hydroxide. (PL’s References to Evidence Exh. 14, at 13.) He explained that benefi-ciation is a process of physically separating grains to focus on the specific minerals the producer wants. (PL’s References to Evidence Exh. 14, at 14.) He also explained that high purity would mean a degree of concentration or purity above 90 percent magnesium hydroxide. Based on these facts and the information provided to him by Chamberlin, he concluded that there was no beneficiation occurring at Marble Canyon. He testified that he was unaware of any way the beneficiation could be simply done with an air process. (PL’s Refer-*403enees to Evidence Exh. 14, at 15.) Air classification only differentiates the particles based on size into different products.
McNulty never visited the ACM processing plant nor has he ever consulted or worked on the design of a brucitic marble processing plant. (PL’s References to Evidence Exh. 14, at 25.) He also made his opinion regarding the lack of beneficiation at Marble Canyon without having seen anything in writing from someone who has actually seen ACM’s beneficiation process. (Pl.’s References to Evidence Exh., 14 at 27.) He testified that screening alone could serve a rudimentary separation function. (Pl.’s References to Evidence Exh. 14 at 28.)
Paul Chamberlin. Paul Chamberlin is a metallurgic engineer that consults in the minerals business. He has a Bachelor of Science degree in metallurgical engineering from Michigan Technological University and an MBA from Arizona State University. (P. Chamberlin Test. 6/30; Pl.’s References to Evidence Exh. 13 at 5.) He has worked in the industry since 1960 except for a brief time in the U.S. Army. (Pi’s. References to Evidence Exh. 13 at 6.) For the last 20-25 years, he has run a company, Chamberlin and Associates, that does metallurgy consulting primarily in gold and copper. (Pi’s. References to Evidence Exh. 13 at 17.) Chamberlin testified that after he was hired as an expert in this case, he visited the mine to answer two questions: (1) is beneficiation being used and (2) is a high purity product being produced. He visited the mine at the beginning of 2008. (Pi’s. References to Evidence Exh. 13 at 19.)
He first testified that he believed benefi-ciation was not occurring at the ACM facility because the process being used did not improve the mineral product. (Pi’s. References to Evidence Exh. 13 at 19-20.) He explained that beneficiating improves the product by removing unwanted materials and concentrating the desired material. This would result in magnesium hydroxide. He testified that the equipment at the ACM facility was not even capable of bene-ficiating the product. It only crushed and screened the rock and more is required to be considered beneficiation. (Pi’s. References to Evidence Exh. 13 at 20-21.) He also explained that because a product is being removed there must be a waste byproduct left over from the process. Since there were no waste materials produced at Marble Canyon, he testified this meant there was no beneficiation. (Pi’s. References to Evidence Exh. 13 at 21.)
Chamberlin testified that he did not see any equipment normally used in separation at the ACM facility. (Pi’s. References to Evidence Exh. 13 at 28.) He only saw equipment for grinding and screening the material. He explained that beneficiating could not be done merely by screening. (Pi’s. References to Evidence Exh. 13 at 29.) He also explained that in his opinion a high purity magnesium hydroxide product would exceed 90% purity, and might require purity as high as 95-96%. (Pi’s. References to Evidence Exh. 13 at 33.)
Chamberlin based his opinion of the ACM mill on three samples he took from the facility. (Pi’s. References to Evidence Exh. 13 at 35.) While there was a difference in the purity of the material, he did not consider it an improvement. (Pi’s. References to Evidence Exh. 13 at 36.) Chamberlin did not do any testing while there was active milling or processing going on at Marble Canyon.
Robert McCreless. Robert McCreless is the principal of both ACM and ACM-Texas, the defendants and counter-plaintiffs to this lawsuit.
According to his testimony, McCreless’ interest in Marble Canyon began in Sep*404tember 1986, when he drove his father and two other directors from Fort Worth, Texas to a board meeting in San Saba. At trial, McCreless described the meeting as a four-hour education in brucite. McCreless’ interests, according to his testimony, lie in the potential markets available to Marble Canyon because of the chemical makeup of brucitic marble. After doing extensive research on brucite, and synthesizing that research in a two-page report, McCreless took Joe Williams, Sr. and his wife Louise to lunch to see whether he could pursue the chemical aspect of brucitic marble.
As stated above, the first agreements between TAA and McCreless’ business entities were unsuccessful because the GLO determined the conveyance contemplated was invalid. According to McCreless’ testimony, the GLO said that an assignment of the leases had to be a complete assignment, and not a partial assignment. According to his testimony, when McCreless entered into the Letter Agreement, he was expecting full assignment of the 175-acre mining lease TAA had with GLO.
Throughout this time, he continued to research potential uses of brucitic marble/markets to expand the business. McCreless testified that he began looking at acid neutralization in wastewater treatment because he foresaw that the carpet industry would be using fewer mineral fillers as fire retardants, due to the Environmental Protection Agency’s (“EPA”) changing regulations.5 In late 1997 or early 1998, the Sanitation Districts of Los Angeles County told McCreless they were interested in a second source of magnesium product for their sewer system. Believing he needed his own plant to contain profits and control costs, McCreless formed ACM in July, 1998, as an S-corporation in Colorado.
In 1998, McCreless flew to Texas and told David Williams that he believed he would be getting significant, long-term contracts in the wastewater industry. David Williams responded that TAA had never been interested in pursuing the wastewater industry. After discussing an arrangement between TAA and the newly-formed ACM, Williams invited McCreless to draft an agreement. After further negotiations between McCreless and TAA, David Williams prepared the final draft of what is referred to in this litigation as the Letter Agreement. (Def.’s Exh. 4.)
McCreless testified that because of the Letter Agreement, he spent millions of dollars in research and development finding high-paying applications of brucitic marble in various industries. In March 2001, McCreless formed AMC-Texas, LLC to raise capital to allow ACM to pursue further market research.
McCreless testified about the terms of the 1999 Letter Agreement, his understanding of them, and his compliance with the terms as he understood them. McCreless testified that ACM worked diligently within the time period specified by the Letter Agreement to gain as much information as to the feasibility of the proposed arrangement. As to intent to move forward with plant construction, McCreless testified that in October 1999, ACM tendered a $5,000 check to TAA to indicate *405that ACM intended to move forward. (Def.’s Exh. 5). TAA cashed the $5,000 check, but never delivered recordable leases to ACM. The only lease ACM has received is the ground lease, known in this litigation as the Mine Mill Site Lease.
As to the competition provision of the Letter Agreement, McCreless testified that the provision left ACM free to develop markets that TAA was not supplying at the time of the agreement. (Def.’s Exh. 4, para. 6.) McCreless testified that he developed markets in industries willing to pay 10-15 times the price TAA received in the aggregate market.
ACM’s Marble Canyon mill was fully operational by March 2001, according to McCreless’s testimony. While McCreless acknowledged that ACM demanded a payment of $200,000, McCreless testified that he would not pay that amount without receiving recordable leases because McCreless felt he needed the recordable leases to secure mineral rights, to exclude competitors from buying brucitic marble at Marble Canyon, and to obtain financing.
McCreless testified that before the August 2003 email from Joe Williams, Sr. instructing ACM not to bring a drill to the Marble Canyon property, no one from TAA told McCreless to stop building the ACM facility at Marble Canyon. The record indicates, however, that McCreless was first told not to bring a drill onto the property on June 10, 2002 via fax from Joe Williams, Sr. (Def.’s Exh. 13(m).) McCreless testified that he responded to the email by saying that he believed he had the right to mine at Marble Canyon, and invited Joe Williams, Sr. to have David Williams send something regarding ACM’s right to mine to TAA’s corporate lawyer for him to look over and respond. The June 10, 2002 fax includes a statement from McCreless stating, “[u]nder the terms of the binding Letter of Agmt that you signed with ACM Corp, we certainly have the right to mine for our own supply. I suggest you check with David who is TAA’s legal counsel. If he will write a letter stating why ACM cannot mine, then we will respond accordingly.” In September 2003, ACM retained an attorney to send a demand letter to TAA. (Pl.’s Exh. 118.) In the letter, ACM demanded the recordable leases per the 1999 Letter Agreement, or it would have to file suit.
Much of McCreless’s testimony was related to whether McCreless represented to ACM that he could separate brucitic marble from calcium carbonate and whether he had the capability to do so. McCreless testified that he understands “high purity” brucite, or magnesium hydroxide, to mean a substance that is low in “impurities,” which he understands as silica, aluminum, iron, or any other impurity that is debilitating to certain market applications. McCreless admits that the expert testimony introduced at trial (that high purity brucitic marble would be something with more than 90% magnesium hydroxide), is at variance with his understanding of high purity brucitic marble. He notes, however, that the 1999 Letter Agreement does not denote a specific percentage and that the experts do not work with brucitic marble. McCreless further admits that in the materials McCreless prepared, on RMC Minerals Letterhead, specified high purity as 90% or better for high purity magnesium oxide, and that his January 2000 letter to Joe Williams, Sr. shows a flow chart indicating production high purity magnesium hydroxide. (Def.’s Exh. 11.) McCreless also admits that obtaining 90% magnesium hydroxide from the brucitic marble at Marble Canyon would require a separation process.
McCreless testified that he and Joe Williams, Sr. discussed the possibility of separating magnesium hydroxide out of *406the ore and they did some testing of the separation processes to determine if those processes would effectively separate magnesium hydroxide. McCreless stated that he shared some information about the potential uses of brucite with the Williamses, but felt that he needed to be a little bit guarded, at least until there were further agreements that would lead to leases. McCreless contends that the plant in Marble Canyon, built in 2000, is capable of doing air separation and separation by air screen units. He admitted, however, that the best that can be done at Marble Canyon by ACM’s plant is to beneficíate the marble to approximately 50%. ACM did not sell this 50% magnesium hydroxide product to anyone, because the markets McCreless provided did not need it.
McCreless testified that in a laboratory setting, the brueitic marble from Marble Canyon has been beneficiated to contain a higher percentage of magnesium hydroxide. A business entity in Needham, Massachusetts corresponded with McCreless about separation testing they were doing. The type of separation process the company tried to employ was a proprietary electrostatic beneficiation process. McCreless testified that the entity sent him correspondence indicating that the best separation, on a first pass through, raised the magnesium hydroxide concentration from 32% to 48%, which the outfit in Massachusetts characterized as “not good enough.”
Regarding the GLO royalties, McCreless testified that TAA represented to him that TAA paid GLO royalties at the rate of $0.67/ton. From 1999, McCreless testified that he sent ACM royalty checks based on 10% of the end selling price to TAA. According to McCreless’ testimony, this amount was based on the spirit of the Letter Agreement. McCreless testified that the checks were delivered to David Williams’ office at the San Saba courthouse. Before February 2003, McCreless received no communication from TAA indicating that it objected to the royalty checks. (Def.’s Exh. 20 (which shows last royalty payment check was cashed in November 2001)). ACM continued to send royalty checks to TAA after 2003, but TAA did not cash them. In 2006, according to his testimony, McCreless met with GLO agent Bill Farr, who set up a blanket authorization allowing ACM to pay GLO directly, bypassing TAA. McCreless submitted information regarding ACM’s production and sales of material from Marble Canyon to the GLO, but is unsure if these numbers were used when Bill Farr calculated TAA’s non-payment and underpayment of ACM production royalties.
McCreless also testified regarding the incidents that took place at Marble Canyon. First, he testified that in January 2008, TAA damaged ACM’s Marble Canyon plant and one of ACM’s drills. (Def.’s Exh. 23.) McCreless stated that ACM could not use the drill until the windshield was replaced at a cost of $1,500. ACM’s crew did some informal patchwork on the roof of the plant. Additionally, McCreless testified that ACM did not misappropriate materials from TAA’s stockpiles. He testified that there is no way to differentiate between ACM’s and TAA’s materials other than that the ACM mining crew knew the locations of its own stockpiles, and knew approximately how many tons of shock rock were produced by a particular shock. McCreless admitted, however, that there is a possibility that through the years some of ACM’s rock was stored close to or on top of some of TAA’s older materials.
McCreless then testified regarding the events that led to ACM-Texas’ bankruptcy. To begin, he testified that on January 26, 2006, the EPA issued ACM a stop order to stop its sale of pesticide product NIC 325. (Pl.’s Exh. 307.) On October *40726, 2007, the EPA issued a second stop order that applied to two more of ACM’s insecticide products. Both stop orders are still in effect.6 (PL’s Exh. 308.)
McCreless testified that the immediate cause of ACM-Texas’ filing for bankruptcy was a March 29, 2008 labor strike at the Cananea copper mine in Northern Mexico. According to McCreless’ testimony, ACM-Texas had a contract with Grupo Mexico, 5.A.B. de C.V. to supply between 1,000 and 1,500 tons of material to its copper mine at Cananea. The March 2008 labor strike shut down mining operations altogether, causing ACM-Texas to lose revenue. McCreless also testified that ACM-Texas spent significant amounts of money in preparation for the Cananea contract.
During his testimony, McCreless also conjectured that he was unable to raise additional capital to avoid bankruptcy because Kit Bramblett, Rick Reaves, and Drake Johnson were contacting members of ACM and telling the members that ACM had no contractual rights in Marble Canyon and that McCreless had made and was making fraudulent misrepresentations.
y.
Conclusions of Law
A. Plaintiffs Causes Of Action.
1. Lack Of Contract/Breach Of Contract.
Plaintiff first argues that the April 2, 1999 Letter Agreement is unenforceable and, in the alternative, that ACM breached the Letter Agreement. The relevant terms of the Letter Agreement state:
Upon such election [by ACM] and the contemporaneous payment to TAA of Five Thousand & no/100 Dollars ($5,000.00), TAA shall cause recordable leases of mineral and surface rights in the Subject Lands, appropriate to the project contemplated herein, to be delivered to ACM.
After ACM made the election, it began building a mill on the property it leased from TAA, and after several years of negotiation, no recordable leases of mineral and surface rights were ever provided.
There are two possible readings of the Letter Agreement that could make it a contract. The agreement could either be a contract with some terms still open to negotiation or an agreement to agree. Each interpretation requires that the contract contain all material elements and meet the requirements under the statute of frauds. Because the Letter Agreement under either reading meets neither of these two fundamental requirements, the Court finds that it is not an enforceable contact.
It is established law that a writing need not have all the stipulations between the parties to be considered a contract. Osborne v. Moore, 247 S.W. 498 (Tex.1923). Rather, a contract need only have the essential elements. Id. A contract can also exist even though there are terms on which the parties have not agreed and which they expect further negotiation. Scott v. Ingle Bros. Pacific Inc., *408489 S.W.2d 554, 555 (Tex.1972). Nevertheless, when an essential term is left open for future negotiation, there is no binding contract. T.O. Stanley Boot Co., Inc. v. Bank of El Paso, 847 S.W.2d 218, 221 (Tex.1992). An agreement to make a future agreement is enforceable only if it contains all essential terms. Fort Worth Indep. Sch. Dist. v. City of Fort Worth, 22 S.W.3d 831, 846 (Tex.2000). Thus, to decide whether the agreement is enforceable, the Court must first determine what the material elements of the contract are, and then whether those elements are included in the Letter Agreement.
Contracts must be read separately to determine the necessary material terms. T.O. Stanley Boot Co., Inc. v. Bank of El Paso, 847 S.W.2d 218, 221 (Tex.1992) (citing Bridewell v. Pritchett, 562 S.W.2d 956, 958 (Tex.Civ.App.-Fort Worth 1978)). Material terms “are those that the parties would reasonably regard as vitally important elements of their bargain.” Potcinske v. McDonald Property Investments, Ltd., 245 S.W.3d 526, 531 (Tex.App.-Houston [1st Dist] 2007) (citing Neeley v. Bankers Trust Co., 757 F.2d 621, 628 (5th Cir.1985)). Additionally, a contract must define its essential terms with enough precision to enable the court to determine the obligations of the parties. Central Texas Micrographics v. Leal, 908 S.W.2d 292, 296-297 (Tex.App.-San Antonio 1995) (citing Weitzman v. Steinberg, 638 S.W.2d 171, 175 (Tex.App.-Dallas 1982)).
No Texas court has specifically identified what terms will be material for a hard mineral lease. Nevertheless, a comparison can be drawn to oil and gas leases as they are both subsurface rights leases and both must meet the requirements of the statutes of frauds. Regarding oil and gas leases, courts have required the extent and duration of the lease to be included in a contract. Fagg v. Texas Co., 57 S.W.2d 87, 89 (Tex.Com.App.1933). Other essential elements include the “term of the lease, the drilling commencement date, time and amount of payments in lieu of drilling operations, and amounts to be paid for produced gas.” Oakrock Exploration Co. v. Killam, 87 S.W.3d 685, 690-691 (Tex.App.-San Antonio 2002) (citing Cantrell v. Garrard, 240 S.W. 533, 534 (Tex.Com.App.1922)). In Oakrock Exploration, letters were given that stated that a future lease would be granted to the mineral rights owners. Oakrock Exploration Co. 87 S.W.3d at 687. The letters were signed but no lease was agreed upon. Id. at 688. When another company leased the property, the original offerers sued for breach of contract and tortious interference. Id. at 688. The court found that since there was no definitive description of the lease, the original agreements were not enforceable contracts as a matter of law. Id. at 691.
If a contract contains all but one material term, a court may still enforce the contract. For example, when all but the price of a good is missing, the court can still presume that a meeting of the minds exists and that a reasonable price was intended. Bendalin v. Delgado, 406 S.W.2d 897, 900 (Tex.1966). The absence of only a durational term also does not necessarily mean that no contract exists. Moore v. Dilworth, 142 Tex. 538, 179 S.W.2d 940, 942 (1944). A court can presume a reasonable time was intended. Id. If a contract does not specify its duration or time of performance, however, it is not enforceable. Id. The court in Moore v. Dilworth reasoned that without one of these necessary terms of the contract, it is impossible for a court to determine the other. Id.
Here, the Defendants allege that all the required material terms are *409included in the Letter Agreement. They contend the material terms required are: (1) the starting date for the lease, (2) the terms of the lease, (3) the property involved, (4) and the price/consideration to be paid. Following Oakrock and Fagg these would be material terms of the lease. The Letter Agreement, however, does not have specificity as to many of these terms. Although the price is adequately described as “10% of the gross revenues,” the only starting date mentioned is that of the delivery of the lease (“[u]pon such election and the contemporaneous payment....”). The starting date term does not refer to the start of any lease rights of ACM or whether that would be the start of mining, the creation of the separation facility, or the beginning of separation. The only terms of the lease described in the Letter Agreement are what will be mined, and that a facility will be built. It does not include the duration of the lease. Following Moore, without the duration and the start date, the Letter Agreement is not an enforceable contract.
The property involved is also not fully described. It is unclear from the Letter Agreement whether the lease “appropriate to the project contemplated herein” includes all the lands listed in Exhibit “A” or merely some of it. The later negotiations indicate that little of the agreement regarding the “recordable leases” was set in stone. There was not yet a decision regarding what piece of land each party would receive. (See Def.’s Exh. 6C (February 17, 2001 email from David Williams to McCreless stating, “I need to know which part of the 40 acres you want....”)) David Williams testified that there was no indication as to what specific lands would be given. (D. Williams Test. 6/29.) There is also no testimony by the Defendant as to any agreement regarding what specific lands would be given. (See R. McCreless Test. 07/02.) Thus, the Letter Agreement is not an enforceable contract because it lacks several material terms.
Additionally, the Court cannot enforce the terms of the Letter Agreement because it fails to meet the statute of frauds. Mineral interests are treated as real property interests and are therefore subject to the rules relating to real property, including the statute of frauds. See Hill v. Heritage Resources, Inc., 964 S.W.2d 89, 134 (Tex.App.-El Paso 1997). Therefore, a lease of mineral rights for longer than one year must be in writing. Tex. Bus. & Com.Code Ann. § 26.01(b)(5). Thus, if the Letter Agreement here is a contract with a missing term, then it must meet the statute of frauds.
If the future agreement is covered by the statute of frauds, then the agreement to make a future agreement must also meet the statute of frauds. Hartford Fire Ins. Co. v. C. Springs, 300, Ltd., 287 S.W.3d 771, 778 (Tex.App.-Houston [1st Dist.] 2009) (citing Baylor Univ. v. Sonnichsen, 221 S.W.3d 632, 635 (Tex.2007) (holding that the statute of frauds bars a breach of contract claim based on an oral agreement to enter a future employment contract that would need to meet the statute of frauds)). If the Letter of Agreement is an agreement to make a mineral rights lease, as the Defendants allege, then it must also meet the requirements of the statute of frauds. Thus, whether the Letter Agreement is an agreement to make a future agreement or an agreement to make a mineral rights lease, it must meet the statute of frauds.
Some courts have specifically held that a writing that contemplates a contract to be made in the future does not satisfy the statute of frauds. Id. (citing Martco, Inc. v. Doran Chevrolet, Inc., 632 S.W.2d 927, 928-29 (TexApp.-Dallas 1982 no writ); Southmark Corp. v. Life Investors, Inc., *410851 F.2d 768, 767 (5th Cir.1988); Document Imaging, Inc. v. IPRO, Inc., 952 F.Supp. 462, 468 (S.D.Tex.1996)). Writings that contain futuristic language are insufficient to show that a contract is already in existence. Hartford Fire Ins. Co., S.W.3d at 778. The limitation on futuristic language was built out of a reading of the case law of other states and the comments to the statute of frauds. Martco, 632 S.W.2d at 928-929. One such comment reads, “ ‘all that is required is that the writing affords a basis for believing that the offered oral evidence rests on a real transaction.’ ” Id. at 929 (quoting Comment 1 to Tex. Bus. & Com.Code Ann. § 2.201(a)). In Martco, the court reasoned that a writing that only referred to an early bid and was not a confirmation of any existing contract was not evidence of any real transaction. Id. In Hartford, the agreement was to first deliver an acceptable contract and then the other party would stand ready to act as a surety. Hartford Fire, S.W.3d at 778-789. The court held that the “futuristic language,” was not indicative of a present intent to act as surety. Similarly, the court in Document Imaging found no contract existed when a letter stated the parties would “agree to formalize” a relationship and that such language was insufficient to meet the statute of frauds. Document Imaging, Inc., 952 F.Supp. at 468. The case law is unclear on what element of the statute of frauds is missing when the contract contains futuristic language. Nevertheless, as the Letter Agreement also refers to the formation of a future contract it would not meet the statute of frauds.
In addition, more is needed to meet the definiteness standards of the statute of frauds. Where parties contracted to “get together later and make a fair selection of acreage,” the court found an unenforceable agreement to agree. Stekoll Petroleum Co. v. Hamilton, 152 Tex. 182, 255 S.W.2d 187, 192 (1953). In Stekoll, the original contract stated that there would be an equitable distribution of land in a checkerboard pattern on a 5000 acre plot of land. Id. at 191. The court found that without a close enough pattern for the first block of land to use as the basis of the checkerboard, the contract fails as it does not specify the terms of the future contract to be made. Id. at 192.
Here, the Letter Agreement has even less description. Although the agreement describes the maximum amount of land available for lease, it does not indicate what section or distribution of the lands will come in that future lease. While it does say the leases will be “appropriate to the project contemplated herein,” that statement gives the court little guidance. The intent of the parties or extrinsic evidence will not be considered when resolving a matter of the statute of frauds. Fears v. Texas Bank, 247 S.W.3d 729, 736 (TexApp.-Texarkana 2008). The Letter Agreement only indicates the parties which with enter into surface and mineral leases appropriate to the mining of brucitic marble and the construction of a brucitic marble separation/milling facility. There is no indication in the contract as to how much land such a project would take. Thus, as there is no other description in the Letter Agreement, it does not meet the statute of frauds and is unenforceable.
2. Common Law And Statutory Fraud.
TAA raises both a common law fraud and a statutory fraud claim. To prevail under a common law fraud claim TAA must show that (1) ACM made a material representation that was false; (2) ACM knew the representation was false or made it reckless as a positive assertion without any knowledge of its truth; (3) it *411intended to induce TAA to act upon the representation; and (4) TAA actually and justifiably relied upon the representation and thereby suffered injury. Ernst & Young, L.L.P. v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex.2001). “A fact is material if it would likely affect the conduct of a reasonable person concerning the transaction.” Coldwell Banker Whiteside Associates v. Ryan Equity Partners, Ltd., 181 S.W.3d 879, 888 (Tex.App.-Dallas, 2006) (citing Custom Leasing, Inc. v. Tex. Bank & Trust Co., 516 S.W.2d 138, 142 (Tex.1974); Miller v. Kennedy & Minshew, P.C., 142 S.W.3d 325, 345 (Tex.App.Fort Worth)).
The statements made by McCreless that ACM would beneficíate the marble were false. All the discussion leading up to the Letter Agreement was about a product with a purity of 90% or more. Both experts testified that 90% purity was the industry standard. Despite this fact, McCreless testified that his product was only 37-50% magnesium hydroxide. His magnesium hydroxide did not meet the standards implied in the discussions leading up the Letter Agreement, therefore his statements were false.
There is, however, no evidence that Robert McCreless knew the statement was false or that the statement was made recklessly without any knowledge of the truth at the time the parties entered into the Letter Agreement. The only evidence given is that McCreless eventually started focusing on selling the non separated brueite. (Pl.’s Exh. 248, p. 013239-40.) There was also no evidence that the statement was given recklessly. For a statement to be reckless it must be made by a person (1) without any knowledge of the truth; (2) who knows that he does not have sufficient information to support the statement; or (3) who realizes he does not know whether the statement is true. Johnson & Higgins of Texas, Inc. v. Kenneco Energy, 962 S.W.2d 507, 527 (Tex.1998). While dealing as W & M, McCreless enlisted a noted metallurgist to determine whether beneficiating was feasible. (Pl.’s Exh. 194, p. TAA-13039.) He also testified that ACM completed the feasibility study required under the Letter Agreement and spent millions of dollars in research and development of high purity products. (R. McCreless Test. 7/1.) The evidence indicates that based on his research, McCreless believed that the development of high purity products was feasible.
Nor was there any showing of intent. The intent required to prove a fraud claim is the intent to deceive. See Cotten v. Weatherford Bancshares, Inc., 187 S.W.3d 687, 702 (Tex.App.-Fort Worth 2006). TAA must show that ACM intended not to complete the promise to beneficíate the marble at the time the promise was made. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex.1986).
Here, the evidence demonstrates that McCreless did not intend to deceive TAA, he merely changed his opinion on the economic feasibility of producing high purity magnesium hydroxide. In the early discussions regarding beneficiation, McCreless pointed to the value of brucitic marble products with a purity of 90% Mg(OH) or better. (Pl.’s Exh. 11, p. 00113.) McCreless sent TAA a memo describing HMR-93, a product used for acid neutralization in waste water, that was listed at a purity of 93% Mg(OH). (Pl.’s Exh. 10.) David Williams testified he felt this implied the products ACM would make would be of a similar high purity. (D. Williams Test. 6/29.) This belief was correctly placed as of January 20, 2000; McCreless sent TAA a letter showing ACM’s plant flowsheet and the output was a product MGH-93. (Pl.’s Exh. 210, p. 04850-51.) McCreless *412testified that MGH-93 was the HMR-93 product he earlier proposed for acid neutralization. (R. McCreless Test. 7/2.) This is, however, where the story turns. The ACM President’s report reveals that McCreless abandoned the idea of producing high purity Mg(OH) after determining that the unseparated product was just as good as the separated product. (Pl.’s Exh. 248, p. TAA 013239-40.) This shows that McCreless intended to make the separated product, but after the promise was made he realized that producing the unseparated product was a better deal. Therefore, McCreless’ intent was to complete the promise to separate the brucite when the promise was made in the April 2, 1999 letter. He simply changed his mind after he signed the Letter Agreement. That he did not complete the promise is not, in and of itself, proof of fraud. Spoljaric, 708 S.W.2d at 435.
Although, TAA may have actually and justifiably relied upon the representation, it cannot prove fraud without proving ACM’s fraudulent intent. Thus, TAA cannot recover under its fraud cause of action.
3. Unjust Enrichment Money Had And Received.
Next, TAA argues that it should recover under the equitable doctrine of money had and received, or unjust enrichment.7 To recover under unjust enrichment, TAA must show that ACM “obtained a benefit from another by fraud, duress, or the taking of an undue advantage.” Heldenfels Bros. Inc. v. City of Corpus Christi, 832 S.W.2d 39, 43 (Tex.1992). In other words, “[u]njust enrichment is enrichment that lacks an adequate legal basis: it results from a transfer that the law treats as ineffective to work a conclusive alteration in ownership rights.” Restatement (Third) of Restitution and Unjust Enrichment § 1, cmt. b (Discussion Draft 2000).
The doctrine is based on the principle that someone that receives benefits which would be unjust for him to retain, ought to make restitution even though no contract exists. Mowbray v. Avery, 76 S.W.3d 663, 679 (Tex.App.-Corpus Christi 2002, pet. denied). “A cause of action for unjust enrichment is not based on wrongdoing, but, instead, looks only to the justice of the case and inquires whether the defendant has received money or property which rightfully belongs to another.” Everett v. TK-Taito, L.L.C., 178 S.W.3d 844, 859 (Tex.App.-Fort Worth 2005); see also Staats v. Miller, 150 Tex. 581, 243 S.W.2d 686, 687 (1951). Thus, the question the Court is asked to answer is “to which party does the money, in equity, justice, and law, belong.” Bank of Saipan v. CNG Financial Corp., 380 F.3d 836, 840 (5th Cir.2004, no pet.).
TAA argues that ACM was unjustly enriched by money received from the sale of materials it mined at Marble Canyon. The Court agrees. Although the parties initially agreed to allow ACM to mine while attempting to negotiate for mineral leases, ACM had no legal right to mine materials at Marble Canyon following the June 11, 2002 fax in which Joe Williams, Sr. told McCreless not to bring a drill onto the property. (PL’s Exh. 210, TAA 08256.) The materials ACM mined and sold after June 11, 2002 were therefore taken without an adequate legal basis. *413In other words, ACM was not legally authorized to mine materials from Marble Canyon and possessed no ownership rights in the materials it mined from Marble Canyon.8 Any money ACM received from selling the materials it unlawfully mined was unjust enrichment, and should be awarded to TAA, who possessed ownership rights in those materials.
The Court considers the GLO records the most reliable evidence of ACM’s enrichment. According to these records, ACM-Texas was paid $7,125,073.08 in exchange for 12,858.24 tons of minerals mined at Marble Canyon from July 2002 to December 2007. (Pl.’s Exh. 193, TAA 12314-16.) Although TAA also seeks restitution for money received by ACM for materials sold before June 16, 2002, it is estopped from doing so because the evidence and testimony indicate that until that date, TAA allowed ACM to mine on the property while the parties attempted to negotiate an agreement.
Thus, TAA may recover the enrichment derived by ACM from the mining and sale of materials from Marble Canyon, which the Court finds to be $7,125,073.08. Costs of labor and equipment incurred by ACM would be subtracted from this amount had the Court found evidence of these costs in the record, but it did not.
4. Accounting And Damages.
An action for accounting may be either a suit in equity or a particular remedy sought in conjunction with another cause of action. Michael v. Dyke, 41 S.W.3d 746, 754 (Tex.App.-Corpus Christi 2001). A claim for accounting can be found in equity, under a contractual arrangement, or a fiduciary relationship. T.F.W. Mgmt., Inc. v. Westwood Shores Property Owners Ass’n, 79 S.W.3d 712, 717 (Tex.App.-Houston [14th Dist] 2002). Although there is a contract between TAA and ACM in this case, the Mine Mill Site Lease, the accounting claim is based on royalties contemplated by the 1999 Letter Agreement. In order to receive an accounting, there must be a specific term in the contract that requires an accounting, not just a contractual relationship. Id. at 718-19. The Court has already found that the Letter Agreement is not an enforceable contract. The Lease does not contain any terms that require an accounting. Thus, there is no contractual right to an accounting and TAA must meet the requirements either because of a fiduciary relationship or because of equity.
In this case, no fiduciary relationship was pled or proved. The Court, therefore, finds that none exists for the purpose of an accounting.
An accounting is proper under equity if the facts presented are so complex that adequate relief is not available at law. Id. (citing Hutchings v. Chevron U.S.A., 862 S.W.2d 752, 762 (Tex.App.-El Paso 1993)). When the use of regular discovery allows for adequate relief, an accounting is not required. T.F.W. Mgmt., Inc., 79 S.W.3d at 717-18. TAA did not establish why proper discovery methods are inadequate to determine the amount of marble mined. See Hutchings, 862 S.W.2d at 762. In fact, ACM gave information on how much it mined to the GLO and that information has been given to *414TAA. (Pl.’s Exh. 193, TAA 11468-73.) Thus, as TAA gave no reason why normal discovery methods were inadequate, the Court does not grant TAA an accounting.
5. Conversion.
To prove conversion TAA must show (1) TAA had legal possession of, or was entitled to, possession of the property; (2) ACM assumed and exercised dominion and control over the property in an unlawful and unauthorized manner to the exclusion of, and inconsistent with, TAA’s rights; and (3) ACM refused TAA’s demand for return of the property. Texas Dept. of Transp. v. Crockett, 257 S.W.3d 412, 416 (TexApp.-Corpus Christi 2008). Demand and refusal is not necessary when the possessor’s acts manifest a clear repudiation of the plaintiffs rights. Cass v. Stephens, 156 S.W.3d 38, 61 (Tex.App.-El Paso 2004).
TAA had possession of the marble. Testimony was given that when TAA milled its material it placed the rock in a specific site in the mine. (M. Baeza Test. 7/1.) The evidence also suggests that ACM assumed control over the property inconsistent with TAA’s rights. Specifically, Manuel Baeza testified that he saw ACM take marble from TAA’s pile. Based on his field notes, Baeza testified ACM took in a total of 2503 tons between Nov. 17, 2003 and June 2007. No testimony was given by the Defendant to rebut the actual taking of the rock. In fact, McCreless acknowledged that ACM probably took some of TAA’s material. (R. McCreless Test. 7/2.) Taking the material is a clear repudiation of TAA’s rights in ownership so no demand is required. Thus, the Court finds that ACM converted some of TAA’s property, but the evidence does not demonstrate how much of the material was taken. In terms of damages for the conversion, TAA asks for recovery in the amount for which the Defendant sold its material. The Court has already awarded TAA with the total amount of its material sold by ACM. Any damages the Plaintiff suffered due to the conversion will be reflected in the total unjust enrichment award because the material converted by ACM was sold and reported to the GLO.
Plaintiff also alleges the conversion was done with malice and that TAA should be awarded exemplary damages. Malice may be implied if the defendant knew or should have known that he had no legal right to the property. Kinder Morgan N. Tex. Pipeline, L.P. v. Justiss, 202 S.W.3d 427, 447-48 (Tex.App.-Texarkana 2006). The only evidence given that ACM knew it did not own the marble was Mr. Baeza’s testimony that he told the ACM foreman that the rock was being taken. (M. Baeza Test. 7/1.) McCreless testified that both TAA and ACM maintained stockpiles of shot rock in the mine and that it is impossible to identify who owned the specific rock, as all the shot rock looked the same. (R. McCreless Test. 7/2.) The Court finds McCreless’ testimony believable and that TAA did not meet its evidentiary burden in showing malice. Therefore, the Court finds that TAA is not entitled to exemplary damages.
6. Trespass.
To prevail under a trespass claim, TAA must show that “(1) it owns or has a lawful right to possess real property; (2) the defendant physically, intentionally, and voluntarily entered the land; and (3) the defendant’s trespass caused damage.” Stukes v. Bachmeyer, 249 S.W.3d 461, 465 (Tex.App.-Eastland 2007). Apparent consent to enter or authorized use is a defense to trespass. Id. at 465 n. 1 (citing Stone Res., Inc. v. Barnett, 661 S.W.2d 148, 151 (TexApp.-Houston [1st Dist.] 1983); Ward v. Northeast Tex. Farmers Co-op. Eleva*415tor, 909 S.W.2d 143, 150 (Tex.App.-Texarkana 1995)). Consent, however, must be affirmatively pled. Stukes, 249 S.W.3d at 465 FN1 (citing Ward, 909 S.W.2d at 150).
Here, the evidence demonstrates that TAA has the lawful right to posses the property in question either in fee or because the GLO leased TAA its mineral rights. It is undisputed that ACM entered the land. To recover for trespass, the plaintiff need only show that the defendant entered the plaintiffs property; intent to trespass is not required. Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 827 (Tex.1997); Texas Woman’s University v. Methodist Hosp., 221 S.W.3d 267, 286 (TexApp.-Houston [1st Dist.] 2006). Whether or not ACM intended to violate TAA’s property right is of no significance; it is the act of entering the property not the specific injury that must be intentional. Trinity Universal Ins. Co., 945 S.W.2d at 827.
In this case, however, the damages caused by the trespass are not clear. TAA only alleges that Defendants should be liable for “all the damages alleged above,” but gives no indication as to what damages were distinctly caused by the trespass. The Court will not infer damages beyond the taking of TAA’s minerals. This amount is subsumed in the unjust enrichment claim as that amount reflects all material sold by ACM.
7. Tortious Interference.
The elements of tortious interference with an existing contract are: “(1) an existing contract subject to interference; (2) a willful and intentional act of interference with the contract; (3) that proximately caused the plaintiffs injury; and (4) caused actual damages or loss.” Prudential Ins. Co. of Am. v. Fin. Review Servs., Inc., 29 S.W.3d 74, 77 (Tex.2000). Intent requires either actual knowledge of the contract or at least knowledge of the circumstances such that a reasonable man would believe a contract existed. Armendariz v. Mora, 553 S.W.2d 400, 406 (Tex.Civ.App.-El Paso 1977).
There was an existing contract between the GLO and TAA. There was, however, no evidence of intent to cause a breach of the contract. See John Paul Mitchell Sys. v. Randalls Food Mkts., Inc., 17 S.W.3d 721, 730-31 (Tex.App.-Austin 2000). TAA needed to show that ACM desired to cause a breach or that it believed a breach was substantially certain to result from its actions. Fluor Enterprises, Inc. v. Conex Intern. Corp., 273 S.W.3d 426, 443 (Tex.App.-Beaumont, 2008). There is no evidence to show ACM desired a breach. In fact, there is evidence that ACM was trying to pay the GLO royalties. Specifically, ACM sent TAA checks to cover the GLO royalties on their mines. (R. McCreless 7/2; Def. Exh. 18, 20.) TAA cashed the first six royalty payments, but then stopped. (Def. Exh. 20.) The evidence demonstrates that ACM contacted the GLO to ensure that the royalties were paid, not because it wanted to cause TAA to breach its contract with the GLO. (Pl.’s Exh. 193, TAA-11468.) The court would be hard pressed to find that ACM was trying to create a breach by paying TAA the royalties ACM thought were due under the Letter Agreement. As there was no showing of intent to cause a breach in the contract between TAA and the GLO, the Court finds that TAA cannot recover under its tortious interference claim.
8. Negligence.
TAA argues that ACM negligently, grossly negligently, maliciously, and with intent to harm, caused the MSHA to close the underground mine to TAA. To establish negligence TAA must show ACM had a duty, there was a breach of that *416duty, and show damages proximately caused by the breach. Kroger Co. v. Elwood, 197 S.W.3d 793, 794 (Tex.2006). Whether a duty exists is a question of law. Id
To show proximate cause, TAA must prove both that ACM-Texas’s conduct was the cause in fact of MSHA’s closure of the underground mine, and the fore see ability of the resulting harm to TAA. W. Investments, Inc. v. Urena, 162 S.W.3d 547, 551 (Tex.2005). “These elements cannot be established by mere conjecture, guess, or speculation.” Doe v. Boys Clubs of Chreater Dallas, Inc., 907 S.W.2d 472, 477. ACM’s conduct is a cause in fact of MSHA’s closure order if TAA demonstrates that but for ACM’s conduct, MSHA would not have issued TAA the Mine Closure Order. Marathon Corp. v. Pitzner, 106 S.W.3d 724, 727 (Tex.2003).
The negligent conduct TAA argues caused MSHA to close the underground mine occurred in July 2007. The evidence and testimony have persuaded the Court that on that date, ACM-employees entered TAA’s underground mine, to which ACM had no legal access, harmed TAA’s truck in the process of entering the mine, and damaged the floor of the mine by drilling and blasting once they had entered.
TAA cannot prevail on its negligence action, however, because it failed to prove that the conduct described above was the cause in fact of the Mine Closure Order. On July 31, 2007, MSHA issued a Mine Closure Order to both TAA and ACM that prohibited both parties from entering or working in the underground mine at Marble Canyon. (Pl.’s Exh. 317, TAA 11820-21.) The Mine Closure Order cited the “civil dispute taking place at this mining operation [and the] disagreement [between the mine operators] regarding their individual rights to mine at this property” as the reason MSHA decided to close the mine to both TAA and ACM to prevent employee injury. Although Joe Williams, Jr. speculated that the ACM blasting was the actual impetus of the Mine Closure Order, the evidence in front of the Court contains no representations by MSHA that suggest a reason for the closure of the mines, other than the ongoing civil litigation between TAA and ACM.
Because TAA fails to show ACM’s conduct was the proximate cause of MSHA’s issuing the Mine Closure Order, the Court need not reach the issue of whether ACM-Texas had a duty, and if there was a duty, whether ACM breached that duty. TAA’s action for negligence is denied.
B. Defendants’ Counterclaims Related to Letter Agreement And Mine Mill Site Lease Breach Of Letter Agreement.
In its opinion on Plaintiffs Motion for Summary Judgment, the Court previously held that ACM’s breach of Letter Agreement is barred by statute of limitations.
1. Breach Of Mine Mill Site Lease.
A breach of contract claim requires the existence of a valid contract, performance or tendered performance by the plaintiff, breach of the contract by the defendant and damages sustained as a result of the breach. Winchek v. American Exp. Travel Related Services Co., Inc., 232 S.W.3d 197, 202 (Tex.App.-Houston [1st Dist.] 2007) (citing Prime Products, Inc. v. S.S.I. Plastics, Inc., 97 S.W.3d 631, 636 (Tex.App.-Houston [1st Dist.] 2002)).
ACM contends that TAA breached the Lease by prohibiting ACM from accessing and using the property that was leased to them. The Lease gave ACM the right to establish a processing mill on the west half of the 40 acre tract of land that *417TAA owned in fee simple. (Def. Exh. 10.) The Lease, however, did not give ACM a right to mine. The only evidence presented as to any limitation of ACM’s use of the leased property were the injunctions and temporary restraining orders entered by various courts that ordered TAA not to limit ACM’s right to use the property. (Def. Exh. 24; Def. Exh. 25; Def. Exh. 27.) These orders, however, come with no evidence about whether TAA, in fact, prevented ACM from entering the property. There is mention of an evidentiary hearing in the August 6, 2007 order granting ACM temporary injunctive relief, but none of the evidence from that hearing was presented to this court. (Def. Exh. 27.) It appears that a hearing for a permanent injunction never took place. Further, on March 29, 2009, the County Court of Culberson, Texas entered a Judgment that found ACM guilty of forcible detainer and awarded possession of the leased premises to TAA. (Def. Exh. 28). At trial, ACM gave no testimony as to anything TAA did to breach the Lease. Thus, the Court finds there was no evidence of a breach of the Mill Mine Site Lease.
2. Tortious Interference With Defendant’s Property Rights.
Tortious interference with property rights is essentially a claim for intentional invasion of or interference with property rights. Suprise v. DeKock, 84 S.W.3d 378, 382 (Tex.App.-Corpus Christi, 2002). ACM must show that TAA intentionally interfered with ACM’s property rights under the Mill Mine Site Lease. Marrs and Smith Partnership v. D.K Boyd Oil and Gas Co., Inc., 223 S.W.3d 1, 21 (Tex.App.-El Paso 2005).
Just like the breach of the Mine Mill Site Lease claim, the only evidence presented by ACM was the previous restraining orders and injunctions. There was no testimony regarding anything TAA did to prevent ACM’s use of the leased property. ACM simply provided the Court with the previous restraining orders and injunction entered by other courts. These orders do not provide any details about TAA’s actions and do not demonstrate that TAA interfered with ACM’s property rights. Thus, the Court finds that ACM failed to show that TAA interfered with ACM’s property rights.
3. Wrongful Eviction From Leased Premises.
To prove wrongful eviction ACM must show (1) the existence of an unexpired lease; (2) occupancy of the property in question; (3) eviction or dispossession by the landlord; and (4) damages attributable to the eviction. McKenzie v. Carte, 385 S.W.2d 520, 528 (Tex.CivApp.-Corpus Christi 1964) (citing Reavis v. Taylor, 162 S.W.2d 1030 (Tex.Civ.App.-Eastland 1942)).
It is undisputed that the Mine Mill Site Lease was a valid lease. It is also undisputed that ACM occupied the property. There was, however, no evidence of eviction. An eviction requires the tenant to be “permanently deprived of the premises.” Martinez v. Ball, 721 S.W.2d 580, 581 (Tex.App.-Corpus Christi 1986). ACM argued that the temporary injunction against TAA and TAA’s later forcible detainer action are evidence of eviction. (Pl.’s Exh. 322.) There is, however, no evidence that ACM left the property or was permanently deprived of access. As there was no eviction, there can also be no damages attributable to the eviction.
Constructive eviction requires a showing of (1) TAA’s intent that ACM should no longer enjoy the premises; (2) a material act by TAA that substantially interferes with ACM’s use and enjoyment of *418the property; (3) an act that permanently deprives ACM of the use and enjoyment of the property; and (4) abandonment of the property by ACM within a reasonable time of the act. Lazell v. Stone, 123 S.W.3d 6, 11-12 (Tex.App.-Houston [1st Dist.] 2003) (citing Holmes v. P.K. Tubing, Inc., 856 S.W.2d 530, 539 (Tex.App.-Houston [1st Dist.] 1993); Columbia/HCA of Houston, Inc. v. Tea Cake French Bakery and Tea Room, 8 S.W.3d 18, 22 (Tex.App.-Houston [14th Dist.] 1999)). The landlord’s intent may be inferred from surrounding circumstances. Lazell, 123 S.W.3d 6, at 12 (citing Holmes, 856 S.W.2d at 539; Columbia/HCA, 8 S.W.3d at 22). A constructive eviction claim relieves ACM of the obligation to pay any remaining rent under the lease and entitles ACM to recover any loss which is a foreseeable consequence of the eviction. Lazell, 123 S.W.3d 6 at 12 (citing Charalambous v. Jean Lafitte Corp., 652 S.W.2d 521, 526 (Tex.App.-El Paso, 1983)).
The wrongful detainer claim is evidence of TAA’s intent to remove ACM from the premises. Like the wrongful eviction claim, however, there is no evidence of a material act on the part of TAA that permanently deprived ACM of the use of the property. There is also no evidence that ACM ever left the premises. Therefore, the Court finds there was no constructive eviction.
4. Fraudulent Misrepresentation And Inducement.
A fraudulent inducement claim is essentially a special type of fraud claim. See In re FirstMerit Bank, N.A., 52 S.W.3d 749, 758 (Tex.2001) (listing the elements which are identical to a normal fraud claim). To prove its claim ACM must show (1) TAA made a material representation that was false; (2) TAA knew the representation was false or made it recklessly as a positive assertion without any knowledge of its truth; (3) TAA intended to induce ACM to act upon the representation; and (4) ACM actually and justifiably relied upon the representation and thereby suffered injury. Ernst & Young, 51 S.W.3d at 577. The distinction is that a fraudulent inducement claim requires the existence of a contract. Haase v. Glazner, 62 S.W.3d 795, 798 (Tex.2001). Without a binding agreement there is no detrimental reliance and therefore no fraudulent inducement claim. Id.
ACM contends that misrepresentations were made regarding the ability of TAA to enter into the leases considered under the Letter Agreement. ACM claims this induced them to enter into the Letter Agreement. Because the Letter Agreement is not a binding contract, ACM has failed to show detrimental rebanee and fraudulent inducement. Thus, the Court finds that ACM cannot recover on its fraudulent inducement claim.
5. Fraud By Nondisclosure.
Fraud by nondisclosure is another subcategory of fraud. Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 181 (Tex.1997). The misrepresentation arises from a nondisclosure that is as misleading as a positive misrepresentation of facts. Id. When there is a duty to speak, silence can be just as misleading as a misrepresentation. Id. In other words, “silence may be equivalent to a false representation only when the particular circumstances impose a duty on the party to speak and he deliberately remains silent.” Bradford v. Vento, 48 S.W.3d 749, 755 (Tex.2001) (citing SmithKline Beecham Corp. v. Doe, 903 S.W.2d 347, 353 (Tex.1995)). Whether such a duty to speak exists is a question of law. Bradford, 48 S.W.3d. at 755. A duty to speak may exist in an arm’s-length transaction when a par*419ty makes a partial disclosure that, although true, conveys a false impression. Id. A duty of disclosure arises if there is a confidential or fiduciary relationship. Insurance Co. of North America v. Morris, 981 S.W.2d 667, 674 (Tex.1998). Confidential relationships arise when the parties have dealt with each other for so long that one party can believe its interests are being taken care of by the other party. Id. In this case, there is no evidence of a confidential or fiduciary relationship.
ACM claims TAA failed to disclose its inability to furnish the leases required by the Letter Agreement. ACM alleges the duty to disclose arises from its inability to find out this information. A duty to disclose can arise when one party knows a material fact and is aware that the other party does not have equal opportunity to discover the truth. Miller v. Kennedy & Minshew Professional Corp., 142 S.W.3d 325, 345 (Tex.App.-Fort Worth 2003).
In this case, however, there is no evidence that TAA was aware that ACM did not have equal opportunity to discover information regarding TAA’s inability to provide the leases. TAA pointed out to McCreless as early as January 5, 2000, that the GLO disallowed partial assignments. (Def. Exh. 6(d)). When McCreless signed the Letter Agreement he knew, or should have known, about TAA’s inability to grant a partial assignment to ACM because W & M’s prior attempt to obtain mineral leases from TAA had failed because of the GLO’s restriction. (Pl.’s Exh. 18.) McCreless testified that when the parties negotiated the Letter Agreement, he believed that ACM was negotiating for a full assignment of TAA’s mineral rights. There is no evidence, however, that TAA knew that McCreless wanted a full assignment of the mineral rights and remained silent about its inability or unwillingness to grant the full assignment.
Because fraud by nondisclosure is a breed of fraud, ACM must also show TAA intended to deceive ACM and that ACM justifiably relied upon that representation and suffered injury. See Cotten, 187 S.W.3d at 702. Evidence of things that occurred after the fact can be used to infer intent. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex.1986).
There was no evidence that TAA intended to defraud ACM. The long ongoing negotiation is evidence of intent to work the problem out rather than an intent to deceive. There is also no evidence that ACM’s reliance on the Letter Agreement was justified. First, the Court has already found that the Letter Agreement is unenforceable. Second, ACM built the facility without the recordable leases even though the parties were in disagreement about how to convey the mining rights. Because there is no evidence of intent this court finds there was no fraudulent nondisclosure.
ACM also alleges that TAA. failed to disclose its intent not to provide the mining leases. This is a distinct failure to disclose, but a similar analysis applies. Assuming that TAA had the intent to lure ACM into the Letter Agreement and Mine Mill Site Lease and then not provide mining rights, it would indeed be a material fact that ACM would likely not have been able to determine. There is, however, no evidence of the intent not to provide mining rights. The ongoing negotiations again show that TAA tried to provide the proper conveyances. That the parties negotiated and simply could not reach common terms is not evidence of intent to not deliver the mineral rights. Ultimately, the evidence demonstrates that the parties attempted to negotiate toward a mutually beneficial business arrangement and the *420negotiations failed. Because there was no evidence of intent to not deliver the teases, the Court finds that there was no material fact that TAA failed to disclose.
6. Detrimental Reliance/Promissory Estoppel.
To recover under a claim of promissory estoppel ACM must show “(1) a promise; (2) foreseeability of reliance thereon by the promisor; and (3) substantial reliance by the promisee to his detriment.” English v. Fischer, 660 S.W.2d 521, 524 (Tex.1983). Promissory estoppel is usually a defensive theory, but it can be used as a cause of action if the promisee “acted in his detriment in reasonable reliance on an otherwise unenforceable promise.” MCN Energy Enter., Inc. v. Omagro de Colombia, L.D.C., 98 S.W.3d 766, 774 (Tex.App.-Fort Worth 2003) (citing Wheeler v. White, 398 S.W.2d 93, 97 (Tex.1965)). Promissory estoppel does not create a contractual relationship where none existed and cannot be used as a counter-defense to the statute of frauds. Frost Crushed Stone Co., Inc. v. Odell Geer Const. Co., Inc., 110 S.W.3d 41, 46-47 (Tex.App.-Waco 2002, no pet.). The doctrine only “prevents a party from insisting upon his strict legal rights when it would be unjust to allow him to enforce them.” Wheeler, 398 S.W.2d at 96. Thus, “damages recoverable in a case of promissory estoppels are not the profits that the promise expected, but only the amount necessary to restore him to the position in which he would have been had he not relied on the promise.” Id. at 47. Whether promissory estoppel is an appropriate remedy is a question of fact. Sonnichsen v. Baylor Univ., 47 S.W.3d 122, 124-27 (Tex.App.-Waco 2001, no pet.).
ACM identifies the April 1999 Letter Agreement and TAA’s behavior in compliance with the Letter Agreement as the promise upon which it detrimentally relied. According to ACM’s pleadings, ACM detrimentally relied in the following four ways: (1) ACM expended $1.2 million constructing a mill at Marble Canyon; (2) ACM employed personnel to work at Marble Canyon; (3) ACM entered into contracts to sell brucitic marble only available at Marble Canyon; (4) ACM expended resources to raise capital funds and create and sustain business relationships.
Although the Court has determined that the Letter Agreement was not a valid contract, it may still be considered a promise that is the basis of a promissory estoppel claim. Other courts have found promissory estoppels present where a contract was found invalid for indefiniteness or uncertainty. Wheeler, 398 S.W.2d at 95-96. The doctrine of promissory estop-pels dictates that a party is compensated for harm suffered as justice requires. See Restatement (Second) of Contracts § 90(1); Restatement (Second) of Contracts § 90, cmt. a.
Here, the Letter Agreement combined with TAA’s subsequent behavior consisting of continued negotiations toward a mineral rights agreement and allowing ACM-Texas to mine and build at Marble Canyon without disturbance or protest, indicate a promise that TAA and ACM-Texas would enter into a long-term contractual relationship, in which ACM would be allowed to mine and mill at Marble Canyon, and sell the materials it mined and milled in specified markets that do not compete with TAA. At trial, David Williams acknowledged that the relationship between TAA and ACM began amicably and the parties mined jointly by agreement for several years. The evidence suggests that it was not until it became clear to TAA that ACM would not beneficíate that the relationship began to sour and it was not until the fax instruct*421ing ACM not to bring a drill to Marble Canyon in June 2002 that ACM had notice that TAA did not intend to continue the business relationship. The issue the Court must now decide is whether it was foreseeable and reasonable that ACM would rely on the promise and whether ACM, in fact, relied on the promise to its detriment.
Under the Letter Agreement, ACM was to wait until it received the recordable leases of mineral and surface rights before it began construction of the mill; therefore, the Court finds that it was unreasonable for ACM to rely on the Letter Agreement when it began constructing the mill without first obtaining the mineral rights. Nevertheless, ACM gave TAA notice of its intent to build the mill, TAA leased the mill-site to ACM, and TAA had actual knowledge of the construction of the mill. Its mine foreman was there four days a week while the mill was being built and an August 2000 letter informed TAA that ACM was building a mill at Marble Canyon. (Pl.’s Exh. 74.) There is no evidence that TAA attempted to delay or stop the construction, or to inform ACM that there was no valid agreement between the parties before the mill was completed in early 2001. It is TAA’s actions in conformity with the promise that make ACM’s reliance on the promise reasonable. The fact that ACM built the mill and spent years mining minerals to which it had no legal right, establishes that ACM relied on TAA’s promise to grant it mineral rights to its detriment. Thus, the Court finds that ACM’s promissory estoppel claim should be granted.
In its pleadings, ACM asserts that it expended $1.2 million constructing the mill. In a letter to TAA dated August 16, 2000, however, McCreless valued the structure at $75,000. (Pl.’s Exh. 74.) There is no evidence other than the assertion in ACM’s pleadings and McCreless’ testimony to suggest to the Court that ACM spent $1.2 million on the structure. The Court, therefore, finds that $75,000 in damages will compensate ACM’s expenditures on the construction of the mill at Marble Canyon, because the Court finds the letter to TAA dated from the time the mill was constructed to be a more accurate representation of the cost of building the mill.
ACM cannot recover under its other claims of detrimental reliance. While ACM may have relied on TAA’s promise to hire personnel to work at Marble Canyon, the Court is allowing ACM to maintain its profits for the period of time in which TAA allowed ACM to mine at Marble Canyon. Therefore, ACM’s employment of personnel until June 2002 was not detrimental. After the June 2002 fax instructing ACM not to drill at Marble Canyon, ACM’s employment of personnel was unjustified. The damages ACM seeks for entering into contracts and expending resources in raising capital and developing relationships fail for the same reasons. Furthermore, the Court has no evidence of the personnel costs or the costs associated in raising capital and developing relationships. Thus, the Court finds that ACM should only recover $75,000 from TAA as reliance damages under the doctrine of promissory estoppel.
C. Defendant’s Counterclaims Related To The Actions Of Andrew Speyrer.
A number of ACM’s counterclaims against TAA arise from the actions of Andrew Speyrer (“Speyrer”), a onetime business associate of ACM. On June 4, 2006, Speyrer broke into ACM’s packhouse office, pilfered various documents, and attempted to set fire to the office. {See R. McCreless Test. 7/2; D. Williams Test. 6/30; J. Williams Test. 6/30).
*422ACM asks the Court to find TAA civilly liable for Speyrer’s actions, and to award ACM whatever damages or equitable remedies the Court finds appropriate.
In its Answer, ACM brings counterclaims against TAA for trespass, alleging that “[a]s TAA’s agent, Speyrer intentionally and voluntarily broke into and entered the property causing extensive damage to the property,” as well as “Misappropriation of Business Information,” and “Theft.” While the controversy was in state court, TAA submitted a motion for summary judgment arguing that ACM had not met its burden in claiming civil conspiracy. ACM then responded to the motion, listing the relevant evidence supporting its claims of civil conspiracy against TAA arising out of Speyrer’s conduct, and arguing that circumstantial evidence can be sufficient to establish the requisite intent and meeting of the minds.
AMC argues that “the Court is faced with an onslaught of circumstantial evidence strongly implicating TAA, through its officers and agents,” including phone calls between Speyrer and Joe Williams, and communication between TAA’s counsel and Speyrer, including documents produced by Speyrer to TAA. Indeed, the evidence indicates that Speyrer and Samuel McDaniel (“McDaniel”), TAA’s counsel, communicated often regarding Speyrer’s interactions and business negotiations with McCreless and that Speyrer and Joe Williams were socially acquainted. (Def.’s Exh. 45 (includes numerous emails from Speyrer to McDaniel about his business dealings with ACM); J. Williams Test. 6/30; D. Williams Test. 6/30.) Nevertheless, the evidence before the Court does not indicate that TAA acted in concert with, or purposefully contributed in any way, to Speyrer’s burglary and attempted arson of ACM’s property.
At trial, TAA made and the Court granted TAA’s 52(c) Motion for Summary Judgment on ACM’s civil conspiracy charge against TAA, which was based on Speyrer’s burglary and attempted arson of ACM’s packhouse office. The motion was granted because the Court found that not even circumstantial evidence indicated a meeting of the minds between Speyrer and any agent of TAA. Such a meeting of the minds is an essential element of civil conspiracy under Texas law. Murray v. Earle, 405 F.3d 278, 293 (5th Cir.2005) (listing a meeting of the minds as one of the elements a plaintiff is required to show to prevail on a civil conspiracy claim). Because the Court found there was no meeting of the minds, it dismissed ACM’s civil conspiracy claim.
Thus, ACM’s conspiracy claim was dismissed by oral order at trial. However, ACM’s pleadings alleged additional causes of action arising out of Speyrer’s conduct. It thus remains for the Court to determine whether TAA is liable to ACM for Speyrer’s conduct through another cause of action.
The Court finds that TAA is not liable to ACM for any harm caused by Speyrer’s actions. TAA and Speyrer had no meeting of the minds, agency relationship, or other concert of action or purpose. Therefore, any claims against TAA for trespass, theft liability, or conversion, should fail. As to any misappropriation actions, there is no evidence that TAA has used any information or materials belonging to AMC that it obtained from Speyrer to use. Moreover, it is not clear that the materials taken from ACM’s packhouse office are of the kind Texas law seeks to protect. The Court, therefore, finds that it should deny ACM’s claims for unfair competition by misappropriation, and misappropriation of trade secrets.
*423As indicated above, ACM also alleges various causes of action against TAA arising from Speyrer’s actions. ACM’s pleadings do not offer clear theories of law under which it is entitled to a remedy. For instance, ACM claims that it is entitled to some remedy for theft without explaining to the Court what remedy it seeks in a civil court, and under what legal theory it seeks a remedy. The Court can thus tailor the plaintiffs claims and legal arguments to fit valid causes of action under Texas law.
Such alterations are within the Court’s discretion. Rule 8 of the Federal Rules of Civil Procedure applies to an adversary proceeding in Bankruptcy Court. Fed.R.Bankr.P. 7008(a). Rule 8(e) requires the Court to construe pleadings “so as to do justice.” Fed.R.Civ.P. 8(e). “This means that federal courts should construe the pleadings in favor of the pleader.” Keim v. City of El Paso, 1998 WL 792699, *3 (5th Cir.1998) (citing Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969)). In Ritchie v. United Mine Workers of America, “a complaint was deemed sufficient to plead a certain legal theory without ever specifically mentioning that theory, when ‘[a]ll the necessary averments were present in the complaint to bring [that] claim.’ ” Konstantinov v. Findlay Ford Lincoln Mercury, 2006 WL 3299487, *3 (E.D.Mich.2006) (citing Ritchie v. United Mine Workers of America, 410 F.2d 827, 832 (6th Cir.1969)).
Where ACM does not assert a cause of action recognized at law, the Court may construe ACM’s allegations liberally, determining what causes of action ACM may pursue given the facts and arguments put forward in its pleadings. The Court should look at the substantive law of Texas to determine where a cause of action may he. Erie R. Co. v. Tompkins, 304 U.S. 64, 77, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) (holding that federal courts should apply state substantive law).
In this case, ACM seeks relief for trespass, misappropriation of business information, and theft, arising from Speyrer’s conduct. Trespass is a cause of action available at Texas common law. Misappropriation of business information is not a recognized cause of action in Texas courts. Nevertheless, the averments offered thereof may support two related causes of action available in Texas: unfair competition by misappropriation and misappropriation of trade secrets. Under the theft claim, ACM may have intended to seek relief under the Texas Theft Liability Act, or by way of conversion, theft’s civil counterpart.
As indicated above, ACM’s civil conspiracy claim, which arose out of Speyrer’s actions, was dismissed at trial. The Court granted TAA’s 52(c) motion for summary judgment on the matter of civil conspiracy upon determining the evidence could not show a meeting of the minds between TAA and Speyrer. The determination that no meeting of the minds took place may foreclose the availability of those claims that require ACM to show TAA is liable for the conduct of a third party.
Actions against TAA for unfair competition by misappropriation and misappropriation of trade secrets should be denied because TAA has failed to show that what Speyrer took from ACM is protected under these causes of action, and additionally has failed to show or assert that TAA has used whatever materials or documents it acquired from Speyrer.
For the reasons stated below, the Court finds that all ACM’s claims against TAA arising out of Speyrer’s actions, including ACM’s claim of trespass and theft, and any claims for conversion, unfair competition *424by misappropriation, and misappropriation of trade secrets should be denied.
The Court’s granting TAA’s 52(c) Motion for Summary Judgment has preclusive effect on some of ACM’s other claims arising out of Speyrer’s actions. As noted above, the Court granted TAA’s 52(c) Motion denying ACM’s civil conspiracy claim because there was no meeting of the minds between Speyrer and TAA. The Court’s determination that there was no meeting of the minds between Speyrer and TAA toward the object of breaking into ACM’s packhouse office and stealing business documents bars ACM from further litigation as to claims of trespass, conversion, and liability under the Texas Theft Liability Act on res judicata grounds.
The doctrine of res judicata dictates that once an issue is decided on the merits, that issue is precluded from further dispute between those parties. “Issue preclusion bars successive litigation on ‘an issue of fact or law1 that ‘is actually litigated and determined by a valid and final judgment, and ... is essential to the judgment.’ ” Bobby v. Bies, — U.S. -, 129 S.Ct. 2145, 2152, 173 L.Ed.2d 1173 (quoting Restatement (Second) of Judgments § 27 (1980) (alterations in original)). Although TAA did not raise the doctrine of res judicata as a defense, the Court may invoke res judicata sua sponte in the interest of judicial efficiency, when the issue was tried in front of the same Court. Boone v. Kurtz, 617 F.2d 435, 436 (5th Cir.1980) (finding a Court’s sua sponte dismissal on res judicata grounds permissible although Rule 8(c) of the Federal Rules of Civil Procedure designates res judicata as an affirmative defense). Additionally, summary judgments have collateral estop-pel, effect. Exhibitors Poster Exchange, Inc. v. National Screen, 421 F.2d 1313, 1318 (5th Cir.1970) (rejecting appellant’s argument that summary judgments cannot have collateral estoppel effect). Thus, this Court’s determination that no meeting of the minds between TAA and Speyrer with the object of inflicting harm upon ACM took place has preclusive effect on any claims requiring the movant to establish such a meeting of the minds.
It now remains for the Court to decide which of ACM’s claims are precluded by the Court’s prior determination that there was no meeting of the minds in order to avoid revisiting an issue that is res judica-ta.
1. Trespass.
ACM brought a claim against TAA for trespass onto ACM’s lawfully possessed property, asserting that “as TAA’s agent, Mr. Speyrer intentionally and voluntarily broke into and entered [ACM’s] property causing extensive damage to the property.”
To show trespass under Texas law, ACM must show (1) ACM owns or has a lawful right to possess real property; (2) the relevant party physically, intentionally and voluntarily entered the land; and (3) the entry caused damage. Stukes v. Bachmeyer, 249 S.W.3d 461, 465 (Tex.App.—Eastland 2007, reh’g overruled) (listing the elements of a cause of action for trespass under Texas law).
Under Texas law, a party need not personally participate in the physical trespass to incur liability; “one who aids, assists, or advises a trespasser in committing a trespass is equally liable with him who does the act complained of.” Kirby Lumber Corp. v. Karpel, 233 F.2d 373, 374 (5th Cir.1956) (quoting McDaniel Bros. v. Wilson, Tex.Civ.App., 70 S.W.2d 618, 621); Schievink v. Wendylou Ranch, Inc., 227 S.W.3d 862, 865 (TexApp.-Eastland 2007, pet. denied).
*425The Court’s determination that no meeting of the minds occurred between TAA and Speyrer precludes a finding that TAA is liable for Speyrer’s trespass onto ACM’s property. This finding also precludes a subsequent finding that TAA aided, assisted, or advised Speyrer in committing a trespass. Additionally, the finding that there was no meeting of the minds as to Speyrer’s course of action, or to the object of entering ACM’s property to appropriate ACM’s business documents precludes the Court from finding that TAA aided, assisted, or advised Speyrer to trespass onto ACM’s property.
Of course, a meeting of the minds is not identical to aiding, assisting, or advising to trespass. The Restatement of Judgment instructs that:
“[w]here there is a lack of total identity between the particular matter presented in the second action and that presented in the first, there are several factors that should be considered in deciding whether for purposes of [issue preclusion] the ‘issue’ in the two proceedings is the same, for example: Is there a substantial overlap between the evidence or argument to be advanced in the second proceeding and that advanced in the first? [....] Could pretrial preparation and discovery relating to the matter presented in the first action reasonably be expected to have embraced the matter sought to be presented in the second? How closely related are the claims involved in the two proceedings?” Restatement of Judgment § 27, Comment c (1982).
Applying the factors suggested in the Restatement here, the Court finds that issue preclusion is appropriate. First, there is substantial overlap between the evidence and argument to be advanced: the trespass and Speyrer’s conduct while trespassing was the basis of the civil conspiracy claim, and TAA’s connection to Speyrer’s trespassory conduct was fully litigated. Second, discovery and pretrial preparation relating to the issue of a meeting of minds for civil conspiracy can be expected to embrace the matter of whether TAA aided, assisted, or advised Speyrer to trespass: any evidence that would support one would support the other. Finally, the two claims are very closely related: the claims seek to assign liability to TAA for the same conduct under two different causes of action, and it would be illogical to conclude that TAA had aided, assisted, or advised Speyrer in trespassing on ACM’s land without a meeting of the minds as to the object of the trespass against ACM.
Even if the Court did not deny ACM’s trespass claim through issue preclusion, there is not sufficient evidence to show that TAA aided, assisted, or advised Speyrer to enter ACM’s property. Joe Williams testified that he had no knowledge of where Andrew Speyrer went after leaving his house the night of the trespass, and had no knowledge of the wrongs Speyrer was going to commit against ACM. (See J. Williams Test. 6/30.) David Williams testified that he wanted nothing to do with Speyrer, and knew him only as a disgruntled client of ACM. (D. Williams Test. 6/30.) Aside from the circumstance that Speyrer was with Joe Williams before burglarizing ACM’s packhouse office, and then called Joe Williams from jail some days after being arrested, ACM offers no evidence that TAA aided, assisted, or advised Speyrer in trespassing.
It appears ’from the pleadings that ACM sought relief from TAA for trespass under a theory of agency. While there are Texas cases from the early twentieth century permitting trespass actions against a defendant based on the defendant’s liability as a principal, it is not clear that suing for *426trespass under general agency principals is proper. See generally Alexander v. St. Louis Southwestern Ry. Co. of Texas, 57 Tex.Civ.App. 407, 122 S.W. 572 (1909, reh’g denied) (acknowledging that a railroad company could be found liable for the trespass of an agent employed to investigate the plaintiffs spouse although the company had not expressly authorized the trespass); Jesse French Piano & Organ Co. v. Phelps, 47 Tex.Civ.App. 385, 105 S.W. 225 (1907, no writ) (finding the piano company liable for the harm done by the trespass on plaintiffs property done by its local agent acting under the instructions of its general manager). Moreover, these cases are distinct from the instant ease in that Speyrer was not acting as an employee of TAA or as an independent contractor acting within the scope of his obligations when he trespassed on ACM’s property, whereas the defendants in both Alexander and Jesse French Piano had the trespasser under their employ at the time of the trespassing. Thus, trespass on a theory of agency should be denied.
Therefore, because TAA did not aid, assist, or advise Speyrer to enter ACM’s property, TAA is not liable to ACM for Speyrer’s trespass.
2. Theft.
ACM claims that TAA is liable for theft because “Mr. Speyrer — acting on behalf of or at the behest of TAA ... examined and/or removed ACM’s business records.” Under Texas law, a party can incur civil liability for theft under Texas Civil Practice and Remedies Code Chapter 134, commonly known as the Texas Theft Liability Act. Tex. Civ. Prac. & Rem. § 134.001. The relevant statute provides: “A person who commits theft is liable for the damages resulting from the theft.” Tex. Civ. Prac. & Rem. § 134.003. “Theft” is defined for the purposes of the Texas Theft Liability Act as “unlawfully appropriating property or unlawfully obtaining services.... ” Tex. Civ. Prac. & Rem. § 134.002(2).
Therefore, excluding some situations not pertinent here, where a party is culpable for theft under the Texas Penal Code, that party is liable under the Texas Theft Liability Act. The Texas Penal Code states that “a person is criminally responsible as a party to an offense if the offense is committed by his own conduct, by the conduct of another for which he is criminally responsible, or by both.” Tex. Penal Code § 7.01(a). The Code provides the ways in which a party may be criminally responsible for the conduct of another, one of which is relevant to the case at hand. Tex. Penal Code § 7.02. TAA may be criminally responsible for theft if TAA “acting with intent to promote or assist the commission of the offense, ... solicits, encourages, directs, aids, or attempts to aid the other person to commit the offense.” Tex. Penal Code § 7.02(a)(2).
On the other hand, a meeting of the minds for civil conspiracy is specifically the meeting of the minds to achieve an unlawful object or course of action. Insurance Co., of North America v. Morris, 981 S.W.2d 667, 674 (Tex.1998). The meeting of the minds requirement encompasses all the available ways that TAA could be held liable for Speyrer’s theft. It seems impossible to somehow find that TAA solicited, encouraged, directed, aided, or attempted to aid Speyrer without getting together with him and meeting towards a common nefarious goal. Because this Court has already determined that no such meeting of the minds existed, the issue of whether TAA aided Speyrer in any way is precluded. Therefore, without the ability to show that TAA could be criminally liable for Speyrer’s ac*427tions, ACM cannot recover for its theft claim.
Even if the Court does not deny ACM’s claim under the Texas Theft Liability Act on the basis of issue preclusion, there is not sufficient evidence on the record that TAA has any criminal responsibility for Speyrer’s theft of ACM’s documents. As noted above, Joe Williams testified that he had no knowledge regarding Andrew Speyrer’s whereabouts after leaving his house the night of the trespass, and had no knowledge of the wrongs Speyrer was going to commit against ACM. (See J. Williams’ Test. 6/30.) Likewise, David Williams testified he wanted nothing to do with Speyrer, and understood that Speyrer was not in business of any kind with TAA. (D. Williams Test. 6/30.) No evidence was presented to show TAA solicited or aided Speyrer. Because no evidence was given to hold TAA criminally liable for Speyrer’s actions, the Court finds that TAA did not commit theft as defined by the Texas Penal Code and therefore TAA could not incur liability under the Texas Theft Liability Act.
3. Conversion.
Read liberally, ACM’s counter-claim against TAA for theft could also be altered into a conversion claim. As mentioned above, to prove conversion ACM must show (1) ACM had legal possession of, or was entitled to, possession of the property; (2) TAA assumed and exercised dominion and control over the property in an unlawful and unauthorized manner to the exclusion of, and inconsistent with, ACM’s rights; and (3) TAA refused ACM’s demand for return of the property. Crockett, 257 S.W.3d at 416. Demand and refusal is not necessary when the possessor’s acts manifest a clear repudiation of the plaintiffs rights. Cass, 156 S.W.3d at 61.
To hold TAA liable for Speyrer’s conversion of ACM’s property, ACM must show that Speyrer was acting as TAA’s agent when Speyrer took ACM’s documents from the packhouse office. Nahm v. J.R. Fleming & Co., 116 S.W.2d 1174, 1176 (Tex.Civ.App.—Eastland 1938). This requires ACM to demonstrate: (1) a consensual relationship between Speyrer and TAA whereby Speyrer acts on behalf of TAA, subject to TAA’s control; (2) a meeting of the minds between TAA and Speyrer to establish the relationship; and (3) some act constituting the appointment of Speyrer as TAA’s agent. Lone Star Partners v. NationsBank Corp., 893 S.W.2d 593, 599-600 (TexApp.-Texarkana 1994, writ denied).
Although agency requires a meeting of the minds, it is not the same meeting of the minds as required for a conspiracy claim. The meeting of the minds required to show agency is a meeting of the minds to establish an agency relationship between two parties. Id. at 599-600. A meeting of the minds for civil conspiracy, on the other hand, requires a meeting of the minds to achieve an unlawful object or course of action. Insurance Co. of North America, 981 S.W.2d at 674. Therefore, the finding that there was no meeting of the minds between Speyrer and TAA to act unlawfully does not preclude a finding that there was a meeting of the minds between Speyrer and TAA to establish a relationship in which Speyrer would act as an agent on TAA’s behalf.
Nevertheless, the evidence in front of the Court is not sufficient to show agency. There is no indication that Speyrer was acting on behalf of TAA, or subject to TAA’s control, or that there was a meeting of the minds to establish an agency relationship. First, agency requires a consensual relationship between the parties. Insurance Co. of North America, 981 *428S.W.2d at 674. An agency relationship almost certainly did not exist here. David Williams testified that he wanted nothing to do with Speyrer. (D. Williams Test. 6/30.) Joe Williams testified that he tried to keep Speyrer from visiting him, and that after making him clean the mess he had made in Williams’ office, Williams told Speyrer, “don’t let the door catch you in the butt” as he left, and was relieved when he was gone. (J. Williams 6/30.) Second, a showing of agency requires a meeting of the minds to establish an agency relationship. Insurance Co. of North America, 981 S.W.2d at 674. In their testimony, both Williams brothers denied that Speyrer was engaged in any business with TAA. Finally, ACM must show some act constituting the appointment of Speyrer as TAA’s agent. Insurance Co. of North America, 981 S.W.2d at 674. ACM alleges no such act. Moreover, there is no evidence of any such act.
Because the evidence indicates that Speyrer was not acting as TAA’s agent, TAA is not liable for conversion of ACM’s documents.
4. Misappropriation Of Business Information.
ACM argues that TAA misappropriated proprietary business information when Mr. Speyrer broke into ACM’s packhouse office and removed business records and other documents containing confidential and valuable information. ACM asserts that it “expended large sums of time and money” developing the information contained in the business records that were stolen, that those business records were “invaluable” to them, that TAA “stood to profit greatly” from the information, and that it was highly unlikely TAA could duplicate the information through its own independent efforts.
While Texas courts have not recognized “misappropriation of business information” as a valid cause of action, ACM’s averments may be molded into a claim for unfair competition by misappropriation, which is recognized under Texas law. Gilmore v. Sammons, 269 S.W. 861, 863 (Tex.Civ.App.1925) (adopting the federal common law doctrine of unfair competition by misappropriation, first established by Int’l News Service v. Associated Press, 248 U.S. 215, 39 S.Ct. 68, 63 L.Ed. 211 (1918)). To prevail on an action for unfair competition by misappropriation, also known simply as misappropriation, ACM must show (1) ACM’s creation of a product through extensive time, labor, skill and money; (2) TAA’s use of that product in competition with ACM, thereby gaining a special advantage in that competition, that is a “free ride” because the TAA is burdened with little or none of the expense incurred by ACM; and (3) commercial damage to ACM. Guy Carpenter & Co., Inc. v. Provenzale., 334 F.3d 459, 467 (5th Cir.2003) (setting forth the elements a plaintiff must show to prevail on a claim for misappropriation of trade secrets under Texas law).
The first element requires an expenditure of extensive time, labor, skill, and money. Although ACM alleges in its pleadings that the materials misappropriated were created through an extensive expenditure of time and money, the pleadings do not speak directly to labor or skill. With some leniency, one may infer the expenditure of labor and skill, from ACM’s insistence that TAA could not duplicate the information on its own, and that the information was “invaluable” to ACM. In addition to these expenditures, the first element requires the manufacture of some product. This product need not be tangible, but it must provide some commercial advantage: “[a] complainant has a protect-*429able property interest in the product of his labor, regardless of subject matter, so long as that matter confers on him a commercial advantage.” U.S. Sporting Products, Inc. v. Johnny Stewart Game, 865 S.W.2d 214, 219 (Tex.App.—Waco 1993, writ denied). Although ACM characterizes the documents as “invaluable” to ACM, it does not indicate the source or nature of this value. In fact, there is no characterization or specific description of what “product” ACM seeks to protect. Without any indication of what product ACM seeks to protect, the Court cannot evaluate whether the product offered either party a commercial advantage. Among the documents Speyrer produced to TAA are a business plan developed for ACM, sales contracts, internal communications, numerous scientific reports regarding the efficacy of ACM’s brucitie marble compound as a repellent against various insects, marketing materials, online order forms, and other documents pertaining to a business engaged in marketing and selling a brucitie marble compound as an organic insect repellent. (See Def.’s Exh. 44.) These documents appear to be an assortment of documents pertaining to the businesses of ACM and Intela-Rid, LLC, which is Speyrer’s company, and appear to have no intrinsic value. ACM has not shown that the hodgepodge of documents Speyrer produced to TAA is the sort of product the unfair competition by misappropriation cause of action seeks to protect.
The second element requires ACM to show that TAA has used the misappropriated product in competition with TAA. Here, ACM neither avers nor shows that TAA has used the documents it received from Speyrer at all, let alone in competition with ACM. Joe Williams testified that Speyrer produced the documents to McDaniel, and it is not clear where the documents went following their production to TAA through McDaniel. (J. Williams Test. 6/30.)
The third element requires that the misappropriation caused ACM to be harmed. While ACM alleges harm, it produces no specific evidence to support this assertion.
Because ACM has failed to prove its ' claim for unfair trade by misappropriation, the Court denies its claim for unfair competition by misappropriation.
5. Misappropriation Of Trade Secrets.
ACM characterizes the information Mr. Speyrer took from the packhouse office as “trade secrets and/or proprietary data.” The Court therefore may mold the misappropriation of business information into a misappropriation of trade secrets claim.
To show TAA is liable for Misappropriation of Trade Secrets under Texas law, ACM must show (1) that a trade secret exists; (2) that the trade secret was acquired through breach of a confidential relationship or by improper means; (3) that TAA used the trade secret without authorization from ACM and with knowledge that it constituted a trade secret. General Universal Systems, Inc. v. HAL, Inc., 500 F.3d 444, 449 (5th Cir.2007) (listing the elements needed to establish the injury of trade secret misappropriation under Texas law).
Under Texas law, a trade secret is defined as “any formula, pattern, device or compilation of information which is used in one’s business and presents an opportunity to obtain an advantage over competitors who do not know or use it.” CQ, Inc. v. TXU Min. Co., LP, 565 F.3d 268, 274 (5th Cir., 2009) (quoting Computer Assoc. Int’l Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex.1996)). The Court in CQ, Inc. further explained that a trade secret “differs from other secret information in a business in that it is not simply informa*430tion as to single or ephemeral events in the conduct of business.” Id. (quoting Restatement of Torts § 757, cmt. b). This seems to indicate that not all secret information used in a business qualifies as a trade secret for the purposes of this cause of action. The information Speyrer took from ACM’s packhouse was variously called “proprietary business information,” “business records,” “confidential documents,” and “trade secrets” in ACM’s filings with this Court. ACM offers no more precise description of how these records or documents were used by ACM, or could be used by TAA. As described above, the documents Speyrer produced to TAA contained ACM’s business plans, reports of scientific studies done on the efficacy of brucitic marble on repelling various kinds of insects, promotional information about ACM and about Intela-Rid, forwarded email communications between Speyrer and McCreless, and various drafts of contracts between ACM and Intela-Rid, and between ACM and Nix, Ltd. (See Def.’s Exh. 44, 45.) These documents do not convey a “formula, pattern, device or compilation of information which is used in one’s business and presents an opportunity to obtain an advantage over competitors who do not know or use it.” Instead, the documents are merely an assortment of documents that are unrelated to one another, aside from the fact that they all pertain generally to ACM’s business activities, and do not amount to “trade secrets” under Texas Law. Therefore, ACM has failed to show TAA misappropriated trade secrets.
It is possible that the “secret” ACM hoped to protect was brucitic marble’s use as an insect repellent, but ACM’s bare hope does not cause the documents to meet the legal definition of “trade secret.” Misappropriation of trade secrets protects previously unknown formulas, patterns, devices, or compilations, and not previously unknown facts or uses. See CQ, Inc., 565 F.3d at 274. Moreover, ACM was actively and openly marketing their brucitic marble compound as an insect repellent, and Speyrer must have known of its use as an insect repellent without relying on any business documents, for he negotiated a contract with ACM to buy the bru-citic marble compound from ACM and then sell it to various purchasers in Louisiana as an insect repellent. (See, e.g., Def.’s Exh. 44, p. 06895.)
Additionally, a cause of action for misappropriation of trade secrets requires a showing that the claim defendant has used that trade secret without authorization. Here, there is no evidence, and ACM does not argue, that TAA has used the information Speyrer produced to it.
Thus, the Court denies ACM’s claim for misappropriation of trade secrets.
VI.
SummaRY
For the reasons stated above, the Court finds that the April 2, 1999 Letter Agreement is not an enforceable contract. The Court also finds that TAA’s fraud, accounting, tortious interference, and negligence claims should be denied. As to TAA’s unjust enrichment cause of action, the Court finds that it should be granted. In compensation for ACM’s unjust enrichment, the Court finds that TAA is entitled to recover damages in the amount of $7,125,073.08. Further, the Court finds that TAA’s conversion cause of action should be granted. Nevertheless, the court also finds that TAA’s damages in relation to ACM’s conversion are incorporated in the damages awarded for ACM’s unjust enrichment, and TAA cannot recover additional damages for conversion. Similarly, the Court finds that TAA’s trespass cause of action should be granted, but *431damages in relation to ACM’s trespass are incorporated in the damages awarded for ACM’s unjust enrichment, and TAA cannot recover additional damages for trespass.
As to ACM’s counterclaims, the Court finds that its breach of contract claim as to both the Letter Agreement and Mine Mill Site Lease, tortious interference, wrongful eviction, fraudulent misrepresentation and inducement, fraud by nondisclosure, trespass/misappropriation of business information, theft, trespass on defendant’s property, and theft of defendant’s mineral property claims should be denied. The Court also finds that ACM’s detrimental reliance/promissory estoppel claim should be granted and that ACM is entitled to recover $75,000 from TAA as reliance damages. The Court finds that all other relief requested by the parties should be denied.
. On June 6, 2009, the Court entered an order granting the Chapter 7 Trustee's application to employ G. Michael Stewart, as special counsel for the Trustee in this adversary proceeding (Bankruptcy Case No. 08-70200, docket # 143).
. McCreless testified that these three directors later warned McCreless that Joe Williams, Sr. was unethical, and that McCreless should not proceed in doing business with him without first having signed contractual documents.
. McCreless explained in his testimony that when a carpet is newly installed, it releases volatile organic compounds (“VOCs”), which cause the familiar “new carpet smell.” In the mid-1990s, the EPA became concerned VOCs could make people working in office buildings with newly installed carpet sick, and that the VOCs might even have carcinogenic effects. In response to new regulations responding to this concern, formulas for carpet backing began to require less capability from mineral fillers, relying more heavily on chemical formulations to achieve what the mineral fillers achieved.
. Separation Technologies became part of Titan America in 2002, and is now known as Separation Technologies LLC, with its headquarters in Daleville, Virginia, and its Technical Center in Needham, Massachusetts.
. McCreless explained in his testimony that when a carpet is newly installed, it releases volatile organic compounds (“VOCs”), which cause the familiar "new carpet smell.” In the mid-1990's the EPA became concerned VOCs could make people working in office buildings with newly installed carpet sick, and that the VOCs might even have carcinogenic effects. In response to new regulations responding to this concern, formulas for carpet backing began to change to require less capability from mineral fillers, relying more heavily on chemical formulations to achieve what the mineral fillers achieved.
. In his testimony, McCreless explained that these stop orders were issued because in order to market a pesticide in the United States, the pesticide product must be registered with the EPA or be allowed within the provisions of FIFRA § 25(b). Despite discussions and correspondence between ACM and the EPA, which indicated that ACM's pesticide products were exempt under § 25(b), Rick Reaves pointed out an ambiguity on the labeling of ACM's pesticide products which caused the EPA to issue the stop orders. These stop orders do not preclude ACM from registering the pesticide with the EPA, and then selling the product.
. “Under Texas law, an action for money had and received is an equitable doctrine applied to prevent unjust enrichment.” Doss v. Homecoming Financial Network, Inc. 210 S.W.3d 706, 709, n. 4 (Tex.App.-Corpus Christi 2006, pel. denied) (holding that although money had and received and unjust enrichment were pled as separate causes of action, they are really the same cause of action).
. The only valid and enforceable contract that exists between TAA and ACM-Texas is the Mine Mill Site Lease, which does not explicitly grant ACM-Texas mineral rights. ACM-Texas does not argue that the Mine Mill Site Lease grants mineral rights. Moreover, it is unlikely that the $600 per year lease that ACM-Texas was to pay under the Mine Mill Site Lease could be construed as adequate consideration for a mineral leasehold at Marble Canyon. (See Pl.’s Exh. 102). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494382/ | OPINION CONCERNING DEFENDANTS’ MOTIONS TO DISMISS AMENDED COMPLAINT
ARTHUR J. GONZALEZ, Chief Judge.
FACTS
Overview and Procedural History
HydroGen, L.L.C. (the “Debtor”) was a development stage company that manufactured phosphoric acid fuel cells for use in modules and power plants fueled by hydrogen and hydrocarbon gases for application by industrial and chemical industry end-users. The Debtor, an Ohio limited liability company, was a wholly-owned subsidiary of HydroGen Corporation (the “Parent”), an SEC-reporting company. On October 22, 2008 (the “Petition Date”), the Debtor filed a voluntary petition (the “Petition”) under chapter 11 of the Bankruptcy Code (the “Code”). The case before the Court is an adversary proceeding commenced by the Official Committee of Unsecured Creditors (the “Committee”) to avoid pre-petition transfers of certain compensation, including bonus payments, to current and former officers and directors of the Debtor and/or the Parent and to bring certain related claims against such officers and directors and certain unnamed defendants who may be determined to have liability upon further discovery (collectively, “Defendants”). The Committee acquired the standing to pursue the claims asserted in the instant proceeding pursuant to an Opinion and Order, dated May 7, 2009, approving, inter alia, assignment nunc pro tunc of estate causes of action from the Debtor to the Committee.
The Committee filed the amended complaint (the “Amended Complaint” or “AC”) on May 12, 2009, setting forth ten causes of action: (1) breach of fiduciary duty, (2) aiding and abetting breach of fiduciary duty, (3) avoidance of constructive fraudulent transfers pursuant to section 548(a)(1)(B) of the Code, (4) avoidance of constructive fraudulent transfers pursuant to section 544(b) of the Code and applicable state law, (5) unjust enrichment, (6) breach of employment agreements, (7) deepening insolvency, (8) equitable subordination, (9) objection to Defendants’ claims against the Debtor’s estate, and (10) avoidance of preferential transfers pursuant to sections 547 and 550 of the Code.1 *344In response, Defendants Dr. Leo Blomen and Blomenco B.V. moved to dismiss the Amended Complaint in its entirety under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief may be granted. Defendant John Freeh moved under Rule 12(b)(6) to dismiss solely the avoidance claims, the unjust enrichment claim and the deepening insolvency claim.2
Factual Allegations Set Forth in the Amended Complaint
The following paragraphs set forth factual allegations found in the Amended Complaint, which the Court must assume to be true on a Rule 12(b)(6) motion. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir.2002). Legal conclusions set forth in the Amended Complaint have been excluded to the extent they are not intertwined with relevant facts, as they should not be presumed to be true or correct and do not bolster the factual sufficiency of a complaint on a motion to dismiss. See Starr v. Sony BMG, 592 F.3d 314, 317 n. 1 (2d Cir.2010) (noting that a court “ ‘considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumptions of truth.’ ”) (quoting Ashcroft v. Iqbal, — U.S.-, 129 S.Ct. 1937, 1949-50, 173 L.Ed.2d 868 (2009)).
The Debtor began operating in November 2001. Because it was a development stage company, it required significant financing in order to sustain operations until it achieved profitability. By December 31, 2007, the Debtor had only $8,100,000 in cash remaining. At such time, Defendants allegedly “knew or should have known that its available cash would not be sufficient to fund its operations after mid-May 2008 absent additional financing.” AC at ¶ 33. Defendants “knew or should have known that [the Debtor] needed immediate, substantial additional capital in the form of debt, equity, or proceeds from the sale of assets in order to maintain and increase the value of the company” and “knew or should have known” that one or more asset sales was necessary given the undercapi-talization of the Debtor. AC at ¶ 36.
Despite the lack of prospects for additional significant financing after December 31, 2007, Defendants “permitted [the Debt- or] to continue operating as if it had limitless sources of financing.” AC at ¶ 34. Instead of modifying the Debtor’s business plan to account for its limited prospects for additional financing, Defendants made unspecified plans to increase the Debtor’s spending. AC at ¶ 35. Defendants allegedly authorized, approved and/or entered into certain unspecified transactions that were inappropriate and incurred unspecified obligations that were not in the Debt- or’s best interest, all of which caused “debilitating financial harm” to the Debtor and rendered it insolvent. AC at ¶ 4. In addition, Defendants “saddled” the Debtor with additional unspecified debts that they “knew or should have known would be beyond the Debtor’s ability to pay.” Id.
Within the two-year period prior to the Petition Date, Defendants permitted bonus payments in the aggregate amount of $410,652.92 to six Defendants.3 AC at *345¶ 52, Exh. A. In addition, salary, benefits, payments of expenses, stock and/or stock options — each in unspecified amounts— were also paid to Defendants. AC at ¶ 52. The Committee considers the bonus payments and compensation to be “substantial” and “excessive”. AC at ¶ 37, 52. By making such payments to themselves, Defendants “placed their own self-interests ahead of the interests of [the Debtor] and its creditors and equity holders.” Id. At all relevant times, the Debtor’s liabilities allegedly exceeded its assets. AC at ¶ 38. And at all relevant times Defendants allegedly knew of the Debtor’s insolvent condition. AC at ¶ 41.
DISCUSSION
Standard of Review for a Fed.R.Civ.P. 12(b)(6) Motion to Dismiss
Federal Rule of Civil Procedure 12(b)(6) is incorporated into bankruptcy procedural rules by Federal Rule of Bankruptcy Procedure 7012(b). In reviewing a motion to dismiss pursuant to Rule 12(b)(6), a court must accept as true all factual allegations contained in the complaint and draw all reasonable inferences in the plaintiffs favor. See Chambers, 282 F.3d at 152; In re Bally Total Fitness of Greater New York, Inc., 2009 WL 1684022 at *1 (S.D.N.Y. June 15, 2009) (quoting Ofori-Tenkorang v. American Int’l Group, Inc., 460 F.3d 296, 298 (2d Cir.2006)). In addition to the complaint, the court may also consider (1) any “document incorporated by reference in the complaint,” Campo v. Sears Holdings Corp., 635 F.Supp.2d 323, 328 (S.D.N.Y. July 21, 2009); (2) any document the plaintiff “has in [his] possession or had knowledge of and upon which [he] relied in bringing suit” Chambers, 282 F.3d at 153; accord Campo, 635 F.Supp.2d 323, 328 (indicating that the court may consider, inter alia, “documents integral to and relied upon in the complaint, even if not attached or incorporated by reference”) (internal quotation marks omitted); and (3) “facts of which judicial notice may be taken.” Chambers, 282 F.3d at 153.
Federal Rule of Civil Procedure 8(a)(2) on its face requires “a short and plain statement of the claim” in the complaint showing that the plaintiff is “entitled to relief.” Recent Supreme Court jurisprudence has clarified the standard in evaluating pleading sufficiency under Rule 8. See generally Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); accord Iqbal, 129 S.Ct. at 1949-50 (providing guidance on the application of Twombly). In order to survive a Rule 12(b)(6) motion, the complaint must contain “enough factual matter (taken as true)” to “raise [the] right to relief above the speculative level,” Twombly, 550 U.S. at 555-56, 127 S.Ct. 1955; accord Campo, 635 F.Supp.2d 323, 328 (citing ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.2007); Iqbal, 129 S.Ct. at 1949). As such, although “detailed factual allegations” are not necessary, “a formulaic recitation of the elements of a cause of action will not do,” Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). Rule 8(a) “contemplates the statement of circumstances, occurrences, and events in support of the claim presented and does not authorize a pleader’s bare averment that he wants relief and is entitled to it.” Twombly, 550 U.S. *346at 556, n. 3, 127 S.Ct. 1955 (quoting 5 Wright & Miller § 1202, at 94, 95) (internal quotation marks omitted). Given the foregoing, a complaint that merely contains “ ‘naked assertion^]’ devoid of ‘further factual enhancement’ ” cannot survive a motion to dismiss. See Iqbal, 129 S.Ct. at 1950 (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955).
Two working principles underlie the standard. See Iqbal, 129 S.Ct. at 1949. First, the court is not “bound to accept as true [any] legal conclusion couched as a factual allegation.” Id., at 1949-50; accord Air Atlanta Aero Engineering Limited v. SP Aircraft Owner I, LLC, 637 F.Supp.2d 185, 189 (S.D.N.Y.2009). Second, “only a complaint that states a plausible claim for relief survives” a Rule 12(b)(6) motion. Iqbal, 129 S.Ct. at 1949-50; accord In re Bally Total Fitness, 2009 WL 1684022 at *1 (“To survive a 12(b)(6) motion to dismiss, the allegations in the complaint must meet a standard of plausibility.”) (internal quotation marks omitted) (citing Twombly, 550 U.S. at 564, 127 S.Ct. 1955). “Judicial experience and common sense” will be required in determining the plausibility of a claim. Iqbal, 129 S.Ct. at 1950. The foregoing construction of Federal Rule of Civil Procedure 8 is intended as a policy matter to weed out meritless cases prior to the commencement of discovery, thereby minimizing the expenditure of the judicial system’s resources on such cases. See Twombly, 550 U.S. at 559-60, 127 S.Ct. 1955.
Breach of Fiduciary Duty
The Committee states that Defendants, as “the current and/or former officers and directors of the Debtor and/or Parent,” owed fiduciary duties to the Debtor and its creditors. AC at ¶ 3. By permitting the Debtor to continue operating, increasing its spending, saddling it with debt and paying themselves allegedly excessive compensation, Defendants allegedly breached their fiduciary duties to the Debtor, its creditors and equity holders.
I. Choice-of-Law Analysis — Internal Affairs Doctrine
Before assessing the pleading sufficiency of the breaeh-of-fiduciary-duty claim, the Court must first determine the applicable state law. Bankruptcy courts adjudicating a state law claim should apply the choice-of-law rules of the forum state in the absence of federal policy concerns. See In re Gaston & Snow, 243 F.3d 599, 601-02 (2d Cir.2001). The internal affairs doctrine is a choice-of-law rule that applies to issues relating to disputes involving corporations and has generally been followed throughout this country, including New York, the forum state in the instant case. See Hausman v. Buckley, 299 F.2d 696, 702-03 (2d Cir.1962). Under the doctrine, issues relating to the internal affairs of a corporation are to be governed by the law of its state of incorporation because application of such body of law “achieves the need for certainty and predictability of result while generally protecting the justified expectations of parties with interests in the corporation.” NatTel, LLC v. SAC Capital Advisors LLC, 2006 WL 957342 at *2 (2d Cir.2006) (internal citations omitted); see also Restatement, Conflict of Laws, § 183, comment b (1934). A claim for breach of fiduciary duty brought against a corporate officer or director raises issues relating to the internal affairs of a corporation and therefore should be governed by the law of the state of incorporation of the relevant corporation. See Walton v. Morgan Stanley & Co., Inc., 623 F.2d 796, 798 n. 3 (2d Cir.1980) (noting that the choice-of-law rules of New York dictate “that the law of the state of incorporation govern[ ] an allegation of breach of fiduciary duty owed to a corporation”); Lachman v. Bell, 353 F.Supp. 37, 39-40 *347(S.D.N.Y.1972) (stating that a breach-of-fiduciary-duty claim is “governed in New York by the law of the State of incorporation”). The internal affairs doctrine has also been applied to limited liability companies. See Ritchie Capital Management, L.L.C. v. Coventry First LLC, 2007 WL 2044656, *4 (S.D.N.Y.) (applying Delaware law to a corporate veil piercing claim brought against a Delaware limited liability company, citing the internal affairs doctrine as the basis therefor). Based on the foregoing analysis, Ohio law, which is the law of the Debtor’s state of incorporation, applies to the breach-of-fiduciary-duty claim brought against Defendants because the Debtor is a limited liability company incorporated in Ohio.
II. Pleading Sufficiency
Under Ohio law, a breach-of-fiduciary-duty claim consists of the following three elements: “(1) the existence of a duty arising from a fiduciary relationship, (2) a failure to observe such duty, and (8) an injury proximately resulting therefrom.” The Unencumbered Assets, Trust v. JP Morgan Chase Bank (In re Nat’l Century Fin. Enters., Inc. Inv. Litig.), 617 F.Supp.2d 700, 717 (S.D.Ohio 2009) (internal citations omitted). To survive a motion to dismiss, the Amended Complaint should provide sufficient facts in support of each element of the claim in order to “raise [the] right to relief above the speculative level.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955.
It is “well-established in Ohio that corporate directors and officers have a fiduciary relationship with respect to the corporation they serve.” Liquidating Trustee of the Amcast Unsecured Creditor Liquidating Trust v. Baker (In re Amcast Indus. Corp.), 365 B.R. 91, 103 (Bankr.S.D.Ohio 2007) (quoting Radol v. Thomas, 772 F.2d 244, 256 (6th Cir.1985)) (other citations omitted); see also In re Nat’l Century Fin. Enters., Inc. Inv. Litig., 617 F.Supp.2d at 718 (“[A] corporate officer occupies a position of trust in relation to his corporation.”) (internal citation and quotation marks omitted). Ohio Revised Code Section 1701.59 (“Authority of directors; liability; standard of care”) codifies a director’s fiduciary duty and standard of care.4 See In re Amcast Indus. Corp., 365 B.R. at 103. Although the fiduciary duty of a corporate officer has not been similarly codified, the basis for such duty is found in common law. See Id.
The Amended Complaint alleges that Defendants “consist of a group of current and/or former officers and directors of the Debtor and/or Parent.” AC at ¶ 3. Under applicable Ohio law, those Defendants who had been officers or directors of the Debtor clearly owe a fiduciary duty to the Debtor during their tenure. In contrast, although the Court has not found any Ohio law directly on point, the weight of authority around the country holds that the directors of a parent corporation owe no fiduciary duties to a wholly-owned subsidiary. See Westlake Vinyls, Inc. v. Goodrich Corp., 518 F.Supp.2d 902, 916-17 (W.D.Ky.2007) (citing Anadarko Petroleum Corp. v. Panhandle E. Corp., 545 A.2d 1171, 1174 (Del.1988); Abex, Inc. v. Koll Real Estate Group, Inc., 1994 WL 728827, No. 13462, *16 (Del. Ch. Dec. 22.1994); Household Reinsurance Co., Ltd. v. Travelers Ins. Co., No. 91 C 1308, 1992 WL 22220, *3-4 (N.D.Ill. Jan.31, 1992); Resolution Trust Corp. v. Bonner, *348No. H-92-430, 1993 WL 414679, *2-3 (S.D.Tex. June 3, 1993)) (other citation omitted). As such, there is no basis for the proposition that those Defendants who had been officers and/or directors of solely the Parent owe any fiduciary duty to the Debtor. The Amended Complaint does not contain enough facts for the Court to decipher the relationship between each individual Defendant, on the one hand, and either the Debtor or the Parent, on the other hand. The Amended Complaint does specifically state, however, that Dr. Blo-men — the only individual Defendant to have filed a motion to dismiss with respect to the breaeh-of-fiduciary-duty claim — and certain other individual Defendants have been directors or officers of the Debtor “at various times between 2001 and 2008.”5 AC at ¶ 11. Although this allegation is sufficient to establish the existence of a fiduciary duty between Dr. Blomen and the Debtor at some point of time between 2001 and 2008, the Court is unable to glean from the facts set forth in the Amended Complaint whether the fiduciary relationship existed specifically between late 2007 and the Petition Date, i.e. the period during which the alleged violations of fiduciary duties took place. Thus, the Court is not persuaded that the Committee has adequately pled the first element of the fiduciary duty claim, i.e. existence of a fiduciary duty between the relevant moving Defendant and the Debtor.
Even if the Court were to find in favor of the Committee on the pleading sufficiency of the first element of the claim, the claim would still have failed to survive Dr. Blomen’s motion to dismiss, as the next element of the claim — failure to observe a fiduciary duty — has also not been alleged with the requisite factual support. Vague and general allegations that certain unspecified transactions had been entered into and that certain unnamed obligations had been incurred by the Debtor cannot form the factual basis for an alleged failure on the part of Defendants to observe their fiduciary duty, as the “circumstances, occurrences, and events” required to be alleged under Federal Rule of Civil Procedure 8(a) are entirely absent in the Amended Complaint. Twombly, 550 U.S. at 556 n. 3, 127 S.Ct. 1955 (internal citation omitted). Similarly, although the Amended Complaint does specify the amount of bonus payment made to Dr. Blomen, it alleges in a conclu-sory fashion that such payment, along with other bonuses and compensation paid to Defendants, was excessive and that Defendants made such payments “in bad faith and/or in a reckless and/or a grossly negligent manner, thereby violating their fiduciary duties to the Debtor.” AC at ¶ 44. In light of the general absence of supporting facts set forth in the Amended Complaint, the Court finds the breach-of-fiduciary-duty claim to be “speculative” under Twombly.6 Cf In re I.E. Liqui*349dation, Inc., 2009 WL 2707223 at *5-6 (Bankr.N.D.Ohio 2009) (finding in connection with a motion to dismiss a breach-of-fiduciary-duty claim that the element relating to failure to observe such duty has been sufficiently pled because the complaint cited “specific events, the incur-rence of more debt and grant of liens” to an affiliate, all of which had been effected to put the corporate directors’ personal interests ahead of the corporation’s); see also In re Nat’l Century Fin. Enters., Inc. Inv. Litig., 617 F.Supp.2d at 705, 717 (upholding a breach-of-fiduciary-duty claim on a Rule 12(b)(6) motion based on a complaint that detailed a fraudulent scheme to misappropriate corporate assets); In re Amcast Indus. Corp., 365 B.R. at 98-101, 110-111 (holding that a claim for breach of fiduciary duty to a corporation has been sufficiently pled under Ohio law in a complaint that provided extensive details on the former directors’ and officers’ failure to adhere to the terms of corporation’s executive pension plan and the making of prohibited payments to the former CEO).
Aiding and Abetting Breach of Fiduciary Duty
The Amended Complaint alleges, without setting forth additional factual details, that Defendants aided and abetted the alleged breaches of fiduciary duties to the extent they did not directly breach such duties. The applicable body of law is not specified for this state law claim. Defendant Dr. Blomen argues that Ohio law should apply, as the Debtor was incorporated in Ohio. In response, the Committee notes that Ohio law may not govern the claim because of the Debtor’s headquarters in New York and substantial presence in Pennsylvania.7 Accordingly, the Com*350mittee reserved the right to argue that some other body of law applies. Due to significant differences in the law of the potentially relevant jurisdictions and their impact on the substance of the Court’s analysis, the Court will perform the relevant choice-of-law analysis before ruling on the Rule 12(b)(6) motion with respect to the aiding and abetting claim. See In re Adelphia Commc’ns Corp., 365 B.R. 24, 39 (Bankr.S.D.N.Y.2007) (observing in connection with claims for aiding and abetting breaches of fiduciary duty that a choice-of-law analysis had to be performed at the outset due to significant differences among potentially applicable bodies of law governing such claims).
I. Choice-of-Law Analysis
Caselaw in this district is split as to what choice-of-law principle applies to a claim for aiding and abetting breach of fiduciary duty. See In re Adelphia Commc’ns Corp., 365 B.R. at 39-40. Some courts have applied the internal affairs doctrine, discussed supra in connection with the breach-of-fiduciary-duty claim, reasoning that a claim for aiding and abetting breach of fiduciary duty, in a way similar to a claim for breach of fiduciary duty, relates to the internal affairs of a corporation. See BBS Norwalk One, Inc. v. Raccolta, Inc., 60 F.Supp.2d 123, 129 (S.D.N.Y.1999); Lou v. Belzberg, 728 F.Supp. 1010, 1023 (S.D.N.Y.1990); Buckley v. Deloitte & Touche USA LLP, 2007 WL 1491403, No. 06 Civ. 3291,* 34-35 (S.D.N.Y. May 22, 2007). In contrast, other courts have classified the aiding and abetting cause of action as a tort claim and accordingly applied traditional tort conflicts of laws principles to determine the applicable state law. See Solow v. Stone, 994 F.Supp. 173, 177 (S.D.N.Y.1998) (finding that the aiding and abetting claim at issue was directed at defendants as independent actors, not in their capacity as officers and directors, and that it was a “garden-variety tort issue[]”); In re Adelphia Commic’ns Corp., 365 B.R. at 40-41 (rejecting the “automatic application” of the internal affairs doctrine and applying tort conflicts of laws principles because the aiding and abetting claims in question did not involve “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders.”) (internal citations omitted).
If this Court were to apply the internal affairs doctrine, the law of the Debtor’s state of incorporation — Ohio law — would govern the aiding and abetting claim. If tort conflicts of laws principles were to be applied, however, an interest analysis would need to be performed by identifying the significant contacts related to the claim, i.e., “the parties’ domiciles and the locus of the tort.” In re Lois/USA Inc., 264 B.R. 69, 107 (Bankr.S.D.N.Y.2001). In the case of a cause of action governing conduct to prevent injuries from occurring, such as the aiding and abetting claim at issue here, the law of the place of the tort is generally determinative. See Id. at 108. The tort is deemed to have occurred where the related economic losses resulting from the tort had been sustained. See Id. In the case of a tort for aiding and abetting breach of fiduciary duty, related economic losses have been deemed to have been incurred in the relevant corporation’s principal place of business. See In re Adelphia Commc’ns, 365 B.R. at 39 (applying the law of the debtor’s principal place of business to claims for aiding and abetting breaches of fiduciary duty because the relevant injury arising from the tort claims is deemed to have been suffered there). Given the foregoing, the Court would have deemed the Debtor’s principal place of business, New York, to be the locus of the aiding and *351abetting claim and therefore would have applied New York law if it were to follow tort conflicts of law principles.
II. Aiding and Abetting Breach of Fiduciary Duty under Ohio Law
Further complicating the analysis is the fact that it is unsettled whether Ohio — the jurisdiction whose law should govern if the internal affairs doctrine were to apply— recognizes aiding and abetting liability generally and, as such, a claim for aiding and abetting breach of fiduciary duty particularly. See Pavlovich v. Nat’l City Bank, 435 F.3d 560, 570 (6th Cir.2006) (“It is unclear whether Ohio recognizes a common law cause of action for aiding and abetting tortuous conduct.”); In re I.E. Liquidation, Inc., 2009 WL 2707223, No. 06-62179, *7 n. 9 (Bankr.N.D.Ohio Aug. 25, 2009) (noting the uncertainty as to the existence of a claim for aiding and abetting breach of fiduciary duty under Ohio law). The sole case that has explicitly recognized the existence of aiding and abetting liability in Ohio, In re Amcast Indus. Corp., 365 B.R. at 112, relies on an Ohio Supreme Court case that cited in dicta — and is interpreted to have adopted implicitly — section 876(b) of the Restatement (Second) of Torts and the concert of action theory set forth therein. See Great Cent. Ins. Co. v. Tobias, 37 Ohio St.3d 127, 130, 524 N.E.2d 168 (Ohio 1988) (citing § 876(b), Restatement of the Law 2d, Torts (1979)); see also § 876(b), Restatement of the Law 2d Torts (“For harm resulting to a third person from the tortuous conduct of another, one is subject to liability if he ... knows that the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself.”). Also relying on Great Central and Restatement (Second) of Torts Section 876(b), one other court has concluded that the Ohio Supreme Court would recognize aiding and abetting liability if faced with the issue, while acknowledging that the Ohio Supreme Court has thus far never spoken on the issue. See Aetna Cas. and Sur. Co. v. Leahey Constr. Co., 219 F.3d 519, 533 (6th Cir.2000). Other courts in the Sixth Circuit have not relied on the Great Central case for the proposition that Ohio recognizes aiding and abetting liability and have simply pronounced the issue to be unsettled in Ohio. See, e.g., Pavlovich, 435 F.3d at 570; In re Nat’l Century Fin. Enters., Inc. Inv. Litig., 617 F.Supp.2d at 719 n. 4 (“The case law is unclear about whether a cause of action exists in Ohio for civil aiding and abetting.”); In re Nat’l Century Fin. Enters., Inc. Inv. Litig., 541 F.Supp.2d 986, 1015 (S.D.Ohio 2007).
When recognized or deemed recognized as a valid cause of action in Ohio, a claim for aiding and abetting breach of fiduciary duty consists of the following elements: (1) “knowledge that the primary party’s conduct is a breach of duty,” and (2) “substantial assistance or encouragement to the primary party in carrying out the tortious act.” In re Nat’l Century Fin. Enters., Inc. Inv. Litig., 541 F.Supp.2d at 1014; see also Aetna Cas. and Sur. Co., 219 F.3d at 533 (citing § 876(b), Restatement (Second) of Torts) (other citations omitted); In re Amcast Indus. Corp., 365 B.R. at 112-13 (citing § 876(b), Restatement (Second) of Torts) (other citations omitted). The Amended Complaint fails to allege either of the foregoing elements. More importantly, the Amended Complaint contains a mere “naked assertion” that Defendants have aided and abetted breaches of fiduciary duty without any “further factual enhancement” supporting either element of the claim. Iqbal, 129 S.Ct. at 1950 (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955). Given the uncertain existence of the cause of action in Ohio and given the Commit*352tee’s failure to plead the cause of action with the required factual enhancement, the Court finds that the aiding and abetting claim would most certainly not have survived the motion to dismiss if the Court were to apply Ohio law to the claim.
III. Aiding and Abetting Breach of Fiduciary Duty under New York Law
Unlike in Ohio, a cause of action for aiding and abetting breach of fiduciary duty is clearly recognized in New York. See In re Adelphia Commc’ns Corp., 365 B.R. at 39 (stating that a cause for aiding and abetting breach of fiduciary duty is a “well-established tort” in New York). Under New York law, a claim for aiding and abetting breach of fiduciary duty consists of the following elements: (1) a breach of fiduciary duty, (2) that the defendant knowingly induced or participated in the breach, and (3) that the plaintiff suffered damages as a result of the breach. See BBS Norwalk One, Inc., 60 F.Supp.2d at 130 n. 2 (citing S & K Sales Co. v. Nike, Inc., 816 F.2d 843 (2d Cir.1987)). Because the Court has previously concluded that the Committee’s breach-of-fidueiary-duty claim has been deficiently pled, it follows that the first element of the aiding and abetting claim — a breach of fiduciary duty — has also not been pled adequately. Given that not every element of the claim has been sufficiently alleged, the aiding and abetting claim would have failed to survive the motion to dismiss if New York law were to govern.
IV. Pleading Sufficiency of the Aiding and Abetting Claim
As stated above, the Court has found the claim for aiding and abetting breach of fiduciary duty to be inadequately alleged under both Ohio and New York law, the only two bodies of law that could conceivably govern the claim if either of the two potentially applicable choice-of-law principles discussed previously were to be followed. Given the similarity of outcomes, there is no need for the Court to choose between the competing choice-of-law principles or to decide which of the two states’ law should govern, as it is clear from the foregoing analysis that the aiding and abetting claim cannot survive the motion to dismiss regardless of such choices. The Court concludes accordingly that the Amended Complaint has failed to allege a claim for aiding and abetting breach of fiduciary duty with the amount of factual enhancement required under Twombly and hereby grants the Dr. Blomen’s and Blo-menco B.V.’s motion to dismiss to the extent it relates to the claim.
Constructive Fraudulent Transfers
I. Constructive Fraudulent Transfer under section 548(a)(1)(B) of the Code
The Committee seeks to avoid bonuses and other compensation received by Defendants during the two-year period prior to the Petition Date as constructive fraudulent transfers under section 548(a)(1)(B) of the Code. In order for the Committee to plead successfully a cause of action under section 548(a)(1)(B), the Amended Complaint must provide adequate facts to support each of the following elements of the claim: that within two years of the Petition Date, (1) the Debtor transferred an interest in property; (2) the Debtor (x) was insolvent at the time of the transfer or became insolvent as a result of the transfer, (y) was engaged in business or was about to engage in business for which the Debtor’s remaining property constituted unreasonably small capital, or (z) intended to incur or believed that it would incur debts beyond its ability to pay as they matured; and (3) the Debtor received less than reasonably equivalent val*353ue in exchange for such transfer. See In re M. Fabrikant & Sons, Inc., 394 B.R. 721, 735 (Bankr.S.D.N.Y.2008).
The Amended Complaint sets forth little more than a “formulaic recitation of the elements” of the section 548(a)(1)(B) claim. Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). In particular, there is a complete absence of facts supporting the allegation that the Debtor received less than reasonably equivalent value in exchange for the payments made to Defendants. Given such absence, the Court concludes that the Committee’s section 548(a)(1)(B) constructive fraudulent transfer claim has failed to survive the motions to dismiss.8 In re Enron Corp., 2006 WL 2400369, No. 01-16034, *8 (Bankr.S.D.N.Y. May 11, 2006) (dismissing a constructive fraudulent transfer claim on a Rule 12(b)(6) motion because the plaintiffs have failed to allege that the relevant debtor entity did not receive reasonably equivalent value); cf. In re M. Fabrikant & Sons, Inc., 394 B.R. at 736 (finding that the amended complaint sufficiently alleges the lack of reasonably equivalent value based on the “worthless or near-worthless” value of loan receivables received by debtors in exchange for the alleged transfers).
II. State Constructive Fraudulent Transfer Claim
The Amended Complaint also alleges that bonuses and other compensation received by Defendants during the two-year period prior to the Petition Date constitute constructive fraudulent transfers under section 544(b) of the Code and state law made applicable thereby. See In re WorldCom, Inc., 2003 WL 23861928, No. 02-13533, *40 (Bankr.S.D.N.Y. Oct. 31, 2003) (noting that applicable law referenced in section 544(b) means state law) (citing Traina v. Whitney Nat’l Bank, 109 F.3d 244, 246 (5th Cir.1997)). The Amended Complaint does not specify which state’s law applies to this claim, and Defendant Mr. Freeh has briefed his claim under the assumption that either New York or Ohio law may apply.9 In the absence of an agreement by the parties with respect to applicable law, the Court will perform a choice-of-law analysis for the claim prior to ruling on the state constructive fraudulent transfer claim.
The law of the jurisdiction with the most significant contacts to the relevant transfers and relevant parties applies to a state constructive fraudulent transfer claim brought under section 544(b) of the *354Code. See In re WorldCom, Inc., 2003 WL 23861928 at *40. Contacts to be considered include the domicile, residence, place of incorporation and place of business of the parties; the place of injury; and the place of injury-causing conduct. See Id. (citing Restatement (Second) of Conflicts of Laws, § 115). Ohio is the Debtor’s place of incorporation and New York is the Debtor’s principal place of business. The location of the alleged injury is most likely Ohio or New York, given that the Debtor is the victim of the alleged constructive fraudulent transfers. Because compensation and other financial decisions (such as the alleged payment of excessive bonuses and other compensation at issue here) were most likely made at the corporate headquarters of the Debtor, the injury-causing conduct arguably took place in New York, the principal place of business. Given the foregoing, the jurisdiction with the most significant contacts is likely to be Ohio or New York.10
In Ohio, a transfer can be avoided as a constructive fraudulent conveyance if a debtor did not receive reasonably equivalent value in exchange for the transfer and if either (x) the debtor was engaged or was about to engage in a transaction for which the remaining assets of the debtor were unreasonably small in relation to the transaction or (y) the debtor intended to incur, or believed or reasonably should have believed that it would incur, debts beyond its ability to pay as they came due. See § 1336.04, Ohio Uniform Fraudulent Transfer Act. Similarly, under the New York Debtor & Creditor Law, a constructive fraudulent transfer contains the following elements: (1) that the transfer was made without fair consideration, and (2) either (a) the debtor was insolvent or was rendered insolvent by the transfer, (b) the debtor was left with unreasonably small capital, or (c) the debtor intended or believed that it would incur debts beyond its ability to pay as the debts matured. See In re M. Fabrikant & Sons, Inc., 394 B.R. at 734 (citing New York Debtor & Creditor Law, §§ 273-75).
Because, as stated above, the Amended Complaint sets forth no facts supporting the allegation that the Debtor failed to receive “reasonably equivalent value” or “fair consideration” in exchange for the payment of bonuses and other compensation to Defendants, the Court concludes that the Committee’s section 544 claim has also failed to survive the motions to dismiss, regardless of whether Ohio or New York law applies.
Preferences
The Amended Complaint states that “during the two-year period” prior to the Petition Date, each Defendant received substantial transfers in the form of salary, benefits, bonuses, expense payments, stock and/or stock options and other compensation. See AC at ¶ 86. The Committee seeks to avoid the transfers as preferences under section 547 of the Code. Although Dr. Blomen is identified as the recipient of $168,452.92 in allegedly avoidable bonus payments, see AC at Exh. A, other alleged transfers to Dr. Blomen and Mr. Freeh are not identified specifically by amount or otherwise.
*355Section 547 of the Code authorizes the avoidance of “any transfer of an interest of the debtor in property” if five conditions enumerated in subsection (b) are satisfied, subject to one of seven defenses available under subsection (c). See Pereira v. United Jersey Bank, N.A., 201 B.R. 644, 656 (S.D.N.Y.1996). Specifically, the trustee (or a party who has stepped into the trustee’s shoes, as is the case here) may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b).
Thus, for purposes of pleading sufficiency, the Amended Complaint must allege enough facts with respect to each of the foregoing elements of section 547(b) in order to put Defendants on notice for the preference claims.
With respect to the preference claims brought against Mr. Freeh, however, the Amended Complaint contains so few relevant facts that it amounts merely to a “a formulaic recitation of the elements.” Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). Without a single relevant detail such as date, amount or type of transfer, it is impossible to identify any specific avoidable transfer to Mr. Freeh. As such, the Court finds the pleadings relating to the preference claims brought against Mr. Freeh to be deficient under the standard delineated in Twombly and under Federal Rule of Civil Procedure 8.11 The preference claims against Mr. Freeh therefore cannot survive Mr. Freeh’s motion to dismiss.
Although the Amended Complaint identifies one of the alleged transfers made to Dr. Blomen by amount ($168,-452.92) and type (bonus payment), it does not plead enough facts with respect to any other transfer for notice and identification purposes. Furthermore, the Amended Complaint is factually deficient in multiple respects, resulting in inadequate pleadings with respect to more than one element of all alleged preferential transfers, including the sole payment that has been identified by amount and type. For example, no allegation has been made that any transfer was made for or on account of a specific and identifiable antecedent debt owed by the Debtor. Nor have any facts been proffered to enable the Court to determine whether the transfers had been made between ninety days and one year before the Petition Date, assuming the alleged officer *356and director status of the relevant Defendants (and therefore the insider status thereof) to be true. Given the foregoing, the Court concludes that the preference claims brought against Dr. Blomen and Blomenco B.V. have similarly failed to survive the relevant motion to dismiss.
Deepening Insolvency
The Amended Complaint alleges that starting on or about December 31, 2007 and continuing until the Petition Date, Defendants caused the Debtor to delay filing an insolvency petition. Defendants allegedly permitted the Debtor to incur obligations beyond its ability to pay at a time when they knew or should have known that the Debtor was insolvent. Thus the Debtor is said to have suffered injury from “fraudulently extended life, dissipation of assets and increased insolvency.” AC at ¶ 74. The Debtor’s creditors also allegedly “lost substantial value that would have otherwise been available to satisfy their claims.” Id.
The Amended Complaint does not state the applicable law for this cause of action. Dr. Blomen and Blomenco B.V. argue that Ohio law governs, and Mr. Freeh asserts that either New York or Ohio law governs. In a later motion, the Committee argues that the law of Pennsylvania, one of two locations of principal assets listed in the Petition,12 applies. Because there are substantial differences in the relevant law of the above-mentioned jurisdictions13 and because the parties do not agree on the body of applicable law, the Court will conduct a choice-of-law analysis as the initial step in its inquiry relating to the deepening insolvency claim.
I. Choice-of-Law Analysis
When recognized or deemed recognized as a cause of action, deepening insolvency has been classified as a tort. See In re CitX Corp., 448 F.3d at 680 n. 11 (referring to the cause of action as an economic tort); In re Amcast Indus. Corp., 365 B.R. at 116 (suggesting that deepening insolvency would be a tort if it were recognized as an independent cause of action); In re Global Serv. Group LLC, 316 B.R. at 458 (same). The choice-of-law principles of New York, the forum state in the present case, call for the application of an interest analysis to determine the governing law in the context of a tort. See Padula v. Lilarn Properties Corp., 84 N.Y.2d 519, 521, 620 N.Y.S.2d 310, 644 N.E.2d 1001 (N.Y.1994). Two inquiries are involved to determine which jurisdiction has the greatest interest in having its law applied: “(1) what are the significant contacts and in which jurisdiction are they located; and (2) whether the purpose of the law is to regulate conduct or allocate loss.” Id. As discussed previously in connection with the choice-of-law analysis for the aiding and abetting claim, in the case *357of a tort involving the violation of a law intended to regulate conduct rather than to allocate loss, the place of the tort has a predominant and generally exclusive interest in the litigation. See Id. at 522, 620 N.Y.S.2d 310, 644 N.E.2d 1001 (“If conflicting conduct-regulating laws are at issue, the law of the jurisdiction where the tort occurred will generally apply because that jurisdiction has the greatest interest in regulating behavior within its borders”) (internal citation and quotation marks omitted); accord In re Lois/USA, Inc., 264 B.R. at 108 (citing Padula, 84 N.Y.2d at 522, 620 N.Y.S.2d 310, 644 N.E.2d 1001). The tort of deepening insolvency, if recognized, involves a violation of state laws intended to govern standards of conduct. Accordingly the law of the place where deepening insolvency is allegedly to have been committed should govern the cause of action. Because the alleged delay in filing the Petition — the crux of the claim — most likely occurred in the context of management decisions made at the Debtor’s principal place of business located in New York, the law of the place of the tort is New York. Cf. In re Lois/USA, Inc., 264 B.R. at 107 (applying a New York interest analysis to several tort claims brought on behalf of debtor’s estate and concluding that the law of the debtor’s principal place of business governs). Thus New York law should govern this cause of action.14
II. Viability of Cause of Action
As stated above, New York does not recognize deepening insolvency as an independent cause of action. See Interstate Foods v. Lehmann, 2008 WL 4443850, No. 06 Civ. 13469, *3 (S.D.N.Y. Sept. 30, 2008); In re Global Serv. Group LLC, 316 B.R. at 458 (“No reported New York case ... has ruled that ‘deepening insolvency’ is an independent tort.”). In New York, deepening insolvency is regarded as a theory of damages that may only result from the breach of a separate duty or the commission of a separate tort.15 *358See Id. A plaintiff seeking to recover under a deepening insolvency theory therefore must demonstrate that in prolonging the relevant corporation’s life and increasing its debts, the defendants’ actions gave rise to a separate cause of action. See Id. Given that elsewhere in this Opinion, the Court has dismissed all independently-recognized causes of action brought by the Committee, no basis can be found for sustaining the Committee’s deepening insolvency claim even if the deepening insolvency claim were interpreted, in the light most favorable to the Committee as plaintiff, to have been alleged merely as a theory of damages. This is so given the fact that no separate and viable cause of action to which such theory of damages could plausibly attach has withstood the relevant motion(s) to dismiss. Because deepening insolvency is not recognized as an independent cause of action under New York law and because the Committee’s deepening insolvency claim cannot stand alone as a theory of damages in light of the dismissal of independent causes of action to which it could have related, the claim is hereby dismissed against Mr. Freeh, Dr. Blomen and Blomenco B.V.
Breach of Employment Agreements
The Amended Complaint further alleges that Defendants breached certain “employment-related agreement[s].” AC at ¶ 68. Nowhere in the Amended Complaint are the agreements in question identified in any manner. As such, it is of course impossible for one to point to any provision of an unspecified agreement upon which the claim may be based. See In re Adelphia Commc’ns Corp., 2007 WL 2403553 at *4 (“In order to adequately allege the existence of an agreement, a plaintiff must plead the provisions of the contract upon which the claim is based.”) (internal citation and quotation marks omitted). The pleadings with respect to the Committee’s breach-of-contract claim thus fall woefully short of the requirement under Federal Rule of Civil Procedure 8(a)(2) that a plaintiffs pleadings give the Defendants “fair notice of what the ... claim is and the grounds upon which it rests.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955. In light of such deficient pleadings, the Court accordingly grants the relevant motion to dismiss to the extent it relates to the breach-of-contract claim. See In re Adelphia Commc’ns Corp., 2007 WL 2403553 at *5 (dismissing a breach-of-contract claim due to the plaintiffs failure to name any contract or identify any term of any agreement purportedly breached).
Unjust Enrichment
The Amended Complaint pleads that “Defendants received interests in property that rightfully belonged to the Debtor” as a result of their receipt of allegedly excessive bonuses and other compensation. AC at ¶ 62. Because the Debtor did not receive “any benefit or received less than reasonably equivalent value” in return for the compensation payments made to Defendants, Defendants unfairly benefited from such payments and were “unjustly enriched thereby.” AC at ¶¶ 63-64. The *359Committee seeks recovery of the value of the payments from Defendants based on the foregoing allegations of unjust enrichment.
I. Choice-of-Law Analysis
Because the parties disagree as to the body of law to be applied to the unjust enrichment claim,16 the Court must perform a choice-of-law analysis to determine the applicable law prior to assessing the pleading sufficiency of the claim. New York choice-of-law principles dictate that an interest analysis be applied to a claim sounding in equity, such as a claim for unjust enrichment. See Icebox-Scoops, Inc. v. Finanz St. Honore, B. V., 676 F.Supp.2d 100, 109-10 (E.D.N.Y.2009) (applying New York’s interest analysis to determine the governing law for an unjust enrichment claim) (citing Krock v. Lipsay, 97 F.3d 640, 645 (2d Cir.1996)); Tyson v. Straight-Out Promotions, LLC (In re Tyson), 412 B.R. 623, 635 n. 14 (Bankr.S.D.N.Y.2009) (same). As previously analyzed and concluded in connection with the application of an interest analysis to the deepening insolvency claim, New York law — the law of the place where the allegedly actions giving rise to the unjust enrichment claim occurred — should also govern the unjust enrichment claim. Such is the case given that relevant compensation decisions were most likely made in New York, the Debtor’s principal place of business. See Icebox-Scoops, Inc., 676 F.Supp.2d at 110 (applying the law of New York, i.e. the plaintiffs principal place of business and the place of the tort, to an unjust enrichment claim).
II. Pleading Sufficiency
Under New York law, a claim for unjust enrichment consists of the following three elements: “that (1) defendant was enriched, (2) at plaintiffs expense, and (3) equity and good conscience militate against permitting defendant to retain what plaintiff is seeking to recover.” Carroll v. LeBoeuf, Lamb, Greene & MacRae, LLP, 623 F.Supp.2d 504, 514 (S.D.N.Y.2009) (quoting Briarpatch Ltd., L.P. v. Phoenix Pictures, Inc., 373 F.3d 296, 306 (2d Cir.2004)) (other citation omitted); accord Giordano v. Thomson, 564 F.3d 163, 170 (2d Cir.2009). Although the Amended Complaint does allege that Defendants were enriched in the form of bonus and other compensation payments presumably paid by the Debtor and thus at the Debt- or’s expense, the Amended Complaint does not adequately explain factually how “equity and good conscience militate against” allowing Defendants to retain such payments. Cf. Pawaroo v. Countrywide Bank, 2010 WL 1048822, No. 09-CV-2924, *7 (E.D.N.Y. Mar. 18, 2010) (“[A] claim for unjust enrichment must specify the manner and extent to which a defendant was unjustly enriched.”) Conclusory and general allegations in paragraphs six-three and sixty-four of the Amended Complaint that the Debtor received disproportionately little or no benefit in connection with the payments do not shed light on the third element of the claim. Moreover, allegations in paragraph five that Defendants “caused [the Debtor’s] insolvency and financial crisis and then compounded [its] problems by awarding themselves generous bonuses” are insufficient for purposes of pleading the third element given the complete lack of specific pleadings with *360respect to causation and given the dismissal of the deepening insolvency claim elsewhere in this Opinion. Cf. Carroll, 623 F.Supp.2d at 513-14 (refusing to find that equity militates against permitting a defendant to retain the benefits in question where the plaintiffs other claims, sounding in fraud, have been dismissed). Because the Committee has failed to plead the third element of the claim adequately, the Court concludes that the unjust enrichment claim cannot survive the motions to dismiss. See Pawaroo, 2010 WL 1048822 at *7 (dismissing an unjust enrichment claim because the plaintiff alleged “little more than the general notion that [the defendant] unjustly received benefits”.); cf. Old Republic Nat’l Title Ins. Co. v. Cardinal Abstract Corp., 14 A.D.3d 678, 680, 790 N.Y.S.2d 143 (App.Div.2d 2005) (“[T]he plaintiffs allegation that the appellants received benefits, standing alone, is insufficient to establish a cause of action to recover damages for unjust enrichment”) (internal citations omitted).
Equitable Subordination
The Amended Complaint asserts that the various alleged actions of Defendants constitute “inequitable, unconscionable, and unfair conduct” that “resulted in harm to the Debtor and its creditors and/or gave [] Defendants an unfair advantage over the Debtor’s other creditors.” AC at ¶¶ 77-78. The Committee requests equitable subordination of all of Defendants’ claims under section 510 of the Code based on such alleged actions.17
Section 510(c) of the Code provides that a bankruptcy court may, “under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim, or all or part of an allowed interest to all or part of another allowed interest....” 11 U.S.C. § 510(c)(1). This section of the Code permits a bankruptcy court to subordinate the claim of a creditor if “the conduct of the claimant in relation to other creditors is or was such that it would be unjust or unfair to permit the claimant to share pro rata with the other claimants of equal status,” notwithstanding the “apparent legal validity” of the relevant claim. In re Lois/USA, Inc., 264 B.R. at 132.
To plead equitable subordination successfully, a complaint must contain enough facts to satisfy each part of the following three-part test: (1) that the defendant-claimant engaged in inequitable conduct, (2) that the misconduct caused injury to the creditors or conferred an unfair advantage on the defendant-claimant and (3) that bestowing the remedy of equitable subordination is not inconsistent with bankruptcy law. See In re Mobile Steel Co., 563 F.2d 692, 700 (5th Cir.1977) (establishing the three-part test), cited with approval in United States v. Noland, 517 U.S. 535, 538, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996); see also In re Lois/USA 264 B.R. at 132 n. 160 (“Mobile Steele’s three prong analysis has been widely adopted by courts as the proper test for equitable subordination under 510(c).”) (internal citation and quotation marks omitted). The third prong of the Mobile Steel test carries minimal significance today because the current Bankruptcy Code provides explicitly for the remedy of equitable subordination, whereas the *361former Bankruptcy Act — under which In re Mobile Steel Co. was decided — did not. See In re Verestar, Inc., 343 B.R. 444, 461 (Bankr.S.D.N.Y.2006); accord In re 80 Nassau Assocs., 169 B.R. 832, 841 (Bankr.S.D.N.Y.1994) (noting that the third prong of the Mobile Steel test is “likely to be moot”). Accordingly, a complaint that satisfies the first two prongs of the Mobile Steel test would survive a motion to dismiss.
In order to satisfy the first prong of the test (i.e. that Defendants engaged in inequitable conduct), the relevant allegations in the Amended Complaint must adequately delineate conduct on the part of Defendants that “may be lawful but is nevertheless contrary to equity and good conscience.” In re Verestar Inc., 343 B.R. at 461. Such inequitable conduct may compass fraud, breach of a fiduciary duty, unjust enrichment, or “enrichment brought about by unconscionable, unjust or unfair conduct or double-dealing.” Id.; accord In re Lois/USA Inc., 264 B.R. at 134 (quoting In re 80 Nassau Assocs., 169 B.R. at 837). Traditionally, inequitable conduct has been found only in cases involving at least one of the following three paradigms: (i) fraud, illegality or breach of fiduciary or other legally recognized duties; (ii) undercapitalization of the debt- or; and (iii) control or use of the debtor as a mere instrumentality or alter ego to benefit another. See In re Lois/USA Inc., 264 B.R. at 134-35; see also In re Verestar Inc., 343 B.R. at 461; New Jersey Steel Corp. v. Bank of New York, 1997 WL 716911, No. 95 Civ. 3071, *4 (S.D.N.Y. Nov. 17, 1997). Thus the Committee must sufficiently allege conduct that fits within at least one such paradigm in order to meet the first condition of the Mobile Steel test. See In re Lois/USA Inc., 264 B.R. at 135.
The scrutiny for presence of inequitable conduct is more stringent with respect to creditors who are insiders of the debtor, such as the moving Defendants in the instant case,18 as opposed to ordinary creditors. See New Jersey Steel Corp., 1997 WL 716911 at *4; In re Interstate Cigar Company, Inc., 182 B.R. 675, 679 (Bankr.E.D.N.Y.1995). In such cases, a breach of fiduciary duty or even mere engagement in conduct that is “somehow unfair” on the part of the insider may constitute inequitable conduct. See In re Interstate Cigar Company, Inc., 182 B.R. at 679 (citing Bellanca Aircraft, 850 F.2d at 1282, n. 13 (8th Cir.1988)). In the present case, however, the Court has previously dismissed the Committee’s breach of fiduciary and unjust enrichment claims against the moving Defendants-creditors for failure to state such claims. Thus neither breach of fiduciary duty nor unjust enrichment constitutes valid grounds for the Committee’s allegations of inequitable conduct. With respect to the remaining types of conduct enumerated in the first (actual fraud, illegality, etc.) and third (control or use of debtor as an instrumentality) paradigms described in the immediately preceding paragraph, the Amended Complaint contains no relevant allegations. *362In light of (i) the Committee’s failure to state the breach-of-fiduciary-duty and unjust enrichment claims and (ii) the complete lack in the Amended Complaint of allegations relating to other applicable conduct, the stricter scrutiny applicable to insiders is inapposite to conduct falling within the first and third paradigms, as there do not exist sufficient allegations relating to any such conduct to which such scrutiny may be applied. It also follows that no basis may be found for an inference of inequitable conduct under either the first or third paradigm.
In light of the foregoing analysis, any pleadings relating to inequitable conduct would have to be based upon the remaining paradigm, undercapitalization of the Debtor. Paragraph thirty-six of the Amended Complaint does contain some allegations of undercapitalization. In the absence of adequate pleadings relating to the types of conduct described under the first and third paradigms, however, under-capitalization alone does not constitute sufficient grounds for an allegation of inequitable conduct. See In the Matter of Lifschultz Fast Freight, 132 F.3d 339, 345 (7th Cir.1997) (holding that undercapitali-zation in itself does not constitute inequitable conduct justifying equitable subordination of an insider’s claim under section 510(c) of the Code); accord Drake v. Franklin Equipment Co. (In re Franklin Equipment Co.), 416 B.R. 483, 514, n. 34 (Bankr.E.D.Va.2009). An adequately alleged claim for equitable subordination requires well-pled allegations of “suspicious, inequitable conduct” beyond mere under-capitalization. See Id. (citing In re Branding Iron Steak House, 536 F.2d 299, 302 (9th Cir.1976)).
Given the insufficiency of undercapitali-zation as an independent basis for pleading inequitable conduct and given the deficient or entirely absent pleadings with respect to other types of inequitable conduct, the Court concludes that the first prong of the Mobile Steel test — Defendants’ alleged engagement in inequitable conduct — has not been satisfied. There is no need to analyze the remaining viable prong of the Mobile Steel test (i.e. injury to creditors or unfair advantage to claimants), as the equitable subordination claim can only withstand the relevant motion to dismiss if both parts of the test are satisfied. Moreover, it is a simple matter of logic that one cannot speak of injury suffered or unfair advantage conferred if the conduct from which such injury or advantage allegedly emanated cannot be established in the first instance. The Court concludes accordingly that the equitable subordination claim against the moving Defendants, Dr. Blo-men and Blomenco B.V., must be dismissed.
Objections to Claims Against the Debtor’s Estate
The Committee urges the Court to disallow all claims of Defendants under section 502(d) of the Code because Defendants “have not turned over property recoverable under, inter alia, sections 544, 547, 548, and 550 of the Bankruptcy Code.” AC at ¶ 84. Section 502(d) of the Code states in relevant part:
[T]he court shall disallow any claim of any entity from which property is recoverable under section ... 550 ... of this title or that is a transferee of a transfer avoidable under section ... 544, ... 547, 548 ... of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section ... 550 ... of this title.
Section 502 “precludes entities which have received voidable transfers from sharing in the distribution of the assets of the estate unless and until the voidable transfer has been returned to the estate.” Rhythms *363NetConnections Inc. v. Cisco Systems Inc. (In re Rhythms NetConnections Inc.), 300 B.R. 404, 409 (Bankr.S.D.N.Y.2003) (internal citation and quotation marks omitted). Because the Committee has failed to state any avoidance claim under sections 544, 547 or 548 of the Code, the issue of unre-turned voidable transfers is inapposite. As such, there is no basis for disallowing Defendants’ claims. Accordingly, the relevant Defendants’ motion to dismiss is granted to the extent it relates to the Committee’s objections to such Defendants’ claims.
Leave to Amend
Federal Rule of Civil Procedure 15(a)(2) states that following an initial amendment to a complaint, further leave to amend should be freely granted at the court’s discretion when justice so requires.19 One main exception to this general rule is futility of amendment. See Acito v. IMCERA Group, Inc., 47 F.3d 47, 55 (2d Cir.1995); In re M. Fabrikant & Sons, Inc., 394 B.R. at 746. Because by proffering additional relevant facts, the Committee may be able to cure the above-described pleading defects with respect to all dismissed claims except for the deepening insolvency claim, the Committee is hereby granted leave to replead such claims in light of the relatively liberal standard for granting such leave. With respect to the deepening insolvency claim, however, a further amendment would be futile because no amount of additional factual enhancement can alter the legal conclusion that the cause of action, as discussed above, is not recognized in New York. As such, leave to replead the deepening insolvency claim is hereby denied. Cf. In re Merrill Lynch & Co., Inc., 273 F.Supp.2d 351, 393 (S.D.N.Y.2003) (denying leave to amend because pleading defects with respect to claims that were time-barred as a matter of law were not curable).
CONCLUSION
For the reasons stated above, the motions to dismiss filed by Dr. Blomen and Blomenco B.V. and by Mr. Freeh, respectively, are both granted in their entirety. With the exception of the deepening insolvency claim, the Committee is granted leave to replead all dismissed claims against the relevant moving Defendants within sixty days of the entry of an order regarding this Opinion.
The Defendants are to settle an order consistent with this Opinion.
. The Committee filed its initial complaint on April 1, 2009. Primarily stylistic revisions and grammatical corrections had been made to the initial complaint in order to produce the Amended Complaint. As such, the Committee did not include any additional relevant facts in the Amended Complaint. The conclusions set forth in this Opinion would not have differed if the Court were to address the allegations set forth in the initial complaint instead.
. Rather than moving to dismiss the Amended Complaint or a portion thereof, the remaining named Defendants proceeded to file answers thereto.
, Schedule 3(c) ("Payments to Insiders within One Year of Filings”) to the Statement of Financial Affairs lists the amount of each bonus and the identity of the recipient with respect to each bonus payment. Dr. Leo Blo-men, a Defendant who filed a Rule 12(b)(6) motion, is listed on the schedule as a recipient of a bonus payment in the amount of $168,452.92 on February 19, 2008. The other individual Defendant who filed a motion to *345dismiss, John Freeh, was not listed as a bonus recipient. Both Dr. Blomen and John Freeh — along with non-movant Defendants Larry Scott Wilshire, Gregory Morris, Philip Kranenburg, Christopher Garofalo, Andrew Thomas, Joshua Tosteson, Michael Basham, Alton Romig, Howard-Yana Shapiro, Brian McGee and Brian Bailys — are listed in more than one place on the schedule as recipients of various payments from the Debtor, including payroll deposits.
. Section 1701.59 requires a director to perform his duties "in good faith, in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances.” Ohio Rev. Code § 1701.59(B).
. Dr. Blomen states in his Motion to Dismiss that he was the CEO of the Debtor until November 2007 and thereafter served only as a director of the Parent. See Motion of Dr. Leo Blomen and Blomenco B.V. to Dismiss Amended Adversary Complaint at p. 11, n. 4. He argues that because the alleged fiduciary duty breaches occurred after December 31, 2007 (at which time he had already resigned from the CEO post), he does not owe any fiduciary duty to the Debtor during the time period of the alleged breaches. See Id. at p. 11. Because Dr. Blomen's argument involves factual assertions that should not be resolved on a Rule 12(b)(6) motion, it is inappropriate for the Court to address his argument at this stage of the proceeding. In any event, as stated below, the breach-of-fiduciary-duty claim against Dr. Blomen is being dismissed on other grounds.
. In addition to breaches of fiduciary duties to the Debtor, the Amended Complaint also alleges that Defendants violated their fiduciary duties to the creditors of the Debtor. Ohio *349caselaw is split as to whether directors and officers of a corporation owe any fiduciary duty to its creditors upon the corporation’s insolvency. See In re Amcast Indus. Corp., 365 B.R. 91 at 104-09 (Bankr.S.D.Ohio 2007) (discussing split and providing historical background); compare In re Amcast Indus. Corp., 365 B.R. at 110 (holding that corporate directors do not owe any fiduciary duty to creditors, relying on an interpretation of Ohio Rev.Code § 1701.59, which states that a director may consider the interests of creditors when making important corporate decisions) (emphasis added) with DeNune III v. Consol. Capital of North America, Inc., 288 F.Supp.2d 844, 859 (N.D.Ohio 2003) (holding that under Ohio law officers and directors of an insolvent corporation owe a fiduciary duty to the corporation’s creditors not to waste corporate assets and citing for this proposition Thomas v. Matthews, 94 Ohio St. 32, 47, 113 N.E. 669 (1916), an old Ohio Supreme Court case that some consider to have been superseded by the intervening enactment of Ohio Rev.Code § 1701.59). There is no need, however, for this Court to decide whether the Ohio Supreme Court, if faced with the issue today, would recognize the existence of any fiduciary duty to corporate creditors. Cf. Adelphia Commc’ns v. Bank of America (In re Adelphia Commc’ns Corp.), 365 B.R. 24, 42 (Bankr.S.D.N.Y.2007) (stating that in determining whether a tort for aiding and abetting breaches of fiduciary duties may be deemed actionable under Pennsylvania law by a federal district court sitting in New York, the relevant inquiry "is not whether the Pennsylvania Supreme Court has already recognized the existence of the cause of action, but rather whether the Pennsylvania Supreme Court would do so if presented with the issue”). This is so because the Committee’s claim for breach of fiduciary duty to creditors would have failed on grounds of pleading deficiencies, regardless of whether the claim is deemed actionable by this Court. As stated below, the Committee has not adequately alleged every element of its breach-of-fiduciary-duty claim.
. Although not included in the Amended Complaint, the Court may choose to take judicial notice of the Debtor’s principal place of business and the location of its principal assets, as such information has been included in the Petition filed with this Court. See Chambers v. Time Warner, 282 F.3d 147, 153 (2d Cir.2002) (stating that courts may consider, on a motion to dismiss, facts of which judicial notice may be taken).
. As discussed below in further detail in connection with the preference claims, the Amended Complaint has also completely failed to identify any specific transfer made to Mr. Freeh. This pleading defect alone would also constitute independent grounds for dismissing the constructive fraudulent transfer claims against Mr. Freeh, as the relevant pleadings do not provide even the minimum of information required to "give the defendant fair notice of what the plaintiff's claim is,” as required under Federal Rule of Civil Procedure 8(a). In re Fabrikant & Sons, 394 B.R. at 735.
. The motion filed by Dr. Blomen and Blo-menco B.V. does not attempt to specify applicable state law. Instead, this group of Defendants argues that the Committee has no standing to bring the section 544 claim because it has failed to allege the existence of a specific triggering creditor who could have avoided the transfer under state law. The main case cited for this standing requirement, however, finds such requirement to be unnecessary. See Musicland Holding Corp. v. Best Buy Co., Inc. (In re Musicland Holding Corp.), 398 B.R. 761, 780 (Bankr.S.D.N.Y.2008). The Musicland court acknowledges the existence of a caselaw split on this issue but observes that all relevant decisions in the Southern District of New York have rejected the requirement to identify an actual creditor. See Id. at 779-80.
. The locations of Defendants have little impact on the analysis due to the geographically dispersed nature of their residences. According to the Amended Complaint, Defendants maintain addresses at places as diverse as the Netherlands, Pennsylvania, Texas, New York, Connecticut, New Mexico, California, Ohio and Florida. Similarly, creditors are not concentrated in one or two states, although multiple secured and unsecured creditors are located in Ohio, Pennsylvania and New York. See Schedules D, E, F to the Statement of Financial Affairs.
. Although Schedule 3(c) to the Statement of Financial Affairs sets forth the amount and type of each transfer made to Mr. Freeh during the one-year period prior to the Petition Date, the contents of the schedule alone do not contain sufficient information to enable the Court to identify the specific transfers with respect to which the preference claims relate.
. The other location is Ohio.
. Deepening insolvency is likely to be a viable cause of action in Pennsylvania under certain circumstances. See Official Comm. v. Lafferty, 267 F.3d 340, 349 (3d Cir.2001) (“[The Third Circuit] concludes that, if faced with the issue, the Pennsylvania Supreme Court would determine that ‘deepening insolvency’ may give rise to a cognizable injury.”); but see Seitz v. Detweiler (In re CitX Corp.), 448 F.3d 672, 680 (3d Cir.2006) (limifting the holding in Lafferly to causes of action sounding in fraud). In contrast, neither Ohio nor New York has recognized deepening insolvency as an independent cause of action. See e.g. In re Amcast Indus. Corp., 365 B.R. 91, 119 (Bankr.S.D.Ohio 2007) ("[T]he court concludes that Ohio courts would not recognize deepening insolvency as an independent cause of action.”); Kittay v. Atlantic Bank (In re Global Serv. Group LLC), 316 B.R. 451, 458 (Bankr.S.D.N.Y.2004) (noting that deepening insolvency is not an independent cause of action in New York).
. Dr. Blomen and Blomenco B.V. cite In re Magnesium Corp., 399 B.R. 722 (Bankr.S.D.N.Y.2009) as the basis for applying Ohio law — the law of the Debtor’s place of incorporation — to the claim. In Buchwald, however, deepening insolvency was not actually pled as a cause of action. See Id. at 760, n. 128 ("Only a tortured reading of the Complaint makes deepening insolvency an element of any of the traditional tort causes of action stated.”) (internal citation and quotation marks omitted). The oblique reference made therein to deepening insolvency merely suggests that Delaware law, the law of the debtors' place of incorporation, would have applied to a deepening insolvency claim — if the complaint were to be interpreted to allege such claim — in the context of allegations involving violations of fiduciary duties by the debtors' officers and directors. See Id. ("Deepening insolvency is not recognized as a separate cause of action under Delaware law, the state under whose law each of [the debtors] were organized, which governs the duties of officers and directors to the companies they serve.") (emphasis added). As discussed and concluded previously, a claim for breach of fiduciary duty would have indeed been governed by the law of the debtors' place of incorporation under the internal affairs doctrine. In any event, even if the Court were to apply Ohio law to the instant deepening insolvency claim, dismissal thereof would still have been warranted, as neither Ohio nor New York recognizes deepening insolvency as an independent cause of action.
. Courts around the country have differed on the treatment of deepening insolvency. Some have viewed it as an independent cause of action, see, e.g. Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340, 349-52 (3d Cir.2001) (addressing Pennsylvania law), while others have considered it to be a mere theory of damages. See In re Global Serv. Group LLC, 316 B.R. 451, 457-58 (Bankr.S.D.N.Y.2004) (citing Schacht v. Brown, 711 F.2d 1343, 1350 (7th Cir.1983); Allard v. Arthur Andersen & Co., 924 F.Supp. 488, 494 (S.D.N.Y.1996); Drabkin v. L & L Constr. Assocs., Inc. (In re Latin Inv. Corp.), 168 B.R. 1, 6 (Bankr.D.C.1993)). Still others have rejected or questioned the validity of *358deepening insolvency, both as a theory of damages and a cause of action. See Id. (citing Florida Dep't of Ins. v. Chase Bank of Texas Nat’l Ass'n, 274 F.3d 924, 935-36 (5th Cir.2001); Askanase v. Fatjo, 1996 WL 33373364, No.Civ. A.H-91-3140, *28 (S.D.Tex. Apr. 1, 1996); Feltman v. Prudential Bache Sec., 122 B.R. 466, 473-74 (S.D.Fla. 1990); Coroles v. Sabey, 79 P.3d 974, 983 (Utah Ct.App.2003)). Those courts that have denied the treatment of deepening insolvency as an independent cause of action view it as redundant with causes of action for breach of fiduciary duty and for fraud. See e.g., Trenwick America Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 205 (Del.Ch.2006).
. Dr. Blomen and Blomenco B.V. assert that Ohio law applies to the claim while Mr. Freeh cites both New York and Ohio law in his briefs. The Committee, in contrast, simply reserves the right to argue at a later point in the proceeding that another state’s law applies.
. Schedule E ("Creditors Holding Unsecured Priority Claims”) to the Statement of Financial Affairs lists John Freeh as a creditor holding a $175,384.74 unsecured claim in the form of employee deferred salary incurred in 2008, of which $10,950.00 has been classified as the amount entitled to priority. Neither Dr. Blomen nor Blomenco B.V. appear on any schedule of creditors.
. Section 101(31)(B) of the Code provides that if a debtor is a corporation, the term "insider” includes:
(i) director of the debtor;
(ii) officer of the debtor;
(iii) person in control of the debtor;
(iv) partnership in which the debtor is a general partner;
(v) general partner of the debtor; or
(vi)relative of a general partner, director, officer, or person in control of the debt- or;....
Because Dr. Blomen and Mr. Freeh allegedly served as directors or officers of the Debtor, they are deemed to be insiders for purposes of this analysis based on sub-clauses (i) and (ii) of this section.
. A plaintiff may amend its complaint once as a matter of course under Federal Rule of Civil Procedure 15(a)(1). The Committee has already done so, as described supra in footnote 1. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488031/ | Putnam v Kibler (2022 NY Slip Op 06574)
Putnam v Kibler
2022 NY Slip Op 06574
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., SMITH, CENTRA, PERADOTTO, AND NEMOYER, JJ.
607 CA 21-01789
[*1]ASHLEY C. PUTNAM, PLAINTIFF-RESPONDENT,
vMICHAEL J. KIBLER, JASON D. KIBLER, DEFENDANTS, AND ANDREW R. GNIAZDOWSKI, DEFENDANT-APPELLANT.
LAW OFFICES OF JOHN TROP, ROCHESTER (MATTHEW T. MURRAY OF COUNSEL), FOR DEFENDANT-APPELLANT.
DIFILIPPO, FLAHERTY & STEINHAUS, PLLC, EAST AURORA (ROBERT D. STEINHAUS OF COUNSEL), FOR PLAINTIFF-RESPONDENT.
Appeal from an order of the Supreme Court, Erie County (Catherine R. Nugent Panepinto, J.), entered December 3, 2021. The order denied the motion of defendant Andrew R. Gniazdowski to dismiss plaintiff's complaint and any cross claims against him.
It is hereby ORDERED that the order so appealed from is unanimously reversed on the law without costs, the motion is granted, and the complaint and any cross claims are dismissed against defendant Andrew R. Gniazdowski.
Memorandum: Plaintiff was riding as a passenger on a snowmobile operated by defendant Jason D. Kibler (Kibler) and owned by defendant Michael J. Kibler (collectively, Kiblers) when a snowmobile operated by defendant Andrew R. Gniazdowski (defendant), who was traveling on the same trail in the opposite direction, struck the Kiblers' snowmobile head-on. All three individuals who had been snowmobiling sustained injuries and were transported to the hospital. Kibler, who reported to the police that he was operating the snowmobile as far to the right as possible and was not going fast, was not issued a ticket. Conversely, defendant, who could not recall whether he was on the correct side of the trail as he approached a blind spot on a hill just before the collision, was issued a ticket for reckless operation.
Plaintiff and Kibler both retained the same law firm to represent them. The attorney at the law firm thereafter negotiated settlements, which Kibler accepted. The attorney then informed plaintiff that defendant, through his insurance carrier, had offered to settle any personal injury action against him for $25,000. Plaintiff subsequently signed a release that was witnessed and notarized by the attorney. A few days later, the law firm emailed a copy of the executed release to the insurer with a request that the insurer send a settlement check in the amount of $25,000 and payable to plaintiff to the law firm's office. According to the insurer's senior claims service specialist, the settlement check was issued about one week later and mailed to the law firm.
Plaintiff subsequently commenced the present personal injury action alleging that she suffered injuries as a result of the negligence or recklessness of defendant and the Kiblers. Defendant moved pursuant to CPLR 3211 (a) (5) to dismiss plaintiff's complaint and any cross claims against him on the basis of the release. Supreme Court denied the motion without explanation. Defendant contends on appeal that the court erred in denying the motion because he met his initial burden of establishing that he was released from the claims now brought against him in plaintiff's action and plaintiff failed to meet her burden in opposition to the motion. We agree, and we therefore reverse.
"Generally, a valid release constitutes a complete bar to an action on a claim which is the [*2]subject of the release . . . If the language of a release is clear and unambiguous, the signing of a release is a jural act binding on the parties" (Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 17 NY3d 269, 276 [2011] [internal quotation marks omitted]). "A release 'should never be converted into a starting point for . . . litigation except under circumstances and under rules which would render any other result a grave injustice' " (id., quoting Mangini v McClurg, 24 NY2d 556, 563 [1969]). Thus, "[a] release may be invalidated . . . for any of 'the traditional bases for setting aside written agreements, namely, duress, illegality, fraud, or mutual mistake' " (id., quoting Mangini, 24 NY2d at 563). "Although a defendant has the initial burden of establishing that it has been released from any claims, a signed release 'shifts the burden of going forward . . . to the [plaintiff] to show that there has been fraud, duress or some other fact which will be sufficient to void the release' " (id., quoting Fleming v Ponziani, 24 NY2d 105, 111 [1969]).
"In assessing a motion to dismiss on the ground that an action may not be maintained because of a release (see CPLR 3211 [a] [5]), the allegations in the complaint are to be treated as true, all inferences that reasonably flow therefrom are to be resolved in [the plaintiff's] favor, and where, as here, the plaintiff has submitted an affidavit in opposition to the motion, it is to be construed in the same favorable light" (Armenta v Preston, 196 AD3d 1197, 1197 [4th Dept 2021] [internal quotation marks omitted]; see Fimbel v Vasquez, 163 AD3d 1120, 1121 [3d Dept 2018]; Sacchetti-Virga v Bonilla, 158 AD3d 783, 784 [2d Dept 2018]). "At the same time, however, allegations consisting of bare legal conclusions as well as factual claims flatly contradicted by documentary evidence are not entitled to any such consideration" (Simkin v Blank, 19 NY3d 46, 52 [2012] [internal quotation marks omitted]).
Here, as a preliminary matter, plaintiff asserts that defendant waived his defense based on the release by failing to raise it in his answer (see CPLR 3211 [e]). Although we may consider that contention despite the fact that it is raised for the first time on appeal (see Edwards v Siegel, Kelleher & Kahn, 26 AD3d 789, 790 [4th Dept 2006]; Oram v Capone, 206 AD2d 839, 840 [4th Dept 1994]), we agree with defendant that plaintiff's assertion is devoid of merit. The record establishes that defendant asserted in one of his affirmative defenses that "plaintiff has provided a signed release to this answering defendant, such that this action is barred by the release." Defendant further asserted in the answer that he was "entitled to dismissal of the complaint and any cross-claims by virtue of the release" and then demanded dismissal "based upon the release running in favor of this answering defendant."
On the merits, we conclude that defendant met his initial burden of establishing that he was released from any claims by submitting the release executed by plaintiff (see Armenta, 196 AD3d at 1197; Cain-Henry v Shot, 194 AD3d 1465, 1466 [4th Dept 2021]; Ford v Phillips, 121 AD3d 1232, 1233 [3d Dept 2014]). As defendant contends, "the language of [the] release is clear and unambiguous" and plaintiff's action against defendant to recover for personal injuries is barred (Booth v 3669 Delaware, 92 NY2d 934, 935 [1998]; see Carew v Baker, 175 AD3d 1379, 1381 [2d Dept 2019]; Kulkarni v Arredondo & Co., LLC, 151 AD3d 705, 706 [2d Dept 2017]).
"[A] general release is governed by principles of contract law" (Mangini, 24 NY2d at 562). "A written agreement that is clear, complete and subject to only one reasonable interpretation must be enforced according to the plain meaning of the language chosen by the contracting parties" (Brad H. v City of New York, 17 NY3d 180, 185 [2011]). "To determine whether a writing is unambiguous, language should not be read in isolation because the contract must be considered as a whole" (id.). An agreement "is unambiguous if the language it uses has 'a definite and precise meaning, unattended by danger of misconception in the purport of the [agreement] itself, and concerning which there is no reasonable basis for a difference of opinion' " (Greenfield v Philles Records, 98 NY2d 562, 569 [2002]).
The release in this case contains preliminary broad language releasing defendant from "any and all claims, demands, damages, costs, expenses, loss of services, actions, and causes of action whatsoever . . . arising from any act or occurrence up to the present time and particularly on account of BODILY INJURY, loss or damages of any kind" that plaintiff sustained or may sustain as a consequence of the accident, which is later narrowed by the language stating that the "agreement only releases the parties named above with respect to BODILY INJURY damages arising out of the accident" and that the "agreement does not waive any other party or parties from making any other claims that are not discharged or settled by this release" (see Lexington [*3]Ins. Co. v Combustion Eng'g, 264 AD2d 319, 321-322 [1st Dept 1999]). It is well established that where the language of a release is "limited to only particular claims, demands, or obligations, the instrument will be operative as to those matters alone, and will not release other claims, demands or obligations" (Dury v Dunadee, 52 AD2d 206, 209 [4th Dept 1976] [internal quotation marks omitted]; see Lexington Ins. Co., 264 AD2d at 322).
Even so, the release of defendant for any "bodily injury damages" arising from the accident clearly and unambiguously encompasses plaintiff's action against defendant to recover for personal injuries sustained in the accident (see Ford, 121 AD3d at 1233; Galatioto v Hanes, 224 AD2d 923, 923 [4th Dept 1996]; DeQuatro v Zhen Yu Li, 211 AD2d 609, 609-610 [2d Dept 1995]). While plaintiff attempts to manufacture ambiguity in the phrase "bodily injury damages" by asserting that the release does not "define what those damages are" and by questioning whether medical expenses, pain and suffering, and wage loss would be included therein, that attempt is unavailing inasmuch as the plain meaning of damages for "bodily injury" refers to personal injury damages, including the items listed by plaintiff (see Le Blanc v Allstate Ins. Co., 279 AD2d 876, 877 [3d Dept 2001]; see also CPLR 4111 [e]). Additionally, the inclusion of some isolated legalese in the release does not render the release ambiguous where, as here, the release is readily understandable when appropriately considered as a whole (see Brad H., 17 NY3d at 185); nor is the document ambiguous on the ground that it releases parties other than defendant, such as the insurer and its affiliates (see e.g. Ford, 121 AD3d at 1232-1233).
The burden thus shifted to plaintiff " 'to show that there has been fraud, duress or some other fact which will be sufficient to void the release' " (Centro Empresarial Cempresa S.A., 17 NY3d at 276; see Armenta, 196 AD3d at 1197). Plaintiff failed to meet that burden.
First, we agree with defendant that plaintiff "cannot avoid the effect of th[e] 'plain and unambiguous' release [merely by stating] that [she] did not understand its terms" (Goode v Drew Bldg. Supply, 266 AD2d 925, 925 [4th Dept 1999]; see Dempski v State Farm Mut. Auto. Ins. Co., 291 AD2d 911, 911 [4th Dept 2002], appeal dismissed and lv denied 98 NY2d 661 [2002]; DeQuatro, 211 AD2d at 610; see also Galster Rd. Props., LLC v Penske Truck Leasing Co., L.P., 195 AD3d 1502, 1502 [4th Dept 2021]). Here, in her affidavit, plaintiff simply averred in conclusory fashion that, although she had the opportunity to read the release before signing it, she "did not fully understand what it meant other than [she] was to receive $25,000[ ]." However, inasmuch as plaintiff entered into a plain and unambiguous contract, she "cannot avoid it by [merely] stating that [she] erred in understanding its terms," and "[r]elief from a release may not be granted on the basis of vague or conclusory allegations of error" such as those put forth by plaintiff (Cortino v London Terrace Gardens, 170 AD2d 305, 306 [1st Dept 1991], lv denied 78 NY2d 853 [1991]). Because her claimed lack of understanding is based entirely on conclusory allegations, plaintiff, who was nearly 19 years old when she signed the release, "has failed to show that [she] lacked the competence to understand the nature and meaning of the release" (Galatioto, 224 AD2d at 924; see Verstreate v Cohen, 242 AD2d 862, 862 [4th Dept 1997]). We conclude that, at best, plaintiff established "a mere unilateral mistake . . . with respect to the meaning and effect of the release. Such a mistake does not constitute an adequate basis for invalidating a clear, unambiguous and validly executed release" (Booth v 3669 Del., 242 AD2d 921, 922 [4th Dept 1997], affd 92 NY2d 934 [1998]; see Phillips v Savage, 159 AD3d 1581, 1581 [4th Dept 2018]).
Next, even assuming, arguendo, that a lawyer's conflict of interest could constitute a ground upon which to set aside a release as "not 'fairly and knowingly made' " (Bronson v Hansel, 16 NY3d 850, 851 [2011]; see Mangini, 24 NY2d at 567), we agree with defendant that plaintiff's claim that her attorney necessarily had a conflict of interest in simultaneously representing plaintiff and Kibler at the time of the release—which constitutes a " 'bare legal conclusion[]' " not entitled to favorable consideration—is insufficient to raise a question of fact in that regard (Simkin, 19 NY3d at 52; cf. Sacchetti-Virga, 158 AD3d at 784). With respect to a conflict of interest arising from representation of multiple clients, the Rules of Professional Conduct provide, in relevant part, that "a lawyer shall not represent a client if a reasonable lawyer would conclude that . . . the representation will involve the lawyer in representing differing interests" (Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.7 [a] [1]). Here, the information available immediately following the accident was that plaintiff and Kibler had been riding together on a snowmobile on the right side of a trail when they were struck head-on by a snowmobile operated by defendant, who could not recall whether he was on the correct side [*4]of the trail and received a ticket for reckless operation. In light of that information, a reasonable attorney would conclude that, at the time of the settlement negotiations, plaintiff and Kibler did not have differing interests inasmuch as they were both injured by the negligence of defendant (see Benevolent & Protective Order of Elks of United States of Am. v Creative Comfort Sys., Inc., 175 AD3d 887, 889 [4th Dept 2019]; Saint Annes Dev. Co. v Batista, 165 AD3d 997, 998 [2d Dept 2018]). Thus, there is no basis to deny defendant's motion on the ground that a conflict of interest rendered the release not fairly and knowingly made.
We also agree with defendant that there is no factual or legal basis for setting aside the release for lack of consideration. With respect to the facts, plaintiff incorrectly represents on appeal that "the record is devoid of evidentiary proof in admissible form to support" defendant's suggestion that the settlement amount of $25,000 was forwarded to the law firm. In reply to plaintiff's claim made in opposition to the motion that she never "received" any settlement money, defendant submitted the affidavit of the insurer's senior claims service specialist, who handled plaintiff's claim and averred that a check in the amount of $25,000 and payable to plaintiff and the law firm was mailed to the law firm. An affidavit of an individual with personal knowledge of the facts constitutes evidentiary proof in admissible form (see Desola v Mads, Inc., 213 AD2d 445, 446 [2d Dept 1995]). Thus, to the extent that plaintiff claimed as a factual matter that the settlement amount was never paid by defendant and the insurer, that claim is "flatly contradicted by documentary evidence" and is not entitled to any favorable consideration (Simkin, 19 NY3d at 52 [internal quotation marks omitted]). As a legal matter, plaintiff's claim that she "never received the compensation called for in the release," while perhaps giving rise to a breach of contract claim, is not a valid basis upon which to set aside the release itself (see General Obligations Law § 15-303; Icdia Corp. v Visaggi, 135 AD3d 820, 823 [2d Dept 2016]; Sampson v Savoie, 90 AD3d 1382, 1383 [3d Dept 2011]; Angel v Bank of Tokyo-Mitsubishi, Ltd., 39 AD3d 368, 369 [1st Dept 2007]; Goode, 266 AD2d at 925).
Finally, we agree with defendant that there are no other grounds upon which the release could be invalidated. Based on the foregoing, we reverse the order, grant the motion, and dismiss the complaint and any cross claims against defendant.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488064/ | Matter of County of Ontario v Messervey (2022 NY Slip Op 06611)
Matter of County of Ontario v Messervey
2022 NY Slip Op 06611
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, LINDLEY, WINSLOW, AND BANNISTER, JJ.
884 CA 22-00147
[*1]OF THE REAL PROPERTY TAX LAW BY THE COUNTY OF ONTARIO, PETITIONER-APPELLANT,
vJOHN MESSERVEY, RESPONDENT-RESPONDENT.
JASON S. DIPONZIO, ROCHESTER, FOR PETITIONER-APPELLANT.
WHITCOMB LAW FIRM, P.C., CANANDAIGUA (DAVID J. WHITCOMB OF COUNSEL), FOR RESPONDENT-RESPONDENT.
Appeal from an order of the Supreme Court, Ontario County (Charles A. Schiano, Jr., J.), entered July 16, 2021. The order, among other things, granted the motion of respondent to vacate a default judgment of foreclosure.
It is hereby ORDERED that the order so appealed from is unanimously affirmed without costs.
Memorandum: In this in rem tax foreclosure proceeding pursuant to RPTL article 11, petitioner appeals from an order that, following a hearing, granted the motion of respondent by, among other things, vacating the default judgment of foreclosure against respondent's residential property. Contrary to petitioner's contention, we conclude that Supreme Court did not abuse its discretion in vacating the default judgment of foreclosure "for sufficient reason and in the interests of substantial justice" (Woodson v Mendon Leasing Corp., 100 NY2d 62, 68 [2003]; see Matter of County of Genesee [Butlak], 124 AD3d 1330, 1331 [4th Dept 2015], lv denied 25 NY3d 904 [2015]; see also Matter of County of Ontario [Lundquist 1996 Living Trust], 155 AD3d 1567, 1567-1568 [4th Dept 2017], lv denied 30 NY3d 912 [2018]; Matter of County of Ontario [Middlebrook], 59 AD3d 1065, 1065 [4th Dept 2009]). We have considered petitioner's remaining contentions and conclude that none warrants reversal or modification of the order.
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488087/ | [Cite as State v. Graves, 2022-Ohio-4130.]
COURT OF APPEALS
ASHLAND COUNTY, OHIO
FIFTH APPELLATE DISTRICT
STATE OF OHIO : JUDGES:
: Hon. Earle E. Wise, Jr., P.J.
Plaintiff-Appellee : Hon. W. Scott Gwin, J.
: Hon. Patricia A. Delaney, J.
-vs- :
:
TYE GRAVES : Case No. 22 COA 001
:
Defendant-Appellant : OPINION
CHARACTER OF PROCEEDING: Appeal from the Court of Common
Pleas, Case No. 20 CRI 235
JUDGMENT: Affirmed
DATE OF JUDGMENT: November 17, 2022
APPEARANCES:
For Plaintiff-Appellee For Defendant-Appellant
CHRISTOPHER R. TUNNELL DONALD GALLICK
NADINE HAUPTMAN 190 North Union Street, #102
110 Cottage Street, Third Floor Akron, OH 44304
Ashland, OH 44805
Ashland County, Case No. 22 COA 001 2
Wise, Earle, P.J.
{¶ 1} Defendant-Appellant Tye Graves appeals the August 11, 2021 judgment of
the Ashland County Court of Common pleas which denied his motion to suppress as well
as his motion to dismiss on speedy trial and double jeopardy grounds. Plaintiff-Appellee
is the state of Ohio.
FACTS AND PROCEDURAL HISTORY
{¶ 2} This case arose from a traffic stop which took place on January 2, 2020. On
that day Ohio State Highway Patrol Trooper Richard Kluever stopped appellant herein
after radar indicated appellant was traveling between 79 and 80 miles per hour in a 60
mile per hour zone.
{¶ 3} When Kluever approached appellant's vehicle he immediately detected the
odor of burnt marijuana. Kluever advised appellant he had been stopped for speeding
and asked for appellant's driver's license and proof of insurance which appellant provided.
{¶ 4} Kluever asked appellant about marijuana use and appellant stated he did
not use marijuana. He first blamed the odor emanating from the car on other people he
had transported in his car, but eventually admitted he had a small bag of marijuana in the
car. Kluever removed appellant from his car, patted him down and placed him in his
cruiser. He then searched appellant's car based on the odor of marijuana.
{¶ 5} Appellant told Kluever the marijuana was in a bookbag in the trunk, but
nothing was found in the trunk. In the passenger compartment, however, Kluever found
a bookbag containing 18 vape pen cartridges marked "Dank vape cartridges." An
additional cartridge was located on the dashboard. In Kluever's training and experience,
Ashland County, Case No. 22 COA 001 3
these cartridges contain THC, the main psychoactive compound in marijuana, in the form
of a liquid hashish-like substance.
{¶ 6} Kluever administered standardized field sobriety testing which appellant
performed poorly. Appellant was transported to the Ashland State Highway Patrol Post
where he provided a urine sample. Appellant's urine was later determined to contain at
per se level of at least 35 nanograms of marijuana metabolite per milliliter. Laboratory
testing also confirmed the vape cartridges found in appellant's vehicle contained hashish
oil.
{¶ 7} On January 6, 2020, a complaint was filed in the Ashland County Municipal
Court charging appellant with speeding in violation of R.C. 197(D)(2) and operating a
vehicle under the influence of drugs or alcohol (OVI) in violation of R.C. 4511.19(A)(1)(a).
On February 4, 2020, appellant was additionally charged with OVI based on the presence
of at least 35 nanograms of marijuana metabolite per millimeter in urine in violation of
R.C. 4511.19(A)(1)(j)(viii)(ll), Ohio's marijuana per se statute.
{¶ 8} On February 28, 2020, appellant pled guilty to OVI in violation of R.C.
4511.19(A)(1). The remaining charges were dismissed. Appellant was sentenced to one
year probation, a one year operator's license suspension, and a 30-day jail sentence with
27 days suspended. On February 27, 2021, appellant successfully completed his
probation.
{¶ 9} On December 11, 2020, the Ashland County Grand Jury returned an
indictment charging appellant with one count of possession of hashish in violation of R.C.
2925.11(A), 2925.11(C)(7)(d), a felony of the third degree.
Ashland County, Case No. 22 COA 001 4
{¶ 10} On February 19, 2021, appellant filed two motions; a motion to suppress
and a motion to dismiss on both speedy trial and double jeopardy grounds. Appellant's
motion to suppress challenged the warrantless search of his vehicle and bookbag.
Appellant's motion to dismiss argued the delay in the felony indictment constituted a
violation of his right to a speedy trial and that he was being placed in jeopardy for a second
time based on the drugs found in his car.
{¶ 11} A hearing was held on appellant's motions on July 12, 2021. On August 11,
2021, the trial court denied appellant's motions by judgment entry.
{¶ 12} On October 29, 2021, appellant entered a plea of guilty to possession of
hashish, a felony of the third degree.1 Following a presentence investigation appellant
was sentenced to a term of community control.
{¶ 13} Appellant filed an appeal and the matter is now before this court for
consideration. He raises three assignments of error as follow:
I
{¶ 14} "THE TRIAL COURT ERRED BY DENYING THE MOTION TO DISMISS
ON STATUTORY SPEEDY TRIAL GROUNDS AS 340 DAYS OCCURRED BETWEEN
THE JANUARY 6, 2020 MISDEMEANOR CASE AND DECEMBER 11, 2020 FELONY
INDICTMENT."
II
1
How appellant pled is not clear. The briefs of both appellant and the state indicate appellant pled guilty to the
offense, appellant's written plea agreement indicates he entered a plea of no contest, and the sentencing
judgment entry indicates appellant pled guilty.
Ashland County, Case No. 22 COA 001 5
{¶ 15} "THE TRIAL COURT ERRONEOUSLY FAILED TO FIND THAT THE
FELONY INDICTMENT VIOLATED DEFENDANT'S CONSTITUTIONAL
PROTECTIONS AGAINST DOUBLE JEOPARDY."
III
{¶ 16} "THE TRIAL COURT ERRONEOUSLY DENIED THE MOTION TO
SUPPRESS AND THE LAW ENFORCEMENT OFFICER SEARCHED A CLOSED
CONTAINER WITHOUT A WARRANT AND WHILE THE DEFENDANT WAS DETAINED
IN THE BACK OF THE PATROL VEHICLE AND THE SEARCH WAS NOT A LAWFUL
INVENTORY SEARCH"
I
{¶ 17} In his first assignment of error, appellant argues the felony indictment
violated his right to a speedy trial. We disagree.
Applicable Law
{¶ 18} Speedy-trial provisions are mandatory and are encompassed within the
Sixth Amendment to the United States Constitution. The availability of a speedy trial to a
person accused of a crime is a fundamental right made obligatory on the states through
the Fourteenth Amendment. State v. Ladd, 56 Ohio St.2d 197, 200, 383 N.E.2d 579
(1978). "The statutory speedy trial provisions, R.C. 2945.71 et seq., constitute a rational
effort to enforce the constitutional right to a public speedy trial of an accused charged with
the commission of a felony or a misdemeanor and shall be strictly enforced by the courts
of this state." State v. Pachay, 64 Ohio St.2d 218, 416 N.E.2d 589, syllabus (1980).
{¶ 19} A speedy-trial claim involves a mixed question of law and fact. State v.
Hickinbotham, 5th Dist. Stark No. 2018CA000142, 2019-Ohio-2978, 2019 WL 4780988,
Ashland County, Case No. 22 COA 001 6
¶ 26, citing State v. Jenkins, 5th Dist. Stark No. 2009-CA-00150, 2010-Ohio-2719, ¶ 31,
citing State v. Larkin, 5th Dist. Richland No. 2004-CA-103, 2005-Ohio-3122. As an
appellate court, we must accept as true any facts found by the trial court and supported
by competent, credible evidence. Id. With regard to the legal issues, however, we apply
a de novo standard of review and thus freely review the trial court's application of the law
to the facts. Id.
{¶ 20} R.C. 2945.71(C)(2) requires "[a] person against whom a charge of felony
is pending * * * be brought to trial within two hundred seventy days after his arrest."
{¶ 21} Speedy trial time is tolled by those events listed in R.C. 2945.72. These
events include "[a]ny period of delay necessitated by reason of a * * * motion * * * made
or instituted by the accused," under R.C. 2945.72(E), or during "[t]he period of any
continuance granted on the accused's own motion, and the period of any reasonable
continuance granted other than upon the accused's own motion," under R.C. 2945.72(H).
{¶ 22} Relevant to the time line in this matter, "[t]he Ohio Attorney General has
opined that courts may suspend jury trials to prevent the spread of the corona virus and
they may do so consistent with state and federal speedy-trial obligations." In re
Disqualification of Paris, 161 Ohio St.3d 1285, 2020-Ohio-6875, 164 N.E.3d 509, ¶5;
quoting In re Disqualification of Fleegle, 161 Ohio St.3d 1263, 2020-Ohio-5636, 163
N.E.3d 609, ¶7; citing 2020 Atty.Gen.Ops. No. 2020-002. In Fleegle, the Ohio Supreme
Court held that trial judges have the authority to continue trials on a case-by-case basis
without violating speedy-trial requirements and continuing a trial because of a pandemic
state emergency is reasonable under R.C.2945.72(H). Id.
Ashland County, Case No. 22 COA 001 7
{¶ 23} When reviewing a speedy trial question, an appellate court must count the
number of delays chargeable to each appellant and appellee. Next, the appellate court
must determine whether the number of days not tolled exceeded the time limits under
R.C. 2945.71. State v. Ferrell, 8th Dist. Cuyahoga No. 93003, 2010-Ohio-2882, ¶20.
When reviewing legal issues presented in a speedy trial claim, we must strictly construe
the relevant statutes against the state. Brecksville v. Cook, 75 Ohio St.3d 53, 57, 661
N.E.2d 706, 709 (1996); State v. Colon, 5th Dist. Stark No. 09-CA-232, 2010-Ohio-2326,
¶12.
Analysis
{¶ 24} Neither appellant nor the state provide this court with a speedy trial
calculation. Even more concerning, however, the record in this matter presents an issue
that neither party addresses – the judgment entry appealed from indicates appellant pled
guilty. Appellant's written change of plea indicates he intended to enter a plea of no
contest, and the change-of-plea entry indicates a plea of no contest. But before
sentencing appellant filed a sentencing memorandum and the memorandum indicates he
pled guilty. Defendant's Sentencing Memorandum filed December 6, 2021. What is more,
both appellant's and appellee's briefs here on appeal indicate appellant entered a plea of
guilty. Appellant's brief at 2, appellee's brief at 8. Further compounding the problem, the
record contains no transcript of the plea hearing and no motion for a nunc pro tunc
sentencing entry.
{¶ 25} It is well settled that a court speaks only through its judgment entry. State
v. King, 70 Ohio St.3d 158, 162, 1994-Ohio-412, 637 N.E.2d 903. It is also well settled
that if a defendant enters a guilty plea, such plea "waives a defendant's right to challenge
Ashland County, Case No. 22 COA 001 8
his or her conviction on statutory speedy trial grounds." State v. Kelly, 57 Ohio St.3d 127,
566 N.E.2d 658 (1991), paragraph one of the syllabus.
{¶ 26} We find, based on the state of the record before us, and the fact that the
judgment entry appealed from states appellant pled guilty, that appellant has waived his
right challenge his conviction on speedy trial grounds.
{¶ 27} The first assignment of error is overruled.
II
{¶ 28} In his second assignment of error, appellant argues the trial court erred by
failing to dismiss the felony indictment of double jeopardy grounds. We disagree.
{¶ 29} We review de novo, a denial of a motion to dismiss an indictment on double
jeopardy grounds. State v. Mullins, 5th Dist. Fairfield No. 12 CA 17, 2013-Ohio-1826, ¶
13 citing State v. Betts, 8th Dist. Cuyahoga No. 88607, 2007-Ohio-5533, ¶ 20.
{¶ 30} The Fifth Amendment to the United States Constitution provides that "[n]o
person shall * * * be subject for the same offence to be twice put in jeopardy of life or
limb." Similarly, Section 10, Article I, Ohio Constitution provides, "No person shall be twice
put in jeopardy for the same offense."
{¶ 31} The Supreme Court of Ohio, in State v. Best, 42 Ohio St.2d 530, 533, 330
N.E.2d 421 (1975), explained that “the fact that the indictment was brought in the name
of the state of Ohio, and the other * * * charges in the name of the city * * *, does not affect
the claim of double jeopardy. * * * [T]he state and the city are parts of a single sovereignty,
and double jeopardy stands as a bar to a prosecution by one, after an accused has been
in jeopardy for the same offense in a prosecution by the other.”
Ashland County, Case No. 22 COA 001 9
{¶ 32} To determine whether an accused is being successively prosecuted for the
"same offense," the Best court adopted the "same elements" test pronounced in
Blockburger v. United States, 284 U.S. 299, 304, 52 S.Ct. 180, 76 L.Ed. 306 (1932), and
held:
The applicable rule under the Fifth Amendment is that where the
same act or transaction constitutes a violation of two distinct statutory
provisions, the test to be applied to determine whether there are two
offenses or only one is whether each provision requires proof of a
fact which the other does not. A single act may be an offense against
two statutes, and if each statute requires proof of an additional fact
which the other does not, an acquittal or conviction under either
statute does not exempt the defendant from prosecution and
punishment under the other.
{¶ 33} Best at paragraph three of the syllabus.
{¶ 34} Later, in State v. Thomas, 61 Ohio St.2d 254, 259, 400 N.E.2d 897 (1980),
overruled on other grounds in State v. Crago, 53 Ohio St.3d 243, 559 N.E.2d 1353 (1990),
syllabus, the court explained:
This test focuses upon the elements of the two statutory provisions,
not upon the evidence proffered in a given case. Brown, supra, 432
U.S. at page 166, 97 S.Ct. at page 2225; Iannelli v. United States
Ashland County, Case No. 22 COA 001 10
(1975), 420 U.S. 770, 785, at n. 17, 95 S.Ct. 1284, 1293, 43 L.Ed.2d
616. Accordingly, if each statute requires proof of an additional fact
which the other does not, the state is not prohibited from seeking a
conviction and punishment under both statutes in the same trial.
Gavieres v. United States (1911), 220 U.S. 338, 342-343, 31 S.Ct.
421, 422-423, 55 L.Ed. 489. Conversely, when the Blockburger test
is not satisfied, the state is not permitted to seek multiple
punishments.
{¶ 35} Appellant was convicted of OVI in violation of R.C. 4511.19(A)(1)(a) which
required the state to prove appellant operated a motor vehicle while under the influence
of drugs, alcohol, or a combination of drugs and alcohol. Appellant was also convicted of
possession of hashish in violation of R.C. 2925.11(A) and (C)(7)(d) which required the
state to prove appellant knowingly obtained or possessed a controlled substance,
specifically hashish, in an amount that equaled or exceeded ten grams but was less than
fifty grams of hashish in a liquid concentrate, liquid extract, or liquid distillate form.
{¶ 36} In applying Blockberger, we find operating a vehicle under the of drugs and
possession of hashish constitute separate violations of distinct statutory provisions, each
requiring proof of a fact which the other did not.
{¶ 37} The second assignment of error is overruled.
III
{¶ 38} In his final assignment of error, appellant argues the trial court erred in
denying his motion to suppress. We disagree.
Ashland County, Case No. 22 COA 001 11
Standard of Review
{¶ 39} As stated by the Supreme Court of Ohio in State v. Leak, 145 Ohio St.3d
165, 2016-Ohio-154, 47 N.E.3d 821, ¶ 12:
"Appellate review of a motion to suppress presents a mixed question
of law and fact." State v. Burnside, 100 Ohio St.3d 152, 2003-Ohio-
5372, 797 N.E.2d 71, ¶ 8. In ruling on a motion to suppress, "the trial
court assumes the role of trier of fact and is therefore in the best
position to resolve factual questions and evaluate the credibility of
witnesses." Id., citing State v. Mills, 62 Ohio St.3d 357, 366, 582
N.E.2d 972 (1992). On appeal, we "must accept the trial court's
findings of fact if they are supported by competent, credible
evidence." Id., citing State v. Fanning, 1 Ohio St.3d 19, 20, 437
N.E.2d 583 (1982). Accepting those facts as true, we must then
"independently determine as a matter of law, without deference to
the conclusion of the trial court, whether the facts satisfy the
applicable legal standard." Id.
{¶ 40} As the United States Supreme Court held in Ornelas v. U.S., 517
U.S. 690, 116 S.Ct. 1657, 1663, 134 L.Ed.2d 94 (1996), "…as a general matter
determinations of reasonable suspicion and probable cause should be reviewed
de novo on appeal."
Ashland County, Case No. 22 COA 001 12
{¶ 41} The instant matter presents a determination of probable cause,
which we review de novo.
Warrantless Search of Appellant's Vehicle and Backpack
{¶ 42} Appellant argues the warrantless search of his vehicle and backpack
were violations of his Fourth Amendment rights. Generally, "[f]or a search or
seizure to be reasonable under the Fourth Amendment, it must be based upon
probable cause and executed pursuant to a warrant." State v. Moore, 90 Ohio
St.3d 47, 49 734 N.E.2d 804 (2000).
{¶ 43} An exception to the warrant requirement is the automobile exception,
which "allows police to conduct a warrantless search of a vehicle if there is
probable cause to believe that the vehicle contains contraband and exigent
circumstances necessitate a search or seizure." State v. Mills, 62 Ohio St.3d 357,
367, 582 N.E.2d 972 (1992), citing Chambers v. Maroney, 399 U.S. 42, 48, 90
S.Ct. 1975, 26 L.Ed.2d 419 (1970). A vehicle's mobility is the traditional exigency
for the automobile exception to the warrant requirement. Id., citing California v.
Carney, 471 U.S. 386, 393, 105 S.Ct. 2066, 85 L.Ed.2d 406 (1985). Therefore, “[i]f
a car is readily mobile and probable cause exists to believe it contains contraband,
the Fourth Amendment * * * permits police to search the vehicle without more.”
Pennsylvania v. Labron, 518 U.S. 938, 940, 116 S.Ct. 2485, 135 L.Ed.2d 1031
(1996), citing Carney at 393.
{¶ 44} Additionally, "the smell of marijuana, alone, by a person qualified to
recognize the odor, is sufficient to establish probable cause to search a motor
vehicle, pursuant to the automobile exception to the warrant requirement. There
Ashland County, Case No. 22 COA 001 13
need not be other tangible evidence to justify a warrantless search of the vehicle."
Id. at 48. See also State v. Farris, 109 Ohio St.3d 519, 2006-Ohio-3255 (reaffirming
that the smell of marijuana in the passenger compartment of a vehicle establishes
probable cause for a warrantless search of the passenger compartment, but not of
the trunk). " 'When there is probable cause to search for contraband in a car, it is
reasonable for police officers * * * to examine packages and containers without a
showing of individualized probable cause for each one.' " State v. Vega, 154 Ohio
St.3d 569, 2018-Ohio-4002 116 N.E.3d 1262 ¶ 14 quoting Wyoming v. Houghton,
526 U.S. 295, 302,119 S.Ct. 1297, 143 L.Ed.2d 408 (1999).
{¶ 45} Appellant does not mention the automobile exception or Moore at all.
Instead he argues the search of a closed container without a warrant is constitutionally
impermissible when the search was not a lawful inventory search. To support his
argument, he compares this matter to cases which do not involve an odor of marijuana
and are therefore factually distinguishable from the instant matter. Moreover, this was not
an inventory search. The trial court specifically found that under the totality of the
circumstances, there was probable cause to search appellant's vehicle and that
appellant's reliance on a case involving an inventory search was misplaced. Judgment
Entry filed August 11, 2021.
{¶ 46} As noted in our statement of facts, upon approaching appellant's
vehicle, Trooper Kluever immediately detected the odor of marijuana coming from
appellant's car. Transcript of suppression hearing (T.) at 11. Kluever also testified
that appellant "admitted that he did have a small baggie of marijuana in the vehicle"
Ashland County, Case No. 22 COA 001 14
and rather than deny the odor of marijuana, blamed the odor on others he had
transported in his vehicle. T. 11.
{¶ 47} Upon review we find the trial court did not err in finding Kluever had
probable cause to search appellant's vehicle.
{¶ 48} The third assignment of error is overruled.
{¶ 49} The judgment of the Ashland County Court of Common Pleas is
affirmed.
By Wise, Earle, P.J.
Gwin, J. and
Delaney, J. concur.
EEW/rw | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488086/ | Spence v Kitchens (2022 NY Slip Op 06355)
Spence v Kitchens
2022 NY Slip Op 06355
Decided on November 10, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 10, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: PERADOTTO, J.P., LINDLEY, CURRAN, WINSLOW, AND BANNISTER, JJ.
731 CA 21-01599
[*1]KENNETH SPENCE, PLAINTIFF-APPELLANT,
vCHRISTOPHER KITCHENS AND EDEN EMERGENCY SQUAD, INC., DEFENDANTS-RESPONDENTS.
CAMPBELL & ASSOCIATES, HAMBURG (JOHN T. RYAN OF COUNSEL), FOR PLAINTIFF-APPELLANT.
PENINO & MOYNIHAN, LLP, WHITE PLAINS (MELISSA L. VINCTON OF COUNSEL), FOR DEFENDANT-RESPONDENT CHRISTOPHER KITCHENS.
LIPPMAN O'CONNOR, BUFFALO (KEVIN M. O'NEILL OF COUNSEL), FOR DEFENDANT-RESPONDENT EDEN EMERGENCY SQUAD, INC.
Appeal from an order of the Supreme Court, Erie County (Mark J. Grisanti, A.J.), entered October 22, 2021. The order, among other things, determined that defendant Christopher Kitchens was operating an authorized emergency vehicle at the time of the subject accident and denied the cross motion of plaintiff for partial summary judgment.
It is hereby ORDERED that the order so appealed from is unanimously modified on the law by vacating the first ordering paragraph and striking the language after the word "denied" in the second through fourth ordering paragraphs and as modified the order is affirmed without costs.
Memorandum: Plaintiff commenced this action to recover damages for injuries that he allegedly sustained when his vehicle and a vehicle driven by Christopher Kitchens (defendant) collided. At the time of the accident, defendant was a volunteer member of defendant Eden Emergency Squad, Inc. (Eden Emergency), a volunteer ambulance service, and was responding to a call. Defendant was driving his personally-owned pickup truck behind plaintiff's vehicle in the southbound lane of a two-lane highway and attempted to pass plaintiff's vehicle on the left. When their vehicles collided, plaintiff was attempting to make a left turn from the southbound lane across the northbound lane into a driveway. Plaintiff alleged that the accident occurred because of defendant's negligence and that Eden Emergency was vicariously liable. After discovery, defendant moved and Eden Emergency cross-moved for, inter alia, summary judgment dismissing the complaint against them contending, among other things, that defendant's conduct was measured by the "reckless disregard" standard of care under Vehicle and Traffic Law § 1104 (e) and that his operation of his vehicle was not reckless as a matter of law. Plaintiff cross-moved for partial summary judgment on the issue of negligence, contending that negligence rather than reckless disregard is the applicable standard of care and that defendant was negligent as a matter of law. Supreme Court denied the motion and cross motions, concluding that although defendant was operating an authorized emergency vehicle at the time of the accident and that the reckless disregard standard of care applied, there are triable issues of fact precluding judgment to either plaintiff or defendants. Plaintiff appeals, and we modify.
As an initial matter, plaintiff's contention that defendants are not entitled to assert the affirmative defense of emergency operation under Vehicle and Traffic Law § 1104 because it was not pleaded in the answers is raised for the first time on appeal and, therefore, that contention is not properly before us (see generally Klepanchuk v County of Monroe, 129 AD3d 1609, 1610 [4th Dept 2015], lv denied 26 NY3d 915 [2015]).
We agree with plaintiff, however, that he met his initial burden on his cross motion of establishing that defendant was not operating an "authorized emergency vehicle" at the time of the accident and thus that the reckless disregard standard of care does not apply. " '[T]he reckless disregard standard of care in Vehicle and Traffic Law § 1104 (e) . . . applies when a driver of an authorized emergency vehicle involved in an emergency operation engages in the specific conduct exempted from the rules of the road by Vehicle and Traffic Law § 1104 (b)' " (Torres-Cummings v Niagara Falls Police Dept., 193 AD3d 1372, 1374 [4th Dept 2021], quoting Kabir v County of Monroe, 16 NY3d 217, 220 [2011]). An "authorized emergency vehicle" includes "emergency ambulance service vehicle[s]" (§ 101), which are defined as "an appropriately equipped motor vehicle owned or operated by an ambulance service . . . and used for the purpose of transporting emergency medical personnel and equipment to sick or injured persons" (§ 115-c). "Ambulance service means an individual, partnership, association, corporation, [or] municipality . . . engaged in providing emergency medical care and the transportation of sick or injured persons by motor vehicle . . . to, from, or between general hospitals or other health care facilities" (Public Health Law § 3001 [2]).
Here, plaintiff submitted evidence that, at the time of the accident, defendant was driving his personally-owned vehicle, which was not affiliated with Eden Emergency (cf. People v Levy, 188 Misc 2d 103, 104-105 [App Term, 2d Dept 2001]). The vehicle also did not comply with Vehicle and Traffic Law § 1104 (c), which requires authorized emergency vehicles to be equipped with "at least one red light." Moreover, at the time of the accident, defendant's vehicle was not being "operated by" Eden Emergency because, while defendant was a volunteer with Eden Emergency, he was not on call at the time of the incident (§ 115-c). Further, defendant did not qualify as an ambulance service. Defendant was not an "individual . . . engaged in providing emergency medical care and the transportation of sick or injured persons" (Public Health Law § 3001 [2]). We also note that defendant was not an emergency medical technician (see generally § 3001 [6]). In opposition, defendants failed to raise an issue of fact whether defendant's vehicle was an authorized emergency vehicle. As a result, the court erred in determining that defendant was operating an authorized emergency vehicle and that his conduct is governed by the reckless disregard standard of care in section 1104 (e), rather than the ordinary negligence standard of care (see generally McLoughlin v City of Syracuse, 206 AD3d 1600, 1600-1601 [4th Dept 2022]; LoGrasso v City of Tonawanda, 87 AD3d 1390, 1391 [4th Dept 2011]). We therefore modify the order accordingly.
Nevertheless, we reject plaintiff's contention that the court erred in denying his cross motion for summary judgment on the issue of defendant's negligence. "[I]t is well settled that drivers have a duty to see what should be seen and to exercise reasonable care under the circumstances to avoid an accident" (Deering v Deering, 134 AD3d 1497, 1499 [4th Dept 2015] [internal quotation marks omitted]). Further, no vehicle shall pass another vehicle on the left "unless such left side is clearly visible and is free of oncoming traffic for a sufficient distance ahead to permit such overtaking and passing to be completely made without interfering with the operation of any vehicle approaching from the opposite direction or any vehicle overtaken" (Vehicle and Traffic Law § 1124 [emphasis added]).
Here, plaintiff and a police officer who witnessed the accident testified at their depositions that plaintiff stopped his vehicle in the center of the southbound lane with his left turn signal activated to make a left-hand turn, while waiting for oncoming traffic to clear. Plaintiff testified that other southbound vehicles were proceeding past plaintiff on the right shoulder. Plaintiff also submitted the deposition testimony of a police officer who did not see the collision, but testified that he saw the involved vehicles immediately before the accident, including seeing plaintiff's vehicle "poised" to turn left and the "aftermath" of the collision. That officer testified that, in his judgment, defendant's action of passing plaintiff's vehicle on the left in the northbound lane was improper. Additionally, plaintiff submitted defendant's deposition testimony, in which defendant provided a different account of the event. Defendant testified that, at the time of the accident, plaintiff's turn signal had not been activated and that plaintiff had not stopped his vehicle in the southbound lane. According to defendant, plaintiff's vehicle had moved completely out of the southbound lane and onto the shoulder, like the other southbound vehicles that had pulled over to allow defendant to pass. When defendant proceeded to pass them on the left while his vehicle was straddling the center line of the road, he saw plaintiff's vehicle turn left from the right shoulder of the southbound lane, at which point defendant tried to move further left into the northbound lane before plaintiff's car collided with [*2]defendant's vehicle. Thus, although plaintiff proffered compelling evidence that defendant acted negligently in the manner he operated his vehicle, plaintiff's own submissions raised triable issues of fact whether defendant was negligent, and the burden never shifted to defendants (see Carnevale v Bommer, 175 AD3d 881, 882 [4th Dept 2019]; see generally Alvarez v Prospect Hosp., 68 NY2d 320, 324 [1986]).
Entered: November 10, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488085/ | Toor v LoTemple (2022 NY Slip Op 06388)
Toor v LoTemple
2022 NY Slip Op 06388
Decided on November 10, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 10, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., SMITH, LINDLEY, NEMOYER, AND WINSLOW, JJ.
822 CA 21-01546
[*1]SUMAN TOOR, PLAINTIFF-RESPONDENT,
vSAMUEL LOTEMPLE AND RETROTECH, INC., DEFENDANTS-APPELLANTS.
LAW OFFICE OF JOHN WALLACE, ROCHESTER (VALERIE L. BARBIC OF COUNSEL), FOR DEFENDANTS-APPELLANTS.
Appeal from an order of the Supreme Court, Monroe County (Debra A. Martin, A.J.), entered September 20, 2021. The order, insofar as appealed from, denied in part the motion of defendants for summary judgment.
It is hereby ORDERED that the order so appealed from is unanimously modified on the law by granting that part of the motion with respect to the 90/180-day category of serious injury within the meaning of Insurance Law § 5102 (d) and dismissing the complaint, as amplified by the bill of particulars, to that extent and as modified the order is affirmed without costs.
Memorandum: Plaintiff commenced this action seeking damages for injuries she allegedly sustained when the vehicle she was driving was struck by a vehicle driven by defendant Samuel LoTemple and owned by defendant Retrotech, Inc. In her complaint, as amplified by the bill of particulars, plaintiff alleged that she sustained a serious injury within the meaning of Insurance Law § 5102 (d) under, inter alia, the significant limitation of use and 90/180-day categories. Defendants moved for summary judgment dismissing the complaint, and they now appeal from an order that, among other things, denied their motion with respect to the significant limitation of use and 90/180-day categories of serious injury.
Contrary to defendants' contention, they failed to meet their initial burden with respect to the significant limitation of use category of serious injury. The reports of defendants' medical experts did not establish that plaintiff's injuries are the result of preexisting degenerative disease inasmuch as they " 'fail[ed] to account for evidence that plaintiff had no complaints of pain [in the allegedly affected areas] prior to the accident' " (Baldauf v Gambino, 177 AD3d 1307, 1308 [4th Dept 2019]; see Shah v Nowakowski, 203 AD3d 1737, 1738 [4th Dept 2022]; Crane v Glover, 151 AD3d 1841, 1842 [4th Dept 2017]). Further, although defendants contend that plaintiff's injuries are not "significant" as that term is used in Insurance Law § 5102 (d), their own submissions in support of their motion raised triable issues of fact with respect to whether plaintiff's injuries are significant (see Baldauf, 177 AD3d at 1308). In light of defendants' failure to meet their initial burden with respect to that category of serious injury, there is no need to consider the sufficiency of plaintiff's opposition thereto (see Summers v Spada, 109 AD3d 1192, 1193 [4th Dept 2013]).
We agree with defendants, however, that Supreme Court erred in denying their motion with respect to the 90/180-day category of serious injury, and we therefore modify the order accordingly. " 'To qualify as a serious injury under the 90/180[-day] category, there must be objective evidence of a medically determined impairment or impairment of a non-permanent nature . . . as well as evidence that plaintiff's activities were curtailed to a great extent' " (Baldauf, 177 AD3d at 1308). An injured plaintiff must be prevented " 'from performing substantially all of the material acts which constituted his [or her] usual daily activities' for at least 90 out of 180 days following the accident" (Cohen v Broten, 197 AD3d 949, 950 [4th Dept 2021], quoting Licari v Elliott, 57 NY2d 230, 238 [1982]). Here, defendants met their initial [*2]burden by submitting plaintiff's deposition testimony, which established that although plaintiff was limited in certain daily activities, she was able to perform others. In response, plaintiff did not raise an issue of fact (see generally Pastuszynski v Lofaso, 140 AD3d 1710, 1711 [4th Dept 2016]).
Entered: November 10, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488059/ | Matter of Olsen (2022 NY Slip Op 06628)
Matter of Olsen
2022 NY Slip Op 06628
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: SMITH, J.P., LINDLEY, CURRAN, AND BANNISTER, JJ. (Filed Nov. 15, 2022.)
&em;
[*1]MATTER OF R. NILS OLSEN, AN ATTORNEY, RESIGNOR.
MEMORANDUM AND ORDER
Application to resign for non-disciplinary reasons accepted and name removed from roll of attorneys. | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488108/ | Filed 11/18/22 In re J.H. CA2/5
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions
not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion
has not been certified for publication or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
In re J.H., a Person Coming B314364
Under the Juvenile Court Law. (Los Angeles County
Super. Ct. No.
19CCJP06341C)
LOS ANGELES COUNTY
DEPARTMENT OF
CHILDREN AND FAMILY
SERVICES,
Plaintiff and Respondent,
v.
C.G.,
Defendant and Appellant.
APPEAL from an order of the Superior Court of Los
Angeles County, Tamara Hall, Judge. Affirmed.
Cristina Gabrielidis, under appointment by the Court of
Appeal, for Defendant and Appellant.
Dawyn R. Harrison, Acting County Counsel, Tracey Dodds,
Principal Deputy County Counsel, for Plaintiff and Respondent.
I. INTRODUCTION
C.G. (mother) appeals from a custody and visitation order
regarding her child J.H. (born in 2009), pursuant to Welfare and
Institutions Code1 section 362.4. We affirm.
The parties are familiar with the facts and procedural
history, and our opinion does not meet the criteria for
publication. (Cal. Rules of Court, rule 8.1105(c).) We therefore
resolve this appeal by memorandum opinion pursuant to
Standard 8.1 of the Standards of Judicial Administration and
consistent with constitutional principles (Cal. Const., art. VI, § 14
[“Decisions of the Supreme Court and courts of appeal that
determine causes shall be in writing with reasons stated”]; Lewis
v. Superior Court (1999) 19 Cal.4th 1232, 1263 [three-paragraph
discussion of issue on appeal satisfies constitutional requirement
because “an opinion is not a brief in reply to counsel’s arguments.
[Citation.] In order to state the reasons, grounds, or principles
upon which a decision is based, [an appellate court] need not
discuss every case or fact raised by counsel in support of the
parties’ positions”]).
1 Further statutory references are to the Welfare and
Institutions Code.
2
II. DISCUSSION
Mother contends that the juvenile court abused its
discretion when it issued a custody and visitation order that
required her visits with the child to be monitored. “When the
juvenile court terminates its jurisdiction over a dependent child,
section 362.4 authorizes it to make custody and visitation orders
that will be transferred to an existing family court file and
remain in effect until modified or terminated by the superior
court.” (In re Roger S. (1992) 4 Cal.App.4th 25, 30, fn. omitted.)
We review a section 362.4 exit order for abuse of discretion. (In
re M.R. (2017) 7 Cal.App.5th 886, 902.)
According to mother, unmonitored visits would pose no
harm to the child so long as the child’s stepfather was precluded
from being present. We disagree. Mother pleaded no contest to a
section 300 petition alleging that on August 9, 2019, she struck
the child’s face, and on prior occasions, she and the stepfather
struck the child on his mouth, the back of his head, and his
forehead with an open hand. Further, even after she completed
her case plan, which included parenting classes and therapy,
mother continued to pose a risk of harm to the child as
demonstrated by the juvenile court’s sustaining of a section 342
petition that alleged mother physically abused the child by
striking the child with a belt. The court also found that on prior
occasions, mother had pulled the child’s hair, slapped the child’s
head, and forced the child to do an excessive number of push-ups
as a form of discipline. The court’s observation that mother had
failed to develop any insight into her behavior was well supported
by the record and we find no abuse of discretion in the court’s
ordering of monitored visitation.
3
III. DISPOSITION
The custody and visitation order is affirmed.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
KIM, J.
We concur:
RUBIN, P. J.
BAKER, J.
4 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488104/ | Filed 11/18/22 P. v. Faber CA1/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not
certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been
certified for publication or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION ONE
THE PEOPLE,
Plaintiff and Respondent,
A162913
v.
REGINA FABER, (Mendocino County
Super. Ct. No. 21CR00391B)
Defendant and Appellant.
Appellant Regina Faber appeals from a final judgment after her no-
contest plea to assault with force likely to cause great bodily injury and
vandalism. She challenges a condition imposed by the trial court in its order
of formal probation, arguing that it is invalid under People v. Lent (1975) 15
Cal.3d 481 (Lent) and unconstitutionally overbroad. The condition requires
her to participate in mental health treatment and to “take all medication as
prescribed.” She also challenges various fines, based on recently enacted
legislation. We conclude that the mental health condition is invalid under
Lent, and that the challenged fines must be vacated. Therefore, we will
strike the condition and direct the trial court to vacate the fines. We
otherwise affirm the judgment.
1
I.
FACTUAL AND PROCEDURAL BACKGROUND
We draw our summary of the facts from the probation officer’s report.
On the night of April 1, 2021, law enforcement officers were dispatched
to a residence in Point Arena on reports of a disturbance. C.C. told the
officers that appellant and several others, including his former wife, who is
appellant’s sister, came to his house and broke a window. Appellant and her
sister climbed through the window and unlocked the front door, whereupon
the other suspects rushed inside and assaulted him and C.R., who is C.C.’s
elderly mother. C.R. later reported that she was assaulted when she tried to
protect her son. During the incident, appellant struck her in the head with a
metal Maglite-style flashlight. Both victims were able to escape and called 9-
1-1. Officers later located and arrested appellant and her sister. When the
victims returned to their home, they discovered several items had been
stolen, including a couch, a Sony PlayStation 5, a television, cigarettes,
money, and C.C.’s methamphetamine. C.R. was transported to the hospital
for her injuries.
The district attorney filed a complaint against appellant and two co-
defendants, charging her with first degree robbery in concert with others in
an inhabited dwelling (Pen. Code, §§ 211/212.5/213, subd. (a)(1)(A) (count
one));1 burglary with a violent felony allegation (§§ 459/460, subd. (a), 667.5,
subd. (c)(21) (count two)); assault with a deadly weapon (§ 245, subd. (a)(1)
(count three)); and inflicting suffering on an elder (§ 368, subd. (b)(1) (count
four)).
1 All undesignated statutory references are to the Penal Code.
2
During the preliminary hearing, appellant entered a negotiated plea to
an amended count three charging assault by means likely to cause great
bodily injury under section 245, subdivision (a)(4), and to an amended count
six charging her with felony vandalism under section 594, subdivision (b)(1).2
Prior to sentencing, appellant acknowledged to the probation officer
that she had gone to the victims’ house in order to help recover her sister’s
belongings. She admitted breaking a window and entering the house,
although she reported that C.R. had attacked her, and did not admit to
hitting the victim. She also admitted to smoking methamphetamine on a
daily basis since she was 30 years old (she was 43 years old at the time of
sentencing). She indicated that she was hoping to attend a residential drug
treatment program upon release from custody. Among other things, the
probation officer opined that appellant “could also benefit from an evaluation
from a therapist or the Mental Health Department. An evaluation could
better assess [her] history and determine if mental health treatment is
appropriate. Considering her violent conduct and her lack of control over her
emotions, she may require some level of counseling.”
On June 10, 2021, the trial court suspended imposition of sentence and
ordered appellant to serve 24 months of formal probation with 114 days
custody with credit for time served. The terms of probation included a
condition requiring her to enroll in substance abuse treatment. The terms
also included the following condition, designated as condition number 26 (No.
26): “You shall be evaluated by a licensed therapist or the Mental Health
Department, at your expense. If deemed appropriate by the therapist and
your Probation Officer, you shall faithfully participate in counseling. Also,
2In the original complaint, count six (vandalism (§ 594, subd. (b)(1))
was charged against appellant’s sister only.
3
you shall submit proof of enrollment, payment, and program completion to
your Probation Officer, and take all medication as prescribed.”
At the sentencing hearing, defense counsel objected to condition No. 26
under Lent, supra, on the ground that there was “no nexus whatsoever with
any kind of mental health issue indicated.” The prosecutor countered that
the condition could “ensur[e] that mental health did not play a role in
[appellant’s] criminal conduct.” Although the probation report indicates that
appellant reported no psychological issues, the prosecutor referenced a
portion of the report stating that she had attempted suicide on four occasions
between 2000 and 2005 due to depression. In response, defense counsel
stressed that the suicide attempts had occurred 16 years ago and were
situational.
The trial court elected to impose the contested condition, stating: “I’m
going to order that you be evaluated by both a substance abuse treatment
specialist and a mental health professional to see if you have any substance
abuse treatment needs or mental health treatment needs that can and should
be addressed on probation so that you can be successful on probation and in
life. If there are any issues about the results of that evaluation, contact your
attorney, and you can bring it back before the Court if there’s some probation
order about substance abuse or mental health treatment that they want you
to participate in that you don’t agree with. All right? But I’m ordering the
evaluation.” The court also imposed various fines and fees.
Appellant timely appealed. On appeal, she asserts that the mental
health probation condition is unreasonable and unconstitutionally overbroad.
She also challenges the court-imposed fines and fees.
4
II.
DISCUSSION
A. Applicable Law and Standard of Review
Trial courts are granted broad discretion under section 1203.1 to
impose conditions of probation. (People v. Penoli (1996) 46 Cal.App.4th 298,
302.) This discretion, however, is not unlimited, and a probation condition
will be considered invalid if it: “ ‘(1) has no relationship to the crime of which
the offender was convicted, (2) relates to conduct which is not in itself
criminal, and (3) requires or forbids conduct which is not reasonably related
to future criminality.’ ” (Lent, supra, 15 Cal.3d at p. 486.) This test is
conjunctive—all three prongs must be satisfied before a reviewing court will
invalidate a probation term. (Id. at p. 486, fn. 1; see People v. Balestra (1999)
76 Cal.App.4th 57, 65, fn. 3.) “As such, even if a condition of probation has no
relationship to the crime of which a defendant was convicted and involves
conduct that is not itself criminal, the condition is valid as long as the
condition is reasonably related to preventing future criminality.” (People v.
Olguin (2008) 45 Cal.4th 375, 379-380 (Olguin).) We review the validity of a
probation condition under Lent for abuse of discretion. (People v. Moran
(2016) 1 Cal.5th 398, 403.)
B. The Mental Health Condition is Invalid Under Lent
i. Appellant’s Constitutional Arguments Are Not Forfeited
Appellant contends that condition No. 26—requiring her to have a
mental health examination, to continue in counseling if directed, and to take
prescribed medications—is unreasonable under Lent and constitutionally
overbroad. She maintains that the challenged condition unreasonably
burdens her constitutional privacy rights against unwanted mental health
medications and examinations.
5
Preliminarily, the Attorney General asserts that appellant forfeited any
as-applied constitutional challenge because during the sentencing hearing
she objected to the mental health probation condition on Lent grounds only.
Challenges to probation conditions ordinarily must be raised in the trial
court; if they are not, appellate review of those conditions will be deemed
forfeited (People v. Welch (1993) 5 Cal.4th 228, 234-235).3 Appellant counters
that her objection under Lent was sufficient to preserve her constitutional
challenge, citing to In re Ricardo P. (2019) 7 Cal.5th 1113 (Ricardo P.).
Appellant has the better argument.
In Ricardo P., the Supreme Court addressed the permissible scope of an
electronic search condition under Lent, expressly noting that it had not
granted review to consider the condition “under [a] constitutional
overbreadth analysis.” (Ricardo P., supra, 7 Cal.5th 1113, 1128.) The
condition required the juvenile to “submit to warrantless searches of his
electronic devices, including any electronic accounts that could be accessed
through these devices,” even though there was no indication that he had used
an electronic device in connection with the underlying offenses. (Id. at p.
1115.) Based on the record in that case, the high court held that the
probation condition “imposes a very heavy burden on privacy with a very
limited justification.” (Ricardo P., supra, 7 Cal.5th at p. 1124.) The court
3 We note that appellant does not contend that condition No. 26 is
facially unconstitutional. An overbreadth challenge to a probation condition
may be raised on appeal despite the failure to object at trial where it is
claimed to be overbroad on its face and is “capable of correction without
reference to the particular sentencing record developed in the trial court.” (In
re Sheena K. (2007) 40 Cal.4th 875, 887-889 (Sheena K.); accord, People v.
Patton (2019) 41 Cal.App.5th 934, 946.) Here, appellant is not asserting a
facial overbreadth challenge. Rather, she claims the condition is overbroad
as to her based on the lack of evidence that she has any psychiatric condition.
6
instructed that the third prong of Lent, regarding the relationship of the
condition to future criminality, includes a requirement that the condition not
disproportionately burden significant rights and interests, including
constitutionally protected privacy rights. (Id. at p. 1119) At no point in the
opinion did the Ricardo P. majority indicate that a separate constitutional
objection was required to preserve this issue if a defendant made an objection
under Lent. We therefore may consider the substance of appellant’s
constitutionally-based arguments in evaluating whether condition No. 26
runs afoul of Lent.4
ii. Requirement to take Prescribed Medications
The Attorney General does not seriously dispute that condition No. 26
satisfies the first two Lent prongs—the condition has no relationship to
appellant’s offenses, and the condition involves conduct that is not itself
criminal. Therefore, at issue here is whether the condition is reasonably
related to preventing future criminality. (See Olguin, supra, 45 Cal.4th at p.
379.) This relationship requires “more than just an abstract or hypothetical
4 While appellant suggests that her constitutional argument is subject
to de novo review, the cases she relies on—In re Shaun R. (2010) 188
Cal.App.4th 1129, 1143 (Shaun R.) and People v. Appleton (2016) 245
Cal.App.4th 717, 723 (Appleton)—are not on point. In stating that
constitutional challenges are evaluated de novo, Appleton relies on Shaun R.
which, in turn, relies on Sheena K., supra. As we have already noted, Sheena
K. concerned a facial constitutional challenge, not an as-applied challenge:
“Defendant’s challenge to her probation condition as facially vague and
overbroad presents an asserted error that is a pure question of law, easily
remediable on appeal by modification of the condition.” (Sheena K., supra, 40
Cal.4th 875 at p. 888.) Because appellant here does not raise a facial
challenge, the de novo standard does not apply.
7
relationship between the probation condition and preventing future
criminality.” (Ricardo P., supra, 7 Cal.5th 1113 at p. 1121.)
Appellant contends that condition No. 26’s requirement for her to “take
all medications as prescribed” is unreasonable, relying primarily on People v.
Petty (2013) 213 Cal.App.4th 1410 (Petty). In Petty, a defendant with a long
history of mental health issues pleaded guilty to felony grand theft (§ 487,
subd. (a)) for stealing jewelry from a friend’s home. (Petty, supra, 213
Cal.App.4th at p. 1412.) The trial court placed him on probation subject to
the condition that he take antipsychotic medications at the direction of his
mental health worker, a condition he challenged on appeal. In striking the
condition, the appellate court relied upon the rule that a probation condition
which impairs constitutional rights must be justified by a compelling interest
and must be narrowly drawn. (Id. at p. 1414.) The Court of Appeal struck
the challenged condition “[b]ecause there was no medically informed showing
. . . that defendant’s adherence to a particular medication regime was
reasonably related to his criminal offense or his future criminality . . . .” (Id.
at p. 1421.) The court’s conclusion was informed by (1) “[t]he potent nature of
the psychoactive drugs which defendant may be ordered to take”; (2)
defendant’s fundamental due process freedom to refuse to take antipsychotic
medications; and (3) evidence that the defendant committed the crime to pay
off a drug debt, rather than because of any underlying mental health issues.
(Id. at p. 1417.)
Appellant persuasively asserts the order here is analogous to the
condition that was invalidated in Petty because it broadly requires her
“simply to ‘take all medication as prescribed’ by an unidentified therapist”,
without any medical justification. She further emphasizes that, unlike in
Petty, the record here is devoid of any suggestion that she has any mental
8
health problems, observing that the probation report itself indicated that
there were no psychological issues.
We agree that the medication order is unreasonable on this record.
Here, as in Petty, the record contains no “[m]edically-informed justification
for insisting upon [appellant’s] compliance with [her] mental health worker’s
medical decisions” (Petty, supra, 213 Cal.App.4th at p. 1420). In
recommending mental health treatment, the probation officer merely cited to
appellant’s “violent conduct and her lack of control over her emotions.”
However, the probation report lacks any supporting medical evidence. The
only evidence of any psychiatric history was appellant’s 16-year-old prior
suicide attempts. Significantly, the defendant in Petty had a more recent
history of attempting suicide, yet the court of appeal held that “a suicide
attempt five years before the crime provides no reasonable basis for imposing
a medication requirement.” (Id. at p. 1417.) The Petty court also rejected the
suggestion that the condition requiring the defendant to obtain substance
abuse treatment could support an order for psychiatric medication,
explaining that “no medically based information was gathered to support
such a supposition.” (Id. at p. 1418.) The same is true here.
Relying on In re Luis F. (2009) 177 Cal.App.4th 176 (Luis F.), the
Attorney General suggests that appellant’s interpretation of the mental
health condition is overly broad, arguing that the medication requirement is
“undoubtedly limited to medication prescribed by a doctor to treat any
potential mental disorders, especially those that may have manifested
themselves when appellant committed the crime below or repeatedly
attempted suicide.” Luis F. is distinguishable.
In Luis F., the appellate court held that a juvenile offender could be
ordered as a condition of probation to continue to take medically effective
9
psychotropic drugs which had been prescribed by his doctor and which he had
been taking voluntarily prior to being declared a ward. (Id. at pp. 192–193.)
In contrast, here there is no indication that appellant has ever been
prescribed psychiatric medications. Moreover, Luis F. involved a minor, not
an adult. “[W]here an adult objects to imposition of antipsychotic medication
as a condition of probation, before such medication may be required a
medically informed record must be developed in the trial court. [Citation.]”
(Petty, supra, 213 Cal.App.4th 1410, 1419, italics added.) And, unlike in Luis
F., here there is no medically informed showing that adherence to a
psychiatric medication protocol is reasonably related to appellant’s future
criminality. Thus, even as construed by the Attorney General the condition is
still unreasonable.
The Attorney General further attempts to distinguish condition No. 26
from the one at issue in Petty, arguing that the condition gives her the
discretion to seek care by a licensed therapist of her choosing, and does not
give the probation officer unfettered power and discretion to force her to
participate in any specific type of treatment. Again, the fundamental
problem with the medication order is that there is nothing in the record to
suggest that appellant has any potential mental disorders. That the
condition allows her to choose her own mental health provider does not
overcome the underlying lack of a nexus to deterring potential future
criminality. The Attorney General also argues that if appellant objects to a
particular medication, she retains the right to file a petition for modification
of her probation condition. However, there is no reason why she should be
compelled to file a petition to modify an otherwise invalid condition.
Finally, the Attorney General urges us to modify the condition to
require appellant to “ ‘take medication deemed necessary by her chosen
10
mental health doctor to treat a diagnosed mental condition, and only when
reasonable necessary to deter or avoid future criminality.’ ” We decline the
invitation as, on this record, there is no evidence that any medications are
“reasonably necessary to deter or avoid future criminality.” Alternatively, he
argues that we should remand to the trial court with directions to cure the
defects so that the trial court “can determine whether a medically-informed
record exists and whether the condition is sufficiently narrow to address
appellant’s particular medications and circumstances.” However, the record
is already before us and, as we have already indicated, it does not contain any
medical information that would support imposition of the condition. In sum,
we conclude that, as in Petty, the medication condition is invalid under Lent.5
iii. Requirement for Mental Health Evaluation
Appellant next asserts that the order requiring her to submit to a
mental health evaluation and participate in counseling “ ‘if deemed
appropriate by the therapist and your Probation Officer’ ” is invalid under
Lent and constitutes an improper delegation of authority. She relies largely
on In re Bushman (1970) 1 Cal.3d 767 (disapproved on another ground in
Lent, supra, 15 Cal.3d at p. 486, fn. 1) (Bushman).).
In Bushman, a pilot was convicted of disturbing the peace for his
actions in protesting the condition of a runway and was sentenced to
probation. (Bushman, supra, 15 Cal.3d 767 at pp. 771-772.) The Supreme
Court invalidated a probation condition requiring the defendant “to seek
psychiatric treatment at his own expense with a qualified psychiatrist
approved by the court, and to continue the treatment as required by the
Because we conclude that the medication order is invalid under Lent,
5
we need not address appellant’s additional argument that the order
improperly delegates authority to a therapist.
11
doctor and approved by the probation department and the court.” (Id. at p.
776.) The high court noted there was no evidence that he needed psychiatric
care, nor was there any suggestion that he had any psychiatric condition
relating to the crime of which he was convicted. (Id. at pp. 776-777.) The
court explained that “without any showing that mental instability
contributed to that offense, psychiatric care cannot reasonably be related to
future criminality.” (Id. at p. 777.) The same is true here.
Citing to the probation report, the Attorney General suggests that
“[g]iven appellant’s inability to control her emotions and cope with stress, her
violent tendencies, her potential childhood trauma, and her need to daily self-
medicate with methamphetamine, the order to seek out a therapist is
motivated out of a concern and desire to maximize her chances of successfully
completing probation.” In the absence of any medically-based supporting
evidence, this justification is insufficient under Lent. As the court observed
in Petty: “While much faith is routinely placed in a probation officer’s
judgment as to how best to rehabilitate a defendant, we cannot leave the vital
linkage between a medication condition of probation and the defendant’s past
or future criminal conduct to the hunch of a probation officer whose
credentials to opine on such matters have not been established.” (Petty,
supra, 213 Cal.App.4th 1410 at p. 1419.) This observation applies equally to
the mental health examination requirement at issue here.
In sum, we conclude condition No. 26 satisfies Lent and must therefore
be stricken.
C. Vacation of Fines and Fees under AB 1869 and AB 177
Appellant contends that several administrative fees imposed on her by
the trial court should be vacated given the recent passage of Assembly Bill
No. 1869 (Stats. 2020, ch. 92, § 11; (AB 1869)), and Assembly Bill No. 177
12
(Stats. 2021, ch. 257, § 35; (AB 177)). The Attorney General concedes that
the orders imposing these fines and fees must be vacated.
At the June 2021 sentencing hearing, the trial court imposed a $412
presentence investigation report fee, a $92 monthly supervision fee, a $237
supplemental report fee, and a $75 collection fee, all pursuant to section
1203.1b. The court also imposed a $33 monthly drug testing fee pursuant to
section 1203.1ab, and a $50 installment payment fee pursuant to section
1205.
Following appellant’s sentencing hearing, AB 1869 became effective.
Among other things, AB 1869 added section 1465.9, which states that “[o]n
and after July 1, 2021, the balance of any court-imposed costs pursuant
[section] 1203.1b … as [that] section read on June 30, 2021, shall be
unenforceable and uncollectible and any portion of a judgment imposing
those costs shall be vacated.” Subsequently, the Legislature enacted AB 177,
which amended section 1465.9 by adding subdivision (b). That provision
states: “On and after January 1, 2022 the balance of any court-imposed costs
pursuant to Section 1001.15, 1001.16, 1001.90, 1202.4, 1203.1, 1203.1ab,
1203.1c, 1203.1m, 1203.4a, 1203.9, 1205, 1214.5, 2085.5, 2085.6, or 2085.7, as
those sections read on December 31, 2021, shall be unenforceable and
uncollectible and any portion of a judgment imposing those costs shall be
vacated.” (§ 1465.9, subd. (b), italics added.)
Because AB 1869 makes the unpaid balance of any probation report or
administration fee as of July 1, 2021 unenforceable and uncollectible, and it
requires that any portion of a judgment imposing such a fee be vacated, we
shall order the trial court on remand to modify the judgment to vacate the
probation report fee of $412, the supplemental probation report fee of $237,
the monthly probation supervision fee of $92, and the collection fee of $75.
13
(See People v. Clark (2021) 67 Cal.App.5th 248, 259 (Clark); People v. Lopez-
Vinck (2021) 68 Cal.App.5th 945, 953.)
Additionally, AB 177 renders any balance of the $50 installment
payment fee and the $33 monthly drug testing fee that remained on or after
January 1, 2022, unenforceable and uncollectible. We therefore also direct
the trial court to vacate any portion of these fees that remain unpaid as of
January 1, 2022. (Clark, supra, 67 Cal.App.5th 248 at p. 259.)
III.
DISPOSITION
The judgment is conditionally reversed, and the matter remanded to
the trial court to modify the judgment as follows: (1) to strike probation
condition No. 26; (2) to reflect that any balances remaining unpaid as of July
1, 2021 for the $412 probation report fee, the $237 supplemental probation
report fee, the $92 monthly probation supervision fee, and the $75
installment payment system fee are unenforceable and uncollectable, and to
vacate the portion of the judgment imposing those costs; and (3) to reflect
that any balances remaining unpaid as of January 1, 2022 for the $50
installment payment fee and the $33 monthly drug testing fee are
unenforceable and uncollectable, and to vacate the portion of the judgment
imposing those costs.
Thereafter, the court shall amend its records to reflect modifications to
its prior orders and shall forward a copy of the amended orders to all
appropriate authorities. As modified, the judgment is affirmed.
14
DEVINE, J.
WE CONCUR:
HUMES, P. J.
MARGULIES, J.
A162913N
Judge of the Contra Costa County Superior Court, assigned by the Chief
Justice pursuant to article VI, section 6 of the California Constitution.
15 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488109/ | Filed 11/18/22 Conservatorship of Y.B. CA1/4
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or
ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FOUR
Conservatorship of the Person of
Y.B.
PUBLIC GUARDIAN OF CONTRA A162550
COSTA COUNTY,
(Contra Costa County Super. Ct.
Petitioner and Respondent, No. MSP13-01485)
v.
Y.B.,
Objector and Appellant.
Y.B. appeals from the Contra Costa County Superior Court’s order
reappointing the Public Guardian of Contra Costa County (Public Guardian)
as her conservator under the Lanterman-Petris-Short (LPS) Act (Welf. &
Inst. Code, § 5350 et seq.). Her counsel has submitted a brief in which he
does not identify any arguable issues and asks this court to conduct an
independent review of the record. Counsel advised Y.B. of her right to file a
supplemental brief within 30 days of the opening brief’s filing, but Y.B. has
not done so.
When a similar appellate brief is filed in a criminal appeal, we must
conduct an independent review of the record to determine if it reveals any
1
arguable issues. (People v. Wende (1979) 25 Cal.3d 436, 441–442.) This duty
does not extend to appeals from conservatorship proceedings.
(Conservatorship of Ben C. (2007) 40 Cal.4th 529, 535.) Rather, upon the
filing of an appellate brief that does not identify any arguable issues and the
allowance of time for the appellant to file a supplemental brief, we may
dismiss such an appeal on our own motion. (Id. at p. 544 & fn. 6.) We shall
do so here.
BACKGROUND
In February 2021, the Public Guardian filed a petition seeking
reappointment as Y.B.’s LPS conservator, alleging that Y.B. remained
gravely disabled and unable to provide for her own basic needs as a result of
a mental health disorder. The Public Guardian recommended the imposition
of special disabilities that would deny Y.B. the right to refuse or consent to
treatment related to her grave disability, the right to enter into contracts
without the knowledge and consent of the conservator, and the privilege of
possessing a driver’s license, and would disqualify her from purchasing or
possessing firearms or other deadly weapons.
Y.B., through her appointed trial counsel, objected to the
reappointment and requested a bench trial. The court advised Y.B. of her
right to a jury trial and accepted her waiver of that right. It also ordered the
petition merged with the February 2020 petition for reappointment, which
had not been heard yet because of the COVID-19 pandemic.
At the bench trial, Dr. Michael Levin, a psychiatrist employed by
Contra Costa County, including to conduct grave disability evaluations for
the county’s conservator’s office, testified as an expert on behalf of the Public
Guardian. He said he had met with Y.B. “a number of times” dating back to
2014 and had interviewed her over Zoom for thirty minutes the day before he
2
testified. Y.B. made “accusatory statements” about staff and peers at her
placement at California Psychiatric Transitions (CPT) that Dr. Levin thought
indicated a “problem with reality testing,” and “paranoid ideation.” For
example, Y.B. said, “ ‘All they do is rape and assault me,’ ” and, “ ‘They treat
me bad here.’ ” She also had an unfounded, “ongoing fixed idea” about a
carton of cigarettes being taken from her.
Asked about Y.B.’s problem with reality testing, Dr. Levin said Y.B.
told him the CPT staff was trying to starve her, and that their bad treatment
of her was racist in nature. When asked about her plan if she left her
placement, she said she wanted to go back to her home area with no specific
place in mind and later said she wanted to go to a court hearing, be put on a
“5150” hold, be taken to a medical center and then released to her home area.
Her plans struck him “as being out of touch with reality,” and indicated she
was unable “to make a concrete defined plan for where she would go.”
Dr. Levin testified that CPT records indicated that Y.B. exhibited a
number of difficulties related to mental illness. She talked to herself,
including saying “ ‘to no one in particular . . . “fuck that shit” ’ ” and “ ‘ “[g]et
out of my way,” ’ ” indicators that she was responding to internal stimuli or
auditory hallucinations, which was a “psychotic symptom.” She made
delusional statements, including that she was pregnant and due in three
months and that someone stole her baby.
Y.B. also had difficulty engaging in daily living activities. For example,
she required “numerous prompts to wash her body appropriately.” She
refused her medications and slammed her room door on CPT staff in one
incident, and she hid pills.
Also, Y.B. had issues with “impulsivity—appropriateness of behavior”
that indicated “a general lack of reality testing and appropriate behavior.”
3
For example, she grabbed a staff member’s hand repeatedly despite efforts to
redirect her behavior and pinched a staff member’s buttocks.
Dr. Levin opined that Y.B. suffered from schizophrenia. She was
taking medications for it, but she did not understand them or know their
names. She “lack[ed] insight into her illness and lack[ed] the capacity really
to form the very cogent plan for taking care of herself were she not in this
kind of facility.” He concluded that she was gravely disabled.
Deborah Tyler, the deputy conservator assigned to Y.B. since 2014,
testified that she visited or spoke to Y.B. every two months. In the previous
year, she observed that Y.B. had expressed “many” fixed false beliefs and
delusions, including that she had a baby and lots of money. She frequently
said she had been released from all felony charges and should therefore be
released from the conservatorship, although Tyler explained to her
repeatedly that her conservatorship was not related to any criminal charges.
She said she had multiple children in Richmond, a job, and a boyfriend, and
she needed to “get back”; Tyler, despite “considerable research,” had not
found proof of these people. Y.B. claimed to have a place to stay other than
CPT, but would not provide information about it.
Y.B. took the stand and began reading and saying things that were
muddled. To the extent discernible, her statements included remarks that
that “they” cut her hair, abused her, starved her, and hit her breast. She
referred to a “one year charge for a gun felony.” She said she was “better
now,” asked to be released to her house, said she was not safe at her current
placement, and asked to be transferred to a hospital for three days and then
released.
The trial court found beyond a reasonable doubt that Y.B. was gravely
disabled and that her existing placement was the least restrictive and most
4
appropriate placement, imposed what were in essence the recommended
special disabilities and granted the petition reappointing the Public Guardian
as Y.B.’s conservator. Y.B. filed a timely notice of appeal from the court’s
order.
Given our decision to dismiss this appeal, we will not analyze the
record other than to note that we likely would find no arguable issues and
affirm even if we were to conduct an independent review of it based on the
evidence we have summarized.
DISPOSITION
The appeal is dismissed.
STREETER, J.
WE CONCUR:
POLLAK, P. J.
GOLDMAN, J.
5 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488111/ | IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE CÔTE D’AZUR ESTATE ) C.A. No. 2017-0290-JTL
CORPORATION )
OPINION
Date Submitted: September 16, 2022
Date Decided: November 18, 2022
Jeremy D. Anderson, FISH & RICHARDSON P.C., Wilmington, Delaware; Counsel for
plaintiff Lilly Lea Perry.
Steven L. Caponi, K&L GATES, LLP, Wilmington, Delaware; Counsel for defendant the
BGO Foundation and for nominal party Côte d’Azur Estate Corporation.
Dieter Walter Neupert; Defendant pro se.
LASTER, V.C.
Plaintiff Lilly Lea Perry has moved for the issuance of a letter of request to obtain
the assistance of the central authority in Switzerland to facilitate discovery. Lilly seeks
international assistance to obtain electronic data that Swiss investigators seized from the
law office of Dieter Neupert, a defendant in this case, while investigating whether Neupert
falsified evidence in a civil proceeding in Switzerland. A Swiss court determined that the
investigators had reasonable cause to obtain the materials and that the investigators acted
properly by only seizing evidence that was directly relevant to their investigation. The
resulting evidence consists primarily of emails sent or received by Neupert and one of his
assistants covering the period from May 1, 2015, through March 1, 2017 (the “Discovery
Materials”).
To obtain a letter of request, the movant must show initially that production would
be ordered if the materials sought were subject to the court’s jurisdiction. In one of her
proposals, Lilly seeks all of the Discovery Materials. In an alternative proposal, Lilly only
seeks the Discovery Materials to the extent that they touch on particular issues relevant to
this proceeding. The court adopts the latter proposal which makes the materials sought
plainly relevant. If the Discovery Materials were subject to this court’s jurisdiction, the
court would order them produced.
Whenever discovery involves a lawyer, there will be concerns about privilege. Here,
those concerns are likely to be limited, because the investigators conducted a focused
investigation and have stated that the Discovery Materials primarily implicate Neupert and
his assistant, rather than clients. Additionally, privilege issues are unlikely to be of concern
1
because of the crime/fraud exception. This court has previously ruled that the actions
Neupert took that form the basis for this case bear sufficient hallmarks of fraud to invoke
the crime/fraud exception. The Discovery Materials were also seized as part of an
investigation into a crime.
A party seeking a letter of request also must convince the issuing court to ask a
foreign court for assistance, taking into account the burden that such a request necessarily
imposes on the judicial system of another nation. Lilly has met her burden on that issue by
showing that the letter of request is targeted and appropriate. The Discovery Materials have
already been collected and are easily identifiable. Under Swiss law, a private plaintiff can
obtain the Discovery Materials, and Lilly has shown that investigators have provided
similar information to a private plaintiff in the past.
Although not required to secure the issuance of a letter of request, Lilly has shown
that it will be difficult, if not impossible, to obtain the information through other means.
To be sure, Neupert is a party to this case and ostensibly subject to compulsory process.
But since April 2017, Neupert has failed to participate meaningfully in this proceeding. He
is a foreign national who previously refused to be deposed, despite his status as a defendant.
Because of his non-participation in an earlier phase of this case, the court drew an inference
that any evidence that Neupert could have provided would be favorable to Lilly. Another
powerful indicator of Neupert’s non-participation is his failure to respond to Lilly’s motion.
Only the BGO Foundation has raised objections to the letter of request.
Lilly has made a convincing showing that Neupert would not produce the Discovery
Materials if he had them, and the record suggests that he may no longer have them. The
2
investigators reported that they seized the Discovery Materials, not that they made copies
of them. It is reasonable to infer that the only source is the investigators’ files.
Lilly’s motion is granted. The letter of request will issue.
I. FACTUAL BACKGROUND
Non-party Israel Igo Perry died on March 18, 2015. He was survived by Lilly, his
widow, and their two daughters, Tamar and Yael.1 Mr. Perry’s last will and testament
named Neupert as the executor of his estate. Neupert is Swiss lawyer who was Mr. Perry’s
longtime advisor and confidant.2 Neupert also was the architect of Mr. Perry’s estate plan,
which involved a complex network of entities called the “Structure.” Louis Oehri & Partner
Trust reg. (“LOPAG”), a Liechtenstein commercial trust company, formed and controlled
all of the entities in the Structure. Neupert and Louis Oehri co-founded LOPAG in 1989,
and they worked hand in hand to create the Structure and advise Mr. Perry.
Neupert and representatives of LOPAG told Lilly that when Mr. Perry died, he was
1
My standard practice is to identify individuals by their last name without
honorifics. When individuals share the same last name, my standard practice is to shift to
first names. Using Mr. Perry’s first name (Israel) can be confusing, because key events
took place in the State of Israel. This decision therefore refers to him as “Mr. Perry.”
This decision periodically uses terms such as “the Perry family” or “the members
of the Perry family” to refer to Lilly, Tamar, and Yael. By describing the Perry family in
this fashion, this decision is not suggesting that other individuals do not qualify as members
of the Perry family under a broader definition.
2
Although Mr. Perry named Neupert to the role of executor in his will, Lilly
contested Neupert’s ability to serve, and Neupert never secured authority to act as executor.
Instead, Tamar and another individual were appointed as co-executors of Mr. Perry’s
estate.
3
the sole member of Côte d’Azur Estate LLC (“Côte d’Azur” or the “LLC”), a Delaware
limited liability company. The LLC owned La Treille, a villa in the south of France (the
“Villa”). Neupert and representatives of LOPAG told Lilly that the member interest in the
LLC passed to Mr. Perry’s estate and that she was the sole heir of the estate.
After Lilly, Tamar, and Yael disagreed about the disposition of Mr. Perry’s wealth,
Neupert and LOPAG tried to broker a settlement of those disputes. By June 2016, however,
it was clear that the family members could not agree. The family divided into two factions,
with Lilly and Tamar on one side and Yael on the other.
Neupert and LOPAG sought to force the family members back to the table by
pressuring Lilly. To achieve that goal, they reversed their position about the ownership of
the LLC, and they asserted that before his death, Mr. Perry transferred his member interest
to the BGO Foundation (the “Foundation”), one of the entities in the Structure. As evidence
of the transfer, they relied on a Deed of Assignment dated May 1, 2013. If the Foundation
controlled the LLC, then Neupert and LOPAG could deny Lilly access to the Villa.
In June 2016, in an effort to bolster their new position about the ownership of the
LLC, Neupert and LOPAG engaged in self-help. Neupert caused a Delaware registered
agent to file a certificate of conversion with the Delaware Secretary of State that converted
Côte d’Azur Estate Corporation (“Côte d’Azur” or the “Corporation”).3 Neupert also
3
Note that the term “Côte d’Azur” may refer to the entity in either its earlier
manifestation as the LLC or its current manifestation as the Corporation. Much of the time,
the distinction does not matter, and so using “Côte d’Azur” promotes clarity. When the
distinction matters, this decision strives to use one of the latter terms.
4
caused the registered agent to file a certificate of incorporation that authorized the issuance
of 10,000 shares of common stock. There are documents which Neupert and LOPAG
created later that purport to issue all of the Corporation’s shares to the Foundation.
Starting in the second half of 2016, litigation broke out in various jurisdictions. In
April 2017, Lilly filed this action. She contends that (i) the Deed of Assignment did not
effectuate an immediate transfer of Mr. Perry’s member interest in the LLC to the
Foundation and (ii) Mr. Perry subsequently decided not to carry out the transfer because of
adverse tax consequences in France. She maintains that Mr. Perry remained the sole
member of the LLC when he died. Consequently, Neupert and LOPAG had no authority
to convert the LLC into the Corporation or to issue shares of stock to the Foundation.
One of the early battles in the case concerned whether Lilly could name the
Foundation as a defendant. When the Foundation moved to dismiss for lack of personal
jurisdiction, the court held that Lilly had made a sufficient showing to conduct
jurisdictional discovery. During jurisdictional discovery, the Foundation stipulated that Mr.
Perry never executed any additional documents to implement the Deed of Assignment, and
Dominik Naeff, a principal of both LOPAG and the Foundation, testified that the Deed of
Assignment was never implemented. The discovery record included contemporaneous
documents in which Naeff and Neupert acknowledged that the Deed of Assignment was
never implemented. The Perry family and their advisors, including Neupert and Naeff, also
represented to the French tax authorities that Lilly was the ultimate beneficial owner of the
Villa. That only could have been true if the Deed of Assignment was never implemented
and if Lilly stood to inherit the Villa as the sole beneficiary of Mr. Perry’s will.
5
The court held a two-day evidentiary hearing to determine whether personal
jurisdiction existed over the Foundation. The court then issued an opinion which concluded
that the court could exercise personal jurisdiction over the Foundation because the
Foundation had conspired with Neupert to commit torts that had a sufficient nexus to
Delaware. Perry v. Neupert (Jurisdictional Decision), 2019 WL 719000, at *37 (Del. Ch.
Feb. 15, 2019).
In reaching this conclusion, the court made findings of fact based on what the
evidentiary record showed at that stage by a preponderance of the evidence. The court’s
factual findings included the following:
• Mr. Perry never executed the documents necessary to implement the Deed of
Assignment. Id. at *7.
• Mr. Perry decided not to complete the transfer to avoid adverse tax consequences in
France. Id. at *8.
• On March 28, 2015, Naeff wrote to the Perry family’s advisors, including Neupert,
that the Deed of Assignment “was never executed.” Id. At the evidentiary hearing,
Naeff testified that by “never executed” he meant “that this transfer has not been
completed or finalized.” Naeff Tr. 53.
• In August 2015, Neupert wanted to claim that the LLC had been transferred into the
Structure. He and Naeff discussed whether they could use the Deed of Assignment
to make such a claim, but they agreed that it had never been implemented.
Jurisdictional Decision, 2019 WL 719000, at *25.
• In August 2016, Neupert and Naeff claimed to have discovered the Deed of
Assignment and that it had transferred the equity of the Corporation to the
Foundation. Id. at *17.
• To bolster their claim about the Deed of Assignment, Neupert and Naeff sought a
legal opinion as to its effectiveness. When the law firm would not deliver the
requested opinion Neupert fabricated documents. Id. at *17–21.
6
• During late September or early October 2016, Neupert and Naeff fabricated a power
of attorney and backdated it to February 5, 2016. Id. at *18.
• During December 2016, Neupert and Tanja Tandler, one of his personal assistants,
created a board resolution and stock certificate, which they backdated to July 1,
2016. Id. at *21.
Based on these and other events, Lilly is pursuing claims for fraud, conversion, and
tortious interference with contract against Neupert and the Foundation. She seeks a decree
invalidating (i) the issuance of shares to the Foundation and (ii) the conversion of the LLC
into the Corporation.
The court’s factual findings only addressed the issue of personal jurisdiction, not
the merits. After still more motion practice, the parties began merits discovery. As part of
that process, both sides have asked the court to issue letters of request to obtain discovery
from various foreign jurisdictions. In total, the parties have sought twenty-one letters of
request. Lilly has sought three. The Foundation has sought eighteen.
On August 1, 2022, Lilly moved for a letter of request to the central authority of
Switzerland to obtain the Discovery Materials, which are in the possession of the
Prosecutor’s Office of the Canton of Zurich (the “Zurich Prosecutor’s Office”). Dkt. 375.
The motion explained that in early 2018, the Zurich Prosecutor’s Office conducted a
criminal investigation into Neupert and one of his personal assistants, Susanne Aalam, for
“forgery of public documents and potential suppression of documents.” Id. at 15. As part
of that investigation, prosecutors searched Neupert’s law firm and seized electronic devices
belonging to Neupert and Aalam.
A Swiss court subsequently determined that the seizure was proper and that
7
“[r]easonable suspicion of a crime was given.” Dkt. 375, Ex. 4 at 4. The court also found
that the seizure of the Discovery Materials complied with the requirements of
proportionality imposed by Swiss law and were closely related to the case. Id. ¶¶ 4.2, 4.4
Lilly has moved for the issuance of a letter of request seeking production of all of
the Discovery Materials. Alternatively, she seeks production of only those Discovery
Materials that touch on topics at the heart of this litigation. Id. at 16–17.
The Foundation opposes Lilly’s request. Neupert has not responded to the motion.
II. LEGAL ANALYSIS
Lilly seeks to obtain the Discovery Materials using the procedures authorized under
the Convention on the Taking of Evidence Abroad in Civil or Commercial Matters, which
opened for signature on March 18, 1970. 23 U.S.T. 2555, T.I.A.S. No. 7444 (Codified as
28 U.S.C. § 1781. “This Convention—sometimes referred to as the ‘Hague Convention’ or
the ‘Evidence Convention’—prescribes certain procedures by which a judicial authority in
one contracting state may request evidence located in another contracting state.” Societe
Nationale Industrielle Aerospatiale v. U.S. Dist. Ct. for the S. Dist. of Iowa, 482 U.S. 522,
524 (1987). To that end, Article 1 states:
In civil or commercial matters a judicial authority of a Contracting State may,
in accordance with the provisions of the law of that State, request the
competent authority of another Contracting State, by means of a Letter of
Request, to obtain evidence, or to perform some other judicial act.
Hague Convention, supra, art. 1.
A party’s use of the Hague Convention is neither mandatory nor exclusive. “[T]he
optional Convention procedures are available whenever they will facilitate the gathering
8
of evidence by the means authorized in the Convention.” Societe Nationale, 482 U.S. at
541; accord Tulip Computers Int’l B.V. v. Dell Computer Corp., 254 F. Supp. 2d 469, 472
(D. Del. 2003) (“The Hague Evidence Convention serves as an alternative or ‘permissive’
route to the Federal Rules of Civil Procedure for the taking of evidence abroad from
litigants and third parties alike.”).
The party seeking a letter of request bears the burden of persuading the trial court
that its issuance is warranted. Tulip Computers, 254 F. Supp. 2d at 427. Initially, the
discovery sought must be permissible under the law of the requesting jurisdiction such that
production would be ordered by the requesting court. See Hague Convention, supra, art. 1
(noting that the request must be “in accordance with the provisions of the law of [the
requesting] State”). For purposes of a Delaware proceeding, that means the discovery must
fall within the scope of Rule 26.
Rule 26(b)(1) states:
Parties may obtain discovery regarding any non-privileged matter that is
relevant to any party’s claim or defense and proportional to the needs of the
case, including the existence, description, nature, custody condition and
location of any documents, electronically stored information, or tangible
things and the identify and location of persons having knowledge of any
discoverable matter.
Ct. Ch. R. 26(b)(1).
“The scope of discovery pursuant to Court of Chancery Rule 26(b) is broad and far-
reaching . . . .” Cal. Pub. Emps. Ret. Sys. v. Coulter, 2004 WL 1238443, at *1 (Del. Ch.
May 26, 2004) (citation omitted). “[T]he spirit of Rule 26(b) calls for all relevant
information, however remote, to be brought out for inspection not only by the opposing
9
party but also for the benefit of the Court . . . .” Boxer v. Husky Oil Co., 1981 WL 15479,
at *2 (Del. Ch. Nov. 9, 1981). Relevance “must be viewed liberally,” and discovery into
relevant matters should be permitted if there is “any possibility that the discovery will lead
to relevant evidence.” Loretto Literary & Benevolent Inst. v. Blue Diamond Coal Co., 1980
WL 268060, at *4 (Del. Ch. Oct. 24, 1980). “Discovery is called that for a reason. It is not
called ‘hide the ball.’” Klig v. Deloitte LLP, 2010 WL 3489735, at *7 (Del. Ch. Sept. 7,
2010). Consequently, when a party objects to providing discovery, “[t]he burden is on the
objecting party to show why and in what way the information requested is privileged or
otherwise improperly requested.”4 Generic and formulaic objections “are insufficient.”
Van de Walle, 1984 WL 8270, at *2.
For purposes of a letter of request, determining that the discovery would be
permissible if the responding party were within the court’s jurisdiction is necessary but not
sufficient. The court must conduct an additional level of analysis that takes into account
the trans-jurisdictional nature of the request. The Supreme Court of the United States has
described the general nature of the inquiry as follows:
4
Van de Walle v. Unimation, Inc., 1984 WL 8270, at *2 (Del. Ch. Oct. 15, 1984);
accord Prod. Res. Gp., L.L.C. v. NCT Gp., Inc., 863 A.2d 772, 802 (Del. Ch. 2004) (Strine,
V.C.) (citation omitted). A more accurate description of the discovery process is “a
practical form of burden-shifting.” In re Appraisal of Dole Food Co., Inc., 114 A.3d 541,
551 (Del. Ch. 2014). “[T]he party seeking the information must first provide some minimal
explanation as to why the discovery satisfies the requirements of relevance and conditional
admissibility.” Id. Once the party seeking discovery has met that initial burden, “[i]t is then
up to the party opposing discovery to show that the explanation is erroneous” or that there
are other reasons why discovery should be limited or foreclosed. Id.
10
American courts, in supervising pretrial proceedings, should exercise special
vigilance to protect foreign litigants from the danger that unnecessary, or
unduly burdensome, discovery may place them in a disadvantageous
position. Judicial supervision of discovery should always seek to minimize
its costs and inconvenience and to prevent improper uses of discovery
requests. When it is necessary to seek evidence abroad, however, the district
court must supervise pretrial proceedings particularly closely to prevent
discovery abuses. For example, the additional cost of transportation of
documents or witnesses to or from foreign locations may increase the danger
that discovery may be sought for the improper purpose of motivating
settlement, rather than finding relevant and probative evidence. Objections
to “abusive” discovery that foreign litigants advance should therefore receive
the most careful consideration. In addition, we have long recognized the
demands of comity in suits involving foreign states, either as parties or as
sovereigns with a coordinate interest in the litigation. American courts should
therefore take care to demonstrate due respect for any special problem
confronted by the foreign litigant on account of its nationality or the location
of its operations, and for any sovereign interest expressed by a foreign state.
Societe Nationale, 482 U.S. at 546 (internal citations omitted).
The Societe Nationale decision recommended that courts consider the following
factors when evaluating whether to issue a letter of request:
• the importance to the litigation of the documents or other information requested;
• the degree of specificity of the request;
• whether the information originated in the United States;
• the availability of alternative means of securing the information; and
• the extent to which noncompliance with the request would undermine important
interests of the United States, or compliance with the request would undermine
important interests of the state where the information is located.
Id. at 544 n.28.
During this stage, the requesting party again bears the burden of showing that the
issuance of a letter of request is warranted, but “[t]hat burden is not great.” Pronova
11
BioPharma Norge AS v. Teva Pharms. USA, Inc., 708 F. Supp. 2d 450, 452 (D. Del. 2010).
According to a leading treatise, “[a] court should make use of the Convention procedures
whenever it is determined on a case-by-case basis that their use will facilitate discovery.”
8 Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice and
Procedure § 2005.1 at 70 (3d ed. 2010), Westlaw (database updated Apr. 2022). Resort to
the Hague Convention generally will be appropriate when the responding party is not a
party to the litigation, has not agreed to respond to discovery voluntarily, and can be
compelled to respond through Hague Convention procedures.5
5
See, e.g., Cosmo Techs. Ltd. v. Actavis Lab’ys FL, Inc., 2016 WL 4582498, at *2
(D. Del. Aug. 31, 2016) (issuing letter of request where witness was located in Italy and
possessed evidence that was relevant and unlikely to be duplicative); Eli Lilly & Co. v.
Teva Parenteral Meds., Inc., 2013 WL 12291616, at *3 (S.D. Ind. Apr. 26, 2013) (“It is
undisputed that Dr. Calvert is a citizen of the United Kingdom. Defendants represent that
Dr. Calvert refused to make himself available for deposition or to produce any documents.
In these circumstances, Defendants’ resort to the Hague Convention appears entirely
appropriate.”); Metso Mins. Inc. v. Powerscreen Int'l Distrib. Ltd., 2007 WL 1875560, at
*3 (E.D.N.Y. June 25, 2007) (finding that use of Hague Convention procedures was
warranted where witness had relevant evidence and “the procedures of the Hague Evidence
Convention may be the only means by which the requested discovery may be obtained
given the fact that Mr. Rafferty is a citizen of Northern Ireland, who is not a party to this
action and is similarly not subject to the jurisdiction of this court”); Tulip Computers, 254
F. Supp. 2d at 474 (“Resort to the Hague Evidence Convention in this instance is
appropriate since both Mr. Duynisveld and Mr. Dietz are not parties to the lawsuit, have
not voluntarily subjected themselves to discovery, are citizens of the Netherlands, and are
not otherwise subject to the jurisdiction of the Court.”); Orlich v. Helm Bros., Inc., 160
A.D.2d 135, 143 (N.Y.A.D. 1990) (“When discovery is sought from a non-party in a
foreign jurisdiction, application of the Hague Convention, which encompasses principles
of international comity, is virtually compulsory.”).
12
A. The Hague Convention Is An Available Method.
As a threshold matter, a court can issue a letter of request to a country that has signed
the Hague Convention. Switzerland is a signatory, so the Hague Convention provides one
option for discovery.
At times, parties resisting a motion seeking a letter of request will show that the
signatory nation executed the Hague Convention subject to reservations.6 No one has
identified any reservations that are pertinent to this case.
B. The Court Would Order Production If The Discovery Were Within Its
Control.
As discussed above, the first step in evaluating whether to issue a letter of request
asks whether the court would order production if the materials were subject to the court’s
jurisdiction. Lilly has made two alternative proposals, one broader and one narrower. If the
Discovery Materials were subject to the court’s jurisdiction, then the court would order
production under the narrower framework. That proposal therefore establishes the
appropriate scope for the letter of request.
In her initial proposal, Lilly asks for production of “[c]omplete forensic copies of
all hard drives or internal memory on all computers and other electronic devices belonging
to Dieter Neupert or Susanne Aalam, which are currently in the possession of the Zurich
6
See, e.g., St. Jude Med. S.C., Inc. v. Janssen-Counotte, 104 F. Supp. 3d 1150,
1167–68 (D. Or. 2015) (discussing Germany’s reservations to the Hague Convention); Eli
Lilly, 2013 WL 12291616, at *2 (discussing the United Kingdom’s reservations to the
Hague Convention); In re Vitamins Antitrust Litig., 120 F. Supp. 2d 45, 56–57 (D.D.C.
2000) (discussing Belgium’s reservations to the Hague Convention).
13
Prosecutor’s Office.” Dkt. 375 at 16–17 (the “Broad Proposal”). The Broad Proposal would
require production of all of the Discovery Materials, regardless of their relevance to this
litigation.
As an alternative, Lilly asks for production of
electronic records on all computers and other electronic devices belonging to
Dieter Neupert or Susanne Aalam, which are currently in the possession of
the Zurich Prosecutor’s Office, and which pertain to:
a. Côte D’Azur;
b. Filings with the Delaware Secretary of State;
c. The Deed of Assignment . . .;
d. Proceedings before the English Serious Organized Crime Agency
(“SOCA”) involving the Deed of Assignment.
Id. at 17 (the “Narrow Proposal”).
As discussed above, discovery must be “relevant to any party’s claim or defense.”
Ct. Ch. R. 26(b)(1). If the court had jurisdiction over the Discovery Materials, then the
court would limit production to those issues that are relevant to this proceeding.
Under the Rule 26(b)(1) standard, the Broad Proposal is not tied to issues that are
relevant to the case. The Broad Proposal seeks production of the Discovery Materials in
their entirety, regardless of subject matter. The risk is admittedly limited, because as a
Swiss court has held, the Zurich Prosecutors’ Office conducted a focused investigation.
Dkt. 375, Ex. 4 ¶ 2 (“Both in the court order as well as in the office search and provisional
seizure, attention had been paid that exclusively evidence was taken, which could prove to
be directly relevant.”). Nevertheless, the Broad Proposal is not tied to the issues relevant
to the case, and it therefore falls short under Rule 26(b)(1).
14
By contrast, the Narrow Proposal ties the production to the topics at issue in this
proceeding. It identifies four categories of information that relate to materials at the heart
of this case. Under the Narrow Proposal, the production is limited to relevant material.
As discussed above, discovery also must be “proportional to the needs of the case.”
Ct. Ch. R. 26(b)(1). Neither of Lilly’s proposals raise any issues involving proportionality.
The Discovery Materials already present a finite and easily accessible scope of production.
As discussed above, discovery extends to “any non-privileged matter.” Ct. Ch. R.
26(b)(1). Neupert has not responded to Lilly’s motion and has not taken any position on
privilege. The Foundation objects that the letter of request will result in the production of
privileged material simply because Neupert is a lawyer. Dkt. 393 ¶ 20. As a threshold
matter, privileged communications involving Neupert’s clients are not likely to be a
problem because of the focused nature of the investigation. As a Swiss court has found, the
Zurich Prosecutor’s Office tailored its seizure to narrowly focus on its forgery
investigation. Dkt. 375, Ex. 4 ¶ 2. The seizure involved only documents that were directly
relevant to its investigation and from the narrow timeframe regarding the tortious act. Id.
Privilege also is not likely to be at issue because of the crime/fraud exception.
Delaware Rule of Evidence 502 shields from discovery any “confidential communications
made for the purpose of facilitating the rendition of professional legal services to the
client.” D.R.E. 502. But the rule establishes an exception when “the services of the lawyer
were sought or obtained to enable or aid anyone to commit or plan to commit what the
client knew or reasonably should have known to be a crime or fraud.” Id. 502(d)(1).
15
The premise behind the crime-fraud exception is “that when a client seeks out an
attorney for the purpose of obtaining advice that will aid the client in carrying out a crime
or a fraudulent scheme, the client has abused the attorney-client relationship and stripped
that relationship of its confidential status.” Princeton Ins. Co. v. Vergano, 883 A.2d 44, 55
(Del. Ch. 2005) (Strine, V.C.). For the crime-fraud exception to apply, the client must
intend to use the communications “as a basis for criminal or fraudulent activity, whether
or not that criminal or fraudulent intent ever comes to fruition.” In re Sutton, 1996 WL
659002, at *11 (Del. Super. Aug. 30, 1996). “To invoke the crime-fraud exception, . . . the
proponent of the exception must make a prima facie showing that the confidential
communications were made in furtherance of a crime or fraud.”. Buttonwood Tree Value
P’rs, L.P. v. R.L. Polk & Co., Inc., 2018 WL 346036, at *6, *8 (Del. Ch. Jan. 10, 2018)
(cleaned up)).
During a previous phase of this case, this court held that Neupert’s actions in
connection with the takeover of the LLC bore sufficient hallmarks of fraudulent and
potentially criminal conduct to overcome the privilege under the crime/fraud exception.
Dkt. 174 at 46–48. Under Lilly’s Narrow Proposal, the letter of request only will seek a
portion of the Discovery Materials that relate directly to issues in the case. Those matters
are likely to fall within this court’s ruling regarding the crime/fraud exception such that
they are subject to production without regard to privilege.
Consequently, if the Discovery Materials were subject to this court’s jurisdiction,
then the court would order production in conformity with the Narrow Proposal.
16
C. A Letter Of Request Is Warranted Notwithstanding The Burden On A Foreign
Court System.
Because Lilly seeks the issuance of a letter of request to the central authority of a
foreign jurisdiction, it is not enough for the court to find that it would order production of
the Discovery Materials that fall within the Narrow Proposal. The court must engage in
additional analysis to determine whether to impose a burden on the courts in a foreign
jurisdiction. In this case, Lilly has made the necessary showing.
In Societe Nationale, the Supreme Court of the United States identified five factors
to consider when determining whether to issue a letter of request. To reiterate, the five
factors are:
• the importance to the litigation of the documents or other information requested;
• the degree of specificity of the request;
• whether the information originated in the United States;
• the availability of alternative means of securing the information; and
• the extent to which noncompliance with the request would undermine important
interests of the United States, or compliance with the request would undermine
important interests of the state where the information is located.
Societe Nationale, 482 U.S. at 544 n.28; see Restatement (Third) of Foreign Relations Law
§§ 441–442 (Am. L. Inst. 1987), Westlaw (database updated Oct. 2022). Evaluating these
factors “requires a particularized analysis of the facts of a case, the sovereign interests
involved, and the likelihood that resorting to the Hague Convention will prove effective.”
Ingenico Inc. v. Ioengine, LLC, 2021 WL 765757, at *2 (D. Del. Feb. 26, 2021).
17
1. The Importance Of The Documents Requested
The first factor requires an assessment of the importance of the documents or other
information to the litigation. Societe Nationale, 482 U.S. at 544 n.28. This factor “calls on
the court to consider the degree to which the information sought is more than merely
relevant under the broad test generally for evaluating discovery requests.” In re Activision
Blizzard, Inc., 86 A.3d 531, 544 (Del. Ch. 2014). To meet its burden, the requesting party
must go beyond “conclusory assertions” that the evidence sought is relevant to the
litigation. Ingenico, 2021 WL 765757, at *3. Production is favored where the requesting
party shows that the evidence sought is “directly probative to the issues of the case.”
Chevron Corp. v. Donziger, 296 F.R.D. 168, 204 (S.D.N.Y. 2013) (quoting Reino de
Espana v. Am. Bureau of Shipping, 2005 WL 1813017, at *7 (S.D.N.Y. Aug. 1, 2005)).
But the requesting party need not show the requested documents are vital to the litigation.
Id. Here, Lilly has shown the proposed discovery directed to Neupert meets the test.
The Discovery Materials that fall within the Narrow Proposal are highly likely to
contain evidence that is directly probative to the issues in this case. The Narrow Proposal
only seeks Discovery Materials that relate to four targeted issues: (i) Côte d’Azur; (ii)
filings with the Delaware Secretary of State; (iii) the Deed of Assignment; and (iv)
proceedings before SOCA involving the Deed of Assignment. Dkt. 375 at 17. Each of these
issues touches on an important subject for this case. For example, the parties dispute who
owned the LLC and Lilly avers that Neupert and one of his secretaries fabricated corporate
records and a power of attorney that enabled Neupert to seize control of Côte d’Azur.
18
The timeframe is also limited. The Discovery Material covers a period from May 1,
2015, to March 1, 2017. Dkt. 409 at 4. That is also the central time period for this case. See
Jurisdictional Decision, 2019 WL 719000, at *18–21.
The request for assistance is appropriately targeted in terms of scope. It pertains
only to Neupert and Aalam. Dkt. 375, Ex. 4 ¶ 4.4 (“Primarily, the Accused and his secretary
are directly affected by the investigation actions in dispute.”). Neupert is the central figure
in both proceedings. In this case, he is one of only two defendants.
Both proceedings also involve allegations that Neupert worked with one of his
assistants to fabricate documents. In this case, electronic records of emails between
Neupert and an assistant supported a finding that Neupert fabricated corporate resolutions
and a stock certificate. Id. at *21. The electronic records in the possession of the Zurich
Prosecutor’s Office may contain drafts and notes relevant to these subjects.
Neupert has not responded to Lilly’s motion. Only the Foundation filed an
opposition. The Foundation has disputed the scope of the Broad Proposal, but not the
Narrow Proposal. As to the latter, the Foundation concedes that the request “seeks
information which may prove relevant to this proceeding.” Dkt. 393 ¶ 28.
Lilly has successfully shown that the Discovery Materials are likely to be probative
on issues in this case. The first factor cuts in her favor.
2. The Degree Of Specificity Of The Request
The second factor directs the court to consider the degree of specificity of the
request. Societe Nationale, 482 U.S. at 544 n.28. A request must be sufficiently specific to
avoid confronting the producing party with “unnecessary, or unduly burdensome
19
discovery” that places the producing party “in a disadvantageous position.” Id. at 546; see
Activision, 86 A.3d at 545. The second factor’s specificity requirement interacts with the
first factor’s emphasis on importance. See Ingenico, 2021 WL 765757, at *4. A sweeping
document request both lacks specificity and is likely to capture evidence of limited
importance. See id. (finding that a “conclusory assertion” that the requested evidence was
relevant failed the first and second factors of the five-factor test).
As this decision has discussed, the Narrow Proposal is targeted and specific. Lilly
has met her burden under the second factor.
3. Whether The Information Originated In The United States
The third factor directs the court to consider “whether the requested information
originated in the United States.” Societe Nationale, 482 U.S. at 544 n.28. This factor is
primarily concerned with helping a court evaluate whether discovery can be obtained either
under the court’s rules or under the Hague Convention. See Catalano v. BMW of N. Am.,
LLC, 2016 WL 3406125, at *7 (S.D.N.Y. June 16, 2016) (evaluating whether documents
located in Germany should be obtained under the Hague Convention even though
defendant was a party to the case and subject to discovery under the Federal Rules of Civil
Procedure); Activision, 86 A.3d at 546 (evaluating whether the Hague Convention should
be used to obtain documents that were located in France, even though the defendant was a
party to the case and subject to party discovery). Although framed in terms of where the
information originated, this factor is actually concerned with the physical location of the
requested information. See Milliken & Co. v. Bank of China, 758 F. Supp. 2d 238, 247
(S.D.N.Y. 2010). If the requested information is located in a foreign jurisdiction where
20
local laws would impose additional compliance obligations on a producing party, then this
factor may favor the use of the Hague Convention so that the central authority in that
jurisdiction can take those obligations into account. In an extreme case where compliance
would be particularly burdensome or contrary to law, this factor may counsel in favor of
not issuing a letter of request at all.
In this case, the Discovery Materials originated and currently are located in
Switzerland. But those facts are largely irrelevant to the balancing of interests, because
Lilly is already proceeding by way of letter of request. Moreover, as discussed in the next
section, that method likely provides the only means of obtaining the discovery. No one has
identified any Swiss legal requirements that would limit or prevent production. Instead,
Lilly has shown that under Swiss law, civil litigants can obtain information like the
Discovery Materials. The third factor supports the issuance of a letter of request.
4. The Availability Of Alternative Means Of Securing The Information
The fourth factor looks to whether alternative means of securing the requested
information are available. Societe Nationale, 482 U.S. at 544 n.28. If there is an alternative
means of obtaining the information that will generate the same or substantially equivalent
discovery without burdening a foreign court system, then that fact counsels in favor of
using the alternative method. See Richmark Corp. v. Timber Falling Consultants, 959 F.2d
1468, 1476 (9th Cir. 1992); Milliken, 758 F. Supp. 2d at 247. If there is no alternative
source, then this factor favors issuing the letter of request. Activision, 86 A.3d at 546. If
the party from whom materials are requested has refused to comply with the alternative
method of production, then this factor again favors issuing the letter of request. Ingenico,
21
2021 WL 765757, at *3. When the Hague Convention is the only feasible means of
acquiring the evidence, resort to a letter of request is “virtually compulsory.” Liqwd, Inc.
v. L’Oréal USA, Inc., 2018 WL 11189616, at *2 (D. Del. Nov. 16, 2018).
Lilly contends that the Hague Convention is the only feasible way for her to procure
the Discovery Materials because the Zurich Prosecutor’s Office is not a party to this case
or otherwise subject to the court’s jurisdiction. Dkt. 375 at 12. That is true, but it is only a
partial answer, because Neupert himself is a party. Normally, the tools of discovery in
litigation in an American court are more effective than the Hague Convention.7 They also
do not impose a burden on a court in another country. See Metso Mins., 2007 WL 1875560,
at *1 (“It is the duty of this court to carefully scrutinize applications [for letters of request]
to attempt to minimize the burden placed on the foreign judiciary by virtue of such an
application.”).
Lilly has shown that she is unlikely to be able to obtain the material sought from
Neupert. In the first instance, it is not clear that Neupert has the Discovery Materials. A
Swiss court decision states that during a search of Neupert’s offices, the investigators
7
See In re Auto. Refinishing Paint Antitrust Litig., 358 F.3d 288, 300 (3d Cir. 2004)
(“[I]n many situations, the Convention procedures would be unduly time-consuming and
expensive, and less likely to produce needed evidence than direct use of the Federal
Rules.”); Swapalease, Inc. v. Sublease Exchange.com, Inc., 2008 WL 11355018, at *5
(S.D. Ohio Sept. 19, 2008) (noting that the Hague Convention is “more restrictive” than
“obtain[ing] discovery through the Federal Rules of Civil Procedure”); In re Aircrash
Disaster Near Roselawn, Ind. Oct. 31, 1994, 172 F.R.D. 295, 310 (N.D. Ill. 1997) (“[N]o
useful purpose would be served to substitute effective and efficient discovery under the
Federal Rules with the less than certain and burdensome Convention procedure.”).
22
seized the Discovery Materials. It does not talk about making copies. Dkt. 375, Ex. 4 ¶ A.
It is therefore reasonable to infer that the Zurich Prosecutor’s Office is the sole possessor
of the Discovery Materials. Serving document requests on Neupert will not result in the
production of the Discovery Materials. The only means of obtaining them is through a letter
of request to the Zurich Prosecutor’s Office.
But even if Neupert had the Discovery Materials, Lilly has demonstrated that he is
unlikely to produce them. As a practical matter, Neupert has stopped participating in the
litigation. He has done only the bare minimum to stave off a default judgment.
The Foundation argues that Neupert previously participated in the case and could
be compelled to produce the documents. In reality, the extent of Neupert’s willingness to
participate in this litigation has evolved through three distinct phases.
During the first phase, after Lilly filed the lawsuit, Neupert controlled Côte d’Azur
as its sole director and sole officer. He retained counsel who jointly represented Côte
d’Azur and himself. He and Côte d’Azur answered the complaint and asserted affirmative
defenses, and he caused Côte d’Azur to file a counterclaim seeking to establish the validity
of the Deed of Assignment. Dkt. 12. The jointly engaged law firm both served and
responded to discovery on behalf of Côte d’Azur and Neupert. See Dkts. 21, 28–29. The
Foundation is correct that Neupert participated in the litigation during that phase, but his
participation did not last long.
During the first phase of this litigation, contemporaneous documents emerged that
contradicted the positions that Neupert and Côte d’Azur were taking. On March 14, 2017,
Neupert resigned from all of his positions with the Corporation. Dkt. 75 ¶ 3. The law firm
23
representing Neupert and the Corporation conveyed that fact to the court in April 2017 in
the law firm’s motion to withdraw from representing Neupert, which the court granted.
Dkt. 76. The law firm subsequently withdrew from representing Côte d’Azur and was
replaced by successor counsel. Dkt. 218. Neupert never retained successor counsel. To the
extent he has participated, he has done so pro se.
After the withdrawal of his former counsel, the second phase began. During this
phase, Neupert did not participate. Even though he possessed evidence that was plainly
relevant to the question of whether the Foundation was subject to jurisdiction in this court,
Neupert refused to be deposed. He also declined to appear at the evidentiary hearing. As a
result, the court drew inferences in Lilly’s favor and adverse to the Foundation based on
any relevant testimony that Neupert reasonably could have offered. Dkt. 173 at 68–71.
After the court’s rulings on the question of jurisdiction, this case entered a third
phase. During this phase, Neupert has participated solely to the extent necessary to avoid
a default judgment. Initially, Neupert failed to answer Lilly’s amended complaint,
prompting Lilly to move for a default judgment. Once Lilly filed her motion, Neupert
responded to the amended complaint with a barebones, one-page motion to dismiss that
merely incorporated by reference the Foundation’s arguments. See Dkts. 231–32. The
Foundation’s counsel served it on Neupert’s behalf. Dkt. 232. After the court denied the
defendants’ motions to dismiss, Neupert filed an answer and asserted affirmative defenses.
Dkt. 257. His pleading paralleled the positions that the Foundation took, and the
Foundation’s counsel submitted Neupert’s answer on his behalf. Dkt. 258.
Otherwise, Neupert has failed to participate:
24
• On August 9, 2021, Lilly noticed Neupert’s deposition. Dkt. 304. There is no
indication that the deposition took place.
• On August 10, 2021, Lilly filed a notice that she served interrogatories on Neupert.
Dkt. 305. Neupert has never filed a notice evidencing that he responded.
• Neupert has not appeared at any of the hearings that this court has conducted.
• Neupert has not responded to Lilly’s motion for a letter of request seeking the
Discovery Materials, which were seized from his office.
Given Neupert’s performance to date, the court concludes that resort to the Hague
Convention is the only effective means by which Lilly can obtain the Discovery Materials
that are subject to the Narrow Request. This factor supports granting the motion.
To rebut Lilly’s argument, the Foundation contends, on Neupert’s behalf, that Lilly
has failed to explain why further discovery requests on Neupert would not be the ideal
means of securing the Discovery Materials. Dkt. 393 ¶ 4. The Foundation argues further
that Neupert already made a sufficient production of documents. Id. This argument is
incorrect. As previously explained, Neupert has refused to participate in this litigation in
any meaningful way. He has repeatedly refused to comply with discovery requests or take
any action above the bare minimum required to avoid a default judgment. Neupert cannot
pick and choose when to participate in this litigation as a means of frustrating Lilly’s
requests.
25
Lilly thus has shown she likely has no alternative means of procuring the Discovery
Materials. The fourth factor favors production.8
5. The Competing Interests Of The Sovereigns Involved
The final factor is a balancing of the competing interests of the sovereigns involved.
Societe Nationale, 482 U.S. at 544 n.28. Under this factor, the court weighs any interest
that the United States or the forum state has in obtaining production of the information
against any interest that the foreign state has in not providing discovery. Activision, 86
A.3d at 547. When considering the interests of the United States, the court may take into
account the requesting party’s “important interests in developing its claims and defenses.”
Ingenico, 2021 WL 765757, at *3. When considering the interests of a foreign state, the
court should take into account any foreign law that limits production. See Activision, 86
A.3d at 547 (giving consideration to French laws regarding data privacy).
This factor is most important where the litigation implicates national security
concerns or national economic policies.9 No such concern is implicated here. This is a civil
8
Discovery from Aalam does not provide a better alternative. She is not a party to
this litigation, and she is located in Switzerland. A letter of request would have to be issued
to her as well, and there is no reason to think that she currently possesses the Discovery
Materials.
9
See, e.g., In re Grand Jury Investigation of Possible Violations of 18 U.S.C. § 1956
and 50 U.S.C. § 1705, 381 F. Supp. 3d 37, 72 (D.D.C. 2019) (“[T]he United States’ interest
in this case pertains to national security . . . . Consequently, non-enforcement would
undermine a critical national interest.”); In re Air Cargo Shipping Servs. Antitrust Litig.,
278 F.R.D. 51, 54 (E.D.N.Y. 2010) (noting the fifth factor is “considered most important
by several courts” where “a case involv[ed] violations of antitrust laws whose enforcement
is essential to the country’s interests in a competitive economy”); Strauss v. Credit
26
case involving private parties. Where the litigants are all private parties, this factor is of
secondary importance. See Milliken, 758 F. Supp. 2d at 248 (“Here, the underlying
interest—collection of a judgment by a private party—is not so dramatic.”).
Although it is difficult to say that the United States has a significant interest in this
dispute, the interests of the forum state are pertinent. “Delaware has a substantial interest
in providing an effective forum for litigating disputes involving the internal affairs of
Delaware [business entities].” Activision, 86 A.3d at 547. “Delaware’s legitimacy as a
chartering jurisdiction depends on it.” NACCO Indus., Inc. v. Applica, Inc., 997 A.2d 1, 26
(Del. Ch. 2009). One of the central issues in this case involves whether Neupert and the
Foundation used fabricated documents to mislead a Delaware registered agent, make false
filings with the Delaware Secretary of State, and seize control of a Delaware entity.
Although Lilly is litigating as a private plaintiff, that fact does not diminish Delaware’s
interest. Activision, 86 A.3d at 547. Delaware has an interest in providing a means for Lilly
to pursue her claims.
To counterbalance Delaware’s interest in providing a forum for litigating disputes
involving Delaware entities, the Foundation offers two ostensibly competing Swiss
interests. The Foundation has not cited any Swiss statute or directive that would limit
Lyonnais, S.A., 249 F.R.D. 429, 443–44 (E.D.N.Y. 2008) (“When that interest [of
adjudicating matters before its courts] is combined with the United States’s [sic] goals of
combating terrorism, it is elevated to nearly its highest point, and diminishes any competing
interests of the foreign state.” (internal quotation marks omitted)).
27
production of the Discovery Materials. Instead, the record shows that civil litigants can
access information like the Discovery Materials.
The first ostensible interest is Switzerland’s concern for maintaining the attorney-
client privilege. This decision has already analyzed the privilege issue and demonstrated
that the letter of request is unlikely to implicate privileged material. Regardless, the Hague
Convention contemplates that a central authority can take into account local privilege law
by providing that “[i]n the execution of a Letter of Request the person concerned may
refuse to give evidence in so far as he has a privilege or duty to refuse to give the evidence
. . . under the law of the State of execution.” Hague Convention, supra, art. 11. This court’s
decision to issue a letter of request does not impair Switzerland’s ability to protect
privileged information, if there is any.
The second ostensible interest is “the danger of instrumentalizing criminal law for
civil law purposes.” Dkt. 393, Ex. A ¶ 77. The Foundation has submitted a court decision
that expresses concern, but the same decision notes that the Zurich Prosecutor’s Office has
previously provided civil litigants with electronic evidence. Dkt. 409, Ex. B ¶ 42. In any
event, the Swiss central authority can refuse to execute the Letter of Request if “the State
addressed considers that its sovereignty or security would be prejudiced thereby.” Hague
Convention, supra, art. 12.
There accordingly does not appear to be any conflict between the interests of
competing sovereigns. Delaware has an interest in obtaining information necessary for the
litigation of a civil dispute. Switzerland does not appear to have any competing interest.
The fifth factor therefore supports the issuance of the letter of request.
28
6. The Overarching Balancing
The court must perform an overarching balancing of the five factors identified in
Societe Nationale. All of the factors favor the issuance of a letter of request, either strongly
or weakly. No factor counsels against the issuance. Lilly has therefore carried her burden.
III. CONCLUSION
Lilly has shown that issuance of the letter of request is warranted, albeit one limited
to the materials requested in the Narrow Proposal. To that extent, the court will grant her
motion.
Lilly’s existing motion predated this court’s decision dismissing the Foundation’s
counterclaims. To avoid confusion, Lilly will submit a new letter of request that removes
references to the Foundation’s counterclaims and limits the materials sought to the
materials requested in the Narrow Proposal.
29 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488106/ | Filed 11/18/22 Marriage of Manyere CA2/7
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions
not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has
not been certified for publication or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
In re Marriage of BRILLIANT B313598
and ANGELA RENEE
MANYERE.
BRILLIANT MANYERE, (Los Angeles County
Super. Ct. No. 20LBFL01308)
Appellant,
v.
ANGELA RENEE MANYERE,
Respondent.
APPEAL from an order of the Superior Court of Los
Angeles County, Carla L. Garrett, Judge. Affirmed.
Brilliant Manyere, in pro. per., for Appellant.
No appearance for Respondent.
Brilliant Manyere appeals from a family court order
awarding his spouse, Angela Manyere, $2,163 per month in
pendente lite (temporary) spousal support. Brilliant1 contends
Angela misrepresented the circumstances of their separation and
the family court failed to consider Angela’s ability to access
Brilliant’s deferred compensation plan savings in calculating
temporary spousal support. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
A. Petition for Dissolution and Request for Order of Support2
Brilliant and Angela married on April 13, 1984; they
separated in April 2010; and Brilliant filed a petition for
dissolution on December 31, 2010. They have two adult children.
Since 1986 Brilliant has worked for the County of Los Angeles
(County) as a property assessor. Angela worked as a deputy
probation officer from 1998 to 2003, when she was diagnosed
with cancer, and thereafter she was a stay-at-home parent. After
1 We refer to the parties by their first names because they
share a last name.
2 The background facts are taken from Angela’s declaration
in support of her request for order awarding temporary spousal
support and from Brilliant’s responsive declaration. On our own
motion, we augment the record to include Brilliant’s
December 31, 2020 petition for dissolution and income and
expense declaration; Angela’s February 16, 2021 request for order
awarding temporary spousal support, attorneys’ fees, and costs,
and her income and expense declaration; Brilliant’s March 30,
2021 responsive declaration and income and expense declaration;
and Brilliant’s April 7, 2021 income and expense declaration.
2
the parties’ separation in 2010, Angela moved to Texas, where
she presently lives with her parents and works as a teacher’s
aide.
On February 16, 2021 Angela filed a request for order
(RFO) seeking $2,400 in monthly temporary spousal support and
$4,000 in attorneys’ fees. In her attached income and expense
declaration, Angela, then 56 years old, stated she earned $1,368
per month working 40 hours per week as a teacher’s aide, and
she claimed monthly expenses of $3,525, including $1,200 in rent.
Angela estimated Brilliant’s monthly income was $12,533 based
on his December 31, 2020 income and expense declaration filed
with the petition for dissolution.
Angela averred in her declaration in support of the RFO
that she suffered mental and physical abuse during the marriage,
and she fled the home with her daughter in April 2010 after a
heated argument with Brilliant. Brilliant cut off Angela’s access
to the family finances and refused to support her, forcing her to
move in with her parents in Texas. However, because her
parents were “getting older,” Angela wanted to have her own
residence to secure her financial future without relying on her
parents’ assistance. Angela stated she lived a middle- to high-
income lifestyle during the marriage, including extensive travel,
shopping, and dining out, and she and Brilliant owned their
home. She submitted a DissoMaster3 report that calculated
monthly guideline spousal support at $2,894 per month based on
3 DissoMaster is a computer software program widely used
by courts and the family law bar in setting child and spousal
support pursuant to the statewide uniform guidelines set by the
Family Code and local rules. (See In re Marriage of Olson (1993)
14 Cal.App.4th 1, 5, & fn. 3.)
3
the parties’ respective incomes. Angela requested $2,400 per
month based on the report, which she asserted was “reasonable”
under the circumstances.
On March 30, 2021 Brilliant filed a responsive declaration
requesting the family court deny the RFO. Brilliant stated he
should not be responsible for supporting Angela because during
their 11 years of separation Angela chose to rely on her parents
for support and did not pursue a remunerative career of her own,
even though she is a college graduate with previous work
experience as a probation officer, eligibility worker, and child
support representative for the County. Brilliant averred that
Angela “drained me financially upon our separation” by staying
in hotels for an extended period and withdrawing $6,000 from the
couple’s joint account, and Angela did not provide any support for
Brilliant or their children during their years of separation.4
Angela’s excessive spending caused Brilliant to remove Angela
from the joint account. Unable to pay his bills, Brilliant filed for
bankruptcy in 2012. Brilliant asserted further, “Division of my
deferred compensation from this dissolution will provide [Angela]
with sufficient support. She will be granted half of the
contributions made when were together from 1990-2010.”
Moreover, “the support [Angela] receives from her parents should
be the source for her attorney’s fees.”
On March 30, 2021 Brilliant filed an income and expense
declaration stating his gross pre-tax pay was $12,558 per month,
4 Brilliant and Angela’s daughter was approximately
14 years old at the time of the 2010 separation. According to
Angela, although their daughter initially left the family home
with Angela, she did not move with Angela to Texas because she
was enrolled in school in California.
4
but his average monthly income was $8,709.5 He listed
approximately $28,800 in assets and $10,028 in monthly
expenses, including $1,277 for home loan payments and $2,000 in
“savings and investments.” He submitted pay stubs showing his
gross monthly pay was approximately $16,100 in January 2021
and $13,000 in February 2021. His monthly contribution to his
deferred compensation retirement plan was approximately
$2,900 in January and $2,600 in February.
B. Hearing on the RFO
The family court heard the RFO on April 12, 2021. Both
parties were present in court and represented by counsel. After
the court summarized the parties’ declarations, Angela’s attorney
argued that Brilliant’s declaration failed to address Angela’s
assertions of domestic violence and the marital standard of living,
and Angela’s support request was very modest in seeking only
$1,200 for monthly rent, $400 for food, and limited additional
amounts to travel to California to visit her children and
grandchildren. Moreover, Brilliant’s income and expense
declaration showed he was able to pay spousal support in light of
his $2,000 in monthly investments and savings “in addition to
what they take out for his deferred compensation and his
retirement.” Angela’s attorney argued further, “For [Brilliant] to
state [Angela] can use the deferred compensation, her half, he
has the same half, if not more, and she’s only 56 years of age.
5 On April 7, 2021 Brilliant filed an updated income and
expense declaration stating he had an average monthly income of
$9,669, comprised of his salary and overtime. The declaration
was otherwise unchanged from the March 30 declaration.
5
She cannot go into the retirement account until she’s 59 and a
half. That’s not even an option at this point.”
Brilliant’s attorney argued Angela should receive “little if
any” temporary spousal support because she had abandoned
Brilliant to raise their children, she was supported by her
parents, she gave up her job without presenting medical evidence
of her inability to work, and the cost of living was lower in Texas
than California.
After hearing argument, the family court announced it had
prepared a DissoMaster report “just based on the income and
expense declaration[s] that both parties provided.” The guideline
monthly spousal support generated by the DissoMaster was
$1,671 based on Brilliant’s declaration that he earned “$8,709 per
month gross.” Angela’s attorney argued the calculation was
inaccurate because Brilliant stated in his December 31, 2020
income and expense declaration that he earned $12,558 per
month. Asked to address the discrepancy, Brilliant’s attorney
explained that Brilliant’s “pay from the County is quite
complicated to figure out,” and Brilliant actually earned $9,153
per month before taxes. Angela’s attorney responded that
Brilliant’s pay stubs indicated his gross pay was significantly
higher. The court and the attorneys began a fruitless effort to
attempt to decipher Brilliant’s County pay stubs, but eventually
the court called a recess and directed the parties “to see if you can
figure out where you are, what the numbers look like, then we
can have a discussion.”
After the recess, Brilliant and Angela jointly submitted a
DissoMaster report that used Brilliant’s IRS Form W-2 income
for 2020 instead of his pay stubs to calculate his monthly income.
Brilliant’s and Angela’s attorneys confirmed they prepared the
6
report together. In the “Input Data” field, the report listed
Brilliant’s monthly wage and salary income as $9,669 and
Angela’s monthly income as $1,367. The parties did not itemize
any 401(k) or other deferred compensation contributions, or other
deductions or adjustments to their monthly income, except for
minor entries reflecting Brilliant’s union dues ($84), Angela’s
health insurance ($133), and Angela’s mandatory retirement
contributions ($27). Based on these inputs, the DissoMaster
calculated guideline support of $2,163 per month for Angela.
After receiving the DissoMaster report, the family court
stated, “I’m glad you guys got together and came up with some
numbers. Now, I understand the concerns. . . . I understand
there [are] some issues regarding how long you two have been
separated, Sir, and the issues that you have regarding paying
any temporary spousal support. . . . However, . . . the court is
going to grant temporary spousal support in this case. And I’m
going to base that on the report that the parties have just
provided that suggests that the guideline support is $2,163 per
month.” The court denied Angela’s request for retroactive
support and ordered payments to commence in two monthly
installments beginning May 12, 2021. The court also awarded
Angela $4,000 in attorneys’ fees after finding “there is a
disparity, . . . there is an ability on [Brilliant] to pay, and . . .
there is a need.” On May 7, 2021 the court entered the findings
and order after hearing setting forth the terms of Brilliant’s
monthly spousal support and attorneys’ fees payment, and
attaching the final DissoMaster report.
7
Brilliant timely appealed.6
DISCUSSION
A. Governing Law and Standard of Review
Under Family Code section 3600,7 a family court may order
temporary spousal support in “any amount that is necessary for
the support of the other spouse,” as long as the amount is
consistent with section 4320 (listing circumstances to consider in
ordering support) and section 4325 (limiting spousal support
awards to a spouse convicted of domestic violence). “The purpose
of pendente lite spousal support is to maintain the parties’
standards of living in as close as possible to the preseparation
status quo, pending trial. In fixing temporary spousal support,
trial courts are not restricted by any set of statutory guidelines.”
(In re Marriage of Ciprari (2019) 32 Cal.App.5th 83, 103-104;
accord, In re Marriage of Brewster & Clevenger (2020)
45 Cal.App.5th 481, 514; In re Marriage of Samson (2011)
197 Cal.App.4th 23, 29.) “‘[I]n exercising its broad discretion, the
court may properly consider the “big picture” concerning the
parties’ assets and income available for support in light of the
6 Brilliant does not assert any arguments regarding the
attorneys’ fees award, thereby forfeiting any challenge to the fee
award on appeal. (See Tiernan v. Trustees of Cal. State
University & Colleges (1982) 33 Cal.3d 211, 216, fn. 4 [issue not
raised on appeal deemed waived]; Eck v. City of Los Angeles
(2019) 41 Cal.App.5th 141, 146 [appellant forfeited or abandoned
issue not raised in appellate briefs].)
7 All further undesignated statutory references are to the
Family Code.
8
marriage standard of living.’” (Marriage of Lim & Carrasco
(2013) 214 Cal.App.4th 768, 773; accord, In re Marriage of
Wittgrove (2004) 120 Cal.App.4th 1317, 1327.)
We review an order for temporary spousal support for an
abuse of discretion. (In re Marriage of Ciprari, supra,
32 Cal.App.5th at p. 104 [“[t]he amount of the award lies within
the trial court’s sound discretion, and is reversible only on a
showing of clear abuse of discretion”]; In re Marriage of Lim &
Carrasco, supra, 214 Cal.App.4th at p. 773.) “Under this
standard, we consider only ‘whether the court’s factual
determinations are supported by substantial evidence and
whether the court acted reasonably in exercising its discretion.’
[Citation.] ‘We do not substitute our own judgment for that of the
trial court, but confine ourselves to determining whether any
judge could have reasonably made the challenged order.’” (In re
Marriage of Macilwaine (2018) 26 Cal.App.5th 514, 527; accord,
In re Marriage of Smith (2015) 242 Cal.App.4th 529, 532 [a
support order “‘will be overturned only if, considering all the
evidence viewed most favorably in support of its order, no judge
could reasonably make the order made’”].) “On review for
substantial evidence, we examine the evidence in the light most
favorable to the prevailing party and give that party the benefit
of every reasonable inference. [Citation.] We accept all evidence
favorable to the prevailing party as true and discard contrary
evidence.” (In re Marriage of Drake (1997) 53 Cal.App.4th 1139,
1151; accord, In re Marriage of Nakamoto & Hsu (2022)
79 Cal.App.5th 457, 470.)
9
B. Substantial Evidence Supports the Family Court’s Order for
Temporary Spousal Support
The family court based its order for $2,163 per month in
temporary spousal support entirely on the guideline support set
forth in the DissoMaster report jointly submitted by the parties
during the hearing on the RFO. The income inputs used to
generate the guideline support were agreed upon by the parties.
Further, the inputs are supported by substantial evidence.
Brilliant’s income input ($9,669) was based on Brilliant’s 2020
IRS Form W-2, and it also matched the gross average monthly
income that Brilliant stated in his April 7, 2021 income and
expense declaration. Angela’s income input ($1,367) matched the
gross monthly income set forth in her February 16, 2021 income
and expense declaration. Further, Angela attested in her
declaration in support of the RFO that she enjoyed a middle- to
high-income lifestyle prior to separation, she was now working 40
hours per week as a teacher’s aide, and although her parents
supported her during the separation, they were getting older and
she could not rely on them to continue supporting her financially.
Based on this evidence, the court did not abuse its broad
discretion in ordering guideline support that was “based on the
supported spouse’s needs and the other spouse’s ability to pay.”
(In re Marriage of Samson, supra, 197 Cal.App.4th at p. 29.)
Brilliant contends the family court erred in issuing the
support order because Angela misled the court into believing she
was forced out of the marital home in 2010, although she left of
her own free will. He argues further that Angela lied to the court
about Brilliant cutting off her access to the parties’ finances,
when Angela in fact “plundered” their bank accounts and maxed
10
out their credit cards, driving Brilliant into bankruptcy.8 He also
argues that Angela’s claims of spousal abuse were
uncorroborated.9
However even if any of Brilliant’s contentions had merit
(which is not clear from the record), these asserted facts are not
relevant to the appeal because the family court made no findings
8 Brilliant’s opening brief includes numerous allegations
regarding Angela’s 2010 departure and financial misconduct that
are not reflected in the record, even as augmented. It is
appellant’s burden to affirmatively demonstrate error by the
lower court, and “‘[f]ailure to provide an adequate record on an
issue requires that the issue be resolved against [the appellant].’”
(Jameson v. Desta (2018) 5 Cal.5th 594, 609.) Moreover, when an
appellant “‘“fails to support [a point] with reasoned argument and
citations to authority, we treat the point as waived.”’” (Shenefield
v. Shenefield (2022) 75 Cal.App.5th 619, 641; accord, Vines v.
O’Reilly Auto Enterprises, LLC (2022) 74 Cal.App.5th 174, 190.)
We recognize Brilliant is self-represented and his understanding
of the rules on appeal is, as a practical matter, more limited than
an experienced appellate attorney’s, and whenever possible, we
do not strictly apply technical rules of procedure in a manner
that deprives a self-represented litigant of a hearing. But we are
required to apply the rules on appeal and the substantive rules of
law to the litigant’s claims on appeal, just as we would to those
litigants who are represented by trained legal counsel.
(Rappleyea v. Campbell (1994) 8 Cal.4th 975, 984-985.)
9 Brilliant asserts that at the hearing on the RFO “he raised
his hand and wished to address the Court regarding the abuse
allegations, but the trial court declined to listen to [him].” The
reporter’s transcript does not reflect that the trial court
prevented Brilliant from speaking, and both Brilliant and his
attorney addressed the court multiple times during the hearing.
11
regarding the parties’ 2010 separation or Angela’s use of joint
funds, and it did not base its award of temporary spousal support
on anything other than the parties’ income and expenses. As
discussed, the court at the hearing summarized both parties’
allegations concerning the 2010 separation, then announced it
had prepared a DissoMaster report “just based on the income and
expense declaration that both parties provided.” And in making
its award of temporary spousal support, the court adopted the
parties’ joint DissoMaster report without making any
adjustments based on either party’s allegations.
Brilliant also contends the family court overlooked his
deferred compensation plan in determining the amount of money
Angela needed for support. He argues Angela’s community share
of these retirement funds would have provided her with a
substantially better standard of living than she enjoyed prior to
separation, and the court could have enabled Angela to access her
share of the funds through a qualified domestic relations order.10
Brilliant also argues Angela’s attorney misled the court into
believing Brilliant had sufficient money to pay spousal support by
stating Brilliant had $2,000 in monthly savings “in addition to
what they take out for his deferred compensation and his
10 Brilliant points to Los Angeles County Code
section 5.25.125, which he asserts provides for early distribution
of retirement funds pursuant to a qualified domestic relations
order. We do not reach whether Angela could have accessed her
share of Brilliant’s deferred compensation plan funds because, as
discussed below, Brilliant waived any challenge to the income
attributed to him in the negotiated DissoMaster report used by
the family court in calculating temporary spousal support.
12
retirement,” when in fact his reported savings included his
retirement contributions.
These arguments are unavailing. First, neither party
asked the family court to enter a qualified domestic relations
order piercing Brilliant’s retirement account, and in any event, as
Angela’s attorney observed, even if Angela could access Brilliant’s
deferred compensation plan as a source of income, arguably
Brilliant could as well, thereby affecting his available funds.
Most significantly, Brilliant waived any challenge to the income
attributed to him in calculating temporary spousal support by
reaching an agreement with Angela on the inputs to the
DissoMaster report the parties jointly submitted to the court.
Brilliant’s attorney confirmed to the court that the joint
DissoMaster report reflected the parties’ agreement on the
income figures. Brilliant has therefore waived any challenge to
the income available for support. (See In re Marriage of
Lionberger (1979) 97 Cal.App.3d 56, 60-62 [after parties
stipulated to spousal support, wife who raised no objection when
the trial court and counsel discussed the amount and termination
date of support payments impliedly waived her right to challenge
the termination date on appeal]; see also In re Marriage of
Freeman (1996) 45 Cal.App.4th 1437, 1450-1451 [where the
parties entered a stipulated judgment embodying the trial court’s
earlier determination the husband was not sterile and a blood
test would not be ordered, husband waived his right to contend
on appeal that he was denied due process without a blood test].)11
11 Further, although Brilliant’s IRS Form W-2 is not in the
record, the $9,669 monthly income extrapolated from the Form
W-2 and entered into the DissoMaster appears to have excluded
13
DISPOSITION
The family court’s May 7, 2021 order for temporary spousal
support is affirmed. Brilliant is to bear his own costs on appeal.
FEUER, J.
We concur:
PERLUSS, P. J.
SEGAL, J.
Brilliant’s deferred compensation contributions given that
Brilliant’s monthly pre-tax gross earnings on his January and
February 2021 pay stubs exceeded $9,669 by several thousand
dollars, and his December 31, 2020 income and expense
declaration likewise listed his monthly pre-tax gross income as
$12,533.
14 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488112/ | IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
AMERICAN HEALTHCARE )
ADMINISTRATIVE SERVICES, INC., )
AHAS HOLDINGS, INC., CHRISTINE )
SCHAFFER, CHRISTINE SCHAFFER )
REVOCABLE LIVING TRUST, GROVER )
LEE, GROVER LEE REVOCABLE LIVING )
TRUST, CHARLES E. LEE, CHARLES E. )
LEE LIVING TRUST, JACQUELINE C. )
LEE, JACQUELINE C. LEE LIVING )
TRUST, CHARLES E. LEE 2012 TRUST )
NO. 1, CHARLES E. LEE 2012 TRUST NO. )
2, JACQUELINE LEE 2012 TRUST NO. 1, )
and JACQUELINE LEE 2012 TRUST NO. 2, )
)
Plaintiffs/Counterclaim-Defendants, )
)
v. ) C.A. No. 2019-0793-JTL
)
LANCE AIZEN, )
)
Defendant/Counterclaim-Plaintiff. )
OPINION
Date Submitted: September 16, 2022
Date Decided: November 18, 2022
Thomas W. Briggs, Jr., Sabrina M. Hendershot, MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; Christopher R. Rodriguez, Andrew D. Bluth,
SINGLETON SCHREIBER, LLP, Sacramento, California; Attorneys for
Plaintiffs/Counterclaim-Defendants.
Paul D. Brown, Joseph B. Cicero, Gregory E. Stuhlman, Aidan T. Hamilton, CHIPMAN
BROWN CICERO & COLE, LLP, Wilmington, Delaware; Attorneys for
Defendant/Counterclaim-Plaintiff.
LASTER, V.C.
A corporation sold assets to a buyer. The buyer placed a portion of the consideration
in escrow to fund any purchase price adjustment and to secure indemnification obligations.
The asset purchase agreement appointed the corporation’s former CEO as the sellers’
representative for purposes of making decisions about the escrowed funds.
The period for holding the escrowed funds has expired, and no claims against the
escrowed funds remain outstanding. The buyer agrees it has no claim to the funds. The
sellers’ stockholders, other than the former CEO, want the funds released from escrow and
paid over to the corporation. They filed this action against the former CEO and asserted a
series of claims, all of which are designed to compel the release of the escrowed funds.
The former CEO answered, raised affirmative defenses, and filed counterclaims, all
of which are designed to obtain a determination that he has authority to keep the funds in
escrow. The former CEO is embroiled in litigation with the selling corporation over his
termination, and he believes that if the escrowed funds are released to the corporation, then
the corporation will distribute them to its stockholders and render itself judgment-proof.
The former CEO wants to keep the funds in escrow so that they can serve as a source of
recovery if he prevails in his litigation. He contends that he has discretion as the sellers’
representative to decline to release the funds from escrow. He argues in the alternative that
the court should order the funds to remain in escrow as a matter of equity.
This decision grants the selling stockholders’ motion for partial judgment on the
pleadings. There is no contractual basis for maintaining the funds in escrow. All of the
conditions for releasing the escrowed funds have been satisfied. The former CEO has
discretionary authority over the release of the escrowed funds, but he must exercise that
2
authority consistent with the implied covenant of good faith and fair dealing, which means
consistent with the purpose of the contract and the range of possibilities that the parties
would have agreed upon if they had anticipated the issue and bargained over it when
negotiating their agreement. Keeping the funds in escrow to serve as a source of recovery
for a personal dispute is not a purpose that the parties would have agreed upon if they had
anticipated the issue and addressed it during the original bargaining phase.
To the extent the former CEO seeks a remedy that would prevent the selling
company from distributing the funds to its stockholders, he should seek that remedy from
the court presiding over his lawsuit against the selling company. To ensure that the former
CEO has the opportunity to seek that relief, and to avoid burdening a sister court with an
emergency application, the order implementing this ruling will provide for the release of
funds from escrow on a date not earlier than sixty days after the judgment in this case
becomes final.
I. FACTUAL BACKGROUND
The facts are drawn from the operative pleadings and the documents they
incorporate by reference. When evaluating a motion for judgment on the pleadings, the
facts must be viewed in the light most favorable to the non-movant. In this case, that means
the facts are viewed in the light most favorable to the former CEO.
A. The Company And Its Affiliates Before The Asset Sale
American Healthcare Administrative Services, Inc. (the “Company”) is a California
corporation with its principal place of business in Rocklin, California. Grover Lee and
Christine Schaffer founded the Company in 1986 to provide pharmacy benefits services to
3
self-insured employers, health plans, hospitals, school districts, labor unions, and health
and welfare funds. Dkt. 50 ¶ 18. Today, the Company is a wholly owned subsidiary of
AHAS Holdings, Inc. (“Parent”). Surprisingly, the parties dispute whether Parent is an
entity that exists under Delaware law or California law. The dispute is immaterial to the
contractual issues addressed by this decision, but given the procedural posture, the court
assumes that Parent is a California entity. Lee and Schaffer comprised the original
members of the board of directors of the Company (the “Company Board”) and the original
members of the board of directors of Parent (the “Parent Board”).
B. Lee Aizen Joins The Company.
In 2010, the Company hired Lee Aizen as Vice President of Sales. Dkt. 58 at 8.
Aizen asserts that he “added professionalism and non-family oversight” to an operation
that was “losing money consistently” due to “mismanagement” and “personal expenses of
the Lee family.” See Dkt. 58 at 8. This assertion does not matter to the outcome of the case,
but given the procedural standard, I assume it to be true.
In 2012, Aizen became President of the Company. He later took on the title of CEO.
Dkt. 58 at 8.
Aizen subsequently entered into an employment agreement dated November 21,
2014 (the “Employment Agreement”). See Dkt. 58 at 11. Surprisingly, it is not clear what
entity served as the counterparty. The parties have not provided the court with a copy of
the Employment Agreement, and two other documents point in different directions, with
one document implying that the Company is the counterparty and the other implying that
Parent is the counterparty. Compare Compl. Ex. D (Company) with Dkt. 53 Ex. A (Parent).
4
Aizen contends that his Employment Agreement was with the Company. That is the
version of the facts most favorable to his position, so I assume it to be true.
Under the terms of the Employment Agreement, Aizen received base compensation
of $550,000, up from his pre-agreement compensation of $354,750. He also received an
option to purchase 1,000 shares of Company stock. Aizen borrowed $2.4 million from
Parent to pay for the shares, documented by a promissory note. See Dkt. 53 ¶ 22; id. Ex. A
at 1–2. The Employment Agreement provided that if the Company ever terminated Aizen’s
employment as a result of a “Change of Control Transaction,” then the Company would (i)
forgive any amounts payable under the promissory note and (ii) make additional payments
to Aizen. Dkt. 58 at 10, 12, 15; accord Dkt. 56 at 6. Aizen also joined the Company Board
and the Parent Board. Cf. Dkt. 50 ¶ 40; Dkt. 53 at 19.
In March 2017, the Parent Board approved an addendum to the Employment
Agreement (the “Addendum”). The Addendum extended the term of Aizen’s employment
through December 31, 2020 and increased his base salary to $750,000. Dkt. 53 Resp.
No. 24.
C. The Asset Purchase Agreement And The Termination Agreement
Soon after the execution of the Addendum, Maxor Acquisition, Inc. (the “Buyer”)
expressed interest in acquiring two of the Company’s lines of business. See Dkt. 50 Ex. B
at A-1. The parties disagree about whether the two segments made up a majority of the
Company’s business. That fact does not have any bearing on the outcome of the case, but
Aizen denies that they did, so given the procedural standard, I accept his assertion.
5
On August 10, 2017, the Company reorganized its corporate structure in anticipation
of selling the two lines of business. As part of the reorganization, Aizen exchanged his
shares in the Company for shares in Parent. After the reorganization, Aizen, Lee, Schaffer,
and their affiliates owned all of the stock in Parent.1 Aizen owned ten percent of Parent’s
equity, and Lee, Schaffer, and their affiliates owned the remaining ninety percent. See Dkt.
53 ¶ 37; accord Dkt. 54 Resp. No. 37.
On June 26, 2018, the Parent Board passed a resolution approving and authorizing
the Company to proceed with the asset sale, which it defined as the “Transaction.” See Dkt.
53 Ex. A. The agreement governing the Transaction is an asset purchase agreement dated
June 27, 2018. Dkt. 50 Ex. B (the “APA” or “Purchase Agreement”). The parties to the
Purchase Agreement were the Buyer and a group defined as the “Seller Parties,” which
consisted of the Company, Parent, and all of the Parent’s stockholders (including Aizen).
See APA at 1. Aizen also became a party to the Purchase Agreement, but only in his
capacity as the “Sellers’ Representative.” See id. In that capacity, Aizen acted as the agent
of the Seller Parties for purposes of taking various actions under the Purchase Agreement.
The use of a sellers’ representative is a common feature in transaction agreements,
particularly where there are many selling stockholders, and it avoids the need to have
1
The following entities are affiliates of Lee or Schaffer and own stock in Parent:
the Christine Schaffer Revocable Living Trust, the Grover Lee Revocable Living Trust,
the Charles E. Lee Living 2012 Trust No. 1, the Charles H. Lee 2012 Trust No. 2, the
Charles E. Lee Living Trust, the Jacqueline C. Lee 2012 Trust No. 1, the Jacqueline C. Lee
2012 Trust No. 2, and the Jacqueline C. Lee Living Trust. See Dkt. 58 at 6–7.
6
multiple parties sign off on the acts necessary to complete a deal. 1 ABA Mergers & Acqs.
Comm., Model Stock Purchase Agreement with Commentary § 12.5 at 358 (2d ed. 2010)
(explaining that appointment of sellers’ representative is for buyer’s convenience,
particularly when buyer “would prefer to deal with one person”; stating that sellers “will
want to assure that Sellers’ Representative acts only within prescribed bounds.”).
The Parent Board also approved an agreement terminating Aizen’s Employment
Agreement (the “Termination Agreement”). The resolution recited that “in connection with
the Transaction, the Aizen Employment Agreement shall be terminated . . . pursuant to the
[the Termination Agreement].” Dkt. 53 Ex. A § II. Under the Termination Agreement,
Aizen became entitled to receive a range of benefits if the Transaction closed successfully,
including (i) a transaction bonus, (ii) complete forgiveness of Parent’s loan to Aizen, (iii) a
tax gross-up payment for the loan forgiveness, and (iv) a mutual release between Aizen
and Parent for all actions that occurred before closing. Id.
The Termination Agreement contemplated a handsome payout for Aizen. He stood
to receive a $9 million “Change of Control Bonus” plus additional consideration of $11.8
million to be paid monthly in $500,000 increments. See Dkt. 50 Ex. D §§ 1–4. Aizen also
became entitled to a six-month consulting engagement with the Buyer. See APA at 1
(Background Statement); see also id. § 7.1(r).
D. The Transaction Closes.
The Transaction closed on September 17, 2018. The Buyer paid $55 million in
exchange for “all of the Seller’s right, title, and interest as of the Closing in all properties,
7
assets, rights and interests of any kind, whether tangible or intangible, real or personal”
that related to the two lines of business that the Company sold. See APA § 2.1(a).
At closing, the Buyer placed $5.5 million of the purchase price in escrow to secure
the Company’s contingent financial obligations under the Purchase Agreement (the
“Original Escrow Amount”). See id. § 2.5(a)(i). Of this amount, $5 million secured the
Company’s contingent obligation to make indemnification payments. The Purchase
Agreement referred to this portion of the Original Escrow Amount as the “Indemnity
Escrow Amount.” See id. The remaining $500,0000 secured the Company’s contingent
obligation to make a purchase price adjustment. The Purchase Agreement referred to this
portion of the Original Escrow Amount as the “Adjustment Escrow Amount.” See id.
The parties agreed that the funds would be held in an escrow account governed by
the terms of an escrow agreement. See APA Ex. A (the “Escrow Agreement” or “EA”).
The Escrow Agreement recited that the escrowed funds were “intended to provide
assurance to Buyer in respect of certain obligations of the Seller Parties set forth in the
Purchase Agreement.” EA at 1 (Recitals). The Escrow Agreement also stated that the
escrowed funds could be used only for their designated purpose, i.e., to satisfy an
indemnification claim or purchase adjustment. Id. § 6(e) (“No Escrow Funds held in one
Escrow Account shall be used for the purposes of the other Escrow Account or for any
other purposes other than as set forth in this Agreement.”).
At closing, the Company paid Aizen the $9 million bonus that he was due under the
Termination Agreement. See Dkt. 58 at 9.
8
E. Litigation Ensues.
After the Transaction closed, the relationship between Grover, Schaffer, and Aizen
soured. On October 16, 2018, Aizen resigned from the Company Board and the Parent
Board. See Dkt. 50 ¶ 40; accord Dkt. 53 Resp. No. 40. On October 23, he filed suit against
the plaintiffs in the United States District Court for the District of New Jersey. See Aizen
v. Am. Healthcare Admin. Servs., Inc., No. 3:18-CV-15195-BRM-DEA (D.N.J. Oct. 23,
2018) (the “New Jersey Action”). Aizen claimed that the defendants had failed to pay him
amounts to which he was entitled under the Termination Agreement.
On November 6, 2018, the Company terminated Aizen. On November 19, the
Company and Parent filed a complaint against Aizen in the Superior Court of California.
See Am. Healthcare Admin. Servs., Inc. v. Aizen, No. S-CV-0042143 (Cal. Sup. Ct. Nov.
19, 2018) (the “California Action”). The complaint asserted claims for breach of fiduciary
duty, fraudulent nondisclosure, intentional misrepresentation, conversion, declaratory
relief, and breach of the covenant of good faith and fair dealing. As relief, the Company
asked for a declaration that the Termination Agreement was “void and unenforceable” and
an injunction compelling Aizen to return all consideration he received under that
agreement. Dkt. 50 ¶ 46. Aizen did not respond, and the Company obtained a default
judgment against him that included damages of $9.5 million (the “California Default
Judgment”).
By letter dated February 13, 2019, the Company informed the Buyer of Aizen’s
termination. Notwithstanding the California Default Judgment, Aizen’s counsel sent a
letter to the Buyer that same day disputing the validity of the termination. Dkt. 50 Ex. E.
9
at 1. Aizen’s counsel also instructed the Buyer to transfer the escrowed funds to an escrow
account under Aizen’s control, reasoning as follows:
Maxor should be aware that Mr. Aizen has specifically alleged in his pending
lawsuit that, inter alia, Ms. Schaffer and other AHAS Defendants fraudulently
induced Mr. Aizen to effectuate the asset purchase transaction with the specific
intent of later denying him his contractually-obligated [sic] payments under
that transaction, and that the AHAS Defendants will fraudulently dissipate and
convert any further payments made by Maxor . . . . Therefore, in order to
prevent any such fraudulent dissipation and converstion [sic], as previously
requested by Mr. Aizen as the designated Seller’s [sic] Representative, Mr.
Aizen again requests that all remaining payments due to American Healthcare
and/or [the Parent] under the APA, including the funds currently held in
escrow under the APA, be wired to an escrow account created by Mr. Aizen.
Mr. Aizen will hold all such funds in escrow pending resolutions of his on-
going disputes with the AHAS Defendants.
Id. at 3 (emphasis added). Aizen thus took the position that he was a creditor of the
Company, that there was a risk that the Company would distribute the escrowed funds to
its stockholders as a fraudulent conveyance, and that he was entitled to control the funds
pending resolution of his claims.
On September 26, 2019, the federal court dismissed the New Jersey Action for lack
of jurisdiction. See Aizen v. Am. Healthcare Admin. Servs., Inc., 2019 WL 4686811, at *1
(D.N.J. Sept. 26, 2019). It appeared that all of the outstanding litigation over Aizen’s
termination had been resolved.
On October 2, 2019, the plaintiffs to this action filed their original complaint. Based
on the California Default Judgment, they sought to revoke Aizen’s authority to act as the
Sellers’ Representative. See Dkt. 1. They also sought expedited relief on the theory that
Aizen had attempted and would continue to attempt to transfer the escrowed funds to his
control.
10
Shortly after the court granted expedition, Aizen moved to vacate the California
Default Judgment. On November 13, 2019, the parties agreed to stay the proceedings in
this action pending resolution of that motion. See Dkt. 37.
In addition to staying this action, the parties agreed to replace the Buyer-controlled
escrow account with a replacement account jointly established by Delaware counsel (the
“Delaware Escrow Account”). Id. ¶ 2. Their stipulation provided that any funds in the
Delaware Escrow Account only would be released to the Company based on an order from
this court or joint instructions from Delaware counsel. Id. The parties expressly preserved
their positions regarding the underlying dispute. Id. ¶ 5 (“By entering into the Stay, neither
Plaintiffs nor Defendant waive any, and expressly preserve all rights, claims and
defenses.”).
The court entered the parties’ stipulation as an order. See Dkt. 38 (the “Stay and
Escrow Order”). In accordance with the Stay and Escrow Order, the parties entered into a
new escrow agreement with Wilmington Trust, N.A. as escrow agent. Dkt. 50 Ex. F.
F. Aizen Refuses To Release Funds From Escrow.
On January, 31 2020, the California court granted Aizen’s motion to vacate the
California Default Judgment. The parties spent the next twelve months negotiating with
the Buyer over a post-closing price adjustment and claims for indemnification. See Dkt. 58
at 14. On December 17, the parties and the Buyer reached agreement on a payment from
the original escrow account to the Buyer. With that issue resolved, the Buyer released
$5,200,643.26 (the “Remaining Escrow Amount”) to the Delaware Escrow Account. The
11
Buyer makes no claim to the Remaining Escrow Amount. The only dispute is between
Aizen and the plaintiffs.
By letter dated December 23, 2020, the plaintiffs’ Delaware counsel asked Aizen’s
Delaware counsel to release the Remaining Escrow Amount. See Dkt. 50 Ex. G. By letter
dated January 25, 2021, Aizen’s Delaware counsel declined, taking the position that the
Remaining Escrow Amount should remain in escrow until the final disposition of the
California Action. Aizen’s counsel reasoned as follows:
Based on the record as it exists today, no further release is appropriate at this
time. Indeed, the entire point of the Stipulation and Order and the new joint
Delaware Escrow was to allow those funds to be protected in the hands of a
neutral party while the parties [sic] claims moved forward, which is occurring
in California at this time. Thus, [the Company’s] request is premature and
unjustified. The Delaware Action should remain stayed and the funds in the
joint Delaware Escrow until the California action has been fully adjudicated. .
. . As you may know, the parties to the California action have made significant
claims against each other and these funds should be available to satisfy any
successful claims asserted in California. . . . The request to distribute the
funds—given the pending allegations in the California action—raises serious
issues about the lawfulness and motives of the request.
Dkt. 50 Ex. H at 2.
Elaborating, Aizen’s Delaware counsel asserted that preserving Aizen’s access to
the Remaining Escrow Amount was necessary to protect Aizen’s ability to recover in the
California Action. Counsel asserted that “[the Company] has little to no ongoing business
yet continues to dissipate assets, including through excessive and unjustified salaries,
which constitute breaches of fiduciary duties by Grover Lee and Christine Schaffer.” Id. at
2–3. Aizen’s counsel refused to release the Remaining Escrow Amount absent “sufficient
evidence about [the Company’s] financial condition and performance to ensure any release
12
will not be in furtherance of the foregoing wrongful acts, and to ensure that [the Company]
is not already technically insolvent in view of its liquidated obligations.” Id. at 3 (citing the
Delaware Uniform Fraudulent Transfer Act, 6 Del. C. § 1301 et seq.).
G. This Dispute
With the California Default Judgment vacated, this court lifted the stay. See Dkt. 48.
The plaintiffs filed an amended complaint in which they alleged that Aizen had improperly
refused to release the Remaining Escrow Amount to the Company. See Dkt. 50. Aizen filed
an answer, raised affirmative defenses, and asserted counterclaims for breach of contract.
See Dkt. 53.
The plaintiffs then moved for partial judgment on the pleadings. See Dkt. 56. They
seek declarations that (i) the Company is entitled to the release of the Remaining Escrow
Amount, (ii) Aizen has no authority to retain the Remaining Escrow Amount, and
(iii) Aizen cannot preserve the Remaining Escrow Amount in escrow as a form of pre-
judgment attachment. The plaintiffs seek a decree of specific performance compelling
Aizen to issue joint instruction to the escrow agent to release the Remaining Escrow
Amount to the Company. Id. at 4.
II. LEGAL ANALYSIS
The plaintiffs have moved for partial judgment on the pleadings under Rule 12(c).
“After the pleadings are closed but within such time as not to delay the trial, any party may
move for judgment on the pleadings.” Ct. Ch. R. 12(c). “A motion for judgment on the
pleadings may be granted only when no material issue of fact exists and the movant is
13
entitled to judgment as a matter of law.” Desert Equities, Inc. v. Morgan Stanley Leveraged
Equity Fund, II, L.P., 624 A.2d 1199, 1205 (Del. 1993).
This case primarily presents issues of contract interpretation. “[J]udgment on the
pleadings . . . is a proper framework for enforcing unambiguous contracts because there is
no need to resolve material disputes of fact.” NBC Universal v. Paxson Commc’ns Corp.,
2005 WL 1038997, at *5 (Del. Ch. Apr. 29, 2005). “The proper interpretation of language
in a contract, while analytically a question of fact, is treated as a question of law both in
the trial court and on appeal.” Pellaton v. Bank of N.Y., 592 A.2d 473, 478 (Del. 1991)
(citation omitted).
“When interpreting a contract, the role of a court is to effectuate the parties’ intent.”
Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006). Absent
ambiguity, the court “will give priority to the parties’ intentions as reflected in the four
corners of the agreement, construing the agreement as a whole and giving effect to all its
provisions.” In re Viking Pump, Inc., 148 A.3d 633, 648 (Del. 2016).
“Unless there is ambiguity, Delaware courts interpret contract terms according to
their plain, ordinary meaning.” Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385
(Del. 2012). The “contract’s construction should be that which would be understood by an
objective, reasonable third party.” Salamone v. Gorman, 106 A.3d 354, 367–68 (Del. 2014)
(internal citation omitted). “Absent some ambiguity, Delaware courts will not destroy or
twist [contract] language under the guise of construing it.” Rhone-Poulenc Basic Chems.
Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 1992). “If a writing is plain and
clear on its face, i.e., its language conveys an unmistakable meaning, the writing itself is
14
the sole source for gaining an understanding of intent.” City Investing Co. Liquidating Tr.
v. Cont’l Cas. Co., 624 A.2d 1191, 1198 (Del. 1993).
“In upholding the intentions of the parties, a court must construe the agreement as a
whole, giving effect to all provisions therein.” E.I. du Pont de Nemours & Co. v. Shell Oil
Co., 498 A.2d 1108, 1113 (Del. 1985). “[T]he meaning which arises from a particular
portion of an agreement cannot control the meaning of the entire agreement where such
inference runs counter to the agreement’s overall scheme or plan.” Id. “[A] court
interpreting any contractual provision . . . must give effect to all terms of the instrument,
must read the instrument as a whole, and, if possible, reconcile all the provisions of the
instrument.” Elliott Assocs., L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del. 1998).
“Contract language is not ambiguous merely because the parties dispute what it
means. To be ambiguous, a disputed contract term must be fairly or reasonably susceptible
to more than one meaning.” Alta Berkeley, 41 A.3d at 385 (footnote omitted). If the
language of an agreement is ambiguous, then the court “may consider extrinsic evidence
to resolve the ambiguity.” Salamone, 106 A.3d at 374. Permissible sources of extrinsic
evidence may include “overt statements and acts of the parties, the business context, prior
dealings between the parties, and business custom and usage in the industry.” Id. (cleaned
up). A court may consider “evidence of prior agreements and communications of the
parties as well as trade usage or course of dealing.” Eagle Indus., Inc. v. DeVilbiss Health
Care, Inc., 702 A.2d 1228, 1233 (Del. 1997). “When the terms of an agreement are
ambiguous, any course of performance accepted or acquiesced in without objection is given
great weight in the interpretation of the agreement.” Sun-Times Media Grp. v. Black, 954
15
A.2d 380, 398 (Del. Ch. 2008) (cleaned up). “[T]he private, subjective feelings of the
negotiators are irrelevant and unhelpful to the Court’s consideration of a contract’s
meaning, because the meaning of a properly formed contract must be shared or common.”
United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 835 (Del. Ch. 2007) (footnote
omitted).
A. The Company’s Rights To The Remaining Escrow Amount
The plaintiffs seek a declaratory judgment that the Company is entitled to the
immediate release of the Remaining Escrow Amount under the terms of the Purchase
Agreement. This decision grants that aspect of the plaintiffs’ motion.
1. The Plain Language Of The Escrow Release Provisions
The analysis turns on the plain language of the provisions in the Purchase
Agreement that govern the release of the Original Escrow Amount. Recall that the Original
Escrow Amount has two components. The smaller component of $500,000 is the
Adjustment Escrow Amount. The larger component of $5 million is the Indemnity Escrow
Amount. Section 2.7(b) of the Purchase Agreement governs the release of the Adjustment
Escrow Amount. Section 6.4 of the Purchase Agreement governs the release of the
Indemnity Escrow Amount. This decision refers to them together as the “Escrow Release
Provisions.”
The plain language of Section 2.7(b) governs the release of any amounts that might
have been attributable to the Adjustment Escrow Amount. The relevant language states:
Sellers’ Representative and the Buyer shall send joint written instruction to
the Escrow Agent to disburse to the Buyer a portion of the Adjustment
Escrow Amount equal to the payment (if any) owed to the Buyer under this
16
Section 2.7(b) [which governs any post-closing adjustment to the transaction
consideration] and the remaining Adjustment Escrow Amount (if any) to the
Seller, to the account designated on the Closing Statement.
APA § 2.7(b). The plain language of this section contemplates that after any post-closing
pricing adjustment has been determined, the Sellers’ Representative and the Buyer will
send joint written instructions to release any remaining amount to the Company.
When the parties reached agreement with the Buyer on the Remaining Escrow
Amount, they necessarily reached agreement on “the payment (if any) owed to the Buyer”
under the section of the Purchase Agreement governing the post-closing adjustment. Once
that happened, Aizen was obligated in his capacity as Sellers’ Representative to join with
the Buyer in sending “joint written instructions to the Escrow Adjustment to disburse . . .
the remaining Adjustment Escrow Amount (if any) to the Seller.”
The plain language of Section 6.4 calls for the release of any amounts that might
have been attributable to the Indemnity Escrow Amount. The relevant language states:
Pursuant to the terms of the Escrow Agreement, on the date which is 15
months after the Closing Date (the “Escrow Release Date”), the Buyer and
the Sellers’ Representative shall send joint written instruction to the Escrow
Agent to release the remaining Indemnity Escrow Amount (and all interest
accrued thereon) to Seller as directed by the Buyer and the Sellers’
Representative to the Escrow Agent; provided that, any amount of the
Indemnity Escrow Amount subject to the Reserve (as defined in the Escrow
Agreement) shall only be released in accordance with the Escrow
Agreement.
Id. § 6.4.
The language of Section 6.4 contemplates that the Company will receive the
Indemnity Escrow Amount when three requirements are met. Each has been satisfied:
• The Transaction closed on September 17, 2018.
17
• More than fifteen months have passed since the closing date.
• As a result of the agreement over the Remaining Escrow Amount, there is no
dispute about the amount of any “Reserve” that might be required.
As soon as these requirements were met, Aizen became obligated in his capacity as Sellers’
Representative to join with the Buyer in sending “joint written instructions to the Escrow
Agent to release the remaining Indemnity Escrow Amount (and all interest accrued
thereon) to Seller.”
Putting the Escrow Release Provisions together results in Aizen having a contractual
obligation as Sellers’ Representative to issue the instructions necessary to release the
Remaining Escrow Amount to the Company. That is what the plain language of the Escrow
Release Provisions requires.
2. The Exercise Of Contractual Discretion And The Implied Covenant Of
Good Faith And Fair Dealing
To avoid the result mandated by the plain language of the Escrow Release
Provisions, Aizen contends that Section 10.10(a) of the Purchase Agreement grants him
“sole and absolute discretion” to determine whether it is “necessary and proper” to disburse
the escrowed funds. Dkt. 58 at 28. He maintains that he can exercise his discretionary
authority to override the Escrow Release Provisions. That argument is not tenable.
Section 10.10(a) of the Purchase Agreement establishes the scope of Aizen’s
authority as Sellers’ Representative. The operative language states:
Each Seller Party hereby irrevocably appoints the Sellers’ Representative as
the designated representative of such Seller Party, as applicable, with full
power and authority, including power of substitution, acting in the name of
and for and on behalf of such Seller Party to do all things and to take all
actions under or related to this Agreement that, in the sole and absolute
18
discretion of the Sellers’ Representative, the Sellers’ Representative
considers necessary or proper, including . . .
(v) to receive payments under or pursuant to this Agreement and disburse the
same to the Seller Parties, as contemplated by this Agreement, and
(vi) on behalf of each such Seller Party to enter into any agreement,
instrument or other document to effectuate any of the foregoing, which shall
have the effect of binding each such Seller Party as if such Person has
personally entered into such agreement, instrument or document.
APA § 10.10(a) (formatting added). Aizen focuses on the sentence that grants him the
authority “to do all things and to take all actions under or related to this Agreement that, in
the sole and absolute discretion of the Sellers’ Representative, the Sellers’ Representative
considers necessary or proper,” and he combines it with the specific reference to receiving
and disbursing payments under or pursuant to the Purchase Agreement. He asserts that he
has made a judgment, in his sole discretion, that “it would not be necessary or proper to
release the escrow funds to the Plaintiffs/Counterclaim-Defendants.” Dkt. 58 at 28.
Aizen’s interpretation of Section 10.10 is not a reasonable one. Section 10.10 vests
Aizen with the discretion to carry out his post-closing duties and obligations as Sellers’
Representative. That discretion extends to his duties and obligations under the Escrow
Release Provisions, but it does not give Aizen the authority to ignore a mandatory provision
of the Purchase Agreement governing the release of the escrowed funds. It would create an
internal contradiction to read the Purchase Agreement as mandating that Aizen release the
escrowed funds, while at the same time granting Aizen the authority to ignore that mandate.
Aizen cannot cherry-pick the contractual provisions that he finds advantageous, while
simultaneously ignoring the contractual obligations that he finds inconvenient.
19
Aizen’s interpretation also ignores constraints that the implied covenant of good
faith and fair dealing imposes on a party’s exercise of discretion. The Delaware Supreme
Court has summarized the implied covenant concisely as follows:
The implied covenant is inherent in all contracts and is used to infer contract
terms to handle developments or contractual gaps that . . . neither party
anticipated. It applies when the party asserting the implied covenant proves
that the other party has acted arbitrarily or unreasonably, thereby frustrating
the fruits of the bargain that the asserting party reasonably expected. The
reasonable expectations of the contracting parties are assessed at the time of
contracting.
Dieckman v. Regency GP LP, 155 A.3d 358, 367 (Del. 2017) (cleaned up). To prevail on
an implied covenant claim, a plaintiff must prove “a specific implied contractual
obligation, a breach of that obligation by the defendant, and resulting damage to the
plaintiff.” Cantor Fitzgerald, L.P. v. Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10,
1998).
When determining whether to invoke the implied covenant, a court “first must
engage in the process of contract construction to determine whether there is a gap that
needs to be filled.” Allen v. El Paso Pipeline GP Co., L.L.C., 113 A.3d 167, 183 (Del. Ch.
2014), aff’d, 2015 WL 803053 (Del. Feb. 26, 2015) (ORDER). “Through this process, a
court determines whether the language of the contract expressly covers a particular issue,
in which case the implied covenant will not apply, or whether the contract is silent on the
subject, revealing a gap that the implied covenant might fill.” NAMA Hldgs., LLC v.
Related WMC LLC, 2014 WL 6436647, at *16 (Del. Ch. Nov. 17, 2014). The court must
determine whether a gap exists because “[t]he implied covenant will not infer language
that contradicts a clear exercise of an express contractual right.” Nemec v. Shrader, 991
20
A.2d 1120, 1127 (Del. 2010). “[B]ecause the implied covenant is, by definition, implied,
and because it protects the spirit of the agreement rather than the form, it cannot be invoked
where the contract itself expressly covers the subject at issue.” Fisk Ventures, LLC v. Segal,
2008 WL 1961156, at *10 (Del. Ch. May 7, 2008), aff’d, 984 A.2d 124 (Del. 2009)
(ORDER).
“If a contractual gap exists, then the court must determine whether the implied
covenant should be used to supply a term to fill the gap. Not all gaps should be filled.”
Allen, 113 A.3d at 183. One reason a gap might exist is if the parties negotiated over a term
and rejected it. Under that scenario, the implied covenant should not be used to fill the gap
left by a rejected term because doing so would grant a contractual right or protection that
the party “failed to secure . . . at the bargaining table.” Aspen Advisors LLC v. United Artists
Theatre Co., 843 A.2d 697, 707 (Del. Ch. 2004), aff’d, 861 A.2d 1251 (Del. 2004).
But contractual gaps may exist for other reasons. “No contract, regardless of how
tightly or precisely drafted it may be, can wholly account for every possible contingency.”
Amirsaleh v. Bd. of Trade of City of N.Y., Inc., 2008 WL 4182998, at *1 (Del. Ch. Sept.
11, 2008). “In only a moderately complex or extend[ed] contractual relationship, the cost
of attempting to catalog and negotiate with respect to all possible future states of the world
would be prohibitive, if it were cognitively possible.” Credit Lyonnais Bank Nederland,
N.V. v. Pathe Commc’ns Corp., 1991 WL 277613, at *23 (Del. Ch. Dec. 30, 1991) (Allen,
C.).
Equally important, “parties occasionally have understandings or expectations that
were so fundamental that they did not need to negotiate about those expectations.” Katz v.
21
Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986) (Allen, C.) (quoting Corbin on
Contracts § 570, at 601 (Kaufman Supp. 1984)). “The implied covenant is well-suited to
imply contractual terms that are so obvious . . . that the drafter would not have needed to
include the conditions as express terms in the agreement.” Dieckman, 155 A.3d at 361.
Applying these principles, the Delaware Supreme Court has made clear that the
implied covenant of good faith and fair dealing restrains a party’s exercise of discretion
under an agreement. The general rule is that the implied covenant requires a party in a
contractual relationship to refrain from arbitrary or unreasonable conduct which has the
effect of preventing the other party to the contract from receiving the fruits of the bargain.
That rule operates with special force “when a contract confers discretion on a party.” Glaxo
Grp. Ltd. v. DRIT LP, 248 A.3d 911, 920 (Del. 2021). At a minimum, the implied covenant
requires that the party empowered with the discretion to make a determination “use good
faith in making that determination.” Gilbert v. El Paso Co., 490 A.2d 1050, 1055 (Del. Ch.
1984), aff’d, 575 A.2d 1131 (Del. 1990).
Moreover, the Delaware Supreme Court has made clear that the use of the term “sole
discretion,” does not eliminate the implied duty and grant a party carte blanche to exercise
discretion however it might wish. Addressing this issue specifically, the Delaware Supreme
Court has explained that “the mere vesting of ‘sole discretion’ did not relieve the [holder]
of its obligation to use that discretion consistently with the implied covenant of good faith
and fair dealing” Miller v. HCP Trumpet Invs., LLC, 194 A.3d 908, 2018 WL 4600818, at
*1 (Del. Sept. 20, 2018) (ORDER); see CC Fin. LLC v. Wireless Props., LLC, 2012 WL
4862337, at *5 n.53 (Del. Ch. Oct. 1, 2012) (“A contract which grants one party sole
22
discretion with respect to a material aspect of the agreement may, through the implied
covenant of good faith and fair dealing, require that the exercise of discretion be in good
faith.”).
The question then arises as to what it means to exercise discretion “in good faith”
for purposes of the implied covenant. The implied contractual term “emphasizes
faithfulness to an agreed common purpose and consistency with the justified expectations
of the other party.” Restatement (Second) of Contracts § 205 cmt. a (Am. L. Inst. 1981),
Westlaw (database updated Oct. 2022). A reviewing court does not simply introduce its
own notions of what is “fair or reasonable under the circumstances.” Allen, 113 A.3d at
184. When used with the implied covenant, the term “good faith” contemplates
“faithfulness to the scope, purpose, and terms of the parties’ contract.” Gerber v. Enter.
Prods. Hldgs., LLC, 67 A.3d 400, 419 (Del. 2013) (cleaned up), overruled on other
grounds by Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del. 2013). The concept of “fair
dealing” similarly refers to “a commitment to deal ‘fairly’ in the sense of consistently with
the terms of the parties’ agreement and its purpose.” Id. (cleaned up). The application of
these concepts turns “on the contract itself and what the parties would have agreed upon
had the issue arisen when they were bargaining originally.” Id. (cleaned up).
“The implied covenant seeks to enforce the parties’ contractual bargain by implying
only those terms that the parties would have agreed to during their original negotiations if
they had thought to address them.” Id. at 418 (cleaned up). When applied to an exercise of
discretion, this means that the exercise of discretionary authority must fall within the range
23
of what the parties would have agreed upon during their original negotiations, if they had
thought to address the issue.
In the context of this case, the Purchase Agreement obligated Aizen to facilitate the
release to the Company of any portion of the Original Escrow Amount that remained after
any purchase price adjustment or the satisfaction of any indemnification obligations.
Section 10.10(a) grants Aizen the authority to make decisions and take actions to fulfill the
purpose of the Purchase Agreement, which includes the Escrow Release Provisions. The
Escrow Release Provisions contemplate that Aizen would work with the Buyer to release
the funds to the Company. At bottom, Aizen must use his contractual discretion in a manner
that is faithful to (in the sense of consistent with) “the scope, purpose, and terms of the
parties’ contract.” Id. at 419 (cleaned up).
A further contractual indication of the purpose underlying Aizen’s authority is the
language of Section 10.10(a), which authorized Aizen to act “in the name of and for and
on behalf of” the Seller Parties. See APA § 10.10(a); see also Behalf, Black’s Law
Dictionary, Westlaw (defining “on behalf of” to mean “in the name of, on the part of, as
the agent or representative of.”). Aizen was empowered to use “sole and absolute
discretion” to act in the name of and on behalf of the Seller Parties. He was not empowered
to use his discretion to act on behalf of himself as a contingent creditor, nor on behalf of
creditors generally. By exercising discretion for that purpose, Aizen has exceeded his
authority under the Purchase Agreement.
Thus, the court will enter a final order declaring that the Company is entitled under
the Purchase Agreement to the Remaining Escrow Amount.
24
B. The Cessation Of Aizen’s Authority
The plaintiffs next seek a declaratory judgment as to whether Aizen continues to
retain power or authority over the Remaining Escrow Amount in his capacity as Sellers’
Representative. The plaintiffs’ position is simple. Given the analysis in the preceding
section, Aizen no longer has any authority to make determinations regarding the Remaining
Escrow Amount; his sole obligation is to facilitate the release of the Remaining Escrow
Amount. Aizen makes four attempts to establish his authority to retain the Remaining
Escrow Amount. None is persuasive.
1. Duties Under The Stay And Escrow Order
First, Aizen denies that he has any current duty to release the Remaining Escrow
Amount to the Company under the Escrow Release Provisions. He claims that he
“performed his obligations under Section 6.4 in negotiating and then providing joint
instructions with [Buyer] to the Escrow Agent to release the remaining Indemnity Escrow
Amount to the Delaware Escrow.” Dkt. 58 at 36. He argues that the Stay and Escrow Order
supplanted the Escrow Release Provisions such that only the language of the Stay and
Escrow Order now controls. Id.
This argument runs contrary to the plain language of the Stay and Escrow Order.
That order contemplated that the parties would jointly instruct Buyer to release the
Remaining Escrow Amount to the Delaware Escrow Account. See Dkt. 38. The order
further provides that the Remaining Escrow Amount could only be released upon “(1) an
order of this Court, or (2) joint instructions by the Parties’ respective Delaware counsel.”
Id. ¶ 2. The order expressly stated that “[b]y entering into the [Stay and Escrow Order],
25
neither Plaintiffs nor Defendant waive any, and expressly preserve all rights, claims and
defenses.” Id. ¶ 5.
The Stay and Escrow Order was an administrative mechanism to get the Buyer out
of the picture and place the Remaining Escrow Amount in an account controlled by
Delaware counsel, rather than an account controlled by Aizen. The Stay and Escrow Order
did not displace the parties’ commitments in the Purchase Agreement about when escrowed
amounts would be released. Those terms continue to apply.
2. Duties Under The Sellers’ Representative Provision
Next, Aizen asserts that he has “continuing duties as Sellers’ Representative” that
include “the duty to ensure performance of the APA, [the Termination Agreement], and
related covenants.” Dkt. 58 at 27 (formatting omitted). Aizen contends that his duties
include the duty to protect the common interest of all Selling Parties,
including himself, in the fair and equitable adjudication of competing claims
to the escrow fund, and therefore in maintaining that fund intact while the
parties’ respective claims to the fund are adjudicated in the first-filed
California Action.
Id. at 30. Aizen argues that his “continuing duties” to make decisions as Sellers’
Representative do not cease simply because the other Seller Parties disagree with his
decision. For that proposition, he relies on Section 10.10(d)(i) of the Purchase Agreement,
which states: “Each Seller Party hereby agrees that: in all matters in which action by the
Sellers’ Representative is required or permitted, the Sellers’ Representative is authorized
to act on behalf of such Seller Party, notwithstanding any dispute or disagreement among
the Seller Parties . . . .” APA § 10.10(d)(i) (formatting omitted).
26
Aizen is correct that the existence of disputes “among the Seller Parties” does not
vitiate his authority. It is possible to envision circumstances when Aizen might validly
argue that he has a duty to retain the Remaining Escrow Amount. For example, if there was
a bona fide dispute among the Seller Parties as to the allocation of the Remaining Escrow
Amount, then Aizen might retain the funds in a manner analogous to interpleader.
The current case is different. Aizen has not identified a valid reason to retain the
Remaining Escrow Amount based on concern for the Seller Parties qua Seller Parties.
Aizen seeks to retain the Remaining Escrow Amount to protect the rights of a contingent
creditor who is pursuing unrelated litigation against the Company. Coincidentally, that
plaintiff happens to be Aizen, but otherwise there is no connection between Aizen’s claims
and the Remaining Escrow Amount. As to the escrowed funds, Aizen is no differently
situated than a third party with an unrelated claim against the Company.
What Aizen is trying to do is use the funds as a litigation escrow for his personal
claims regarding his termination. The plain language of the Purchase Agreement makes
clear that the Original Escrow Amount was held back from the purchase price for two
specific purposes: to fund a purchase price adjustment and to secure the Seller Parties’
indemnification obligations. See id. § 2.5(a)(i). The Purchase Agreement did not
contemplate the use of those funds for any other purpose, such as a litigation escrow.
The plain language of the Escrow Agreement supports this reading. Its recitals state
that the funds were placed in escrow “to provide assurance to Buyer in respect of certain
obligations of the Seller Parties set forth in the Purchase Agreement.” EA at 1 (Recitals).
The Escrow Agreement does not contemplate other uses for the funds. The Escrow
27
Agreement even states that “[n]o Escrow Funds held in one Escrow Account shall be used
for the purposes of the other Escrow Account or for any other purposes other than as set
forth in this Agreement.” Id. § 6(e). Under this provision, the funds comprising the
Adjustment Escrow Amount cannot be used for indemnification claims, and the funds
comprising the Indemnity Escrow Amount cannot be used for a purchase price adjustment.
The proscription on cross utilization makes it all the more clear that the parties had no
intention of using the escrowed funds for a different, unrelated purpose, such as a litigation
escrow.
3. A Broader Appeal To Equity
In a related argument in favor of preserving his control over the Remaining Escrow
Amount, Aizen makes a broader appeal to equity. He asserts that “[t]he reasons for creating
the Delaware Escrow remain and provide ample reason to continue the safeguarding of the
funds until the California Action is resolved.” Dkt. 58 at 42. Through this argument, Aizen
openly seeks an injunction that would constitute a form of pre-judgment attachment. Aizen
is not entitled to that form of relief from this court.
“Equitable relief that has the sole function and effect of freezing [a litigant’s] assets
in place to make them available to satisfy any possible future money judgment . . . is not
within the proper exercise of the Court’s power.” Uragami v. Century Int’l Credit Corp.,
1997 WL 33175027, at *2 (Del. Ch. Dec. 2, 1997), aff’d, 710 A.2d 218 (Del. 1998). Stated
differently, this court “lacks the power to grant an injunction for the sole purpose of aiding
the collection or enforcement of a possible future money judgment in an unrelated action.”
Neuberger v. Olson, 1992 WL 50873, at *6 (Del. Ch. Mar. 11, 1992); see E.I. Du Pont de
28
Nemours & Co. v. HEM Rsch., Inc., 576 A.2d 635, 640 (Del. Ch. 1989) (denying motion
for preliminary injunction to enjoin payment of dividends when moving party’s “only
possible interest” in the money was as a source of possible future money judgment).
The principle is a venerable one, with Chancellor Wolcott having answered the same
question a century ago:
May the writ of injunction be employed in equity to accomplish the same
purpose which is served by the writ of foreign attachment at law? Here the
main defendant is a nonresident; he is charged with a breach of trust; property
in the names of others, but alleged on information and belief to be his, is found
in this state; this property is in no wise involved in the suit; and it is sought by
a preliminary injunction to arrest it in the hands of its present holders to await
the final decree, and then in some way to compel it to respond to the
complainant in case the decree is in its favor. In its last analysis, is not this
(eliminating for the moment the material circumstance that title to the shares
is in persons other than the principal defendant) an employing of the injunction
writ in equity as a foreign attachment is employed at law? The writ cannot be
so employed. No authority can be found which allows it.
Cities Serv. Co. v. McDowell, 116 A. 4, 9 (Del. Ch. 1922). The writ of injunction “must be
predicated on the existence of some equity. The anticipatory desire to aid the enforcement
of a possible future decree, standing alone, has never been recognized as constituting such
an equity.” Id.
There is a narrow exception under which a court of equity can grant injunctive relief
to protect its jurisdiction over property that a defendant otherwise would remove from the
jurisdiction and place outside the court’s control. See, e.g., Brinati v. TeleSTAR, Inc., 1985
WL 44688, *5 (Del. Ch. Sept. 3, 1985) (granting preliminary injunction protecting court’s
jurisdiction over assets by restraining defendants from expending those funds, other than
for purposes of winding up or liquidating); Eberhardt v. Christiana Window Glass Co., 74
29
A. 33, 36–37 (Del. Ch. 1909) (issuing preliminary injunction to preserve fund in
controversy “to await the final determination of the cause”). If the property is unique, then
the court may issue injunctive relief to preserve its jurisdiction to address claims relating
to the property. If the property is money, then there must be a concrete threat that the
defendant intends to render itself insolvent and judgment-proof. See Mitsubishi Power Sys.
Ams., Inc. v. Babcock & Brown Infrastructure Grp. US, LLC, 2009 WL 1199588, at *5
(Del. Ch. Apr. 24, 2009) (granting temporary restraining order to party that made a
colorable claim that any future transfer of the defendant company would be fraudulent per
se under the Delaware Uniform Fraudulent Transfer Act); see also In re CNX Gas Corp.
S’holder Litig., 4 A.3d 397, 420 (Del. Ch. 2010) (denying injunction where “[n]o question
has been raised, much less evidence presented, to cast doubt on CONSOL’s solvency or
ability to satisfy a damages award”).
Aizen claims that the Company is “a non-functioning, defunct, and likely insolvent
business that was and remains continually beset by self-dealing by its remaining family
member officers and directors (i.e., the plaintiffs), which threatens its future ability to pay
any creditors, including Aizen.” See Dkt. 58 at 19. The Company has not attempted to
refute these claims. See Am. Healthcare Admin. Sys., C.A. 0793 (Del. Ch. Sept. 27, 2022)
(TRANSCRIPT); Dkt. 56; Dkt. 60. With the record viewed in the light most favorable to
Aizen, it is reasonable to infer that the Company will be judgment-proof if it receives and
then distributes the Remaining Escrow Amount.
The shortcoming in Aizen’s analysis is that he has only identified a potential source
of irreparable harm. He has not addressed the other two elements necessary to earn a
30
preliminary injunction, such as a probability of success on the merits or a balancing of the
equities that favors injunctive relief. See Revlon, Inc. v. MacAndrews & Forbes Hldgs.,
Inc., 506 A.2d 173, 179 (Del. 1986) (identifying elements). For this court to assess whether
Aizen has a probability of success on the merits would require the court to evaluate the
claims in the California Action. The parties have not briefed those issues, and it would be
both inefficient and suggest a lack of comity for this court to delve into the merits of a case
pending before a sister court.
Aizen therefore has not provided a basis for the court to issue relief that would
function as a pre-judgment attachment. Instead, the court will nod to equity in its grant of
relief. As discussed below, as a condition of granting the plaintiffs’ request for an order of
specific performance compelling Aizen to instruct the escrow agent to release the
Remaining Escrow Amount, the court will delay the obligation to comply with that order
for sixty days so that Aizen can seek relief against a potential wrongful distribution from
the California Court.
4. Consideration For A Non-Compete Provision
Aizen’s final argument is easily addressed. Aizen claims that the Remaining Escrow
Amount cannot be released because the funds serve as consideration for a four-year non-
compete between Aizen and the Buyer. See Dkt. 58 at 9. Aizen correctly observes that
Section 6.8 of the Purchase Agreement imposed a four-year non-compete in favor of the
Buyer. See APA § 6.8(b). But nothing links that obligation to any of the escrowed amounts.
The escrowed funds were placed in escrow for specific purposes. They do not represent
compensation for a non-compete.
31
C. Aizen’s Unclean Hands Defense
Aizen also invokes the equitable defense of unclean hands. See Dkt. 58. That
doctrine applies the maxim of equity that “[h]e who comes into equity must come with
clean hands.” 1 John Norton Pomeroy, Equity Jurisprudence § 397 at 737 (4th ed. 1918).
The maxim “dates back to the late eighteenth century when it was gleaned by a British
barrister from a collection of cases in which plaintiffs had been denied relief on the basis
of their inequitable conduct.” Nakahara v. NS 1991 Am. Tr., 718 A.2d 518, 522 (Del. Ch.
1998) (Chandler, C.); see also Elec. Rsch. Prods., Inc. v. Vitaphone Corp., 171 A. 738, 749
(Del. 1934) (discussing the history of the “well established principle”).
“The question raised by a plea of unclean hands is whether the plaintiff’s conduct is
so offensive to the integrity of the court that his claims should be denied, regardless of their
merit.” Gallagher v. Holcomb & Salter, 1991 WL 158969, at *4 (Del. Ch. Aug. 16, 1991)
(Allen, C.), aff’d sub nom. New Castle Ins., Ltd. v. Gallagher, 692 A.2d 414 (Del. 1997)
(ORDER).
Unclean hands does not operate as a free-floating, bad-person defense based on
conduct wholly unconnected to the facts of the case. “To bar relief, plaintiff’s hands must
be rendered unclean by reason of some conduct relating directly to the matter in
controversy.” Walter v. Walter, 136 A.2d 202, 207 (Del. 1957); see also Nakahara, 718
A.2d at 523 (“[I]n order for the doctrine to apply in the first place the improper conduct
must relate directly to the underlying litigation.”).
[T]he doctrine of unclean hands does not affect all “sinners” and does not
comprehend all “moral infirmities,” the reason being that courts of equity are
not primarily engaged in the moral reformation of the individual citizen; the
32
misconduct must be serious enough to justify a court’s denying relief on an
otherwise valid claim, for even equity does not require saintliness.
27A Am. Jur. 2d Equity § 21 (footnotes omitted), Westlaw (database updated Nov. 2022).
“[U]nclean hands is a doctrine designed to protect the integrity of a court of equity, not a
weapon to be wielded by parties seeking to excuse their own inequitable behavior by
pointing out a trifling instance of impropriety by their counterpart . . . .” Portnoy v. Cryo-
Cell Int’l, Inc., 940 A.2d 43, 81 (Del. Ch. 2008).
“In fashioning a remedy for unclean hands, the Court has a wide range of discretion
in refusing to aid the ‘unclean litigant.’” Merck & Co., Inc. v. SmithKline Beecham Pharm.
Co., 1999 WL 669354, at *44 (Del. Ch. Aug. 5, 1999), aff’d, 746 A.2d 277 (Del. 2000)
(ORDER) (affirming judgment), and aff’d, 766 A.2d 442 (Del. 2000) (affirming decision).
“The application of the doctrine of unclean hands is not ‘bound by formula or restrained
by any limitation that tends to trammel the free and just exercise of discretion.’” Id.
(quoting Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240, 245–46 (1933)).
“Ultimately, the doctrine is about public policy, and the Court has the broad discretion to
refuse relief if [a party] can establish that [the other party] does not meet a very basic
though inexact standard: ‘where the litigant’s own acts offend the very sense of equity to
which he appeals.’” Id. at *45 (quoting Nakahara, 718 A.2d at 522).
1. The Availability Of Unclean Hands As A Defense
A threshold question exists as to whether Aizen can invoke the defense of unclean
hands in response to an action for breach of contract. “In a smattering of recent decisions,
this court has endorsed to varying degrees the proposition that equitable defenses are not
33
available to defend against legal claims.” XRI Inv. Hldgs. LLC v. Holifield, 2022 WL
4350311, at *35 (Del. Ch. Sept. 19, 2022). The XRI decision devoted many pages to
explaining why the broad assertion that equitable defenses cannot be raised to defeat legal
claims constitutes an erroneous generalization. Id. at *35–47. Many equitable defenses can
be used to defeat legal claims. Id. at *36.
Whether a party can raise a particular equitable defense in response to a legal claim
depends on the equitable defense. One key consideration is the nature of the relief sought.
If, for example, a party seeks an equitable remedy—such as specific performance or a
permanent injunction—then a court may consider equitable defenses in deciding whether
to award equitable relief. Another key consideration, regardless of the relief sought, is
whether the equitable defense originated as a form of “equitable affirmative relief” that
courts of equity issued to bar the enforcement of judgments at law, such that the defense
now can be properly viewed as an affirmative defense to a legal claim. See id. at *37–41,
*44–46. Yet another consideration, regardless of the relief sought, is whether the defense
has otherwise succeeded in crossing the law-equity divide such that common law courts
now embrace it. See id. at *41–44. The assimilation of equitable principles by the law
courts and the procedural merger of law and equity have produced a legal system in which
most equitable defenses are available in actions at law. Describing the current reality, a
leading treatise states:
Most equitable defenses are now available in legal actions as well, even in
jurisdictions, such as Delaware, that maintain separate courts of law and
equity. Equitable defenses that today may be asserted in both legal actions
and in equity include: fraud, mistake, waiver, acquiescence, ratification,
failure of consideration, discharge of surety, impossibility,
34
unconscionability, duress, estoppel, rescission, lack of ripeness, and
mootness.
Donald J. Wolfe & Michael A. Pittenger, Corporate and Commercial Practice in the
Delaware Court of Chancery § 15.01, at 15-3 (2d ed. 2018 & Supp.) (footnote omitted).
Other authorities say the same thing.2
2
See Dan B. Dobbs, Handbook on the Law of Remedies: Damages—Equity—
Restitution, § 2.3, at 44 (1973) [hereinafter Dobbs, Law of Remedies] (“Estoppel, waiver,
acquiescence, and perhaps laches, have all worked over into law and are now regularly
used in purely legal cases, along with equitable defenses generally.”); see also USH
Ventures v. Glob. Telesystems Grp., Inc., 796 A.2d 7, 14 (Del. Super. 2000) (“[E]quitable
defenses generally, a long time ago, worked their way into purely legal cases.”); T. Leigh
Anenson, Treating Equity Like Law: A Post-Merger Justification of Unclean Hands, 45
Am. Bus. L.J. 455, 463–64 (2008) [hereinafter Equity Like Law] (“Defenses like fraud,
duress, illegality, unconscionability, and accommodation derived from equity but were
converted to law and often considered legal defenses. Others retained their equitable
designation but were routinely recognized in actions at law. Such equitable defenses
included estoppel, waiver, rescission, ratification, and acquiescence.” (cleaned up));
Bernard E. Gegan, Turning Back the Clock on the Trial of Equitable Defenses in New York,
68 St. John’s L. Rev. 823, 847 (1994) (“Many matters such as duress, fraud and illegality,
which had once been cognizable only in equity, were familiar defenses to a legal action by
the end of the eighteenth century.”) (quoting Fleming James, Jr. et al., Civil Procedure §
8.2, at 415 (4th ed. 1992)); Douglas Laycock, The Triumph of Equity, 56 L. & Contemp.
Probs. 53, 70 (1993) (“[T]he equitable defenses are now generally available both at law
and in equity.”).
35
There are two outliers: laches and unclean hands. It is generally accepted that laches
remains on the equity side of the divide and is only available to defend against an equitable
claim.3 A similar consensus does not exist as to the availability of unclean hands.4
3
See Petrella v. Metro-Goldwyn-Mayer, Inc., 572 U.S. 663, 678 (2014) (“[L]aches
is a defense developed by courts of equity; its principal application was, and remains, to
claims of an equitable cast for which the Legislature has provided no fixed time
limitation.”); see also SCA Hygiene Prods. Aktiebolag v. First Quality Baby Prods., LLC,
580 U.S. 328, 137 S. Ct. 954, 959–64 (2017) (discussing Petrella); Kraft v. WisdomTree
Invs., Inc., 145 A.3d 969, 974 (Del. Ch. 2016) (“There is, in my view, logical force for
strictly applying statutes of limitations in this situation because a plaintiff pressing a purely
legal claim in the Court of Chancery should not be able to avoid the statute of limitations
by invoking the doctrine of laches when the limitations period would have conclusively
barred the same claim had it been brought in a court of law.”) (internal citation omitted);
Dobbs, Law of Remedies, supra, § 2.4(4), at 76 (“Courts have routinely referred to laches
as an equitable defense, that is, a defense to equitable remedies but not a defense available
to bar a claim of legal relief.”). At times, “delay in pursuing a right might well qualify as
an estoppel or even a waiver or abandonment of a right, as courts sometimes recognize.”
Dobbs, Law of Remedies, supra, § 2.4(4), at 76. In cases where the delay amounts to an
estoppel or waiver, then the delay would provide a defense to a legal claim. See id.
4
Compare T. Leigh Anenson, Announcing the “Clean Hands” Doctrine, 51 U.C.
Davis L. Rev. 1827, 1851 (2018) (“Historically, the defense applied to all equitable relief,
but only equitable relief.”), Wolfe & Pittenger, supra, § 15.01 (“Other defenses, among
them laches, unclean hands, and the balancing of equities, remain more equitable in nature
and generally cannot be asserted as defenses in purely legal actions.”), and Dobbs, Law of
Remedies, supra, § 2.4(2), at 71 (“If the [unclean hands defense] is really an appeal to
equitable discretion [and not an appeal to generate a rule of law], then it should apply only
to bar equitable remedies. It should be dropped entirely if it is asserted as a defense against
a legal remedy.”), with Cummings v. Wayne Cnty., 533 N.W. 2d 13, 13 (Mich. Ct. App.
1995) (“The authority to dismiss a lawsuit for litigant misconduct is a creature of the ‘clean
hands doctrine’ and, despite its origins, is applicable to both equitable and legal damages
claims.”), T. Leigh Anenson, Limiting Legal Remedies: An Analysis of Unclean Hands, 99
Ky. L. J. 63, 73 & n.62 (2010) (collecting authorities to support the proposition that
“[c]ourts from seven states have declared the doctrine of unclean hands available in an
action at law.”), and Zechariah Chafee, Jr., Coming into Equity with Clean Hands, 47 Mich.
L. Rev. 877, 878 (1949) (“I propose to show that the clean hands doctrine . . . ought not to
be called a maxim of equity because it is by no means confined to equity . . . .”).
36
As originally framed, the unclean hands defense was purely an equitable defense
and not a form of equitable affirmative relief. It prevented a petitioner from seeking relief
in the Court of Chancery in the first instance; it was not a doctrine that a court of equity
could use to issue an injunction barring an action at law. And compared to the other
defenses originating in equity, the unclean hands doctrine was “considerably newer.”
Equity Like Law, supra, at 466 & n.63. The earliest known invocation of something akin
to unclean hands in the United States was in 1725, when one highwayman filed a bill in
the equity arm of the Court of Exchequer seeking an accounting against his partner in
crime. Everet v. Williams (Ex. 1725) (known as the “The Highwayman’s Case,” as reported
long afterward in a note by that name in 9 L. Q. Rev. 197, 197–99 (1893)). Finding the
contents of the bill “scandalous and impertinent,” the court denied the bill on that ground,
and both highwaymen were hanged. Id.; see Shondel v. McDermott, 775 F.2d 859, 868 (7th
Cir. 1985) (Posner, J.) (discussing The Highwayman’s Case).
In 1728, Richard Francis formulated an early conception of the unclean hands
doctrine, coining the maxim of equity “he that hath committed inequity shall not have
equity.” Chafee, supra, at 880. Francis later caveated his maxim with the requirement that
“the Iniquity must have been done to the defendant himself.” Richard Francis, Maxims of
Equity 5 cmt. a (3d ed. 1791). A reframing of this maxim, known as “clean hands,” first
entered the vernacular in 1787, when the Court of Exchequer crystalized the principle that
“a man must come into a Court of Equity with clean hands; but when this is said, it does
not mean a general depravity; it must have an immediate and necessary relation to the
equity sued for.” Chafee, supra, at 882 (quoting Dering v. Earl of Winchelsea, 29 Eng.
37
Rep. 1184, 1185 (1787)). The unclean hands doctrine did not garner much fame or attention
until 1881, when Pomeroy published the first edition of his treatise.5
Meanwhile, since at least 1775, common law courts applied a similar principle that
has become known as the in pari delicto doctrine. For example, in Holman v. Johnson,
Lord Mansfield, while serving as a judge on the King’s Bench, explained that
[t]he objection, that a contract is immoral or illegal as between plaintiff and
defendant, sounds at all times very ill in the mouth of the defendant. It is not
for his sake, however, that the objection is ever allowed; but it is founded in
general principles of policy, which the defendant has the advantage of,
contrary to the real justice, as between him and the plaintiff, by accident, if I
may so say. The principle of public policy is this; ex dolo malo non oritur
actio. No Court will lend its aid to a man who founds his cause of action
upon an immoral or an illegal act. If, from the plaintiff’s own stating or
otherwise, the cause of action appears to arise ex turpi causa, or the
transgression of a positive law of this country, there the court says he has no
right to be assisted.
[1775] 1 Cowp. 341, 98 Eng. Rep. 1120 (KB).
Scholars have characterized Holman as the “seminal case” for the in pari delicto
doctrine. See, e.g., Brian A. Blum, Equity’s Leaded Feet in a Contest of Scoundrels: The
Assertion of the In Pari Delicto Defense Against a Lawbreaking Plaintiff and Innocent
Successors, 44 Hofstra L. Rev. 781, 786 n.31 (2016) (“Holman v. Johnson is regarded as
5
Chafee, supra, at 884 (chronicling the scholarly treatment of unclean hands; noting
that it did not appear in the early editions of Joseph Story’s Commentaries on Equity
Jurisprudence). Story’s Commentaries did not mention the doctrine of unclean hands until
the eleventh edition, after Story himself stopped working on the treatise. The treatise
mentioned unclean hands in a footnote, describing it as a “rule analogous” to the maxim
that “he who seeks equity, must do equity.” 1 Joseph Story, Commentaries on Equity
Jurisprudence as Administered in England and America § 64e, at 59 n.2 (12th ed. 1877).
38
the seminal case in which Lord Mansfield expressed both the ex turpi causa principle and
the in pari delicto rule.”). As the Supreme Court of the United States has explained, the
doctrine, which “literally means ‘in equal fault,’ is rooted in the common-law notion that
a plaintiff’s recovery may be barred by his own wrongful conduct.” Pinter v. Dahl, 486
U.S. 622, 632 (1988). Yet at the same time, the Pinter decision characterized the in pari
delicto doctrine as an “equitable defense,” illustrating the blending of legal and equitable
principles. Id. (internal citation omitted). The Pinter court openly acknowledged the
existence of doctrinal drift, observing that “[c]ontemporary courts have expanded the [in
pari delicto] defense’s application to situations more closely analogous to those
encompassed by the ‘unclean hands’ doctrine, where the plaintiff has participated ‘in some
of the same sort of wrongdoing’ as the defendant.” Id.
Other authorities illustrate the blending of unclean hands and in pari delicto into a
more general defense based on inequitable conduct. For example, despite Holman’s status
as the seminal common law decision for in pari delicto, courts have quoted Holman when
describing the doctrine of unclean hands.6 And despite reference to The Highwayman’s
6
See, e.g., Am. Bell Inc. v. Fed’n of Tel. Workers of Pa., 736 F.2d 879, 886 (3d Cir.
1984) (describing Holman as establishing an “equitable principle” about “unclean hands”
despite the fact that Holman was a decision of a common law court that addressed in pari
delicto); Marshall v. Lovell, 19 F.2d 751, 755–56 (8th Cir. 1927) (finding that “[a]ppellant
is not in equity with clean hands” while relying on Holman); Highland Tank & Mfg. Co. v.
PS Int’l, Inc., 393 F. Supp. 2d 348, 361–62 (W.D. Pa. 2005) (relying on Holman and
describing unclean hands as “an English common law doctrine” (cleaned up)); Nester v.
Cont’l Brewing Co., 23 A. 102, 105 (Pa. 1894) (relying on Holman when addressing
equitable claims); Sowles v. Welden Nat’l Bank, 17 A. 791, 792 (Vt. 1889) (relying on
Holman in legal action for assumpsit and describing the operative principle as “a rule that
39
Case as the foundational unclean hands decision, that case now serves as a cornerstone for
the in pari delicto doctrine.7 Some courts seem to use the terms interchangeably.8 As a
result, at least one legal camp has concluded that “[t]oday, ‘unclean hands’ really just
those who come into a court of justice to seek redress must come with clean hands, and
must disclose a transaction warranted by law” (citation omitted)).
7
Williams Elecs. Games, Inc. v. Garrity, 366 F.3d 569, 574 (7th Cir. 2004) (Posner,
J.) (“The defense of in pari delicto is intended for situations in which the victim is a
participant in the misconduct giving rise to his claim as in the classic case of the
highwayman who sued his partner for an accounting of the profits of the robbery they had
committed together.” (cleaned up)); United States v. Bedi, 453 F. Supp. 3d 563, 572
(N.D.N.Y. 2020) (“[T]he equitable principle to be derived from The Highwayman’s Case
is that of in pari delicto, or perhaps unclean-hands, depending on the precise context in
which the defense is raised.”), rev’d and remanded on other grounds, 15 F.4th 222 (2d Cir.
2021); Leland v. Ford, 223 N.W. 218, 223 (Mich. 1929) (“In the early day [of] the equity
side of the Exchequer, in the case of Everet v. Williams [or “The Highwayman’s Case”],
dealt most severely with those in pari delicto who sought its aid.” (formatting added)).
8
Dobbs, Law of Remedies, supra, § 2.4(2), at 68 & n.6 (“The unclean hands defense
used in this way may be just another phrase for the illegality rule under the pari delicto
doctrine, and courts frequently seem to use the phrases interchangeably.”); id. § 13.6, at
879 (“Unclean hands and pari delicto doctrines are often mentioned in the same judicial
opinions. Sometimes courts seem to use the terms as if they were distinct doctrines,
sometimes as if they were about the same.” (footnotes omitted)); see Bateman Eichler, Hill
Richards, Inc. v. Berner, 472 U.S. 299, 310 (1985) (discussing in pari delicto using
authorities addressing unclean hands); Lawler v. Gilliam, 569 F.2d 1283, 1294 (4th Cir.
1978) (“Much of our discussion about in pari delicto applies to the defense of unclean
hands; sometimes, the two concepts are considered to be interchangeable.”), abrogated by
Pinter v. Dahl, 486 U.S. 622 (1988); Lord v. Chadbourne, 42 Me. 429, 433–34 (Me. 1856)
(“The plaintiff should come into Court with clean hands. In regard to contracts, no principle
of law is better settled, than that the law will not lend its aid to enforce an illegal contract,
or one founded on an illegal consideration. In pari delicto, potior est conditio
defendentis.”); Ryan v. Motor Credit Co., 23 A.2d 607 (N.J. Ch. Ct. 1941) (“[I]n granting
relief to the borrower, the courts, both of law and equity, have subordinated the equitable
doctrines of in pari delicto, unclean hands and ‘he who seeks equity must do equity to the
legislative fiat . . . .”).
40
means that in equity as in law the plaintiff’s fault, like the defendant’s, may be relevant to
the question of what if any remedy the plaintiff is entitled to.”9
9
Shondel, 775 F.2d at 868; see also, e.g., Schlueter v. Latek, 683 F.3d 350, 355 (7th
Cir. 2012) (“When as in such cases the plaintiff is asking for equitable relief, the in pari
delicto defense is referred to as the unclean-hands defense. But the label doesn’t matter,
and the defenses were equated in McKennon v. Nashville Banner Publishing Co., 513 U.S.
352, 360–61 (1995) . . . .”); Kuehnert v. Texstar Corp., 412 F.2d 700, 704 (5th Cir. 1969)
(“Although [the plaintiff] is not seeking equitable relief, the doctrine [of unclean hands]
remains applicable, since it expresses a general principle equally suited to damage
actions.”); Kohler v. Staples the Office Superstore, LLC, 291 F.R.D. 464, 470 (S.D. Cal.
2013) (“In fact, the Court [in Mckennon] recognized that unclean hands may still be
applicable to non-equitable forms of relief . . . .”); Smith v. Cessna Aircraft Co., 124 F.R.D.
103, 106 (D. Md. 1989) (“Although the maxim originated in courts of equity, it now
extends to actions at law, such as the instant suit for damages.”); Union Pac. R. Co. v. Chi.
& N.W. Ry. Co., 226 F. Supp. 400, 410 (N.D. Ill. 1964) (“The clean hands maxim is not
peculiar to equity, but expresses a general principle equally applicable to damage
actions.”). See generally Blum, supra, at 800–01 (“[S]ome courts continue to confine the
unclean hands doctrine to equitable relief. Other courts are not so wedded to the crumbling
division between law and equity and no longer confine the unclean hands doctrine to suits
in equity.” (footnotes omitted)).
Dobbs remarks that “[i]f [the doctrines] are not the same, there are probably two
important differences.” Dobbs, Law of Remedies, supra, § 13.6, at 879–80. The first is that
even if a court of equity denies equitable relief on the basis of unclean hands, the plaintiff
should be able to assert legal claims in a court of law. Id. at 880. The same is not true of
the in pari delicto defense: “The pari delicto doctrine . . . would bar the plaintiff’s entire
claim, not merely one of the possible remedies for it.” Id. The second is that the “unclean
hands doctrine relies heavily on equity’s claim of moral superiority, not on a policy of
discouraging wrongdoing.” Id. With unclean hands, the doctrine exists to “maintain the
court’s own robes free from blemish.” Id. The in pari delicto defense, by contrast, bars
relief because the plaintiff is “morally worse than the defendant,” which creates an
incentive for parties to avoid wrongdoing (or at least be less blameworthy than the
opponent). Id.; accord Bateman Eichler, 472 U.S. at 306–07 (describing the premises of
the in pari delicto doctrine as “first, that courts should not lend their good offices to
mediating disputes among wrongdoers; and second, that denying judicial relief to an
admitted wrongdoer is an effective means of deterring illegality”).
41
Nonetheless, “[t]he most orthodox view of the unclean hands doctrine makes it an
equitable defense; that is, one that can be raised to defeat an equitable remedy, but not one
that defeats other remedies.” Dobbs, Law of Remedies, supra, § 2.4(2), at 68.10 A line of
Court of Chancery decisions has arrived at this outcome. Those decisions treat the defense
of unclean hands as generally unavailable to defeat a legal claim, but available if the
plaintiff seeks equitable relief.11 Although that approach implicitly views unclean hands as
10
Under this “orthodox view,” a court may exercise its discretion “to deny a purely
equitable remedy, while leaving the plaintiff full access to her legal remedies.” Dobbs, Law
of Remedies, supra, § 2.4(2), at 69; see Problems of Res Judicata Created by Expanding
“Cause of Action” Under Code Pleading, Note, 104 U. Penn. L. Rev. 955, 957 (1956)
(observing that if a court of equity “denied the equitable relief on a principle of a ‘court of
conscience,’ such as laches, unclean hands, etc.,” then it “was held that the plaintiff was
not barred from proceeding at law for his legal remedy”). Dobbs also maintains that a party
should have to show actual harm (or a threat of actual harm) before invoking the doctrine
of unclean hands:
If there are any cases at all in which there is room for “unclean hands” as a
purely equitable defense based on discretion to deny equitable remedies, the
plaintiff’s remedy against the defendant should not be denied unless his
misconduct has actually harmed the defendant, or has at least put the
defendant in substantial risk of harm from that misconduct.
Dobbs, Law of Remedies, supra, § 2.4(2), at 70. Dobbs acknowledges that “[c]ourts do not
seem to limit themselves invariably to such usage.” Id. at 68.
11
See In re Liquid. of Indem. Ins. Corp., RRG, 2019 WL 2152844, at *5 (Del. Ch.
May 15, 2019) (holding that unclean hands was not available as a defense to an action
seeking a declaratory judgment that a bank had a valid and enforceable security interest in
the loan “because . . . claims do not invoke equity and are not, therefore, subject to equitable
defenses” (cleaned up)); NASDI Hldgs., LLC v. N. Am. Leasing, Inc., 2019 WL 1515153,
at *1 (Del. Ch. Apr. 8, 2019) (“Because the equitable doctrine of unclean hands may not
supply a defense to a purely legal claim, the unclean-hands defense also fails.”), aff’d, 276
A.3d 463 (Del. 2022); Quantlab Grp. GP, LLC v. Eames, 2019 WL 1285037, at *7 (Del.
Ch. Mar. 19, 2019) (holding that unclean hands was not a defense where case turned on
interpretation of partnership agreement as a matter of law), aff’d, 222 A.3d 580 (Del. 2019);
42
unavailable in an action at law that does not seek legal relief, there are Delaware Superior
Court decisions that have applied the defense.12
Standard Gen. L.P. v. Charney, 2017 WL 6498063, at *25 (Del. Ch. Dec. 19, 2017)
(holding that unclean hands failed as defense because plaintiff sought “money damages—
a quintessentially legal form of relief”), aff’d, 195 A.3d 16 (Del. 2018); Lehman Bros.
Hldgs. v. Spanish Broad. Sys., Inc., 2014 WL 718430, at *7 n.47 (Del. Ch. Feb. 25, 2014)
(“[T]he ‘unclean hands’ doctrine bars equitable relief, but not legal, relief.”), aff’d, 105
A.3d 989 (Del. 2014); In re Est. of Tinley, 2007 WL 2304831, at *1 (Del. Ch. July 19,
2007) (declining to consider doctrine of unclean hands when awarding statutory right to an
elective share; noting that parties had only cited cases applying unclean hands in cases
seeking equitable relief or mixed equitable and legal relief).
Some of these decisions contain broad language suggesting that equitable defenses
generally are unavailable whenever a party pursues a legal claim in equity. The XRI
decision responded to those assertions by showing that many equitable defenses originated
as forms of equitable affirmative relief that supported injunctions against the prosecution
of an action at law or the enforcement of a judgment, so they operated as defenses to action
at law. The XRI decision also showed that other equitable defenses had crossed the law-
equity divide and been embraced by common law courts. The XRI decision concluded that
general assertions about the nonavailability of equitable defenses can be misleading and
that it is therefore necessary to examine the equitable defense in question. See XRI, 2022
WL 4350311, at *35–47.
12
See Mfrs. & Traders Tr. Co., Wilm. Savs. Fund Soc., FSB v. Wash. House P’rs,
LLC, 2012 WL 1416003, at *4 (Del. Super. Mar. 22, 2012) (“While the unclean hands
doctrine is generally an equitable defense available in the Court of Chancery, this Court is
permitted to consider equitable defenses raised by parties.”); Kroll, Inc. v. Salesorbit Corp.,
2008 WL 2582989, at *2 (Del. Super. June 25, 2008) (denying summary judgment on
defendant’s claim that plaintiff acted with unclean hands when seeking to collect on
promissory note); cf. Korotki v. Hiller & Arban, LLC, 2017 WL 2303522, at *11 & n.78
(Del. Super. May 23, 2017) (characterizing the unclean hands defense as “purely equitable”
and “‘generally inappropriate’ where legal remedies are sought,” but recognizing
conflicting authority; stating that the in pari delicto defense is “[a]kin to the doctrine of
unclean hands”).
There is also a decision in which then-Judge Quillen, who previously served as an
Associate Justice on the Delaware Supreme Court and as Chancellor of this court,
explained why the Delaware Superior Court should be able to consider the full range of
equitable defenses that would be available in a system that had merged its courts of law
43
“[A]t bottom, the unclean hands doctrine is a ‘rule of public policy.’”13 And there
are competing policies at play. The case for applying the unclean hands doctrine broadly
and equity, while acknowledging that “certain equitable defenses which are purely
equitable in nature,” such as unclean hands, “may present adoptability problems.” USH
Ventures, 796 A.2d at 20. In a footnote, he acknowledged that “[t]he defense of ‘unclean
hands’ is generally inappropriate for legal remedies.” Id. at 20 n.16. In a case where the
defendants only relied on USH Ventures for the proposition that parties facing a claim for
breach of contract that sought only legal relief should be able to raise equitable defenses,
this court downplayed the discussion in USH Ventures as “free-wheeling dicta.” NASDI,
2019 WL 1515153, at *6 n.47. And it is true that Justice Quillen modestly described his
discussion using those self-deprecating terms. USH Ventures, 796 A.2d at 14. But the
parties in USH Ventures had asked Judge Quillen to seek appointment as a Vice Chancellor
pro hac vice so that he could consider equitable defenses, and he had rejected that request.
His “preliminary digression” was pertinent to that issue and provided his explanation for
reaching the outcome he did. Id. at *13–20. It was thus not technically dictum. Nor was it
“free-wheeling.” I would characterize it as a scholarly and well-supported exposition of the
evolution of equitable defenses and their role in contemporary actions at law.
13
Morente v. Morente, 2000 WL 264329, at *3 (Del. Ch. Feb. 29, 2000); accord
Skoglund v. Ormand Indus., Inc., 372 A.2d 204, 213 (Del. Ch. 1976) (describing doctrine
as “a rule of public policy” rather than “a matter of defense to be applied on behalf of
litigants”); Vitaphone Corp., 171 A. at 749 ( “It (the doctrine of unclean hands) is a rule
that lays restrictions upon complainants, and tells them that an appeal for relief to a court
of conscience will not be honored by one who has himself been guilty of unconscionable
conduct.” (formatting in original)).
To call the unclean hands doctrine a “rule” of public policy is something of a
misnomer. It is more aptly regarded as a standard animated by public policy. Other
decisions appropriately refer to the unclean hands doctrine as a standard. See eBay
Domestic Hldgs., Inc. v. Newmark, 2009 WL 3806162 (Del. Ch. Nov. 9, 2009) (observing
that certain actions, taken together may satisfy “an ‘unclean hands’ standard”); see also,
e.g., Finjan, Inc. v. Juniper Network, Inc., 2018 WL 4181905, at *7 (N.D. Cal. Aug. 31,
2018) (“Such a tactic, as alleged, goes beyond mere ‘hands that are not as clean as snow,’
which would not by itself meet the unclean hands standard.” (cleaned up)); Wecare Hldgs.,
LLC v. Bedminster Int’l Ltd., 2009 WL 2226681, at *2 (W.D.N.Y. July 23, 2009)
(considering whether certain conduct rose “to the level of inequity, bad faith and
unconscionability to support the unclean hands standard articulated by this Court”). See
generally Equity Like Law, supra, at 503 (describing the “standard-like quality” of the
unclean hands doctrine and rejecting characterization of doctrine as “bundles of rules
44
relating to diverse subject”; stating that “the only way to achieve a more unified rule of
unclean hands is through the experiential process of precedent”); Duncan Kennedy, Form
and Substance in Private Law Adjudication, 89 Harv. L. Rev. 1685, 1688 (1976) (“At the
opposite pole from a formally realizable rule is a standard or principle or policy. A standard
refers directly to one of the substantive objectives of the legal order. . . . The application of
a standard requires the judge both to discover the facts of a particular situation and to assess
them in terms of the purposes or social values embodied in the standard.”); Kathleen M.
Sullivan, The Supreme Court, 1991 Term—Foreword: The Justices of Rules and
Standards, 106 Harv. L. Rev. 22, 58 (1992) (“Rules aim to confine the decisionmaker to
facts . . . . A legal directive is ‘standard’-like when it tends to collapse decisionmaking back
into the direct application of the background principle or policy to a fact situation.”). There
is a long-standing debate over the benefits of rules versus standards. See Louis Kaplow,
Rules Versus Standards: An Economic Analysis, 42 Duke L.J. 557, 559 (1992) (contrasting
the consequences of a standards-based decisionmaking regime with those of a rules-based
regime); Pierre Schlag, Rules and Standards, 33 U.C.L.A. L. Rev. 379, 383 (1985) (“The
possibility of casting or construing directives as either rules or standards has given rise to
patterned sets of ‘canned’ pro and con arguments about the value of adopting either rules
or standards in particular contexts.”); Cass R. Sunstein, Problems with Rules, 83 Calif. L.
Rev. 953, 984–85 (1995) (“If we are fanatical about limiting interpretive discretion, we
will be disturbed to find that laws apparently intended as ex ante rules call for judgments
by interpreters at the point of application . . . Some laws that appear to be rules are really
standards: their terms squarely invite moral and political judgments.”). Equity has
generally favored standards, and one of the traditional roles of equity has been to deploy
fact-specific equitable doctrines to mitigate the sometimes harsh outcomes that a bright-
line rule of law can produce. See Tusi v. Mruz, 2002 WL 31499312, at *4 (Del. Ch. Oct.
31, 2002) (“Equitable defenses are frequently fact specific and, thus, their application
depends upon the unique circumstances of each case.”); Mentor Graphics Corp. v.
Quickturn Design Sys., Inc., 728 A.2d 25, 52 n.105 (Del. Ch. 1998) (“[E]quitable and
fiduciary principles . . . by their nature are highly fact specific and particularized . . . .”),
aff’d sub nom. Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998); accord
Holland v. Florida, 560 U.S. 631, 650 (2010) (“We have said that courts of equity must be
governed by rules and precedents no less than the courts of law. But we have also made
clear that often the exercise of a court’s equity powers must be made on a case-by-case
basis. In emphasizing the need for flexibility, for avoiding mechanical rules, we have
followed a tradition in which courts of equity have sought to relieve hardships which, from
time to time, arise from a hard and fast adherence to more absolute legal rules, which, if
strictly applied, threaten the evils of archaic rigidity.” (cleaned up)). See generally Jill E.
Martin, Hanbury & Martin on Modern Equity 3 (14th ed.1993) (noting that equity assists
in “[d]eveloped systems of law” by introducing “discretionary power to do justice in
particular cases where the strict rules of law cause hardship.”).
45
starts from the premise that courts should not be granting relief to parties who have acted
improperly and at the same time recognizes that public confidence in the judicial system
would decline if bad actors prevailed notwithstanding their bad acts.14 Making the doctrine
of unclean hands broadly available also ensures that courts can consider case-specific
factors that call for a departure from an otherwise applicable rule of law: “Empowering the
judge through the invocation of unclean hands is an essential institutional check.” Beyond
Chafee, supra, at 541. And in situations like The Highwayman’s Case, the doctrine enables
courts to avoid becoming embroiled in disputes over illegal transactions. See Henry L.
McClintock, Handbook of the Principles of Equity § 26, at 59–69 (2d ed. 1948) (“No court,
and certainly no court which considers itself a court of conscience, can spend its time and
the public money in determining how the proceeds of an inequitable transaction should be
divided between the parties to it.”).
But there are countervailing interests. Litigants regularly cast stones, and it is all too
easy for a litigant to invoke the doctrine of unclean hands. Its ready availability increases
litigation costs, injects an additional issue for resolution into the case, and creates the risk
14
See, e.g, T. Leigh Anenson, Beyond Chafee: A Process-Based Theory of Unclean
Hands, 47 Am. Bus. L.J. 509, 528 (2010) [hereinafter Beyond Chafee] (describing the
doctrine’s “procedural justice component”); see also Gaudiosi v. Mellon, 269 F.2d 873,
882 (3d Cir. 1959) (“Courts in such situations act for their own protection and not as a
matter of ‘defense’ to the defendant.”); Hall v. Wright, 240 F.2d 787, 795 (9th Cir. 1957)
(“In applying the clean hands maxim, the court is ‘concerned primarily with protecting its
own integrity from improper action by a party.”); Nakahara, 718 A.2d at 521–22 (“The
doctrine of unclean hands functions to promote and protect courts of equity . . . The unclean
hands doctrine is aimed at providing courts of equity with a shield from the potentially
entangling misdeeds of the litigants in any given case.”).
46
that close calls on difficult facts will subvert the doctrine. Even if a litigant is ultimately
unsuccessful in proving the defense, she may enjoy the residual benefits of painting her
opponent as an unsavory character. Cf. Chafee, supra, at 878 (“[T]he use of the clean hands
maxim does harm by distracting judges to the basic policies which are applicable to the
situation before them.”).
Having explored the historical evolution of the unclean hands doctrine, evaluated
its moderate but not universal success in crossing the equity-law divide, and weighed the
competing policy interests, this decision adheres to the Court of Chancery precedents that
have arrived at the endpoint that Dobbs recommends. Under that approach, a defense of
unclean hands is generally unavailable to defeat a legal claim, but becomes available if the
plaintiff seeks equitable relief.
In this case, the plaintiffs are seeking equitable relief in the form of a decree of
specific performance compelling Aizen to release the Remaining Escrow Amount. The
plaintiffs are not solely seeking legal relief in the form of money damages or a declaratory
judgment. By invoking the court’s equitable powers, the plaintiffs have opened the door to
Aizen’s assertion of an unclean hands defense.
2. The Grounds For Unclean Hands
Having concluded that Aizen can invoke unclean hands as a defense, the next
question is whether he has made a sufficient showing to warrant denying the plaintiffs’
motion. Aizen failed to present evidence sufficient to create a genuine issue of material
fact about whether the plaintiffs’ conduct was sufficiently reprehensible as to forfeit their
right to relief.
47
a. The Termination Agreement
Aizen first claims that the plaintiffs have unclean hands because the Company
induced him to enter into the Termination Agreement with the promise of $20.8 million,
plus other benefits. He claims that the Purchase Agreement was contingent on him entering
into the Termination Agreement such that any misconduct in connection with the latter
undermines the validity of the former. Presumably, he views the Seller Parties’ rights under
the Purchase Agreement as an enrichment that they unjustly received.
“[F]or the unclean hands doctrine to apply, the inequitable conduct must have an
‘immediate and necessary’ relation to the claims under which relief is sought.” In re
Rural/Metro Corp. S’holders Litig., 102 A.3d 205, 237–38 (Del. Ch. 2014) (cleaned up).
“The doctrine of unclean hands provides that a litigant who engages in reprehensible
conduct in relation to the matter in controversy forfeits his right to have the court hear his
claim, regardless of its merit.” Portnoy, 940 A.2d at 81 (cleaned up).
Thus, in applying the unclean hands doctrine, the relevant inquiry is not
whether the nonmovant’s hands are dirty, but whether the nonmovant dirtied
them in acquiring the right that party now asserts, or whether the manner of
dirtying renders inequitable the assertion of such rights against the movant. .
. . The maxim does not extend to any misconduct, however gross, that is
unconnected with the matter in litigation, and with which the opposite party
has no concern.
27A Am. Jur. 2d Equity § 25, Westlaw (database updated Aug. 2022).
Aizen’s complaints about the Termination Agreement are too far removed from the
current dispute over the Purchase Agreement. Aizen is litigating those issues in the
California Action, not in this court. Thus, an unclean hands defense based on breach of the
Termination Agreement is not sufficiently related to the matter in controversy.
48
b. The Possibility Of A Fraudulent Transfer Or Illegal Dividend
Aizen next argues that the plaintiffs have unclean hands because the Company could
distribute the Remaining Escrow Amount to its stockholders as a fraudulent transfer or
illegal dividend. That fear is not sufficient to invoke the doctrine.
To invoke the doctrine of unclean hands, a party must identify something that the
opponent has already done or is currently doing. A party cannot invoke a speculative fear
about future wrongdoing. Aizen is concerned about something that might happen in the
future, which is not a basis for unclean hands.
To support his effort to invoke the doctrine of unclean hands now, Aizen observes
that Delaware courts do not require a showing of injury to plead the unclean hands defense.
It is true that this court has rejected the notion of “no harm, no foul” and held that “[e]quity
does not reward those who act inequitably, even if it can be said that no tangible injury
resulted.” Nakahara v. NS 1991 Am. Tr., 739 A.2d 770, 792 (Del. Ch. 1998); cf. T. Leigh
Anderson, Announcing the “Clean Hands” Doctrine, 51 U.C. Davis. L. Rev. 1827, 1870
(“The prevailing view is that unclean hands applies even though the plaintiff has not injured
anyone (including the defendant).”). But someone must have acted (or be acting)
inequitably.
Aizen has taken the notion of pre-crime and applied it to unclean hands. See Philip
K. Dick, The Minority Report, in The Philip K. Dick Reader 323, 324 (1956) (depicting a
dystopian world in which the government imprisons people because it believes they will
commit crimes in the future). For unclean hands, the proposition does not work. The threat
of future wrongdoing does not figure into the unclean hands analysis.
49
D. The Order For Specific Performance Compelling The Release Of Funds
Having prevailed in seeking declaratory judgment and having defeated Aizen’s
counterarguments regarding his authority, pre-judgment attachment, and unclean hands,
the plaintiffs seek an order that compels Aizen to provide joint instructions to the escrow
agent to effectuate the release. The plaintiffs have earned that remedy, but the court will
impose a moderate condition on its implementation.
A decree of specific performance is “the appropriate form of relief to compel the
release of funds from an escrow account.”15 To obtain specific performance, a party must
“prove by clear and convincing evidence” that a legal remedy would be inadequate and
that “(1) a valid contract exists, (2) he is ready, willing, and able to perform, and (3) that
the balance of equities tips in favor of the party seeking performance.” Osborn ex rel.
Osborn v. Kemp, 991 A.2d 1153, 1158 (Del. 2010) (footnotes omitted); see QC Hldgs.,
2018 WL 4091721, at *11 (applying these factors to release of escrowed funds).
The plaintiffs are plainly ready, willing, and able to perform under the Purchase
Agreement and the Stay and Escrow Order by issuing the necessary instructions to the
15
QC Hldgs., Inc. v. Allconnect, Inc., 2018 WL 4091721, at *11 (Del. Ch. Aug. 28,
2018); see, e.g., Sparton Corp. v. O’Neil, 2018 WL 3025470, at *4 (Del. Ch. June 18, 2018)
(issuing injunction requiring party to release escrow funds); E. Balt LLC v. E. Balt US,
LLC, 2015 WL 3473384, at *2–4 (Del. Ch. May 28, 2015) (holding that this court had
jurisdiction over an action for “an order requiring Defendants to provide joint written
instructions directing the Escrow Agent to release the remaining Escrow Amount” because
money judgment alone would not be an adequate remedy); Xlete, Inc. v. Willey, 1977 WL
5188, at *1 (Del. Ch. June 6, 1977) (“[T]he Court of Chancery has the power to specifically
enforce escrow agreements which are by their very nature fiduciary relationships.”).
50
escrow agent. The Purchase Agreement is a valid contract under Delaware law. And there
is no longer any dispute regarding the plaintiffs’ entitlement to the Remaining Escrow
Amount. The only remaining questions are whether the plaintiffs have an adequate remedy
at law and whether the balance of equities tips in their favor. In this case, the Purchase
Agreement answers these questions.
1. The Plaintiffs Lack An Adequate Remedy At Law.
The plaintiffs have shown that they lack an adequate remedy at law by pointing to
provisions in the Purchase Agreement that provide expressly for a decree of specific
performance and stipulate to the existence of irreparable harm in the event of a breach. The
existence of these provisions is sufficient to support a decree of specific performance,
although a court can decline to issue one if there are supervening equities or other
considerations. There are none on these facts.
Section 10.8 of the Purchase Agreement provides that “if any party violates or
refuses to perform any covenant or agreement made by it herein, the non-breaching party
shall be entitled, in addition to any other remedies or relief permitted herein, to specific
performance of such covenant or agreement,” and “each party hereby agrees not to raise
any objections to the availability of specific performance . . . to specifically enforce the
terms and provisions of this Agreement, and to enforce compliance with the covenants and
obligations in this Agreement.” APA § 10.8(a) (the “Specific Performance Clause”)
(formatting omitted). “Delaware is strongly contractarian, and the presence of a provision
in favor of specific performance in case of breach, as the parties contracted for here, must
be respected.” Williams Cos., Inc. v. Energy Transfer Equity, L.P., 2016 WL 3576682, at
51
*2 (Del. Ch. June 24, 2016), aff’d, 159 A.3d 264 (Del. 2017). That said, a court is not
required to enforce a specific performance provision. See Dobbs, Law of Remedies, supra,
§ 12.9(6), at 819 (“[T]he court may consider the contract provision in favor of specific
performance, not as binding, but as an important influence on the exercise of discretion.”);
see also Godwin v. Collins, 1868 WL 1255, at *1 (Del. Ch. Mar. 1868) (“It is the
established rule that a specific performance of a contract of sale is not a matter of course,
but rests entirely in the discretion of the court upon a view of all the circumstances.”
(cleaned up)). But when a party has agreed to provision like the Specific Performance
Clause, the party must establish a persuasive case-specific why the clause should not be
respected.
The plain and unambiguous language of the Specific Performance Clause is
sufficient to support a decree of specific performance. Aizen has not pointed to facts or
circumstances that would cause the court to decline to enforce this provision.
Although the language of the Specific Performance Clause is sufficient, the
Purchase Agreement also addresses the inadequacy of a legal remedy by providing that a
breach of its provisions constitutes irreparable harm. “A party can prove inadequate relief
at law by showing irreparable damages will result without specific performance.” 71 Am.
Jur. 2d Specific Performance § 11, Westlaw (database updated Aug. 2022) (formatting
omitted). Section 10.8(a) of the Purchase Agreement also provides that “each party
acknowledges that the other party would be damaged irreparably and would have no
adequate remedy of law if any provision of this Agreement is not performed in accordance
52
with its specific terms or otherwise is breached.” APA § 10.8(a) (the “Irreparable Harm
Clause”).
The language of the Irreparable Harm Clause is sufficient to establish the
inadequacy of a remedy at law.
In Delaware, parties can agree contractually on the existence of requisite
elements of a compulsory remedy, such as the existence of irreparable harm
in the event of a party’s breach, and, in keeping with the contractarian nature
of Delaware corporate law this court has held that such a stipulation is
typically sufficient to demonstrate irreparable harm.
Martin Marietta Mat’ls, Inc. v. Vulcan Mat’ls Co., 56 A.3d 1072, 1145 (Del. Ch. 2012)
(Strine, C.) (footnotes omitted), aff’d, 68 A.3d 1208 (Del. 2012); see also Gildor v. Optical
Sols., Inc., 2006 WL 4782348, at *11 (Del. Ch. June 5, 2006) (Strine, V.C.) (upholding the
parties’ contractual stipulation “that money damages would not be an adequate remedy for
any breach” of the agreement, and that any party to the contract “may in its sole discretion
apply to any court of law or equity of competent jurisdiction for specific performance”).
The plain and unambiguous language of the Irreparable Harm Clause is sufficient
to support the lack of an adequate remedy at law. As with the Specific Performance Clause,
Aizen has not pointed to facts or circumstances that would cause the court to decline to
enforce the Irreparable Harm Clause.
Even without provisions like the Specific Performance Clause and the Irreparable
Harm Clause, this court has held that a party’s failure to comply with a requirement to
53
direct an escrow agent to release funds constitutes irreparable harm and warrants a decree
of specific performance.16 Those same principles apply here.
In response to unambiguous contractual language and settled law, Aizen argues that
Section 10.10(b) of the Purchase Agreement grants him “unique protections” that “limit
Plaintiffs’ rights to establish irreparable harm from breach based on the pleadings alone.”
Dkt. 58 at 40. Section 10.10(b) is an indemnification provision which states:
Each of the Seller Parties hereby agrees to indemnify and hold the Sellers’
Representative and its agents, assigns and representatives harmless from and
against any and all Damages that the Sellers’ Representative may sustain or
incur as a result of or arising out of any action or inaction of the Sellers’
Representative in its capacity as such, or otherwise relating to its
appointment as Sellers’ Representative, except to the extent arising out of the
gross negligence or willful misconduct of the Sellers’ Representative.
APA § 10.10(b). Aizen argues that he has a right to indemnification from the Company
and that if the Remaining Escrow Amount is released, then the Company will distribute
the funds to its stockholders and will not be able to fulfill his indemnification right.
Aizen’s argument is a non sequitur. It does not address the role of specific
performance or the existence of irreparable harm. It instead provides another reason why
16
See Sparton, 2018 WL 3025470, at *4 (“The escrow funds belong to Defendants,
and under the circumstances, damages would not adequately compensate Defendants for
their losses.”); United BioSource LLC v. Bracket Hldg. Corp., 2017 WL 2256618, at *4
(Del. Ch. May 23, 2017) (“[E]ven if plaintiff could obtain a judgment for damages in a law
court, defendants have failed to show how plaintiff could then enforce its judgment as to
the sum held in escrow.”) (cleaned up)); Xlete, Inc. v. Willey, 1977 WL 5188, at *1 (Del.
Ch. June 6, 1977) (finding that defendant failed to establish that plaintiff “ha[d] a remedy
at law that was as certain, prompt, complete, or efficient as the equitable remedy” of an
order “directing the release of a sum of money held in escrow”).
54
Aizen believes that he is a contingent creditor who should have access to the Remaining
Escrow Amount to satisfy his claims. That is another version of Aizen’s pre-judgment
attachment argument, which this decision has already rejected. And here, the pre-judgment
attachment argument is even weaker, because the right of indemnification extends to the
Seller Parties, not just the Company. So even if the Company distributes amounts to its
stockholders, those stockholders as Seller Parties still will have an obligation to indemnify
Aizen.
The plaintiffs have established the inadequacy of a remedy at law sufficient to
warrant a decree of specific performance.
2. The Balance Of Equities Favors The Plaintiffs.
The final issue is the balancing of the equities. This factor “reflect[s] the traditional
concern of a court of equity that its special processes not be used in a way that unjustifiably
increases human suffering.” Bernard Pers. Consultants, Inc. v. Mazarella, 1990 WL
124969, at *3 (Del. Ch. Aug. 28, 1990). This court’s precedents support balancing the
equities in favor of ordering the release of the last portion of the transaction consideration
from escrow.17 The Buyer bargained for an escrow fund to secure the Company’s financial
17
See Sparton, 2018 WL 3025470, at *4 (“The equities are in Defendants’ favor
because Sparton never had the right to withhold the escrow funds under the parties’
agreements.”); FriendFinder Networks Inc. v. Penthouse Glob. Media, Inc., 2017 WL
2303982, at *17 (Del. Ch. May 26, 2017) (holding that balance of equities favored plaintiff
where “allowing assets that are rightfully [plaintiff’s] to remain in the custody and control
of [defendant] will harm [plaintiff] more than taking those domains that were not
[defendant’s] at the time of closing away from [defendant]”); SLC Beverages, Inc. v.
Burnup & Sims, Inc., 1987 WL 16035, at *3 (Del. Ch. Aug. 20, 1987) (finding that equities
55
obligations to the Buyer. The Company has met those obligations. The Buyer is satisfied.
The plaintiffs are now entitled to the Remaining Escrow Amount .
Aizen argues that the balance of equities tips in his favor because he “seeks only to
maintain the status quo” under the Stay and Escrow Order. See Dkt. 58 at 42. Aizen’s
argument fails to acknowledge that the Stay and Escrow Order preserved the parties’
arguments and positions under the Purchase Agreement. The status quo as it existed under
the Stay and Escrow Order is that the Remaining Escrow Amount would stay in escrow
until release was warranted under the terms of the Purchase Agreement. It is Aizen who
seeks to change the status quo by keeping the Remaining Escrow Amount in escrow as a
form of pre-judgment attachment.
Although an order of specific performance is warranted, that does not mean that the
release must happen instantaneously. A court may place conditions on a decree of specific
performance. See Wolfe & Pittenger, supra, § 16.03[c], 16-55; see also Mumford v. Long,
1986 WL 2249, at *4 (Del. Ch. Feb. 21, 1986) (granting specific performance on condition
that plaintiffs pay contract price and interest to nonmoving party); Valley Builders, Inc. v.
Stein, 193 A.2d 793, 799 (Del. Ch. 1963) (granting specific performance on condition that
parties obtain necessary county regulatory agency approvals). This court has exercised that
favored issuance of a mandatory injunction where “plaintiff is suffering injury by being
prevented from obtaining the consideration which it bargained for”).
56
authority to delay the release of funds from escrow, particularly when doing so would
further judicial economy.18
As discussed above, there is a non-trivial risk that the Company will distribute the
Remaining Escrow Amount to its stockholders and render itself judgment-proof. If that
threat is sufficiently real, then pre-judgment attachment might be warranted. The proper
court to consider that issue is not this court but the California Court. That is the court
presiding over the underlying claim, and that is the court that should determine whether
the equities are strong enough to support some form of interim relief to preserve a source
of recovery.
The equitable outcome is to provide Aizen with a brief window in which to seek
relief from the California Court. How brief? I have no interest in creating a false emergency
for a California colleague. Sixty days should suffice for Aizen to make an application and
for the parties to brief the issue. The final order in this action therefore will delay the
effective date for the release of the Remaining Escrow Amount for sixty days.
18
See J&J Produce Hldgs., Inc. v. Benson Hill Fresh, LLC, 2020 WL 1188052, at
*5 (Del. Ch. Mar. 11, 2020) (ORDER) (granting in part motion for partial summary
judgment; holding seller was entitled to escrowed funds; ordering funds to remain in
escrow until conclusion of case to avoid “a series of unproductive procedural moves and
countermoves”); see also Schillinger Genetics, Inc. v. Benson Hill Seeds, Inc., 2021 WL
320723, at *18 (Del. Ch. Feb. 1, 2021) (“As a matter of judicial economy, a series of
potential and disruptive appeals can be avoided by denying the request for the decree and
allowing the Adjustment Escrow Funds to remain in escrow until the end of the case.”
(cleaned up)).
57
The plaintiffs argue that Aizen should not be given this opportunity because he
could have applied to the California Court years ago. But that would have been a gratuitous
application, because the Remaining Escrow Amount remained in escrow. I do not think a
trial judge in California, presiding over a busy docket, would have appreciated an
application seeking to freeze already frozen funds. I know I would not. At this point, the
facts have changed, and Aizen should have an opportunity to seek relief.
III. CONCLUSION
The plaintiffs’ motion for partial judgment on the pleadings is granted with the
condition that the Remaining Escrow Amount will not be released until sixty days after the
entry of the order implementing this opinion. If there are other issues that need to be
addressed before this proceeding can conclude at the trial level, the parties shall submit a
joint letter identifying them and proposing a schedule for their resolution. If there are no
other disputes, then the parties will submit a final order that has been agreed as to form.
58 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488103/ | Filed 11/18/22 P. v. Hernandez CA5
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT
THE PEOPLE,
F082679
Plaintiff and Respondent,
(Merced Super. Ct.
v. No. 15CR-00084B)
JOSE HERNANDEZ,
OPINION
Defendant and Appellant.
APPEAL from a judgment of the Superior Court of Merced County. Jeanne
Schechter, Judge.
Robert J. Beles and Micah Reyner for Defendant and Appellant.
Rob Bonta, Attorney General, Lance E. Winters, Chief Assistant Attorney
General, Michael P. Farrell, Assistant Attorney General, Catherine Chatman and R. Todd
Marshall, Deputy Attorneys General, for Plaintiff and Respondent.
-ooOoo-
INTRODUCTION
On the night of August 1, 2014, defendant, William White, Victor Hernandez, and
Orlando Yepez entered a house and robbed Juan A.1 and Gloria of drug money. On
1Pursuant to California Rules of Court, rule 8.90, we refer to some persons by
their first names or initials.
February 7, 2019, a jury convicted defendant of two counts of first degree robbery (Pen.
Code, § 211, count 1 (Juan); count 3 (Gloria))2 and as to both counts found true the
allegation the robbery was committed in concert with two or more other perpetrators
inside an inhabited dwelling; and first degree burglary (§ 459, subd. (a), count 4) with the
allegation a person other than of the perpetrators was present in the dwelling house at the
time the burglary was committed. Defendant waived jury trial as to the bifurcated
enhancements and as to each count admitted two strike priors (§§ 667, subds. (b)−(i),
1170.12, subds. (a)−(d)), two five-year enhancements (§ 667, subd. (a)(1)), and two
prison priors (§ 667.5, subd. (b)). As to counts 1 and 3, the trial court sentenced
defendant to consecutive upper terms of nine years, tripled to a total of 27 years to life
pursuant to section 667, subdivision (e)(2)(A), plus two additional five-year
enhancements pursuant to section 667, subdivision (a), for a total term of 64 years to life.
As to count 4, the trial court sentenced defendant to 25 years to life but stayed the
sentence pursuant to section 654.3
On appeal, defendant contends there is insufficient evidence to support his
conviction for robbery against Gloria because she did not “constructively possess” the
drug money. Defendant further contends he received ineffective assistance of counsel
when his trial counsel failed to object to the prosecutor’s prejudicial, misleading
statements during his closing argument.
We conclude there exists substantial evidence to support defendant’s conviction
for robbery against Gloria because Gloria constructively possessed the drug money, and
therefore we affirm his conviction as to count 3. Further, we conclude, that even if
defendant received ineffective assistance of counsel, he was not prejudiced.
Accordingly, we affirm the judgment.
2
All further references are to the Penal Code, unless otherwise stated.
As to each count, the prosecutor dismissed defendant’s two prison prior
3
enhancements (§ 667.5, subd. (b)).
2.
FACTS
I. Events Leading Up to the Offense
On the night of July 31, 2014, William White and Tiffany R. drove in a white
Mercedes Benz to Modesto. After arriving in Modesto, William spoke with his friend,
defendant, while Tiffany remained in the car. A month before, William had told Tiffany
defendant owed him some money. William and defendant then got into the car and drove
to a liquor store. Subsequently, they drove to a location nearby and defendant’s younger
brother4 got in the back seat with defendant. The group drove through a rural area and
eventually stopped next to a black BMW car with dark tinted windows. Defendant exited
the car and got into the BMW and came back with a black backpack. The car and the
BMW were driven together and stopped in a residential area with “[r]eally big houses.”
Defendant and William exited the car and walked around the corner, while defendant’s
little brother eventually moved from the back seat into the driver’s seat. Before William
left, he told Tiffany, “ ‘I’ll be back in a few minutes. I love you.’ ”
II. The Offense
In July of 2014, Juan A. lived alone in a house in Hilmar, but his girlfriend Gloria,
who he had been dating for two or three years, stayed with him. Juan testified under a
“use immunity” agreement that on the night of July 31, 2014, he just got back from
Sacramento with either $10,000 or $12,000 in drug money and placed the money on the
kitchen counter.5 A half-hour to one hour later, Gloria watched television while Juan
made a sandwich when Victor Hernandez and Orlando Yepez6 arrived unannounced at
the house and knocked on the door. Juan testified that they both were wearing black.
4 Although defendant’s little brother was never identified by name, it appears the
litigants may have been referring to “Hugo Hernandez.”
5 Juan admitted he had a lengthy criminal history. Juan was in custody and
awaiting extradition to New Jersey to be sentenced on drug-related charges and had
pending criminal charges in Stanislaus County at the time of his testimony.
6 Orlando was also referenced throughout the trial as his nickname “Joe” or “Fat
Joe.” For purposes of this appeal, we will refer to him as Orlando.
3.
Juan knew both Victor and Orlando from prior illegal activities. Gloria answered the
door and both Victor and Orlando came inside. Juan testified that Orlando observed
“how much [money he] would bring home” from selling drugs and he knew Juan was in
the drug business. Orlando told Juan he had just been robbed and he tried to convince
Juan to go to a hotel to confront the robbers. Orlando also asked Juan whether he had
any weapons on him.
At this point, Orlando punched Juan while he was standing near the kitchen
counter. Orlando and Juan started fighting and Victor then ran towards Juan with a black
handgun. During the struggle, William and defendant ran into the house. Defendant
jumped up onto the kitchen counter, while William rushed Gloria with a gun and grabbed
her and threw her to the ground. Defendant then stabbed Juan with a screwdriver in the
hand and in the back. Juan testified that he suffered stab wounds, scrapes, puncture
wounds, and bruising.7 While they were fighting, Juan heard Victor say, “ ‘[G]et out the
way. I’m going to shoot him.’ ” Juan and Victor then struggled over the gun causing the
gun to fire “[a] couple times” towards the kitchen area. Orlando ended up being shot.
Juan never saw anyone go into the bedroom.
At or around this time, Tiffany heard “some, like, snap, crack, popping noises
from a distance,” which she believed were “[e]ither gunshots or fireworks.” Defendant’s
little brother attempted to make a phone call in the car, but nobody answered.
III. Events After the Offense
Juan then grabbed the handgun and ran towards the garage and exited the house.
He then attempted to bang on his neighbor’s doors, but nobody answered. At this point,
Juan called 911 and ended up on the side of his neighbor’s house. Juan observed Victor
looking for defendant, but he ended up getting into a BMW car and leaving the scene.
Detective Sanchez later testified that he did not observe an injury on Juan’s back
7
he would characterize as a “stab wound.”
4.
Subsequently, William sprinted back to the car with a wad of money in his hand
and defendant was not with him. William screamed, “ ‘[M]ove, move, move.’ ”
Defendant’s younger brother exited the driver’s seat, went into the back seat and William
entered the driver’s seat and drove fast with the headlights turned off. Defendant’s
younger brother asked William where his brothers were and William responded they
were fine, but “ ‘Gordo’ ” or “ ‘Fats’ ” was most likely not going to make it. Further,
William frantically stated, “ ‘The house lick went bad.’ ”8 William ended up dropping
off defendant’s younger brother at defendant’s house and then drove to a gas station. At
the gas station, William told Tiffany to remove a piece of paper that covered the entire
rear license plate, which she did. Eventually they drove to Concord where Tiffany lived.
The next day, William gave Tiffany $400 or $500 in cash for bills.
IV. Subsequent Law Enforcement Investigation
Deputy V. LaMattina was dispatched to the Hilmar house and immediately noticed
two individuals coming out the house, later identified as Juan and Gloria. Juan appeared
very distressed and emotional and bled from his left arm or hand. Deputy LaMattina
noticed a “wad or bundle of cash in the middle of the [house’s] lawn.” He then swept the
house and observed Orlando dead in the kitchen laying on top of a rifle.9 Further, he
noticed “glass shatters all over the living room, spent handgun shells in the living room
area … [and] pools of blood, some of them led … down the hallway towards the garage”
door. He then went back outside and noticed the cash on the lawn was missing. Gloria
admitted she picked up the cash and placed it in her pocket, and Deputy LaMattina told
her to place it back on the lawn in the general area where it was originally found.
8 Tiffany testified she understood the word “ ‘lick’ ” as “street slang for robbery.”
9 A subsequent autopsy established Orlando suffered two gunshot wounds: a
nonfatal graze wound on his upper left arm and a fatal wound to his left lung, heart, and
liver. Powder burns or gunshot residue around the wound were not found, which would
have been indicative of a close-range shot.
5.
Detective K. Ly testified he took multiple photographs of the scene. During this
time, Detective Ly located a footprint on the concrete towards the garage door, which
indicated to him the individual who made the footprint wore socks. He also located a
rifle underneath Orlando and a .45-caliber handgun near the couch. The handgun had
been fired until empty. There were “puffs on the back of [the] couch,” which was
consistent with a bullet going through the couch. Detective Ly also located nine-
millimeter casings indicating two firearms were used.
During the search, officers also located two screwdrivers, one with a shaved tip.
Juan identified the nonshaved tip screwdriver as the one possessed by defendant when he
entered the home and stabbed him. Both screwdrivers were later tested by the
Department of Justice for blood, fibers, fingerprints, and DNA, but no evidence was
found. A forensic DNA analyst testified that if someone stabbed another with a
screwdriver causing that person to bleed it is “[v]ery likely” DNA evidence would be
located on that screwdriver, assuming it was not subsequently cleaned with either bleach
or running water.
Detective S. Sanchez then interviewed Juan. Detective Sanchez testified that
during the interview it was possible Juan called Orlando a “ ‘[g]reedy mother f[**]king
piece of shit.’ ” Additionally, Juan told Detective Sanchez the money found on the front
lawn belonged to Gloria, and he attempted to dissociate himself from the money.10
Officers then obtained cell phone records associated with defendant and his
brothers. Specifically, the records established defendant’s little brother was in the area of
Hilmar, within several miles of the crime scene on the night of the incident. During the
time of the incident, Orlando and defendant’s little brother attempted to call defendant
multiple times.
10Juan also testified that he told law enforcement some of the money in the house
belonged to his sister.
6.
DISCUSSION
I. There is Substantial Evidence of the Robbery Against Gloria (Count 3)
On appeal, defendant contends there is insufficient evidence to support
defendant’s conviction for robbery against Gloria. Specifically, defendant argues there is
insufficient evidence for a jury to conclude Gloria possessed Juan’s drug money at the
time it was stolen. We disagree.
A. Standard of Review
“ ‘In reviewing a challenge to the sufficiency of the evidence, we do not determine
the facts ourselves. Rather, we “examine the whole record in the light most favorable to
the judgment to determine whether it discloses substantial evidence – evidence that is
reasonable, credible and of solid value – such that a reasonable trier of fact could find the
defendant guilty beyond a reasonable doubt.” [Citations.] We presume in support of the
judgment the existence of every fact the trier could reasonably deduce from the
evidence .… “[I]f the circumstances reasonably justify the jury’s findings, the judgment
may not be reversed simply because the circumstances might also reasonably be
reconciled with a contrary finding.” [Citation.] We do not reweigh evidence or
reevaluate a witness’s credibility.’ ” (People v. Nelson (2011) 51 Cal.4th 198, 210.) “In
our limited role on appeal, ‘[c]onflicts and even testimony which is subject to justifiable
suspicion do not justify the reversal of a judgment, for it is the exclusive province of the
trial judge or jury to determine the credibility of a witness and the truth or falsity of the
facts upon which a determination depends. [Citation.] We resolve neither credibility
issues nor evidentiary conflicts; we look for substantial evidence.’ ” (People v. Letner
and Tobin (2010) 50 Cal.4th 99, 161–162.)
B. Applicable Law
“Robbery is defined in section 211 as ‘the felonious taking of personal property in
the possession of another, from his [or her] person or immediate presence, and against his
[or her] will, accomplished by means of force or fear.’ ” (People v. Scott (2009)
7.
45 Cal.4th 743, 749 (Scott).) “A person from whose immediate presence property was
taken by force or fear is not a robbery victim unless, additionally, he or she was in some
sense in possession of the property. ‘It has been settled law for nearly a century that an
essential element of the crime of robbery is that property be taken from the possession of
the victim.’ ” (Ibid.)
Possession may be actual or constructive. “A person who owns property or who
exercises direct physical control over it has possession of it, but neither ownership nor
physical possession is required to establish the element of possession for the purposes of
the robbery statute. [Citations.] ‘[T]he theory of constructive possession has been used
to expand the concept of possession to include employees and others as robbery victims.’
[Citation.] Two or more persons may be in joint constructive possession of a single item
of personal property, and multiple convictions of robbery are proper if force or fear is
applied to multiple victims in joint possession of the property taken.” (Scott, supra, 45
Cal.4th at pp. 749–750, fn. omitted.)
“For constructive possession, courts have required that the alleged victim of a
robbery have a ‘special relationship’ with the owner of the property such that the victim
had authority or responsibility to protect the stolen property on behalf of the owner.”
(Scott, supra, 45 Cal.4th at p. 750.) “ ‘[I]t is enough that the person presently has some
loose custody over the property, is currently exercising dominion over it, or at least may
be said to represent or stand in the shoes of the true owner.’ ” (People v. DeFrance
(2008) 167 Cal.App.4th 486, 497.)
Cases recognizing constructive possession to support a robbery conviction outside
the employment context have generally involved family members. (See, e.g., People v.
Gordon (1982) 136 Cal.App.3d 519 [parents robbed or drugs and cash belonging to their
adult son].) In Gordon, although neither parent knew of the marijuana or $1,000 taken
from their son’s bag, the court explained, “[P]arents have at least the same responsibility
to protect goods belonging to their son who resides with them in their home.” (Ibid.)
8.
Moreover, in People v. Weddles (2010) 184 Cal.App.4th 1365, 1372 (Weddles), the court
upheld two counts of robbery against two brothers who did not live together. In Weddles,
the other brother (Armando) did not live at his brother’s (Alex) apartment, but “regularly
visited.” (Ibid.) During the ensuing robbery, the defendants held a gun to the Armando’s
head repeating, “ ‘ “Where’s the money, where’s the money .… We’ll shoot you, we’ll
pop you.” ’ ” (Id. at pp. 1368–1369.) Armando knew where Alex stashed his money and
was able to lead the robbers “to the bedroom, where he pointed out the jar[] [and] [t]he
robbers took $1,500 in cash from the hiding place.” (Id. at p. 1369.)
The Weddles court explained, “Although Armando did not live in Alex’s
apartment, he had a close connection to Alex. Not only was Armando his brother, but
Armando was also sufficiently close to Alex that he knew where Alex kept his hidden
savings. Armando had a special relationship with Alex that conferred him with
constructive possession of Alex’s personal property in the apartment.” (Weddles, supra,
184 Cal.App.4th at p. 1371.) Additionally, in People v. DeFrance, supra, 167
Cal.App.4th 486, a mother had implied authority over her son’s car because she “helped
her son buy it, had access to the keys, had driven it, and was named on the insurance.”
(Id. at p. 499.) The mother was no mere bystander to the car, but instead had a
possessory “connection” to it. (Ibid.)
C. Analysis
Defendant contends there was insufficient evidence for the jury to conclude Gloria
constructively possessed the drug money because there lacked sufficient evidence Juan
“had granted Gloria some right to control or protect his drug money.” We disagree.
People v. Hutchinson (2018) 20 Cal.App.5th 539 (Hutchison) is instructive. In
Hutchison, the defendant and three other men entered a residence and proceeded to rob a
family of “jewelry, including cuff links, watches, necklaces, and a bracelet, as well as
two $50,000 cashier’s checks .…” (Id. at pp. 543–545.) One of the robbery victims was
the parents’ 15-year-old daughter. (Id. at p. 543.) The defendant was subsequently
9.
convicted of five counts of robbery (id. at p. 542) and argued on appeal his robbery
conviction against the 15-year-old daughter should be vacated because there was
insufficient evidence to establish the daughter had either actual or constructive possession
of any property that was taken from the residence. (Id. at p. 546.) The court disagreed
because the daughter “lived at the residence, was present inside the home during the
entire robbery, and, as with the other victims, was physically assaulted and restrained in
order to prevent her from interfering with the crime’s commission.” (Id. at p. 547.)
Specifically, the court reasoned:
“First, we observe that the jury may have reasonably found that some of the
property taken belonged to [the daughter] personally given that her mother
testified that watches belonging to her daughters were stolen. Second,
‘[c]onstructive possession does not require an absolute right of possession.’
[¶] … Given that one need not own or have a legal right to the property in
order to have possession of it, [citation], as well as the codified special
relationship between [the daughter] and her parents,[11] we decline to hold
that [the daughter] could not be deemed a robbery victim. Unarguably, in
effecting the theft of property, [the] defendants subjected [the daughter] to
the same force and intimidation as her other family members. We see no
rational basis to conclude that a minor’s constructive possession of or
possessory interest in her family’s property is nonexistent if majority
members of her family are present.” (Id. at p. 549.)
Similarly, here, substantial evidence supports the determination that Gloria
constructively possessed the drug money under the special relationship doctrine.
Although Juan testified that he lived alone, he further testified that he dated Gloria for
two or three years and that she was staying at the house when the robbery occurred. On
the night of the robbery, Juan came home and placed $10,000 or $12,000 in drug money
in plain view on the kitchen counter, while Gloria watched television. Thereafter,
Orlando and Victor entered the house, and Juan began struggling with Orlando. At this
11 The Hutchison court referred to Civil Code section 50, which states, “Any
necessary force may be used to protect from wrongful injury the person or property of
oneself, or of a spouse, child, parent, or other relative, or member of one’s family, or of a
ward, servant, master, or guest.” (Hutchison, supra, 20 Cal.App.5th at p. 547, fn. 4.)
10.
point, defendant and William rushed in and William pointed a gun at Gloria, grabbed her,
and threw her to the ground, presumably to get her under control. Eventually, defendant
and his coparticipants ran off, and officers later found a “wad or bundle of case in the
middle of the [house’s] lawn,” which was later picked up by Gloria and stashed in her
pocket. Irrespective of Juan’s credibility issues and the conflicting evidence, it was
reasonable for the jury to infer Gloria “lived at the residence, was present inside the home
during the entire robbery, and, as well with the other victim[], was physically assaulted
… to prevent her from interfering with the crime’s commission.” (Hutchison, supra, 20
Cal.App.5th at p. 547; see People v. Letner and Tobin, supra, 50 Cal.4th at p. 162 [“ ‘We
resolve neither credibility issues nor evidentiary conflicts; we look for substantial
evidence.’ ”].) Additionally, it was reasonable for the jury to conclude Gloria had
constructive possession over the money based on the money being in plain view on the
kitchen counter during the commission of the robbery, along with Gloria’s subsequent
actions of picking up the wad of money off the lawn and placing it in her pocket.
Moreover, Juan’s assertion that some or all of it was Gloria’s money – whether truthful or
not – could contribute to the jury inferring that she had constructive possession.
Nonetheless, defendant cites People v. Ugalino (2009) 174 Cal.App.4th 1060
(Ugalino) for the proposition the prosecution failed to establish Gloria had possession of
the drug money.12 The Ugalino court concluded insufficient evidence existed to support
his robbery conviction against the victim’s roommate because there “lack[ed] any
evidence that the roommate owned, had access to, control over, or an obligation” to
protect the stolen property. (Id. at p. 1065.) In Ugalino, the defendant went into the
apartment to steal marijuana, “aimed a gun [at the victim], and said, ‘you’re getting
12 Defendant further directs this court to People v. Galoia (1994) 31 Cal.App.4th
595 in support of his argument. However, Galoia is unpersuasive because it involved a
store robbery where a customer was present. (Id. at pp. 596–597.) The court concluded
the customer “was not an employee or agent of the convenience store[,] [n]or was he in
any way responsible for the security of the items taken” (id. at p. 597), and therefore, the
defendant’s robbery conviction against the customer was dismissed. (Id. at p. 599.)
11.
jacked.’ ” (Id. at pp. 1062–1063.) The defendant then “pointed it at [the roommate],
telling [the roommate] to lie facedown on the ground.” (Id. at p. 1063.) The court
concluded the defendant could not be convicted of robbery against the roommate
because:
“The evidence at trial established [the] defendant attempted to steal
marijuana from [the victim], saying, ‘you’re getting jacked[.]’ ‘Give [me]
the weed.’ It was undisputed that [the roommate] did not have actual
possession of the marijuana, and [the victim] stored the marijuana locked in
a safe in his bedroom. There was no evidence [the roommate], who had
been living with [the] defendant for only three to four months, had access to
the safe. In fact, [the roommate] did not even have a key to the apartment,
most of the time coming and going only when someone else was home.”
(Id. at p. 1065.)
Ugalino is distinguishable. First, the drug money was in plain view on the kitchen
counter and not “locked in a safe in [the] bedroom,” (Ugalino, supra, 174 Cal.App.4th at
p. 1065), which implies Gloria had access to the money prior to and during the
commission of the robbery. Second, unlike the roommate victim in Ugalino who “did
not even have a key to the apartment, most of the time coming and going only when
someone else was home,” (ibid.), Juan and Gloria had been dating for two or three years.
Additionally, Gloria had a suitcase in one of the bedrooms and answered the door letting
Victor and Orlando inside the house, all of which established a level of dominion and
control over the house. Accordingly, we conclude substantial evidence exists to support
defendant’s conviction of robbery against Gloria (count 3) because there was
“ ‘ “evidence that is reasonable, credible and of solid value – such that a reasonable trier
of fact could find the defendant guilty beyond a reasonable doubt.” ’ ” (People v. Nelson,
supra, 51 Cal.4th at p. 210.)
II. Defendant Forfeited His Claim of Prosecutorial Misconduct and Failed to
Establish Ineffective Assistance of Counsel for Failure to Object to the
Alleged Prosecutorial Misconduct
Defendant further contends the prosecutor committed prejudicial misconduct
during his closing argument by inferring there were three screwdrivers used during the
12.
robbery because the evidence did not support such an inference. We conclude trial
counsel’s failure to object and request a curative admonition forfeited his claim on
appeal. (See People v. Fayed (2020) 9 Cal.5th 147, 204 (Fayed).) In the alternative,
even if we conclude trial counsel’s performance fell below an objective standard of
reasonableness, defendant did not suffer prejudice. (Strickland v. Washington (1984) 466
U.S. 668, 687–688, 694 (Strickland).)
A. Additional Factual Background
1. Closing Arguments
The prosecutor stated the following during his closing argument:
“Last witness the defense called from the Department of Justice said
the screwdrivers number 12, and screwdriver number 14 didn’t have any
victims’ DNA on it, so it’s not consistent with being stabbed with a
screwdriver. That wasn’t the defendant’s screwdriver, ladies and
gentlemen. That’s a distraction.
“Whose screwdriver was number 14? That was William’s
screwdriver right where he was jumping over the counter, firing his gun
from. He came in armed with a screwdriver, fell out of his pocket.
Orlando’s screwdriver, Joe’s screwdriver. Right next to him there in that
picture, Exhibit 120. That was his screwdriver. The one that the defendant
had he took with him when he fled. Again, distraction.”
The prosecutor continued by arguing, “[T]hat’s when William … had jumped over the
counter … right next to the screwdriver that he dropped that he was carrying. Again,
screwdriver 12 and 14, those weren’t [defendant’s] screwdrivers. That’s a distraction.”
Trial counsel stated the following during his closing argument:
“And then the most important evidence in this case, the
screwdrivers. So I gather from [the prosecutor’s] argument that the plan as
he sees it was to all three be armed with screwdrivers, which is a dumb
plan. It’s also completely fantasy and conjecture. There’s not a single
shred or piece of evidence that you heard from the witness stand that
supports that. And that is evidence of how awful this case is. That’s how
awful this case is, because in order to tell a coherent story about what
happened, they just have to make it up. Oh, yeah. There’s a third
13.
screwdriver. He took it with him, obviously, because that’s the only way
the evidence fits. [¶] … [¶]
“[Detective] Sanchez testified that he sat through other hearings where Juan
… did the same thing. Nobody at any point at any part of this trial has said
anything about a third screwdriver, much less anything about a second
person, other than [defendant], being armed with a screwdriver. It’s pure,
pure fantasy. But it’s the fantasy that you have to concoct in your [head] in
order to fit the DA’s theory together, because, folks, those screwdrivers had
no blood on them, no fibers on them. They had no DNA significance on
them. And you heard Sarah P[.], a scientist with the Department of Justice,
tell you that’s not consistent with a screwdriver that just stabbed somebody.
“Juan … planted that screwdriver there to support his story. That’s
what happened. He grabbed a screwdriver out of a drawer somewhere,
threw it on the ground, and said ‘Oh, they stabbed me with a screwdriver,’
because there was absolutely no evidence to suggest that he was stabbed
with a screwdriver. And the evidence that is on the scene does not in any
way, shape, manner, or form corroborate. The only thing you can do is
create a third screwdriver out of nowhere to make Juan[’s] story fit.
“And remember what happened we questioned about the
screwdriver. I questioned Juan … about the screwdriver. Is that the
screwdriver? Yeah. That’s the screwdriver. Show you previous where
you’ve identified this as the screwdriver. Yes. That’s [the] screwdriver.
“Did the [prosecutor] ask any questions calling into question
whether or not that was the screwdriver, saying hey, are you sure it was the
screwdriver? Might there have been a different screwdriver? Did he ask
any questions about the screwdriver of Juan … ? No. What about when
[Detective] Sanchez was up there and I was asking him, ‘Hey, did Juan …
say anything about the screwdriver? Did he ask [Detective] Sanchez?’
Well, was there any equivocalness – that’s not a word – did he equivocate?
Did he say maybe it was a different screwdriver? There was no questioning
by the DA on the subject of the screwdriver and whether or not that was the
screwdriver that, in fact, stabbed Juan .…
“After Sarah [P.] testifies, though, there’s got to have been a third
screwdriver, man. Has to have been. That’s how critically damning that
piece of evidence is for this case. If you remember, two pieces of evidence
when you go back in the jury room, the screwdrivers and the target phone.
Absolutely demolish, devastate, and destroy the case that the DA is trying
to present to you.”
14.
2. Proceedings After the Trial
Following the trial, trial counsel stated the following on the record, “Whatever the
Court would like to do. I think it’s abundantly clear that I rendered ineffective assistance
in [defendant’s] trial, and that needs to be addressed by other counsel.” The trial court
asked trial counsel if he in fact rendered ineffective assistance of counsel and trial
counsel replied, “Yes.”
At a subsequent Marsden13 hearing, trial counsel stated:
“ … I didn’t miss what [the prosecutor] said about the fact that somebody
brought in another screw driver. I got that loud and clear. What I missed
was the fact that that argument is, in fact, misconduct by the prosecutor.
And I missed the objection to that argument. So I argued it, because I had
to argue it. However, it would have been to [defendant’s] advantage clearly
to have the Court sustain an objection, admonish the prosecutor, and
instruct the jury to disregard that argument.”
The trial court responded:
“I think out of an abundance of caution, it probably would – in fairness to
[defendant], it probably would be best – I’m not saying that I’m finding at
this point what he did rose to the level of ineffective assistance of counsel; I
want to make that clear on the record, because once – if that finding is
made, then I have to report it to the State Bar and all that stuff. But out of
an abundance of caution, I think it would be good to have another attorney
take over this – she’ll have to be appointed for all purposes.”
New counsel then filed a motion for a new trial alleging both prosecutorial
misconduct regarding the prosecutor’s misstatements about the screwdrivers and
ineffective assistance of counsel because trial counsel failed to object to these statements.
The People then filed an opposition to defendant’s motion for a new trial. At the motion
for a new trial hearing, the trial court concluded:
“And in analyzing this case, the Court does find that the district
attorney did refer to facts that were not in evidence. And there were some
mischaracterization. He stated that a screwdriver fell out of William[’s]
pocket, however, the Court could not find any such testimony and also
13 People v. Marsden (1970) 2 Cal.3d 118.
15.
made comment that [] defendant had a third screwdriver and took it with
them.
“And the Court does not find that these were reasonable inferences
to be drawn from the evidence, and they’re not the type of matters that
would be considered common knowledge or illustrations drawn from
common experience, history, or any sort of reasonable inference in the
Court’s mind. And frankly had an objection been made, I would have
sustained it and admonished the jury.”
However, the trial court concluded “in reviewing the closing arguments as whole, the
screwdriver’s [sic] were only part of the evidence [¶] [a]nd so as to the claim of
constitutional due process violation, there’s no pattern of conduct so egregious that it
[infects] the trial with unfairness.” Additionally, the trial court stated, “And as to the
state claim, I don’t find that this rises to the level of deception or reprehensible methods
to persuade a jury[] [and] [w]hile I do find it to be improper argument, I do not find that it
constitutes prosecutorial misconduct.” Lastly, the trial court did not find ineffective
assistance of counsel because trial counsel “did overall a very good job of representing
[defendant]” and there was not “anything about his representation [that] fell below any
objective standard of reasonableness.” The trial court denied the motion for a new trial.
B. Defendant Forfeited His Prosecutorial Misconduct Claim by Not
Objecting at Trial
1. Applicable Law
Prosecutorial misconduct exists “ ‘under state law only if it involves “ ‘the use of
deceptive or reprehensible methods to attempt to persuade either the court or the
jury.’ ” ’ ” (People v. Earp (1999) 20 Cal.4th 826, 858.) In more extreme cases, a
defendant’s federal due process rights are violated when a prosecutor’s improper
remark(s) “ ‘ “ ‘infect[s] the trial with unfairness,’ ” ’ ” making it fundamentally unfair.
(Ibid.) For example, it is prosecutorial misconduct to both misstate the law, (People v.
Cortez (2016) 63 Cal.4th 101, 130), and to misstate the evidence or go beyond the record.
(People v. Gonzales (2011) 51 Cal.4th 894, 947; People v. Davis (2005) 36 Cal.4th 510,
550.) However, the prosecution “enjoys wide latitude in commenting on the evidence,
16.
including the reasonable inferences and deductions that can be drawn therefrom.”
(People v. Hamilton (2009) 45 Cal.4th 863, 928; see People v. Rowland (1992) 4 Cal.4th
238, 277 [“hyperbolic and tendentious” comments, even if “harsh and unbecoming,” may
be reasonable if they can be inferred from the evidence].) “A defendant asserting
prosecutorial misconduct must … establish a reasonable likelihood the jury construed the
remarks in an objectionable fashion.” (People v. Duff (2014) 58 Cal.4th 527, 568.) “To
preserve a claim of prosecutorial misconduct on appeal, ‘ “a criminal defendant must
make a timely and specific objection and ask the trial court to admonish the jury to
disregard the impropriety. [Citations.]” [Citation.] The failure to timely object and
request an admonition will be excused if doing either would have been futile, or if an
admonition would have not cured the harm.’ ” (Fayed, supra, 9 Cal.5th at p. 204.)
2. Analysis
Here, trial counsel did not object to the prosecutor’s statements during closing
argument and made no request the jury be admonished. Although “ ‘[t]he failure to
timely object and request an admonition will be excused if doing either would have been
futile, or if an admonition would have not cured the harm,’ ” (Fayed, supra, 9 Cal.5th at
p. 204), defendant has not established that an objection or admonition would have been
futile. Indeed, as the trial court subsequently stated, “[H]ad an objection been made, [the
trial court] would have sustained it and admonished the jury.” Thus, an objection would
not have been futile, and we therefore conclude defendant may not pursue the issue of
prosecutorial misconduct on appeal because the issue has been forfeited.14
14In his reply brief, defendant contends for the first time that the People’s
statements in their opening brief, “the lack of DNA evidence could show that [Juan] was
lying about being stabbed with a screwdriver” “a third screwdriver was used by
[defendant] and that screwdriver was not left both at the scene,” established the
prosecutor committed misconduct by eliciting false testimony at trial because the
prosecutor had a duty of candor to correct Juan’s testimony if he believed Juan was lying
or mistaken. Defendant argues that because the prosecutor presented false testimony, this
court should review prejudice under the Chapman v. California (1967) 386 U.S. 18
standard. We disagree. First, and most importantly, “a point raised for the first time [in a
17.
C. Defendant has Failed to Establish Trial Counsel was Ineffective for
Failing to Object to the Alleged Prosecutorial Misconduct
Defendant acknowledges his claims of prosecutorial misconduct may have been
forfeited because his trial counsel failed to object and request a jury admonishment.
Therefore, in the alternative, defendant contends his trial counsel was ineffective for
failing to object. As we shall explain, we reject defendant’s claim for ineffective
assistance of counsel.
1. Applicable Law
Defendant has the burden of proving ineffective assistance of counsel. (People v.
Pope (1979) 23 Cal.3d 412, 425, overruled on other grounds in People v. Berryman
(1993) 6 Cal.4th 1048.) To establish such a claim, a defendant must show (1) his
counsel’s performance fell below an objective standard of reasonableness and (2) but for
counsel’s error, a different result would have been reasonably probable. (Strickland,
supra, 466 U.S. at pp. 687–688, 694; People v. Ledesma (1987) 43 Cal.3d 171, 216–218.)
“A reasonable probability is a probability sufficient to undermine confidence in the
outcome.” (Strickland, at p. 694.)
“Because of the difficulties inherent in making the evaluation [of counsel’s
performance], a court must indulge a strong presumption that counsel’s conduct falls
within the wide range of reasonable professional assistance; … the challenged action
‘might be considered sound trial strategy.’ ” (Strickland, supra, 466 U.S. at p. 689.)
Moreover, “ ‘ “ ‘a court need not determine whether counsel’s performance was deficient
before examining the prejudice suffered by the defendant as a result of the alleged
deficiencies.’ ” ’ ” (People v. Holt (1997) 15 Cal.4th 619, 703.)
reply brief] therein is deemed waived and will not be considered, unless good reason is
shown for failure to present it before,” (People v. Baniqued (2000) 85 Cal.App.4th 13,
29), and therefore, this argument is waived on appeal. Second, even assuming the
prosecutor committed misconduct by “present[ing] false testimony,” this argument is still
waived by trial counsel’s failure to object in the trial court, (Fayed, supra, 9 Cal.5th at
p. 204), and as we discuss below defendant was not prejudiced by trial counsel’s failure
to object.
18.
2. Analysis
Even if trial counsel’s failure to object fell below an objective standard of
reasonableness, there was not a reasonable probability that the result of the proceeding
would have been different but for counsel’s deficient performance. (Strickland, supra,
466 U.S. at pp. 687–688.) First, there was ample evidence to establish defendant guilty
of robbery and burglary against Juan. Apart from Juan’s testimony about the robbery and
burglary, Tiffany testified that William, defendant, and defendant’s little brother were all
together before the crimes and stopped in a residential neighborhood. At or around the
time the robbery and burglary occurred Tiffany heard what she believed to be “[e]ither
gunshots or fireworks” and then observed William run back into the car with a wad of
cash and frantically state, “ ‘[M]ove, move, move’ ” and “ ‘[t]he house lick went bad.’ ”
Later, William told Tiffany to remove a piece of paper covering the entire license plate,
which she ended up doing.
Subsequently, law enforcement arrived and located a “wad or bundle of cash in the
middle of the lawn,” a .45-caliber handgun, and evidence of use of a nine- millimeter
handgun, Orlando dead in the kitchen on top of a rifle, pools of blood leading out to the
garage, and two screwdrivers, one with a shaved tip. All this evidence corroborated the
testimony surrounding the robbery and burglary. The jury may have believed Juan’s
testimony because of this corroborating evidence, irrespective of his credibility issues.
Second, the jury was properly instructed they alone were to judge the evidence and
determine whether defendant was guilty beyond a reasonable doubt. (See People v.
Pearson (2013) 56 Cal.4th 393, 414 [“We presume that jurors understand and follow the
court’s instructions”].) The trial court instructed the jury, “[y]ou must decide what the
facts are [] [and] [i]t is up to all of you, and you alone to decide what happened based
only on the evidence that has been presented to you in this trial” (CALCRIM 200) and
“ ‘[e]vidence’ is the sworn testimony of witnesses, the exhibits admitted into evidence,
and anything else [the trial court] told you to consider as evidence … [and] [i]n their
19.
opening statements and closing arguments, the attorneys discuss the case, but their
remarks are not evidence” (CALCRIM No. 222). (Italics added.) Lastly, the jury was
instructed that “[i]n deciding whether the People have proved their case beyond a
reasonable doubt, you must impartially compare and consider all evidence that was
received throughout the entire trial” (CALCRIM No. 220). Accordingly, even assuming
trial counsel’s performance did fall below an objective standard of reasonableness, it was
not reasonably probable defendant would have obtained a different result.
DISPOSITION
For the foregoing reasons, the judgment is affirmed.
POOCHIGIAN, J.
WE CONCUR:
HILL, P. J.
DE SANTOS, J.
20. | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488062/ | Matter of Florentino v Bukowski (2022 NY Slip Op 06608)
Matter of Florentino v Bukowski
2022 NY Slip Op 06608
Decided on November 18, 2022
Appellate Division, Fourth Department
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on November 18, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, LINDLEY, WINSLOW, AND BANNISTER, JJ.
879 CAF 21-01687
[*1]IN THE MATTER OF GENE FLORENTINO, PETITIONER-RESPONDENT,
vJENNIFER BUKOWSKI, RESPONDENT-APPELLANT.
IN THE MATTER OF BECKY FLORENTINO, PETITIONER-RESPONDENT,
vJENNIFER BUKOWSKI, RESPONDENT-APPELLANT. (APPEAL NO. 3.)
MARGARET A. MURPHY, P.C., HAMBURG (MARGARET A. MURPHY OF COUNSEL), FOR RESPONDENT-APPELLANT.
THE LAW OFFICE OF RACHEL K. MARRERO, ESQ., BUFFALO (RACHEL K. MARRERO OF COUNSEL), FOR PETITIONERS-RESPONDENTS.
DAVID C. SCHOPP, THE LEGAL AID BUREAU OF BUFFALO, INC., BUFFALO (RUSSELL E. FOX OF COUNSEL), ATTORNEY FOR THE CHILD.
Appeal from an order of the Family Court, Erie County (Sharon M. LoVallo, J.), entered April 8, 2021 in a proceeding pursuant to Family Court Act article 6. The order terminated respondent's visitation with the subject child.
It is hereby ORDERED that the order so appealed from is unanimously affirmed without costs.
Same memorandum as in Matter of Bukowski v Florentino ([appeal No. 1] — AD3d — [Nov. 18, 2022] [4th Dept 2022]).
Entered: November 18, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488091/ | Case: 22-2133 Document: 28 Page: 1 Filed: 11/18/2022
NOTE: This order is nonprecedential.
United States Court of Appeals
for the Federal Circuit
UNITED THERAPEUTICS CORPORATION,
Appellant
v.
LIQUIDIA TECHNOLOGICS, INC.,
Appellee
2022-2133
Appeal from the U n i t e d S t a t e s Patent and Trademark
Office, Patent Trial and Appeal Board in IPR2020-00770.
--------------------------------------------------
LIQUIDIA TECHNOLOGICS, INC.,
Appellant
v.
UNITED THERAPEUTICS CORPORATION,
Appellee
2022-2174
Case: 22-2133 Document: 28 Page: 2 Filed: 11/18/2022
2 BRUMFIELD V. IBG LLC
Appeal from the U n i t e d S t a t e s Patent and Trademark
Office, Patent Trial and Appeal Board in IPR2020-00770.
ON MOTION
ORDER
Upon consideration of the party’s motion to voluntarily
dismiss Appeal No. 2022-2174,
IT IS ORDERED THAT:
(1) The motion is granted. Appeal No. 2022-2174 is
DISMISSED under Fed. R. App. P. 42 (b).
(2) Each side shall bear their own costs with respect to
Appeal No. 2022-2174.
(3) Appeal No. 2022-2174 is deconsolidated from
Appeal No. 2022-2133, and the revised caption is reflected
above.
November 18, 2022 FOR THE COURT
Date
/s/ Peter R. Marksteiner
Peter R. Marksteiner
Clerk of Court
ISSUED AS A MANDATE (only as to Appeal No.
2022-2174): November 18, 2022 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488095/ | United States Tax Court
159 T.C. No. 5
GREEN VALLEY INVESTORS, LLC, ET AL., 1
BOBBY A. BRANCH, TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket Nos. 17379-19, 17380-19, Filed November 9, 2022.
17381-19, 17382-19.
—————
P timely petitioned this Court challenging the IRS’s
adjustments in notices of final partnership administrative
adjustment regarding charitable deductions related to
syndicated conservation easement transactions listed
under I.R.S. Notice 2017-10, 2017-4 I.R.B. 544. The parties
filed Cross-Motions for Partial Summary Judgment
seeking summary adjudication as to the imposition of
penalties in these consolidated cases. P principally
contends that I.R.C. § 6662A penalties cannot be imposed
for two reasons: (1) the IRS seeks to improperly impose
such penalties retroactively and (2) the IRS failed to
comply with the notice-and-comment rulemaking
procedures of the Administrative Procedure Act (APA)
when issuing Notice 2017-10. R contends that Notice
2017-10 was properly issued without notice-and-comment
rulemaking and that he is entitled to partial summary
judgment.
1 The following cases are consolidated herewith: Vista Hill Investments, LLC,
Bobby A. Branch, Tax Matters Partner, Docket No. 17380-19; Big Hill Partners, LLC,
Bobby A. Branch, Tax Matters Partner, Docket No. 17381-19; and Tick Creek
Holdings, LLC, Bobby A. Branch, Tax Matters Partner, Docket No. 17382-19.
Served 11/09/22
2
Held: Notice 2017-10 is a legislative rule, improperly
issued by the IRS without notice and comment as required
under the APA.
Held, further, Notice 2017-10 will be set aside by the
Court, and P’s Cross-Motions for Summary Judgment will
be granted in part prohibiting the imposition of I.R.C.
§ 6662A penalties in these consolidated cases.
—————
Vivian D. Hoard, Kip D. Nelson, Richard A. Coughlin, Brian C.
Bernhardt, and Elizabeth K. Blickley, for petitioner.
Emily J. Giometti, Kirsten E. Brimer, Clint J. Locke, Kimberly B. Tyson,
Mary Helen Weber, Travis Vance, and Angela B. Reynolds, for
respondent.
OPINION
WEILER, Judge: On December 3, 2021, the Commissioner of
Internal Revenue (respondent) filed a third Motion for Partial Summary
Judgment, 2 seeking summary adjudication in each of these consolidated
cases (third Motions for Partial Summary Judgment) on the issue of
whether the Internal Revenue Service (IRS) complied with the
requirements of section 6751(b)(1) as applied to the gross valuation
misstatement penalty under section 6662(h), the substantial valuation
misstatement penalty under section 6662(e), the negligence penalty
under section 6662(b)(1) and (c), and the reportable transaction penalty
2 In each of these consolidated cases respondent has twice before moved for
partial summary judgment. By separate order, the court will rule on respondent’s
Motions for Partial Summary Judgment regarding the issue of whether the IRS
complied with the requirements of section 6751(b)(1). Unless otherwise indicated, all
statutory references are to the Internal Revenue Code (Code), Title 26 U.S.C., in effect
at all relevant times, all regulation references are to the Code of Federal Regulations,
Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the
Tax Court Rules of Practice and Procedure. All dollar amounts are rounded to the
nearest dollar.
3
under section 6662A. 3 Then on December 14, 2021, petitioner 4 in these
consolidated cases filed Motions for Summary Judgment (Cross-Motions
for Summary Judgment) regarding respondent’s assertion of two
penalties—sections 6662(h) and 6662A. 5
In the Cross-Motions for Summary Judgment petitioner makes
two arguments against the penalties asserted under section 6662A.
First, petitioner contends that penalties under section 6662A may not
be asserted in these cases since any assessment of them would be made
retroactively after the issuance of I.R.S. Notice 2017-10, 2017-4 I.R.B.
544; and second, the issuance of Notice 2017-10 failed to comply with
the notice-and-comment provisions of the Administrative Procedure Act
(APA), 5 U.S.C. §§ 551–559, 701–706.
On January 7, 2022, petitioner filed a written objection to
respondent’s third Motions for Partial Summary Judgment. Petitioner’s
principal argument is that respondent cannot assess penalties under
section 6662A as a matter of law.
On February 11, 2022, respondent filed a written objection to
petitioner’s Cross-Motions for Summary Judgment. In the objection, and
among other arguments not relevant to this report, respondent contends
petitioner has failed to show and establish that section 6662A penalties
are not applicable to the transactions at issue in these consolidated cases
pursuant to Notice 2017-10. Respondent further contends that Notice
2017-10 was properly issued without notice-and-comment rulemaking,
and that he is entitled to partial summary judgment as prayed for in his
third Motions for Partial Summary Judgment.
3 The tax year at issue for Green Valley Investors, LLC (Green Valley), Big Hill
Partners, LLC (Big Hill), and Tick Creek Holdings, LLC (Tick Creek), is 2014, while
the tax year at issue for Vista Hill Investments, LLC (Vista Hill), is 2015.
4 In these consolidated cases Bobby A. Branch is the petitioner and tax matters
partner for four entities: Green Valley, Vista Hill, Big Hill, and Tick Creek. We refer
to these entities individually as “LLC” and collectively as “the LLCs.” Since Mr. Branch
is the tax matters partner in each of these consolidated cases, we will collectively refer
to the tax matters partner for the LLCs in the singular and as “petitioner” throughout
this report.
5 This report will address only petitioner’s Motions regarding respondent’s
determination of section 6662A penalties. The Court will, by separate order, address
petitioner’s Cross-Motions for Partial Summary Judgment with respect to section
6662(h) penalties.
4
Background
The following facts are drawn from respondent’s third Motions for
Partial Summary Judgment, petitioner’s Cross-Motions for Summary
Judgment, declarations and exhibits thereto, and the parties’ respective
written objections. These facts are stated solely for purposes of ruling on
the parties’ Motions herein.
By deed recorded on December 31, 2014, Green Valley, Big Hill,
and Tick Creek each granted a conservation easement to Triangle Land
Conservancy (TLC). On December 3, 2015, Vista Hill did the same.
Green Valley, Big Hill, and Tick Creek each timely filed Forms 1065,
U.S. Return of Partnership Income, for tax year 2014, and Vista Hill
timely filed Form 1065 for tax year 2015. On its Form 1065 Green Valley
deducted $22,559,000 for its charitable easement contribution to TLC
for the tax year 2014. Similarly, Big Hill and Tick Creek deducted
contributions of charitable easements of $22,626,000 and $22,605,000,
respectively. Vista Hill deducted $22,498,000 on its Form 1065 for its
charitable easement contribution for tax year 2015.
On December 23, 2016, the IRS issued Notice 2017-10. Notice
2017-10 identified all syndicated conservation easement transactions
beginning January 1, 2010, including all substantially similar
transactions, as “listed transactions” for purposes of Treasury
Regulation § 1.6011-4(b)(2).
The IRS conducted examinations of Green Valley’s, Vista Hill’s,
Big Hill’s, and Tick Creek’s respective Forms 1065. By notices of final
partnership administrative adjustment (FPAA) issued to the LLCs on
June 24, 2019, the IRS disallowed the claimed deductions for noncash
charitable contributions because the LLCs (1) did not establish that the
deductions met all requirements pursuant to section 170 and (2) failed
to establish that the values of the property interests contributed
exceeded zero. In addition each FPAA asserted a gross valuation
misstatement penalty under section 6662(h), a substantial valuation
misstatement penalty under section 6662(e), a negligence penalty under
section 6662(b)(1) and (c), and a substantial understatement penalty
under section 6662(b)(2) and (d). Respondent’s Answers asserted the
additional reportable transaction penalty under section 6662A.
5
On September 20, 2019, petitioner timely petitioned this Court
challenging the FPAA determinations. When the Petitions were filed,
the LLCs’ principal places of business were in North Carolina.
Discussion
I. Summary Judgment
A party may move for summary judgment regarding all or any
part of the legal issues in controversy. See Rule 121(a); Wachter v.
Commissioner, 142 T.C. 140, 145 (2014). We may grant summary
judgment if the pleadings, stipulations and exhibits, and any other
acceptable materials show that there is no genuine dispute as to any
material fact and that a decision may be rendered as a matter of law.
See Rule 121(a) and (b); see also CGG Ams., Inc. v. Commissioner, 147
T.C. 78, 82 (2016); Elec. Arts, Inc. & Subs. v. Commissioner, 118 T.C.
226, 238 (2002). We construe the facts and draw all inferences in the
light most favorable to the nonmoving party to decide whether summary
judgment is appropriate. Sundstrand Corp. v. Commissioner, 98 T.C.
518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). The moving party has
the burden of proving that there is no genuine issue of material fact.
Naftel v. Commissioner, 85 T.C. 527, 529 (1985). However, the
nonmoving party may not rest upon the mere allegations or denials in
its pleadings but instead must “set forth specific facts showing that
there is a genuine dispute for trial.” Rule 121(d); see Sundstrand Corp.,
98 T.C. at 520.
II. Application of Section 6662A Penalties
Section 6662A was enacted as part of the American Jobs Creation
Act of 2004 (AJCA), Pub. L. No. 108-357, § 812(a), 118 Stat. 1418, 1577.
It is effective for tax years ending after October 22, 2004. Id. § 812(f),
118 Stat. at 1580. Section 6662A(a) provides: “If a taxpayer has a
reportable transaction understatement for any taxable year, there shall
be added to the tax an amount equal to 20 percent of the amount of such
understatement.” The penalty is increased from 20% to 30% of the
amount of the understatement if the disclosure requirements of section
6664(d)(3)(A), requiring disclosure in accordance with the regulations
prescribed under section 6011, are not met. I.R.C. § 6662A(c). Section
6662A penalties apply to any item which is attributable to any “listed
transaction.” I.R.C. § 6662A(b)(2)(A).
After the enactment of the AJCA, temporary regulations were
issued, including Temporary Treasury Regulation § 1.6011-4T(b)(2)
6
defining the term “listed transaction” to include those types of
transactions which the IRS has determined to be tax avoidance
transactions and identified by notice, regulation, or other form of
published guidance. See T.D. 9350, 2007-38 I.R.B. 607. This temporary
regulation was published, and the IRS requested comments. Additional
notice and request for comments was published by the IRS in Notice
2005-11, 2005-1 C.B. 493, and Notice 2005-12, 2005-1 C.B. 494, as
amended. 6 Final regulations were published, the IRS requested
comments as to Treasury Regulation § 1.6011-4, and the term “listed
transaction” continued to be defined as a transaction that is the same or
substantially similar to one of the types of transactions that the IRS has
determined to be tax avoidance transactions and identified by notice,
regulation, or other form of published guidance. Treas. Reg.
§ 1.6011-4(b)(2).
It is undisputed that Notice 2017-10 was issued after the LLCs
filed the returns at issue. It is also undisputed that Notice 2017-10
identified certain syndicated conservation easement transactions as tax
avoidance transactions classified as “listed transactions” for purposes of
Treasury Regulation § 1.6011-4 and sections 6111 and 6112. See Notice
2017-10, § 3, 2017-4 I.R.B. at 545. Petitioner does not dispute that the
transactions at issue are the same or substantially similar to the certain
syndicated conservation easement transactions described in Notice
2017-10.
Effective December 23, 2016, Notice 2017-10 identifies certain
transactions for purposes of Treasury Regulation § 1.6011-4(b)(2) and
sections 6111 and 6112. The notice includes transactions entered into on
or after January 1, 2010, that are the same as or substantially similar
to certain syndicated conservation easement transactions described in
the notice. Notice 2017-10 states that taxpayers who have entered into
a listed transaction or transactions of interest “must disclose the
transactions as described in [Treasury Regulation §] 1.6011-4 for each
taxable year in which the taxpayer participated in the transactions,
provided that the period of limitations for assessment of tax has not
ended on or before December 23, 2016.” On the basis of this text, the
Court finds that Notice 2017-10 is applicable to the 2014 and the 2015
transactions at issue.
6 These notices alerted taxpayers to the recent enactments and invited
comments from the public regarding rules and standards relating to section 6707A and
sections 6662A, 6662, and 6664, as amended.
7
Petitioner cites the definition section found in section 6707A(c)(2)
as an indication that the terms Congress uses are in the past tense.
Similarly, petitioner cites Treasury Regulation § 1.6011-4 for the
proposition that the IRS must identify a transaction as being a
reportable transaction prospectively. However, respondent notes that
Treasury Regulation § 1.6011-4(e)(2) addresses the issue at hand—
namely, the duty on taxpayers to disclose a previous transaction within
90 calendar days from the date in which the prior transaction became a
listed transaction or transaction of interest, so long as the period of
limitations for assessment remains open.
We have previously upheld the retroactive application of
penalties, even though the taxpayers became subject to the penalties
after they had entered into the transactions or after their tax returns
had been filed. See Soni v. Commissioner, T.C. Memo. 2013-30, at *8–9;
see also Kenna Trading, LLC v. Commissioner, 143 T.C. 322, 371–72
(2014), aff’d sub nom. Sugarloaf Fund, LLC v. Commissioner, 911 F.3d
854 (7th Cir. 2008); Patin v. Commissioner, 88 T.C. 1086, 1127 n.34
(1987), aff’d without published opinion, 865 F.2d 1264 (5th Cir. 1989),
and aff’d sub nom. Gomberg v. Commissioner, 868 F.2d 865 (6th Cir.
1989), Skeen v. Commissioner, 864 F.2d 93 (9th Cir. 1989), and
Hatheway v. Commissioner, 856 F.2d 186 (4th Cir. 1988) (per curiam)
(unpublished table decision); McGehee Family Clinic, P.A. v.
Commissioner, T.C. Memo. 2010-202.
Petitioner also cites Bowen v. Georgetown University Hospital,
488 U.S. 204, 208 (1988), in which the Supreme Court struck down the
retroactive application of a newly promulgated regulation by the
Department of Health and Human Services.
On the basis of our findings infra Part III, we conclude that these
cases do not require us to decide whether section 6662A penalties can be
applied retroactively. Accordingly, we refrain from doing so.
III. Notice-and-Comment Rulemaking Requirements
The APA provides a three-step procedure for “notice-and-
comment rulemaking” whereby agencies are required to (1) issue a
general notice of proposed rulemaking, (2) allow interested persons an
opportunity to participate, and (3) include in the final rule a “concise
general statement of [its] basis and purpose.” Perez v. Mortg. Bankers
Ass’n, 575 U.S. 92, 96 (2015) (quoting 5 U.S.C. § 553(c)). However, “[n]ot
all ‘rules’ must be issued through the notice-and-comment process. . . .
8
[T]he notice-and-comment requirement ‘does not apply’ to
‘interpretative rules, general statements of policy, or rules of agency
organization, procedure, or practice.’” Id. (quoting 5 U.S.C. § 553(b)(A)).
“The APA also recognizes that Congress may modify these
requirements, but provides that a ‘[s]ubsequent statute may not be held
to supersede or modify this subchapter . . . except to the extent that it
does so expressly.’” Asiana Airlines v. FAA, 134 F.3d 393, 396 (D.C. Cir.
1998) (quoting 5 U.S.C. § 559).
Notably, the Supreme Court has affirmed a material advisor’s
right to challenge an IRS notice as violative of the APA. See CIC Servs.,
LLC v. IRS, 141 S. Ct. 1582 (2021). Other federal courts have recently
wrestled with the issue before this Court. In Mann Construction, Inc. v.
United States, 539 F. Supp. 3d 745 (E.D. Mich. 2021), the district court
held that Congress authorized the IRS to promulgate Notice 2007-83,
2007-2 C.B. 960, without the requirement of having to first provide
notice and comment under the APA; however, this decision was later
reversed by the U.S. Court of Appeals for the Sixth Circuit in Mann
Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022). While
in CIC Services, LLC v. IRS, No. 3:17-CV-110, 2021 WL 4481008 (E.D.
Tenn. Sept. 21, 2021), the district court granted a preliminary injunction
in favor of the taxpayer, finding the taxpayer was likely to prevail on its
challenge of Notice 2016-66, 2016-47 I.R.B. 745, on the basis of the IRS’s
failure to first comply with the APA’s notice-and-comment
requirements. 7
Respondent makes two arguments identical to those made by the
United States in Mann Construction; namely, that (1) Notice 2017-10
was an interpretative rather than legislative rule and (2) even if Notice
2017-10 were a legislative rule, Congress has authorized its issuance by
procedure other than the notice-and-comment requirements under the
APA.
A. Is Notice 2017-10 an Interpretative or Legislative Rule?
Legislative rules impose new rights or duties and change the legal
status of regulated parties. Chen Zhou Chai v. Carroll, 48 F.3d 1331,
1340 (4th Cir. 1995); see Tenn. Hosp. Ass’n v. Azar, 908 F.3d 1029, 1042
(6th Cir. 2018) (explaining that legislative rules impose new rights or
7 See also Liberty Glob., Inc. v. United States, No. 1:20-CV-03501, 2022 WL
1001568 (D. Col. Apr. 4, 2022) (granting partial summary judgment after finding
temporary treasury regulations related to section 245A were invalid since they were
not promulgated in compliance with the APA’s notice-and-comment requirements).
9
duties and change the legal status of the parties, whereas interpretative
rules articulate what an agency thinks a statute means or remind
parties of pre-existing duties). Interpretative rules merely advise the
public of an agency’s construction of the statutes it administers. Mortg.
Bankers Ass’n, 575 U.S. at 97. Unlike interpretative rules, legislative
rules have the force and effect of law. Id. at 96.
The Sixth Circuit recently addressed respondent’s first argument,
finding Notice 2007-83, entitled “Abusive Trust Arrangements Utilizing
Cash Value Life Insurance Policies Purportedly to Provide Welfare
Benefits,” to be a legislative rule requiring the IRS to comply with
notice-and-comment requirements under the APA. Mann Constr., Inc.,
27 F.4th at 1143–44. Like the Sixth Circuit, we find Notice 2017-10 to
be a legislative rule.
Congress tasked the IRS with determining “by regulations” how
taxpayers are to “make a return or statement” and the information they
must provide therein to the IRS. See I.R.C. § 6011(a). Under section
6707A, Congress likewise delegates authority to determine which
transactions are reportable transactions as having “a potential for tax
avoidance” or that are “the same as, or substantially similar to, a
transaction” deemed “a tax avoidance transaction.” I.R.C. § 6707A(c)(1).
Notice 2017-10, 2017-4 I.R.B. at 544–45, purports to carry out this
delegation of authority, and states in part:
This notice alerts taxpayers and their representatives that
the transaction described in section 2 of this notice is a tax
avoidance transaction and identifies this transaction, and
substantially similar transactions, as listed transactions
for purposes of § 1.6011-4(b)(2) of the Income Tax
Regulations (Regulations) and §§ 6111 and 6112 of the
Internal Revenue Code (Code).
The act of identifying a transaction as a listed transaction by the
IRS, by its very nature, is the creation of a substantive (i.e., legislative)
rule and not merely an interpretative rule. 8 See 5 U.S.C. § 553.
8 Many of the provisions discussed infra were enacted or substantially modified
in 2004 as part of AJCA §§ 811–822, 118 Stat. at 1575–87. These provisions
substantially changed the reporting and recordkeeping requirements for listed and
other reportable transactions. This report offers no opinion on whether identifying a
transaction as a listed transaction was substantive rulemaking before the enactment
of the AJCA or whether Congress expressed its intent to exempt from the standard
10
Identifying a transaction as a listed transaction does not merely provide
the IRS’s interpretation of the law or remind taxpayers of preexisting
duties. Rather, and as we will detail below, identifying a transaction as
a listed transaction imposes new duties in the form of reporting
obligations and recordkeeping requirements on both taxpayers and their
advisors. Notice 2017-10 exposes these individuals to additional
reporting obligations and penalties to which they would not otherwise
be exposed but for the notice. Creating new substantive duties and
exposing taxpayers to penalties for noncompliance “are hallmarks of a
legislative, not an interpretive, rule.” Mann Constr., Inc., 27 F.4th
at 1144.
1. Reporting Obligations on Taxpayers
The IRS’s act of identifying a transaction as a listed transaction
imposes a reporting obligation on any taxpayer who participated in such
a transaction. See Treas. Reg. § 1.6011-4. As part of their obligation to
file a tax return, taxpayers must disclose their participation in any
reportable transaction. Id. para. (a). A listed transaction is a type of
reportable transaction. Id. para. (b)(2). A taxpayer is considered to have
participated in a listed transaction if the taxpayer’s return reflects tax
consequences or a tax strategy described in published guidance that lists
the transaction as a listed transaction. Id. para. (c)(3)(i)(A). Without the
IRS identifying the transaction as a listed transaction, no such reporting
obligation exists.
Once a transaction is identified by the IRS as a listed transaction,
a taxpayer’s reporting obligation is significant. Listed transactions are
reported on Form 8886, Reportable Transaction Disclosure Statement.
Unlike most tax forms, which generally require information relating to
calculation of a tax liability, Form 8886 requires narrative information
unrelated to the computation of tax. For example, for the years in issue,
Form 8886 asks the taxpayer to
describe the amount and nature of the expected tax
treatment and expected tax benefits generated by the
transaction for all affected years. Include facts of each step
of the transaction that relate to the expected tax benefits
including the amount and nature of your investment.
Include in your description your participation in the
notice-and-comment procedures transactions that were already listed as of the
enactment of the AJCA.
11
transaction and all related transactions regardless of the
year in which they were entered into. Also, include a
description of any tax result protection with respect to the
transaction.
Form 8886 further requires the taxpayer to
[i]dentify all individuals and entities involved in the
transaction that are tax-exempt, foreign, or related. Check
the appropriate box(es) (see instructions). Include their
name(s), identifying number(s), address(es), and a brief
description of their involvement. For each foreign entity,
identify its country of incorporation or existence. For each
individual or related entity, explain how the individual or
entity is related.[9]
Taxpayers are not merely required to include Form 8886 with
their tax returns. Form 8886 must be attached to each amended return
and a copy sent to the Office of Tax Shelter Analysis at the same time
Form 8886 is first filed by the taxpayer. Treas. Reg. § 1.6011-4(e)(1). If
a transaction becomes a listed transaction after the filing of a taxpayer’s
return that reflects the taxpayer’s participation in the listed transaction,
then the taxpayer is required to file Form 8886 with the Office of Tax
Shelter Analysis within 90 days after the date in which the transaction
became a listed transaction. Id. subpara. (2)(i). This obligation continues
until the period of limitations for that filed return has lapsed. Id. 10
9This information may not be readily known to the taxpayer; however, the IRS
expects the taxpayer to gather this information from third parties who, themselves,
are under no obligation to provide it.
10 That period of limitations may be affected by the IRS’s act of identifying a
transaction as a listed transaction. If a taxpayer does not disclose a listed transaction,
the period of limitations for assessment of tax attributable to that transaction does not
expire until one year after the transaction is disclosed. I.R.C. § 6501(c)(10). And we
have already discussed that the obligation to disclose a listed transaction applies to
previously filed returns. Treas. Reg. § 1.6011-4(e)(2). We are unaware of any cases
deciding whether the IRS’s action of identifying a transaction as a listed transaction
has the effect of holding open the period of limitations on a return that was filed before
the transaction was listed, but at a minimum, the interplay of these two provisions
creates uncertainty.
12
Failure to report a listed transaction to the IRS can have
significant financial consequences for a taxpayer. 11 Section 6707A
imposes a maximum penalty of 75% of the decrease in tax resulting from
a transaction, not to exceed $200,000. I.R.C. § 6707A(b)(1) and (2). This
penalty, however, still applies even if the taxpayer’s tax treatment of the
transaction ultimately proves to be correct. In other words, this penalty
does not require a tax deficiency or that the IRS’s adjustment to the
treatment of the transaction be sustained by the Court. The minimum
penalty for failing to report a listed transaction is $10,000. I.R.C.
§ 6707A(b)(3).
If a penalty is imposed on a taxpayer for failure to disclose a listed
transaction, an additional reporting obligation may arise for some
taxpayers. If the taxpayer is required to file periodic reports with the
Securities & Exchange Commission (SEC), listed or reportable
transaction penalties must be disclosed as part of certain SEC filings.
See I.R.C. § 6707A(e) (flush text). Failure to report these penalties as
part of a taxpayer’s SEC filings can result in yet another penalty under
section 6707A(e).
In addition to the section 6707A reporting penalty, identifying a
transaction as a listed transaction results in enhanced penalties if the
taxpayer’s treatment of the transaction is not upheld. Section 6662(a)
generally imposes an accuracy-related penalty when there is an
underpayment of tax required to be shown on a return. However, if a
transaction is identified as a listed transaction by the IRS, and the
taxpayer’s treatment of that transaction is not upheld by a court, a
penalty can be imposed whether or not there is a tax deficiency. See
I.R.C. § 6662A. The starting point for the calculation of a section 6662A
penalty is not the amount of tax owed; instead, it is the “reportable
transaction understatement” amount. See I.R.C. § 6662A(b)(1)(A)(i). A
11 Notably, the IRS’s identification of a transaction as a listed transaction has
no bearing on the merits of the transaction itself, and the IRS has previously listed,
and subsequently delisted, a transaction that was upheld by courts. In Notice 98-5,
1998-1 C.B. 334, 334, the IRS characterized certain transactions as “abusive tax-
motivated transactions with a purpose of acquiring or generating foreign tax credits
that can be used to shelter low-taxed foreign-source income from residual U.S. tax.”
When the first group of listed transactions was announced, the IRS included
transactions described in Part II of Notice 98-5. Notice 2000-15, 2000-1 C.B. 826. But
the Courts of Appeals for the Eighth and Fifth Circuits upheld the taxpayers’
treatment of transactions described in Notice 98-5. See Compaq Comput. Corp. & Subs.
v. Commissioner, 277 F.3d 778 (5th Cir. 2001); IES Indus., Inc. v. United States, 253
F.3d 350 (8th Cir. 2001). Ultimately, the IRS withdrew Notice 98-5. Notice 2004-19,
2004-1 C.B. 606.
13
section 6662A penalty is not determined on the basis of the taxpayer’s
actual tax rate but at the highest rate of tax imposed. I.R.C.
§ 6662A(b)(1)(A)(ii). To calculate the penalty, this hypothetical
understatement is multiplied by 20%; if the transaction was not
disclosed to the IRS, the penalty rate increases to 30%. 12 This section
6662A penalty is separate from, and in addition to, the penalty for
failure to disclose under section 6707A. It is the IRS’s act of identifying
a transaction as a listed transaction (as it did in Notice 2017-10) that
makes section 6662A and 6707A penalties applicable.
2. Reporting Obligations on Advisors
The identification of a transaction as a listed transaction does not
merely impose new reporting obligations on taxpayers who participate
in the transaction; it also imposes new reporting obligations on tax
advisors. A material advisor 13 with respect to a reportable transaction 14
is required to make a return setting forth detailed information.
12 To explain this calculation using a hypothetical, assume a taxpayer’s return
shows a net loss of $1 million and a tax liability of zero. Assume that a transaction that
generated a $600,000 loss is disallowed. The result of the disallowance of that loss is
that the taxpayer’s return will show a net loss of $400,000 and a tax liability of zero.
Because the taxpayer’s bottomline tax liability is unchanged, there would be no penalty
under the general accuracy-related penalty rules of section 6662. If this is a listed
transaction, however, a penalty would apply. The starting point for calculating the
penalty is the amount of the disallowed loss, or hypothetically here $600,000. The
amount of the reportable transaction understatement is calculated by multiplying that
amount by the highest marginal tax rate. If the taxpayer is an individual, the highest
marginal tax rate is 39.6%, resulting in a reportable transaction understatement of
$237,600. I.R.C. § 1. To calculate the penalty, that amount is multiplied by either 20%
(if the transaction was disclosed) or 30% (if it was not disclosed), yielding a penalty of
up to $71,280 for a transaction that resulted in no understatement of tax. If the IRS
had not listed that transaction, the amount of the penalty would be zero.
13 A material advisor, defined in section 6111(b)(1)(A), is any person—
(i) who provides any material aid, assistance, or advice with
respect to organizing, managing, promoting, selling, implementing,
insuring, or carrying out any reportable transaction, and
(ii) who directly or indirectly derives gross income in excess of
the threshold amount (or such other amount as may be prescribed by
the Secretary) for such aid, assistance, or advice.
The threshold amount is $50,000 in the case of a reportable transaction. See I.R.C.
§ 6111(b)(1)(B)(i).
14 As previously mentioned, when the IRS identifies a new listed transaction,
it is deemed to be a reportable transaction subject to additional reporting obligations.
I.R.C. §§ 6111(b)(2), 6707A(c)(2); Treas. Reg. § 1.6011-4(b)(1) and (2).
14
I.R.C. § 6111(a). Simply described, this rule applies to anyone who
advises with respect to a reportable transaction and receives fees in
excess of a threshold amount. See I.R.C. § 6111(b).
The reporting requirement imposed on a material advisor is
significant. The IRS has adopted Form 8918, Material Advisor
Disclosure Statement, as the form on which material advisor reporting
must be made. Treas. Reg. § 301.6111-3(d). In addition to specific items
of information, Form 8918 also requires several narrative responses.
Some responses require brief descriptions; however, Form 8918 also
requires a rather substantial narrative, as follows:
Describe the reportable transaction for which you provided
material aid, assistance or advice, including but not limited
to the following: the nature of the expected tax treatment
and expected tax benefits generated by the transaction for
all affected years, the years the tax benefits are expected
to be claimed, the role of the entities or individuals
mentioned in [Form 8918] lines 7a or 8a (if any) and the
role of the financial instruments mentioned in [Form 8918]
line 9 (if any). Explain how the Internal Revenue Code
sections listed in [Form 8918] line 12 are applied and how
they allow the taxpayer to obtain the desired tax
treatment. Also, include a description of any tax result
protection with respect to the transaction.
The IRS’s identifying a listed transaction essentially obligates the
taxpayer’s advisor to become an unwilling advisor to the IRS. This
obligation arises only because the IRS has identified the transaction as
a listed transaction.
In addition to the obligation to disclose a listed transaction to the
IRS, material advisors also become records repositories for the IRS.
Material advisors are required to maintain lists identifying each person
they advised. I.R.C. § 6112(a). As with the disclosure under section 6111,
the information required to be maintained as part of these lists under
section 6112 is substantial. Some of the information required to be
maintained is brief and straightforward, see Treas. Reg.
§ 301.6112-1(b)(3)(i), while other items of information are broad and
include a “detailed description of each reportable transaction that
describes both the tax structure of the transaction and the purported tax
treatment of the transaction,” see id. subdiv. (ii). The IRS also requires
material advisors to retain documents such as
15
[c]opies of any additional written materials, including tax
analyses or opinions, relating to each reportable
transaction that are material to an understanding of the
purported tax treatment or tax structure of the transaction
that have been shown or provided to any person who
acquired or may acquire an interest in the transactions, or
to their representatives, tax advisors, or agents, by the
material advisor or any related party or agent of the
material advisor.
Id. subdiv. (iii)(B). The obligation on the part of material advisors to
prepare this list and retain these documents arises solely because the
IRS has identified a transaction as a listed transaction.
A material advisor’s failure to disclose a transaction under section
6111 or to provide a list upon demand can expose the individual to
significant penalties. Like the section 6707A penalty for a taxpayer’s
failure to report a listed transaction, a similar penalty under section
6707 can be imposed on a material advisor. See Treas. Reg. § 301.6707-1.
Failure to furnish the list of information required to be maintained
under section 6112(a) within 20 business days after the date of request
can result in a penalty of $10,000 per day until the list is provided. I.R.C.
§ 6708. Again, it is the IRS’s act of identifying a transaction as a listed
transaction (as it did in Notice 2017-10) that makes section 6707 and
6708 penalties applicable.
In sum, by its issuance, Notice 2017-10 creates new substantive
reporting obligations for taxpayers and material advisors, including
petitioner and the LLCs, the violation of which prompts exposure to
financial penalties and sanctions—the prototype of a legislative rule. See
Mann Constr., Inc., 27 F.4th at 1144. We cannot see how Notice 2017-10
could be considered an interpretative rule; consequently, we find it to be
a legislative rule. See Schwalbach v. Commissioner, 111 T.C. 215,
220–21 (1998).
B. Is Notice 2017-10 Otherwise Exempt from the Notice-and-
Comment Requirements Found Under the APA?
1. Legal Background
Having determined that Notice 2017-10 is a legislative rule, we
are to assume that this IRS action—having the force and effect of law—
must go through notice-and-comment rulemaking under the APA
regime. See 5 U.S.C. § 553. Respondent contends, however, that
16
Congress clearly exempted the IRS from following the APA’s normal
procedures when it enacted section 6707A and that Notice 2017-10 thus
was properly issued without notice-and-comment rulemaking.
Therefore, the remaining question before us is whether Congress has
established procedures so different from those required by the APA that
it intended to displace the norm. For the reasons discussed below, we
reject respondent’s position.
We note how the APA also provides that an agency may depart
from normal notice-and-comment procedures for good cause. See 5
U.S.C. § 553(b)(B). In this instance the IRS elected not to invoke the
good cause exception when issuing Notice 2017-10; consequently, we
have no reason to analyze whether and when the exception may be used.
In other instances the government has invoked the good cause exception
when promulgating temporary Treasury regulations.
As previously stated, the APA limits the ability of a subsequent
statute to modify or supersede its procedures “except to the extent that
it does so expressly.” 5 U.S.C. § 559. Consistent with this limiting text,
appellate courts have held that 5 U.S.C. § 559 “forbids amendment of
the APA by implication.” Lane v. USDA, 120 F.3d 106, 110 (8th Cir.
1997); see Five Points Rd. Joint Venture v. Johanns, 542 F.3d 1121, 1127
(7th Cir. 2008) (“[Title 5 U.S.C. §] 559 therefore prevents a statute from
amending the APA by implication.”). The Supreme Court has likewise
emphasized that “[e]xemptions from the terms of the Administrative
Procedure Act are not lightly to be presumed in view of the statement in
[5 U.S.C. § 559] that modifications must be express.” Marcello v. Bonds,
349 U.S. 302, 310 (1955). 15
Our view on the APA’s express-statement requirement is also
consistent with the Supreme Court’s “already-powerful presumption
against implied repeals.” Lockhart v. United States, 546 U.S. 142, 149
(2005) (Scalia, J., concurring). The Supreme Court has also stated that,
absent a clearly expressed congressional intention, repeals by
implication are disfavored, id. (citing Branch v. Smith, 538 U.S. 254, 273
(2003) (plurality opinion)), and implied repeals will be found only where
provisions in two statutes are in “irreconcilable conflict” or where the
latter act covers the whole subject of the earlier one and “is clearly
15 See also Dickinson v. Zurko, 527 U.S. 150, 155 (1999); Citizens for Resp. &
Ethics in Wash. v. FEC, 993 F.3d 880, 889 (D.C. Cir. 2021) (“The APA imposes a high
bar, met only if ‘Congress has established procedures so clearly different from those
required by the APA that it must have intended to displace the norm.’” (quoting Asiana
Airlines, 134 F.3d at 397)).
17
intended as a substitute,” Posadas v. Nat’l City Bank of N.Y., 296 U.S.
497, 503 (1936).
In Marcello the Supreme Court relied upon statutory text and
legislative history to hold that the 1952 Immigration and Nationality
Act displaced the hearing requirements of the APA. Marcello, 349 U.S.
at 310. In reaching this conclusion, the Supreme Court explained:
[W]e cannot ignore the background of the 1952
immigration legislation, its laborious adaptation of the
Administrative Procedure Act to the deportation process,
the specific points at which deviations from the
Administrative Procedure Act were made, the recognition
in the legislative history of this adaptive technique and of
the particular deviations, and the direction in the statute
that the methods therein prescribed shall be the sole and
exclusive procedure for deportation proceedings.
Id. That is not to say that Congress must “employ magical passwords in
order to effectuate an exemption from the Administrative Procedure
Act.” Id. However, what is needed is an “express[]” indication of
congressional intent. Id. Accordingly, mere differences between a
statutory scheme and the APA are insufficient to establish Congress’
intent to dispense with the standard APA procedures. For example, the
U.S. Court of Appeals for the District of Columbia Circuit has concluded
that the Federal Election Campaign Act and the APA could “readily
coexist,” despite various distinct procedures and requirements in the
former statutory scheme. See Citizens for Resp. & Ethics in Wash., 993
F.3d at 892.
The Supreme Court has further described the necessary indicia
of congressional intent by the terms “necessary implication,” “clear
implication,” and “fair implication.” See Dorsey v. United States, 567
U.S. 260, 274–75 (2012). The Supreme Court has used these terms
interchangeably. Id. at 274. 16
16 In the dissent Justice Scalia agreed that express-statement requirements of
the sort presented in Dorsey are ineffective and noted how congressional repeal can be
by clear implication. Dorsey, 567 U.S. at 289 (Scalia, J., dissenting). Justice Scalia
further agrees that the standard for overcoming the strong presumption against
implicit repeal is accurately described as “necessary implication” or “clear implication”
but took issue with the “fair implication” formulation. Id. at 289–90.
18
In Asiana Airlines the D.C. Circuit looked to the statutory text in
question and found an express exception granted by Congress justifying
the agency’s departure from standard notice and comment under the
APA. Asiana Airlines, 134 F.3d at 397–98. In interpreting this
exemption from the APA, the D.C. Circuit found irreconcilable
differences between the procedures under the law in question and those
of the APA. Id. at 398. However, the D.C. Circuit also stated generally
that “[w]e have looked askance at agencies’ attempts to avoid the
standard notice and comment procedures, holding that exceptions under
[5 U.S.C.] § 553 must be ‘narrowly construed and only reluctantly
countenanced.’” Id. at 396 (quoting New Jersey Dep’t of Env’t Prot. v.
EPA, 626 F.2d 1038, 1045 (D.C. Cir. 1980)).
Previously, the D.C. Circuit rejected the argument that terms in
the Clean Water Act requiring states to create procedures for “public
notice” and “public hearings” established congressional intent to
displace the APA’s notice-and-comment requirements. See Lake
Carriers’ Ass’n v. EPA, 652 F.3d 1, 6 (D.C. Cir. 2011) (per curiam). For
its part, the U.S. Court of Appeals for the Ninth Circuit found
unconvincing an agency’s argument that Congress’ authorization of
“interim final rules” in the Affordable Care Act context displayed an
intention to displace the APA’s presumed notice-and-comment
rulemaking. See California v. Azar, 911 F.3d 558, 579–80 (9th Cir.
2018).
In the light of the foregoing jurisprudence and in determining
whether Congress expressly intended to exempt the IRS from the
presumed APA procedures when issuing Notice 2017-10, an analysis of
the “listed transaction regime” as created under the AJCA and its
potential departure from the APA takes center stage.
2. Application
Respondent contends that Congress authorized the IRS to
identify listed transactions without notice-and-comment rulemaking.
Respondent points to the text of section 6707A, Treasury Regulation
§ 1.6011-4, and other AJCA provisions, along with the context and
legislative history of the AJCA. 17
17 Some of these arguments were also made by the Commissioner in Green
Rock, LLC v. IRS, No. 2:21-cv-01320 (N.D. Ala. filed Oct. 2, 2021), which is currently
pending before the U.S. District Court for the Northern District of Alabama.
19
We begin with the observation that section 6707A offers no
express indication from Congress exempting the IRS from the standard
notice-and-comment rulemaking of the APA. See 5 U.S.C. § 559.
Likewise, section 6011 (which is referenced by section 6707A) is also
silent on any express congressional intent, and provides: “When
required by regulations prescribed by the Secretary any person made
liable for any tax imposed by this title, or with respect to the collection
thereof, shall make a return or statement according to the forms and
regulations prescribed by the Secretary.” I.R.C. § 6011(a). As the Sixth
Circuit observed, “[t]he statutes do not say anything, expressly or
otherwise, that modifies the baseline procedure for rulemaking
established by the APA.” Mann Constr., Inc., 27 F.4th at 1146. Unlike
Asiana Airlines, where the D.C. Circuit found sufficient evidence of
congressional intent within the statutory text, there is no comparable
text found in the statute before us. Asiana Airlines, 134 F.3d at 399.
Neither section 6011 nor 6707A says anything that would lead us to
conclude that the IRS is exempt from the baseline procedures for
rulemaking under the APA.
Respondent also attempts to fill the void left by Congress in the
foregoing statutory text with the IRS’s own regulations. Specifically,
respondent notes that, before the enactment of section 6707A, Treasury
regulations were issued defining a listed transaction as one “identified
by notice, regulation, or other form of published guidance.” See Treas.
Reg. § 1.6011-4(b)(2). Respondent contends that this regulation apprised
Congress that it would operate outside of the APA by issuing future
notices (such as Notice 2017-10) without notice and comment.
Respondent further maintains that when Congress later defined
reportable transaction in section 6707A(c)(1), it incorporated this
procedure set forth in Treasury Regulation § 1.6011-4. We are not
persuaded. As an initial matter, we are less confident that Congress
understood that the IRS’s reference to the term “notice” within Treasury
Regulation § 1.6011-4 was a clearly defined procedure for identifying
listed transactions separate from traditional APA procedures,
particularly since Congress’ statutory text in no way authorizes such a
course. To the contrary, we believe that Congress operates under the
expectation that administrative agencies respect their APA obligations
except when Congress expressly chooses different procedures. 5 U.S.C.
§ 559.
Furthermore, Congress’ descriptive reference in section
6707A(c)(1) to “regulations prescribed under section 6011” does not
suggest otherwise. To provide the full context, section 6707A(c)(1)
20
defines a reportable transaction as “any transaction with respect to
which information is required to be included with a return or statement
because, as determined under regulations prescribed under section
6011, such transaction is of a type which the Secretary determines as
having a potential for tax avoidance or evasion.” This definitional text
of section 6707A(c) only links the penalty for reportable and listed
transactions to the five different types of reportable transactions
(including listed transactions) specifically designated in Treasury
Regulation § 1.6011-4(b)(2)–(7). In other words, we conclude that section
6707A(c) “addresses a ‘which transactions’ question, not a ‘what process’
question.” See Mann Constr., Inc., 27 F.4th at 1146.
Respondent also emphasizes the phrase “as determined under
regulations prescribed under section 6011,” contending that it refers
solely to the manner of determination under Treasury Regulation
§ 1.6011-4 and implicitly blesses all processes contained therein,
including the IRS’s noncompliance with notice-and-comment
rulemaking. As an initial matter, the general reference to “regulations
prescribed under section 6011” does not establish an express
congressional intention to displace fundamental APA principles for
future reportable transactions. As noted previously, the D.C. Circuit
concluded that statutory text in the Clean Water Act providing for
alternative notice and hearing procedures did not satisfy an express
congressional intent sufficient to deviate from the APA. Lake Carriers’
Ass’n, 652 F.3d at 6. In these cases, the text of section 6707A does not
reference any procedures whatsoever; and accordingly, we cannot
conclude it establishes Congress’ express intention to disregard APA
procedures.
Considering the statutory text before us, we are unable to
reasonably conclude that Congress demonstrated its express intention
to deviate from normal APA procedures by implementing a reticulated
scheme of the sort described in Marcello. To the contrary, we find
respondent has failed to establish that Congress expressed any
alternative procedures “so clearly different from those required by the
APA that it must have intended to displace the norm.” See Asiana
Airlines, 134 F.3d at 397; see also Mann Constr., Inc., 27 F.4th at 1146.
Rather, the “listed transaction regime” procedures as created by
Congress can be reconciled with the APA since the statutes merely
establish a disclosure and penalty regime to be administered by the IRS.
See Mann Constr., Inc., 27 F.4th at 1146; see also Citizens for Resp. &
Ethics in Wash., 993 F.3d at 892. Furthermore, the so-called fair
implication standard of an express congressional intent to replace the
21
APA—as argued by respondent—understates the burden imposed by
Congress and contravenes the Supreme Court’s interchangeable use of
the relevant formulations. Dorsey, 567 U.S. at 274; see supra p. 17. We
therefore reject this argument.
Even if we were to look to the congressional text “regulations
prescribed under section 6011” in conjunction with Treasury Regulation
§ 1.6011-4, respondent’s argument fares no better. Like the statutory
text, Treasury Regulation § 1.6011-4 does not seem very concerned with
setting up processes but rather is directed to naming categories of
transactions subject to IRS reporting requirements. While Treasury
Regulation § 1.6011-4 does include those transactions as determined by
the IRS to be tax avoidance transactions and identified “by notice,
regulation, or other form of published guidance,” we remain convinced
this regulatory text can also be read to demonstrate that the “as
determined” clause was intended to co-exist with the requirements of
the APA and for the IRS to identify future reportable transactions under
the APA’s ordinary regime of notice and comment. See Citizens for Resp.
& Ethics in Wash., 993 F.3d at 892. In any event, our task is to
determine whether Congress, not the IRS, amended the APA’s
presumed application.
We acknowledge that Congress understood that the IRS had
identified listed transactions before the enactment of the AJCA. We also
recognize that Congress, through its enactment of the AJCA, was
acknowledging the IRS’s disclosure framework already in place, with
the goal of strengthening its efficacy. See S. Rep. No. 108-192, at 90
(2003); see also H.R. Rep. No. 108-548, pt. 1, at 261 (2004). 18 But, we
cannot accept the enactment of the AJCA as Congress’ blanket approval
of the IRS’s method of identifying a syndicated conservation easement
as a listed transaction in Notice 2017-10 without notice and comment.
Next, respondent contends that Congress is “presumed to [have
been] aware” of the IRS’s actions when it amended section 6707A to
enhance the monetary penalties for taxpayers through subsequent
enactment; however, Congress is likewise equally aware of the normal
APA rulemaking requirements, which it must “expressly” override. See
18 Respondent also points to repealed text found in section 6707A, which
required the IRS to submit an annual report to Congress’ two tax writing committees,
as congressional oversight and evidence sufficient to supplant the standard APA
procedures. It is true that at one point in recent history there was an annual
mandatory reporting requirement; however, we do not see how the IRS’s prior
reporting obligation establishes Congress’ clear intent to override the APA.
22
5 U.S.C. § 559; see also Mayo Found. for Med. Educ. & Rsch. v. United
States, 562 U.S. 44, 55 (2011) (rejecting the concept of carving out unique
treatment for tax law under the APA). Like the Sixth Circuit, we
disagree with respondent’s contention that Congress’ subsequent
inaction means that it was “endorsing and ratifying” the IRS’s practice
to bypass the notice-and-comment requirements for future reportable
transactions. As well stated by the Sixth Circuit, “[i]naction may, but
does not always, mean ratification” and “rarely suffices to show express
modification of the APA’s bedrock procedural guarantees given the raft
of potential explanations for inaction on Capitol Hill.” Mann Constr.,
Inc., 27 F.4th at 1147.
We similarly find it inappropriate to assume Congress expected
that any subsequent amendment or addition to the listed transaction
regime by the IRS would be made without notice and comment under
the APA. In these cases, Notice 2017-10 was not issued until 2016. 19
Accordingly, we cannot subscribe to any alternative theory that prior
notice and comment made at the time of promulgation of Treasury
Regulation § 1.6011-4 satisfies the IRS’s ongoing obligation to comply
with the APA when issuing Notice 2017-10. To the contrary, we find
Congress has made it clear that each substantive rule of general
applicability, including amendment or revision thereto, must comply
with the APA. See 5 U.S.C. § 552.
Finally, we do not find a committee print from 2020 relating to
continued congressional oversight of syndicated conservation easement
transactions to be persuasive evidence that Congress intended to
override the APA’s applicability to the IRS’s listing of transactions. See
Staff of S. Comm. on Finance, 116th Cong., Syndicated Conservation-
Easement Transactions Exhibits 1–133, S. Prt. 116-44 (Comm. Print
2020). 20
We do not dispute the significance of congressional oversight of
so-called “Syndicated Conservation-Easement Transactions” and the
efforts to curtail these transactions. However, we do dispute a
19 We find the matter before us to be limited to the IRS’s actions with respect
to Notice 2017-10, and we do not reach any conclusion as to those listed transactions
the IRS identified when Treasury promulgated Treasury Regulation § 1.6011-4(b)(2).
20 The exhibits included letters from both IRS Acting Commissioner, David J.
Kautter, dated July 12, 2018, and IRS Commissioner Charles P. Rettig, dated
February 12, 2020, regarding congressional requests for information and analyses
related to Notice 2017-10.
23
conclusion that congressional oversight hearings, written statements by
the respective chairs of the Senate Finance Committee at the oversight
hearings, and testimony related to these transactions from executive
branch members can serve as express congressional intent sufficient to
override the requirements of the APA with respect to Notice 2017-10. 21
The foregoing congressional actions alone are insufficient to supplant
the APA, since the Supreme Court has told us exemptions from the
terms of the APA are not presumed and must be expressed by Congress.
See Marcello, 349 U.S. at 310 (considering legislative history in
conjunction with the final operative statutory text to find Congress’
express intent to override the APA).
After considering these additional arguments, we remain
unconvinced that Congress expressly authorized the IRS to identify a
syndicated conservation easement transaction as a listed transaction
without the APA’s notice-and-comment procedures, as it did in Notice
2017-10.
IV. Conclusion
We determine summary adjudication to be appropriate in
petitioner’s favor as to prohibiting the imposition of section 6662A
penalties against the LLCs in these cases since Notice 2017-10 was
issued without notice and comment as required under the APA.
Accordingly, we will grant petitioner’s Cross-Motions for Summary
Judgment, in part, and set aside 22 Notice 2017-10, including the
imposition of section 6662A penalties with respect to reportable
transactions.
21 Generally speaking, legislative history related to the Code includes
congressional members’ statements made in markup sessions, congressional tax
writing committees, committee reports, conference committee reports, and
postenactment tax committee reports.
22 Although this decision and subsequent order are applicable only to
petitioner, the Court intends to apply this decision setting aside Notice 2017-10 to the
benefit of all similarly situated taxpayers who come before us.
24
To reflect the foregoing,
An appropriate order will be issued.
Reviewed by the Court.
FOLEY, GUSTAFSON, MORRISON, BUCH, ASHFORD, URDA,
COPELAND, JONES, GREAVES, and MARSHALL, JJ., agree with
this opinion of the Court.
KERRIGAN, PARIS, PUGH, and TORO, JJ., concur in the result,
and TORO, J., agrees with Part III.A.
GALE and NEGA, JJ., dissent.
25
PUGH, J., concurring in the result: I write separately to explain
why, after careful consideration of the history of the statute at issue
alongside the tools of statutory construction and precedent, set forth
below, I reach the same conclusion as the majority.
Section 6707A was enacted in the American Jobs Creation Act of
2004 (AJCA), § 811(a), Pub. L. No. 108-357, 118 Stat. 1418, 1575–76. It
did two things. First, it imposed penalties for failure to disclose
information with respect to a “reportable transaction.” § 6707A(a)
and (b). Second, it defined “reportable transaction” and “listed
transaction” (a subcategory of reportable transaction) by reference to the
IRS’s process for identifying those transactions in the already-existing
regulations under section 6011. Section 6707A(c)(1) confirmed the IRS’s
authority to “determine[] under regulations prescribed under section
6011” whether a transaction is “of a type which the [IRS] determines as
having a potential for tax avoidance or evasion,” thereby making it a
“reportable transaction.” A reportable transaction that is “the same as,
or substantially similar to, a transaction specifically identified by the
[IRS] as a tax avoidance transaction for purposes of section 6011” is a
“listed transaction.” § 6707A(c)(2).
Pursuant to this authority, the IRS identified syndicated
conservation easement transactions as listed transactions in I.R.S.
Notice 2017-10, 2017-4 I.R.B. 544. 1 They joined a list first issued in 2000
that originally included 7 transactions, added 23 more transactions by
the time the AJCA was enacted, and added 5 more by the time Notice
2017-10 was issued (making syndicated conservation easement
transactions the 36th). See Recognized Abusive and Listed Transactions,
IRS, https://www.irs.gov/businesses/corporations/listed-transactions
(last visited Aug. 1, 2022). 2
I agree with the opinion of the Court that Notice 2017-10 is a
legislative rule. “[A] substantive or legislative rule, pursuant to properly
delegated authority, has the force of law, and creates new law or imposes
new rights or duties.” Jerri’s Ceramic Arts, Inc. v. Consumer Prod. Safety
Comm’n, 874 F.2d 205, 207 (4th Cir. 1989). By identifying syndicated
conservation easement transactions as listed transactions, Notice
2017-10 exposed taxpayers and representatives required to disclose
these transactions under Treasury Regulation § 1.6011-4 to stiff
1 The opinion of the Court and my concurrence address the validity of Notice
2017-10 only, not the tax treatment of the underlying transaction.
2 No transactions have been added to the list since Notice 2017-10.
26
penalties under section 6707A for failure to disclose. Notice 2017-10, § 3,
2017-4 I.R.B. at 546; see also op. Ct. pp. 8–15 (discussing obligations
imposed by Notice 2017-10 on taxpayers and material advisors).
And the IRS used authority delegated to it under sections 6011
and 6707A to do so. See CIC Servs., LLC v. IRS, 141 S. Ct. 1582, 1587
(2021) (noting that “the Code [through sections 6011 and 6707A]
delegates to the Secretary of the Treasury, acting through the IRS, the
task of identifying particular transactions with the requisite risk of tax
abuse” and stating the IRS “[u]se[d] that authority” to determine “that
so-called micro-captive transactions must be reported because of their
potential for tax evasion”); see also Mann Constr., Inc. v. United States,
27 F.4th 1138, 1144 (6th Cir. 2022) (stating that “the reality” is “that
the relevant statutory terms [section 6707A(c)] are not self-defining,
which explains why Congress delegated to the IRS authority to
‘determine[]’ and ‘identif[y]’ which transactions need to be reported”).
“When an agency relies on expressly delegated authority to establish
policy . . . courts generally treat the agency action as legislative, rather
than interpretive, rulemaking.” Children’s Hosp. of the King’s
Daughters, Inc. v. Azar, 896 F.3d 615, 622 (4th Cir. 2018) (citations
omitted) (holding that a U.S. Department of Health & Human Services
policy for calculating the amount of financial assistance available to
certain hospitals set forth in a Frequently Asked Questions document is
a legislative rule in part because the agency relied on statutorily
delegated authority to “determine[]” what constitutes “costs incurred”).
In general a legislative rule is subject to the notice-and-comment
requirements of the Administrative Procedure Act (APA) under 5 U.S.C.
§ 553(b). SIH Partners LLLP v. Commissioner, 150 T.C. 28, 41 (2018),
aff’d, 923 F.3d 296 (3d Cir. 2019). The parties agree that issuance of
Notice 2017-10 did not comply with these notice-and-comment
requirements.
The APA enumerates exceptions to its general rule of notice-and-
comment rulemaking, including “when the agency for good cause finds
(and incorporates the finding and a brief statement of reasons therefore
in the rules issued) that notice and public procedure thereon are
impracticable, unnecessary, or contrary to the public interest.” 5 U.S.C.
§ 553(b)(B). The IRS did not invoke the good cause exception when it
issued Notice 2017-10. See op. Ct. p. 16.
Another exception to the notice-and-comment requirement is a
necessary consequence of courts’ applying a basic precept of statutory
27
construction: “[O]ne legislature cannot abridge the powers of a
succeeding legislature.” Fletcher v. Peck, 10 U.S. (6 Cranch) 87, 135
(1810). A succeeding legislature can alter a prior legislative act “when
the legislature shall please to alter it.” Marbury v. Madison, 5 U.S.
(1 Cranch) 137, 177 (1803). As Justice Scalia wrote in his concurrence in
Lockhart v. United States, 546 U.S. 142, 148 (2005):
Among the powers of a legislature that a prior
legislature cannot abridge is, of course, the power to make
its will known in whatever fashion it deems appropriate—
including the repeal of pre-existing provisions by simply
and clearly contradicting them. Thus, in Marcello v. Bonds,
349 U.S. 302 (1955), we interpreted the Immigration and
Nationality Act [(INA), ch. 477, 66 Stat. 163 (1952),] as
impliedly exempting deportation hearings from the
procedures of the [APA], despite the requirement in § 12 of
the APA that “[n]o subsequent legislation shall be held to
supersede or modify the provisions of this Act except to the
extent that such legislation shall do so expressly,” 60 Stat.
244. The Court refused “to require the Congress to employ
magical passwords in order to effectuate an exemption
from the Administrative Procedure Act.” 349 U.S., at 310.
We have made clear in other cases as well, that an express-
reference or express-statement provision cannot nullify the
unambiguous import of a subsequent statute. In Great
Northern R. Co. v. United States, 208 U.S. 452, 465 (1908),
we said of an express-statement requirement that “[a]s the
section . . . in question has only the force of a statute, its
provisions cannot justify a disregard of the will of Congress
as manifested either expressly or by necessary implication
in a subsequent enactment.” (Emphasis added.) A
subsequent Congress, we have said, may exempt itself from
such requirements by “fair implication”—that is, without
an express statement. Warden v. Marrero, 417 U.S. 653,
659–660, n. 10 (1974). See also Hertz v. Woodman, 218 U.S.
205, 218 (1910).
The opinion of the Court cites Justice Scalia’s concurrence in
Lockhart for the proposition that the APA’s express-statement
requirement is consistent with the presumption against implied repeals.
See op. Ct. p. 16. And Justice Scalia acknowledges the Supreme Court’s
admonition in Marcello that exemptions from the APA are “not lightly
to be presumed” in the light of the APA’s express-statement
28
requirement. 5 U.S.C. § 559; Lockhart, 546 U.S. at 148–49; see Marcello,
349 U.S. at 310. But he then states that this assertion “may add little or
nothing to our already-powerful presumption against implied repeals.”
Lockhart, 546 U.S. at 149 (“An implied repeal will only be found where
provisions in two statutes are in irreconcilable conflict, or where the
latter Act covers the whole subject of the earlier one and is clearly
intended as a substitute.” (quoting Branch v. Smith, 538 U.S. 254, 273
(2003))). Justice Scalia’s stated reason for writing separately was to
emphasize that express-statement requirements are not binding and
that “[w]hen the plain import of a later statute directly conflicts with an
earlier statute, the later enactment governs, regardless of its compliance
with any earlier-enacted requirement of an express reference or other
‘magical password.’” Id. at 147, 149; see also Dorsey v. United States, 567
U.S. 260, 274–75 (2012) (quoting this statement when describing the
requisite inquiry as not a search for a magical password but rather for
assurance that “ordinary interpretive considerations point clearly in
th[e] direction” of superseding an express-statement requirement). I
understand Justice Scalia (and the Supreme Court) to be cautioning us
not to elevate express-statement requirements to exalted status or to
gloss over the text of the later enacted statute in the name of
“fundamental APA principles.” See op. Ct. p. 20.
Our task, then, is to read the later statute (section 6707A) and
determine whether its plain import directly conflicts with an earlier
statute (5 U.S.C. § 553(b)). Stated differently, we must decide “whether
Congress has established procedures so clearly different from those
required by the APA that it must have intended to displace the norm.”
Asiana Airlines v. FAA, 134 F.3d 393, 397 (D.C. Cir. 1998) (analyzing a
non-APA statutory scheme for potential conflict with the APA’s baseline
rule of notice and comment).
This analysis will produce a range of results. Some procedures
will fall on the “irreconcilable-with-the-APA” side of the line. See, e.g.,
Marcello, 349 U.S. at 309 (holding that INA procedures superseded the
APA’s notice-and-comment requirement because, among other reasons,
Congress mandated that the INA procedures “shall be the sole and
exclusive procedure for determining the deportability of an alien under
this section” (quoting INA § 242(b), 66 Stat. at 210)); Asiana Airlines,
134 F.3d at 398 (holding statute mandating that the FAA “publish in
the Federal Register an initial fee schedule and associated collection
process as an interim final rule, pursuant to which public comment will
be sought and a final rule issued” superseded the APA’s notice-and-
comment requirement because it required the FAA to follow procedures
29
that could not be reconciled with the APA (quoting 49 U.S.C.
§ 45301(b)(2))). Other procedures will fall on the “coexistence-with-the-
APA” side of the line. See, e.g., Coal. for Parity, Inc. v. Sebelius, 709 F.
Supp. 2d 10, 17, 19 (D.D.C. 2010) (holding statute providing that an
agency “may promulgate any interim final rules as the Secretary
determines are appropriate to carry out this [part]” did not supersede
the APA because the enabling provision was “permissive,” “wide-
ranging,” and “d[id] not contain any specific deadlines for agency
action”).
There is little doubt that in enacting section 6707A Congress
knew about and endorsed the existing administrative procedure for
determining reportable transactions and identifying listed ones. The
statute defines the terms by reference to the procedure by which the IRS
determines or identifies them. See § 6707A(c)(1) (defining a “reportable
transaction” by reference to the IRS’s “determin[ation] under
regulations prescribed under section 6011” that the transaction has a
potential for tax avoidance or evasion); § 6707A(c)(2) (defining “listed
transaction” by reference to “a transaction specifically identified by the
Secretary as a tax avoidance transaction for purposes of section 6011”).
Specifically, the procedure invoked by section 6707A is
“identifi[cation] by notice,[3] regulation, or other form of published
3 Here, “notice” refers to an IRS notice—“a public pronouncement by the
[Internal Revenue] Service that may contain guidance that involves substantive
interpretations of the Internal Revenue Code or other provisions of the law” and is
published in the Internal Revenue Bulletin, Internal Revenue Manual 32.2.2.3.3 (Aug.
11, 2004); it should be distinguished from a “notice of proposed rulemaking” published
in the Federal Register pursuant to the APA, 5 U.S.C. § 553(b); see, e.g., Treas. Reg.
§ 1.6662-3(b)(2) (“The term ‘rules or regulations’ includes the provisions of the Internal
Revenue Code, temporary or final Treasury regulations issued under the Code, and
revenue rulings or notices (other than notices of proposed rulemaking) issued by the
Internal Revenue Service and published in the Internal Revenue Bulletin.” (Emphasis
added.)).
We have concluded in other contexts that IRS notices are mere statements of
the Commissioner’s position and lack the force of law. Phillips Petroleum Co. v.
Commissioner, 101 T.C. 78, 99 n.17 (1993), aff’d, 70 F.3d 1282 (10th Cir. 1995). Here,
by contrast, we have concluded that Notice 2017-10 is a legislative rule because it
imposes substantive obligations on taxpayers by operation of section 6707A.
Because we are to presume Congress is aware of existing law, including
existing regulations, I am more confident than the majority, see op. Ct. p. 19, that
Congress understood that the IRS had already identified and would continue to
identify transactions as listed, perhaps even by issuing notices. But, as I explain below,
30
guidance.” Treas. Reg. § 1.6011-4. This existing procedure “under
regulations prescribed under section 6011” of determining reportable
transactions and identifying listed ones was introduced in temporary
regulations in 2000 that were finalized in 2003. T.D. 9046, 2003-1 C.B.
614, 616, 68 Fed. Reg. 10,161, 10,163 (Mar. 4, 2003).
“Congress is presumed to be aware of an administrative or
judicial interpretation of a statute and to adopt that interpretation when
it re-enacts a statute without change.” Lorillard v. Pons, 434 U.S. 575,
580–81 (1978) (citations omitted). “So too, where . . . Congress adopts a
new law incorporating sections of a prior law, Congress normally can be
presumed to have had knowledge of the interpretation given to the
incorporated law, at least insofar as it affects the new statute.” Id. at
581. We thus presume that Congress knew of Treasury’s (and the IRS’s)
interpretation of section 6011 in the reportable and listed transaction
disclosure regulations when Congress enacted section 6707A in 2004.
Therefore, section 6707A is a “[s]ubsequent statute” that adopts a
procedure that could potentially “supersede or modify” the general APA
requirement in 5 U.S.C. § 553 that legislative rules must go through
notice and comment. 5 U.S.C. § 559.
The opinion of the Court discounts these principles of statutory
construction and the history of section 6707A. It begins its analysis with
its conclusion that “section 6707A offers no express indication from
Congress exempting the IRS from the standard notice-and-comment
rulemaking.” See op. Ct. p. 19. It is difficult to conjure up what would
satisfy this requirement short of a magical password, to wit, “the APA
is displaced.” And I respectfully disagree with its dismissal of section
6707A(c) as mere “definitional text” that “only links” the statutory
penalties to the regulatory scheme, and its summary adoption of the
U.S. Court of Appeals for the Sixth Circuit’s conclusion that section
6707A(c) “addresses a ‘which transactions’ question, not a ‘what process’
question.” See op. Ct. p. 20 (quoting Mann Constr., 27 F.4th at 1146). 4
I do not believe that this presumption that Congress knew about the IRS procedure for
listing transactions by notice wins the day for the IRS. And on this point, the majority
and I do agree.
4 Our decision in this case is appealable to the U.S. Court of Appeals for the
Fourth Circuit. See § 7482(b)(1); Golsen v. Commissioner, 54 T.C. 742, 756–57 (1970),
aff’d, 445 F.2d 985 (10th Cir. 1971). As a court of nationwide jurisdiction, we should
not simply adopt the opinion of another circuit, but rather are obliged to perform the
necessary analysis of section 6707A ourselves, situating it among the range of
31
Two additional points also respond to this conclusion in the
opinion of the Court. First, whereas the opinion of the Court starts (and
apparently ends) with the heading of section 6707A(c), see op. Ct. p. 20
(“This definitional text . . . .”), I would begin with the text of section
6707A. See Yates v. United States, 574 U.S. 528, 553 (2015) (Kagan, J.,
dissenting). Second, despite (or in contradiction of) its conclusion that
section 6707A addresses a “which transactions” question, the Sixth
Circuit also recognized “the reality that the relevant statutory terms
[section 6707A(c)(1) and (2)] are not self-defining, which explains why
Congress delegated to the IRS authority to ‘determine[]’ and ‘identif[y]’
which transactions need to be reported.” Mann Constr., 27 F.4th at 1144.
That is, the statute points elsewhere: to the “regulations prescribed
under section 6011” and their method for determining reportable
transactions and identifying listed transactions. By failing to follow
where the statute leads, the opinion of the Court implies that Congress
cannot adopt procedures by referencing them in a statute. This abridges
“the power [of Congress] to make its will known in whatever fashion it
deems appropriate.” Lockhart, 546 U.S. at 148 (Scalia, J., concurring).
The remaining question then is whether, in adopting this
procedure by reference, Congress “must have intended to displace the
norm” of APA notice and comment because the adopted procedure is “so
clearly different from” it. Asiana Airlines, 134 F.3d at 397.
The procedures at issue in Marcello and Asiana Airlines set a high
bar for “displacing the norm” of APA notice and comment. In both
Congress mandated that the agency use a procedure different from or in
direct conflict with the one in the APA. The statute in Marcello provided
an alternate procedure and stated that it “shall be the sole and exclusive
procedure.” 349 U.S. at 309 (quoting INA § 242(b)). The statute in
Asiana Airlines required the use of a procedure that, by its terms,
“cannot be reconciled with the notice and comment requirements of [the
APA].” 134 F.3d at 398 (“[T]he agency was to issue not a proposed rule,
but an ‘interim final rule,’ and comment was to be sought ‘pursuant to,’
not in anticipation of, that rule.” (quoting 49 U.S.C. § 45301(b)(2))).
Here, Congress did not mandate a specific alternative rulemaking
procedure different from or in direct conflict with the APA. Rather,
section 6707A authorized the IRS to identify listed transactions “by
notice, regulation, or other form of published guidance,” Treas. Reg.
statutory provisions that may or may not have displaced APA notice-and-comment
rulemaking.
32
§ 1.6011-4(b)(2), permissive text more similar to that in Coalition for
Parity, Inc., 709 F. Supp. 2d at 19. And the procedure “by notice,
regulation, or other form of published guidance” can, by its terms, be
reconciled with the APA; nothing in it directly conflicts with the APA
like the “sole and exclusive” or “interim final rule, pursuant to which
public comment will be sought” procedures at issue in Marcello and
Asiana Airlines.
Any argument to the contrary puts a great deal of weight on the
contention that identification “by notice” is irreconcilable with the APA.
And the weight that the phrase “by notice” can bear is circumscribed by
the adoption of penalties in section 6707A to give force to the listed
transaction regime. To conclude that Congress was ratifying the IRS’s
pre-AJCA practice of listing transactions without notice and comment
we must explain why, after section 6707A added penalties, notice and
comment could not be required for future notices. 5 The imposition of
penalties is, after all, a critical reason we conclude that the listing of a
transaction is a legislative rule subject to APA notice and comment.
I would be loath to supplant the APA requirements even if I could
come up with my own policy justification for their nonapplication; that
is not our place, but Congress’. Congress also is presumed to be aware
that to supersede APA notice and comment, it must do so “expressly,”
see 5 U.S.C. § 559, or by “necessary implication,” “clear implication,” or
“fair implication,” see Dorsey, 567 U.S. at 274–75. And a policy
justification for skipping notice and comment does not necessarily
render a statutory scheme irreconcilable with the APA.
Finally, it is worth noting that if notice-and-comment rulemaking
impedes the IRS’s ability to identify transactions with the potential for
tax avoidance or evasion, the APA and the Internal Revenue Code
already provide options. Under the APA, the IRS could invoke the good
cause exception, as it did when issuing regulations targeting another
listed transaction, the so-called Son-of-Boss transaction, for example.
See T.D. 9062, 2003-2 C.B. 46, 48 (“These temporary regulations are
necessary to prevent abusive transactions of the type described in the
Notice 2000-44. Accordingly, good cause is found for dispensing with
notice and public procedure pursuant to 5 U.S.C. 553(b)(B) and for
5 Our holding does not invalidate notices that had been issued before Congress
enacted penalties. Those notices are not before us today and the circumstances
surrounding their issuance are distinguishable. And Congress would be presumed to
know about and adopt pre-existing notices when it adopted pre-existing procedures for
identifying listed transactions.
33
dispensing with a delayed effective date pursuant to 5 U.S.C. 553(d)(1)
and (3).”). And under section 7805(b)(3), the IRS “may provide that any
regulation may take effect or apply retroactively to prevent abuse.”
In sum, I concur in the result because the procedure referenced
by section 6707A—“identifi[cation] by notice, regulation, or other form
of published guidance” by the IRS, Treas. Reg. § 1.6011-4(b)(2)—is not a
“procedure[] so clearly different from [that] required by the APA that it
must have intended to displace the norm,” Asiana Airlines, 134 F.3d
at 397.
KERRIGAN, PARIS, ASHFORD, and COPELAND, JJ., agree
with this opinion concurring in the result.
34
TORO, J., concurring in the result: As the opinion of the Court
and Judge Pugh correctly conclude, I.R.S. Notice 2017-10, 2017-4 I.R.B.
544, which identified the type of transaction at issue in this case as a
listed transaction, is a legislative rule under the Administrative
Procedure Act (APA). See 5 U.S.C. §§ 551, 553. But the Internal
Revenue Service (IRS) did not follow the APA’s notice-and-comment
procedures when adopting the rule. See 5 U.S.C. § 553(b) and (c).
Therefore, to resolve this case, we must decide whether the American
Jobs Creation Act of 2004 (AJCA), Pub. L. No. 108-357, 118 Stat. 1418,
exempted the Secretary of the Treasury from following the APA’s
requirements for purposes of identifying listed transactions after the
enactment of the AJCA. See 5 U.S.C. § 559. If not, then the
section 6662A penalty determined by the Commissioner here cannot
apply.
The parties’ dispute focuses on section 6707A(c), and in
particular, whether that provision adopted by reference Treasury
Regulation § 1.6011-4, T.D. 9046, 2003-1 C.B. 614, 616, 68 Fed. Reg.
10,163 (Mar. 4, 2003) (2003 regulation). 1 In my view, it is unnecessary
to decide whether Congress did or did not incorporate the 2003
regulation in section 6707A(c). Even if (for the sake of analysis) I were
to agree with the Commissioner that (1) the 2003 regulation established
procedures for identifying listed transactions and (2) Congress adopted
those procedures by reference when enacting section 6707A(c), the
Commissioner still would not prevail because the procedures reflected
in the 2003 regulation are not, by their terms, inconsistent with the
APA. Put another way, the Commissioner could have followed both the
procedures set out in the 2003 regulation and the APA when issuing
Notice 2017-10.
Specifically, contrary to the Commissioner’s position, the
statement in the 2003 regulation that the IRS may identify listed
transactions “by notice,” see Treas. Reg. § 1.6011-4(b)(2), is fully
compatible with the APA. For example, the IRS could comply with the
APA by issuing a notice that establishes good cause for proceeding
without a prior opportunity for comment. See 5 U.S.C. § 553(b)(B).
Moreover, as Judge Pugh observes, see Pugh concurring op. p. 32, “the
weight that the [pre-AJCA regulatory] phrase ‘by notice’ can bear is
1 The regulation has since been amended, but for purposes of this discussion I
focus on the version that was in effect before the adoption of the AJCA. One pre-AJCA
amendment, see T.D. 9108, 2004-1 C.B. 429, 68 Fed. Reg. 75,128 (Dec. 30, 2003), had
no effect on the provisions discussed.
35
circumscribed by [Congress’s] adoption of” a new and significant
enforcement mechanism. “The imposition of penalties is, after all, a
critical reason we conclude that the listing of a transaction is a
legislative rule subject to APA notice and comment.” See Pugh
concurring op. p. 32. I am not persuaded that Congress, when
instituting this penalty regime, intended to strip away the protections
of the APA for future listed transactions, see, e.g., Azar v. Allina Health
Servs., 139 S. Ct. 1804, 1816 (2019) (explaining that the purpose of
notice-and-comment rulemaking is to “give[] affected parties fair
warning of potential changes in the law and an opportunity to be heard
on those changes” while “afford[ing] the agency a chance to avoid errors
and make a more informed decision”); Dep’t of Homeland Sec. v. Regents
of the Univ. of Cal., 140 S. Ct. 1891, 1929 n.13 (2020) (Thomas, J.,
concurring in the judgment in part, dissenting in part) (“[T]he notice and
comment process at least attempts to provide a ‘surrogate political
process’ that takes some of the sting out of the inherently undemocratic
and unaccountable rulemaking process.” (quoting Michael Asimow,
Interim-Final Rules: Making Haste Slowly, 51 Admin. L. Rev. 703, 708
(1999))), or to ratify a practice developed for a fundamentally different
context, i.e., the IRS’s pre-AJCA practice of listing transactions without
notice and comment and without a showing of good cause for not
providing notice and comment.
Absent conflict in the instructions Congress provided in the AJCA
and the instructions Congress provided in the APA, the Commissioner
had an obligation to follow both. See Posadas v. Nat’l City Bank, 296
U.S. 497, 503 (1936) (“Where there are two acts upon the same subject,
effect should be given to both if possible.”); see also Dorsey v. United
States, 567 U.S. 260, 274 (2012) (discussing the standard for departures
from the APA); Nat’l City Bank, 296 U.S. at 503 (discussing the standard
for implied repeals); Lockhart v. United States, 546 U.S. 142, 149 (2005)
(Scalia, J., concurring) (discussing the standard for implied repeals). As
all agree, this the Commissioner did not do. Accordingly, the section 6662A
penalty may not be sustained, as the opinion of the Court properly
concludes.
I write separately to offer a few observations on the extent to
which section 6707A(c) might be viewed as incorporating the 2003
regulation, given the focus on this issue by the parties and my
colleagues.
36
AJCA Background
To begin with, I agree with Judge Pugh and the Commissioner
that the context in which Congress enacted section 6707A and the other
provisions of the AJCA is important. See Marcello v. Bonds, 349 U.S.
302, 310 (1955) (noting that the Court could not “ignore the background
of the . . . legislation”). To summarize the context here, in 2000, in an
effort to address tax shelters, the U.S. Department of the Treasury and
the IRS issued temporary and proposed regulations under section 6011.
See Temp. Treas. Reg. § 1.6011-4T, 65 Fed. Reg. 11,205 (Mar. 2, 2000);
Prop. Treas. Reg. § 1.6011-4, 65 Fed. Reg. 11,271 (Mar. 2, 2000). The
regulations, which were finalized in 2003 after several rounds of
revision, 2 required taxpayers to provide information with respect to
“reportable transactions,” see Treas. Reg. § 1.6011-4(a), a category that
was defined to include “listed transactions,” see id. para. (b)(1) and (2).
Thus, the statutory terms we are focused on in this case were first
defined by temporary and proposed regulations culminating in the 2003
regulation.
When it adopted the AJCA in 2004, Congress established new
penalties and other rules that hinged on the terms “reportable
transaction” and “listed transaction.” See, e.g., AJCA §§ 811 and 812,
814–816, 118 Stat. at 1575–84. 3 Congress appears to have drawn on the
regulatory definitions of those terms to craft the statutory definitions.
See I.R.C. § 6707A(c); Treas. Reg. § 1.6011-4(b)(1) and (2). Additionally,
the statutory definitions refer to “determin[ations] under regulations
prescribed under section 6011,” see I.R.C. § 6707A(c)(1), and to
“identif[ications] . . . for purposes of section 6011,” see I.R.C.
§ 6707A(c)(2). So, in my view, there is no doubt that Congress
“legislated against the backdrop of [the 2003 regulation]” when it
enacted the AJCA, as the Commissioner contends, see Resp’t’s Mem. in
Supp. of Obj. to Mot. for Partial Summ. J. 35, and that Congress sought,
2 The revisions included changes made later in 2000, see Temp. Treas. Reg.
§ 1.6011-4T, 65 Fed. Reg. 49,909 (Aug. 16, 2000); Prop. Treas. Reg. § 1.6011-4, 65 Fed.
Reg. 49,955 (Aug. 16, 2000), one set of changes in 2001, see Temp. Treas. Reg. § 1.6011-
4T, 66 Fed. Reg. 41,133 (Aug. 7, 2001); Prop. Treas. Reg. § 1.6011-4, 66 Fed. Reg. 41,169
(Aug. 7, 2001), and two sets of changes in 2002, see Temp. Treas. Reg. § 1.6011-4T, 67
Fed. Reg. 41,324 (June 18, 2002); Prop. Treas. Reg. § 1.6011-4, 67 Fed. Reg. 41,362
(June 18, 2002); Temp. Treas. Reg. § 1.6011-4T, 67 Fed. Reg. 64,799 (Oct. 22, 2002);
Prop. Treas. Reg. § 1.6011-4, 67 Fed. Reg. 64,840 (Oct. 22, 2002).
3 These penalties and rules appear in sections 6111, 6112, 6501, 6662A, 6664,
6707, and 6707A, among others.
37
at least to some extent, to incorporate the structure Treasury and the
IRS had established there into the new penalty regime.
But this general observation is insufficient to determine with
precision what Congress incorporated when it enacted section 6707A(c).
To answer that question, I turn to the text of the provisions at issue. See
Nat’l Fed’n of Indep. Bus. v. Sebelius (NFIB), 567 U.S. 519, 544 (2012)
(“[T]he best evidence of Congress’s intent is the statutory text.”); United
States v. Am. Trucking Ass’ns, 310 U.S. 534, 543 (1940) (“There is . . . no
more persuasive evidence of the purpose of a statute than the words by
which the legislature undertook to give expression to its wishes.”);
Grajales v. Commissioner, 156 T.C. 55, 61 (2021) (“NFIB, 567 U.S. 544,
directs us to look to the statutory text as ‘the best evidence of Congress’s
intent.’ ”), aff’d, 47 F.4th 58 (2d Cir. 2022).
Section 6662A Penalty and Section 6707A(c) Definitions
The question ultimately before the Court is whether petitioner
may be held liable for the penalty imposed by section 6662A. That
penalty applies if a taxpayer’s return reflects a “reportable transaction
understatement,” which includes, among others, items attributable to
“any listed transaction.” I.R.C. § 6662A(a) and (b). Section 6662A(d)
defines the terms “listed transaction” and “reportable transaction” by
reference to “the respective meanings given to such terms by section
6707A(c).”
Section 6707A(c)(2) tells us that “[t]he term ‘listed transaction’
means a reportable transaction which is the same as, or substantially
similar to, a transaction specifically identified by the Secretary as a tax
avoidance transaction for purposes of section 6011.” In other words, a
listed transaction is a reportable transaction with certain characteristics.
The term “reportable transaction” is also a defined term. It
means “any transaction with respect to which information is required to
be included with a return or statement because, as determined under
regulations prescribed under section 6011, such transaction is of a type
which the Secretary determines as having a potential for tax avoidance
or evasion.” I.R.C. § 6707A(c)(1).
Analysis
Several observations relevant to the APA analysis follow from the
statutory text. First, neither section 6662A nor section 6707A (or, for
that matter, section 6011) refers to the APA. Second, although
38
section 6707A(c)(2), which defines listed transactions, contemplates
that the Secretary must “specifically identif[y]” certain types of
transactions as having the characteristics required to be listed
transactions, the statute is silent on how that identification should be
made. Third, section 6707A(c)(1), which defines reportable transactions,
is more explicit about the Secretary’s procedural responsibilities. It
provides that the authority contemplated by it—that is, the authority to
require certain information to be included with a return or statement
for a specific reason—will be exercised “as determined under regulations
prescribed under section 6011.”
Nothing in the statutory text thus expressly turns off the APA
requirements that would otherwise govern the Secretary’s designation of
a listed transaction under section 6707A(c)(2). See 5 U.S.C. § 559.
Moreover, I see nothing in the text of section 6707A(c)(2) that gives rise
to a “fair” implication of a departure from the APA requirements, let
alone a “necessary” or “clear” one. See Dorsey, 567 U.S. at 274.
The Commissioner, however, contends that Congress’s use of the
clause “as determined under regulations prescribed under section 6011”
in defining reportable transactions, I.R.C. § 6707A(c)(1), signals its wish
to supplant the APA’s procedures in favor of the 2003 regulatory
provision. That regulation defines listed transactions to include
transactions that the IRS “identified by notice, regulation, or other form
of published guidance as a listed transaction.” Treas. Reg. § 1.6011-
4(b)(2). I am skeptical that the “as determined” clause bears the weight
the Commissioner places on it, for a few reasons.
To begin, it is worth noting that the “as determined” clause (with
its reference to regulations under section 6011) appears in the definition
of the term “reportable transaction” in section 6707A(c)(1), but is absent
from the definition of the term “listed transaction” in section 6707A(c)(2).
The term that matters most in deciding this case is “listed transaction,”
not “reportable transaction.” 4 And courts assume that when Congress
includes specific language in one provision and excludes it from a
neighboring provision, it does so intentionally. See, e.g., Loughrin v.
United States, 573 U.S. 351, 358 (2014) (“We have often noted that when
‘Congress includes particular language in one section of a statute but
4 The Commissioner asserts that the returns in this case improperly reported
a listed transaction. See I.R.C. § 6662A(a) and (b)(1) and (2)(A). He does not assert
that the returns reported a reportable transaction other than a listed transaction with
a significant purpose of avoiding or evading federal income tax. See I.R.C.
§ 6662A(b)(2)(B).
39
omits it in another’—let alone in the very next provision—this Court
‘presume[s]’ that Congress intended a difference in meaning.” (quoting
Russello v. United States, 464 U.S. 16, 23 (1983))); Grajales v.
Commissioner, 47 F.4th at 62 (2d Cir. 2022) (“When Congress uses
certain language in one section of the statute yet omits it in another
section of the same Act, ‘it is generally presumed that Congress acts
intentionally and purposefully in the disparate inclusion or exclusion’ of
that language.” (quoting Homaidan v. Sallie Mae, Inc., 3 F.4th 595, 602
(2d Cir. 2021))), aff’g 156 T.C. 55. Thus, whatever meaning one is
intended to glean from the “as determined” clause for purposes of section
6707A(c)(1), it does not shed much light on the procedural steps the
Secretary must take in making the specific identification called for by
section 6707A(c)(2). And it would be curious for Congress to signify its
decision to depart from APA procedures with respect to listed
transactions by adding the “as determined” clause to section 6707A(c)(1)
(which defines a reportable transaction), rather than section 6707A(c)(2)
(which defines a listed transaction). Put differently, one would have
expected instructions about how the Secretary must “specifically
identif[y]” the transactions that should be listed in the definition of that
term, rather than in the definition of the more general “reportable
transaction.”
Furthermore, the 2003 regulation was focused on the
characteristics of reportable transactions and not on processes for
identifying them. Indeed, it did not contain any overall provisions
prescribing any process the Secretary would follow in identifying
reportable transactions. Rather, it simply provided that “[a] reportable
transaction is a transaction described in any of the paragraphs (b)(2)
through (7) of this section.” Treas. Reg. § 1.6011-4(b)(1). It went on to
explain that “[t]here are six categories of reportable transactions: listed
transactions, confidential transactions, transactions with contractual
protection, loss transactions, transactions with a significant book-tax
difference, and transactions involving a brief asset holding period.” Id.
The only text that may be fairly viewed as process focused in the entire
2003 regulation is a phrase of nine words in the definition of a listed
transaction, as described below. In the absence of any overall direction
in the 2003 regulation about process, it seems difficult to agree with the
Commissioner’s view that the “as determined” clause was intended to
signify a congressional decision to depart from the APA-mandated
process for administrative rulemaking.
Of course, as the Commissioner would surely point out, we are
concerned specifically with listed transactions in this case. And in
40
defining listed transactions, the 2003 regulation did specify a process,
as follows:
A listed transaction is a transaction that is the same as or
substantially similar to one of the types of transactions
that the Internal Revenue Service (IRS) has determined to
be a tax avoidance transaction and identified by notice,
regulation, or other form of published guidance as a listed
transaction.
Treas. Reg. § 1.6011-4(b)(2) (emphasis added). In the Commissioner’s
view, the “as determined” clause in section 6707A(c)(1) incorporated this
regulatory definition, including the nine procedural words highlighted
above.
This argument, however, overlooks a critical fact: When it
enacted the AJCA, Congress adopted its own statutory definition of
“listed transaction” at section 6707A(c)(2):
The term “listed transaction” means a reportable [ 5]
transaction which is the same as, or substantially similar
to, a transaction specifically identified by the Secretary as
a tax avoidance transaction for purposes of section 6011.
Comparing the two definitions, one can see that the statute essentially
paraphrases the regulatory definition with one key difference: It omits
the nine procedural words italicized above. The Commissioner’s entire
case rests on those nine words, and their omission in the statute is
notable in light of the otherwise parallel definitions.
To put this point in another way, if Congress had intended to
adopt a specific process for the Secretary to use in identifying listed
transactions, Treasury Regulation § 1.6011-4(b)(2) provided a ready
model. Yet, despite apparently incorporating other words from the
regulation into the statutory definition, Congress did not incorporate the
nine procedural words. Instead, it chose to modify them, omitting any
mention of process from section 6707A(c)(2). Faced with that
Congressional choice, I would be disinclined to read section 6707A(c)(1)
5 The regulatory definition begins by stating that a listed transaction is “a
transaction” instead of “a reportable transaction.” But the inclusion of the word
“reportable” in the statutory definition is consistent with the structure of the 2003
regulation, which defined listed transactions as a subset of reportable transactions.
See Treas. Reg. § 1.6011-4(b)(1) and (2).
41
and the “as determined” clause as a back-door way of establishing a
process for identifying listed transactions under section 6707A(c)(2) (as
the Commissioner urges). See Knight v. Commissioner, 552 U.S. 181,
188 (2008) (“The fact that [Congress] did not adopt [a] readily available
and apparent alternative strongly supports rejecting [a] reading . . .
[that relies on the rejected alternative text].”).
To summarize then, the Commissioner argues that
section 6707A(c)(1) overrides the APA by cross-referencing the 2003
regulation. But he overlooks that (1) the regulation is barely concerned
with process, mentioning it in just nine words in the definition of listed
transaction; (2) Congress adopted a statutory definition of listed
transaction that paraphrases the regulation but excludes the nine
procedural words; and (3) unlike the definition of reportable transaction
in section 6707A(c)(1), the definition of listed transaction in
section 6707A(c)(2), which is what we are primarily concerned with
here, does not include a cross-reference to regulations under
section 6011.
All of this suggests that the “as determined” clause in
section 6707A(c)(1) is an awfully thin reed to support an express or
implied departure from the APA. See 5 U.S.C. § 559. Although I do not
think we need to decide the issue to dispose of this case, it seems to me
difficult to conclude that Congress incorporated in section 6707A(c) the
process set in the 2003 regulation when Congress seems to have gone
out of its way to exclude the process-related words of the regulation from
the text that it used.
With these observations, I agree with the opinion of the Court’s
disposition of the section 6662A penalty issue.
COPELAND, J., agrees with this opinion concurring in the result.
42
GALE, J., dissenting: In my view, in enacting section 6707A, with
its express reference to the regulations under section 6011, Congress
intended to except the identification of “listed transactions” from the
notice-and-comment requirements of the Administrative Procedure Act
(APA). See 5 U.S.C. § 553(b). I would first note that I agree with the
lion’s share of the analysis in Judge Pugh’s concurring opinion,
including the conclusion that the Internal Revenue Service’s
identification of syndicated conservation easement transactions as
listed transactions is a legislative rule. Importantly, I agree with its
critique of the opinion of the Court’s and the Court of Appeals for the
Sixth Circuit’s conclusion that the reference in section 6707A to the
section 6011 regulations “addresses a ‘which transactions’ question, not
a ‘what process’ question.” See op. Ct. p. 20 (quoting Mann Constr., Inc.
v. United States, 27 F.4th 1138, 1146 (6th Cir. 2022)). Instead, I
conclude that the reference to the section 6011 regulations goes to the
heart of the process question.
And, as Judge Pugh notes, the procedure in the section 6011
regulations for making a transaction a “listed” one, subject to disclosure
requirements, that is referenced in section 6707A for penalty purposes,
is “identifi[cation] by notice, regulation, or other form of published
guidance.” Treas. Reg. § 1.6011-4(b)(2) (2003) (emphasis added). The
reference to identification “by notice” is significant. A “notice” is a long
recognized species of written guidance published by the Internal
Revenue Service “when the Service determines that a public concern
requires a speedy response” and is correspondingly “[i]ssued without
public notice and comment.” Stephanie Hunter McMahon, Classifying
Tax Guidance According to End Users, 73 Tax Law. 245, 256–58 (2020).
This type of “notice” is to be distinguished from the notice entailed in
notice-and-comment rulemaking enumerated in the APA. See 5 U.S.C.
§ 553(b).
Regulations under section 6011 permitting the identification of
listed transactions “by notice” were first promulgated as temporary and
proposed regulations in 2000. See T.D. 8877, 2000-1 C.B. 747; Prop.
Treas. Reg. § 1.6011-4, 65 Fed. Reg. 11,269 (Mar. 2, 2000). The
regulations (Treas. Reg. § 1.6011-4) were made final in 2003. T.D. 9046,
2003-1 C.B. 614. By the time section 6707A was enacted in 2004, the
Service had identified 30 “listed transactions” pursuant to the section
6011 regulations, all without adherence to the notice-and-comment
requirements of the APA. “Congress is presumed to be aware of an
administrative or judicial interpretation of a statute and to adopt that
interpretation when it re-enacts a statute without change.” Lorillard v.
43
Pons, 434 U.S. 575, 580–81 (1978). “So too, where . . . Congress adopts
a new law incorporating sections of a prior law, Congress normally can
be presumed to have had knowledge of the interpretation given to the
incorporated law, at least insofar as it affects the new statute.” Id.
at 581. In this instance, Congress was not only presumptively aware
when cross-referencing the section 6011 regulations of the Service’s
interpretation of its authority under section 6011 to identify a listed
transaction without adhering to the notice-and-comment requirements
of the APA. See 5 U.S.C. § 553(b). Congress was actually aware, having
cited the temporary and final regulations permitting identification “by
notice” in all accompanying committee reports. See H.R. Rep. No.
108-755, at 595 (2004) (Conf. Rep.), as reprinted in 2004 U.S.C.C.A.N.
1341, 1649; S. Rep. No. 108-192, at 89 (2003), 2003 WL 22668223, at
*89; H.R. Rep. No. 108-548, pt. 1, at 260 (2004), 2004 WL 1380512, at
*260. Consistent with the foregoing, Judge Pugh’s concurring opinion
finds “little doubt that in enacting section 6707A Congress knew about
and endorsed the existing administrative procedure for determining
reportable transactions and identifying listed ones.” Pugh concurring
op. p. 29. Since this existing administrative procedure is
“identifi[cation] by notice, regulation or other form of published
guidance,” Judge Pugh acknowledges that it could potentially supersede
or modify the APA’s general requirement that legislative rules must go
through notice and comment. See 5 U.S.C. § 553; Pugh concurring op.
p. 30. Whether the APA has been superseded or modified depends,
Judge Pugh reasons, upon the application of a caselaw test best
summarized as “whether Congress has established procedures so clearly
different from those required by the APA that it must have intended to
displace the norm.” See 5 U.S.C. § 553; Pugh concurring op. p. 28
(quoting Asiana Airlines v. FAA, 134 F.3d 393, 397 (D.C. Cir. 1998)).
I agree with Judge Pugh that this is the appropriate test in the
circumstances. I part ways, however, with her application of the test.
Plainly put, identification of a listed transaction “by notice” cannot be
reconciled with APA notice-and-comment procedures. See 5 U.S.C.
§ 553. The latter requires prior notice to and opportunity for comment
from the public for an identification to become effective—a significant
and time-consuming set of procedural steps—while the former does not.
Congress cross-referenced and thereby incorporated the former
procedure, well-established at the time, into section 6707A. I find it very
unlikely that, in cross-referencing the extant identification procedures
in the section 6011 regulations, Congress intended as significant a
modification to them as APA notice and comment would require without
any mention of that modification in the accompanying committee
44
reports. The “necessary,” “clear,” or “fair implication,” see Dorsey v.
United States, 567 U.S. 260, 274–75 (2012), of Congress’ action in
incorporating the section 6011 regulations into the statute is that
Congress intended to displace the otherwise applicable notice-and-
comment requirements of the APA. See 5 U.S.C. § 553.
I find further support for this interpretation of section 6707A in
Congress’ subsequent enactment of section 4965 two years later. Section
4965 imposes excise taxes on tax-exempt entities and their managers for
participation in listed transactions. See Tax Increase Prevention and
Reconciliation Act of 2005, Pub. L. No. 109-222, § 516, 120 Stat. 345, 368
(2006). At that time, in its description of then-present law, the
conference report on this legislation described a listed transaction as
follows:
A listed transaction means a reportable transaction which
is the same as, or substantially similar to, a transaction
specifically identified by the Secretary as a tax avoidance
transaction for purposes of section 6011 . . . and identified
by notice, regulation, or other form of published guidance
as a listed transaction.
H.R. Rep. No. 109-455, at 125 (2006) (Conf. Rep.), as reprinted in 2006
U.S.C.C.A.N. 234, 321 (emphasis added). Thus, a subsequent Congress
understood and reconfirmed the authority of the Secretary (and the
Service as his or her designee) to identify a transaction as “listed” merely
“by notice.” The views of a subsequent Congress in a committee report
concerning the interpretation of a prior enactment are entitled to
significant weight. Seatrain Shipbuilding Corp. v. Shell Oil Co., 444
U.S. 572, 596 (1980); Sykes v. Columbus & Greenville Ry., 117 F.3d 287,
293–94 (5th Cir. 1997); United States v. Wilson, 884 F.2d 174, 178 n.7
(5th Cir. 1989); Sorrell v. Commissioner, 882 F.2d 484, 489–90 (11th Cir.
1989), rev’g T.C. Memo. 1987-351; Johnsen v. Commissioner, 794 F.2d
1157, 1163 (6th Cir. 1986), rev’g 83 T.C. 103 (1984).
Because I conclude that Congress intended in section 6707A to
displace the APA requirement of notice and comment for the
identification of listed transactions, I dissent from the opinion of the
Court.
45
NEGA, J., dissenting: The American Jobs Creation Act of 2004
(AJCA), Pub. L. No. 108-357, 118 Stat. 1418, and its legislative history
are consistent with the Congress’ decades-long effort to respond to the
kind of transactions addressed by the AJCA. Such transactions
historically have been viewed as a threat to the voluntary compliance
tax system measured in terms greater than any direct loss in revenue
from the transactions themselves. This long history set the stage for the
AJCA.
Further, I am not aware of any debate over whether the AJCA
was intended to allow the Internal Revenue Service (IRS) to improve the
administration of the tax law and enhance general compliance. In my
view, the legislation does exactly that by limiting the application of the
Administrative Procedure Act (APA), 5 U.S.C. §§ 551–559, 701–706. I
cannot agree that Congress enacted legislation so obviously in
contradiction of the APA as the majority does.
Under one basic rule of statutory interpretation, “Congress is
presumed to be aware of an administrative or judicial interpretation of
a statute and to adopt that interpretation when it re-enacts a statute
without change.” Lorillard v. Pons, 434 U.S. 575, 580–81 (1978). We can
also take judicial notice that Congress would be aware of the inherent
delays were the APA fully applicable. Congress could easily have
decided that the delays inherent in the APA were outweighed by faster
application of the AJCA to tax returns reflecting such transactions. I
believe this to be true.
The issue is whether, in adopting the IRS’s existing regulations
into the statutory scheme, Congress “must have intended to displace the
norm” of APA notice and comment because the adopted procedure is “so
clearly different from” it. Asiana Airlines v. FAA, 134 F.3d 393, 397 (D.C.
Cir. 1998). I find that to be the case.
I believe that the majority’s holding is worryingly close to a
standard requiring “magical passwords in order to effectuate an
exemption from the Administrative Procedure Act.” Marcello v. Bonds,
349 U.S 302, 310 (1955). In that case, after exhaustive analysis, the
Supreme Court found that there was enough evidence to find that the
1952 Immigration and Nationality Act did not violate the APA.
Congress was aware of the IRS’s rulemaking in this area when it
enacted the AJCA to bolster the IRS’s efforts by adding a penalty to the
existing regime. Congress ratified the existing procedures for identifying
46
these transactions even in the absence of strict adherence to the APA’s
notice-and-comment requirements in those procedures. Section
6707A(c)(1) and (2) confirm my understanding. The cross-reference to
the regulations under section 6011 constitutes strong textual evidence
of Congress’ intent to replace the ritual application of the APA in this
area.
I disagree that Congress failed to “expressly” override the
application of the APA to the IRS process incorporated into law by the
AJCA. The nature of the legislation as well as the legislative history
associated with it that the opinion of the Court finds unpersuasive leads
me to the conclusion that Congress did not intend to enact the AJCA
penalty regime subject to the time-consuming notice-and-comment
procedures of the APA. In the light of congressional knowledge of the
existence of the APA when enacting the AJCA, I cannot agree that
Congress added a penalty regime to enforce the existing IRS rulemaking
without addressing an obvious APA vulnerability, at least, to the then-
listed transactions.
For these reasons, I dissent. | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488098/ | 11/18/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0041
No. DA 22-0041
STATE OF MONTANA,
Plaintiff and Appellee,
v.
JAMES MICHAEL PARKER,
Defendant and Appellant.
ORDER
Upon consideration of Appellant’s motion for extension of time,
and good cause appearing,
IT IS HEREBY ORDERED that Appellant is granted an extension
of time to and including December 27, 2022, within which to prepare,
file, and serve Appellant’s opening brief on appeal.
Electronically signed by:
Mike McGrath
Chief Justice, Montana Supreme Court
November 18 2022 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488097/ | In the United States Court of Federal Claims
No. 16-840C
(Filed Under Seal: November 1, 2022)
(Re-Issued for Publication: November 18, 2022) 1
*****************************************
*
BITMANAGEMENT SOFTWARE GMBH, *
Copyright Infringement;
* Software; Licenses; Actual
Plaintiff, * Usage; Damages; Remand; 28
v. * U.S.C. § 1498(b); 28 U.S.C. §
* 1498(c).
THE UNITED STATES, *
*
Defendant. *
*
*****************************************
Brent J. Gurney, Wilmer Cutler Pickering Hale and Dorr LLP, Washington DC, with
whom were Leon T. Kenworthy, Michael Carpenter, and Mark Fleming, Of Counsel, Wilmer
Cutler Pickering Hale and Dorr LLP, for Plaintiff.
Scott Bolden, Deputy Director, Commercial Litigation Branch, Civil Division, United
States Department of Justice, Washington DC, with whom were Michael Granston, Deputy
Assistant Attorney General, and Gary L. Hausken, Director, for Defendant. Patrick C. Holvey,
United States Department of Justice, Jennifer S. Bowmar and Andrew P. Zager, United States
Department of the Navy, Of Counsel.
OPINION AND ORDER
On February 5, 2021, the United States Court of Appeals for the Federal Circuit vacated
and remanded this Court’s decision in Bitmanagement Software GMBH v. United States, 989
F.3d 938 (Fed. Cir. 2021)(“Bit II”). The majority of the panel agreed with this Court’s opinion,
Bitmanagement Software GMBH v. United States, 144 Fed. Cl. 646 (2019) (“Bit I”), that there
was an implied license between Bitmanagement Software GMBH (“Bitmanagement” or
“Plaintiff”) and the Navy regarding the Navy’s use of Plaintiff’s software. However, the
majority found that the implied license required the use of the Flexera software to monitor the
Navy’s use of Plaintiff’s software as a condition precedent to the implied license, observing that
“this condition rendered reasonable the otherwise objectively unreasonable decision of
1
This reissued Opinion and Order incorporates the agree-to redactions proposed by the
parties. The redactions are indicated with “[ ].”
1
Bitmanagement to allow the Navy to make unlimited copies of its commercial product.” Bit II,
989 F.3d at 950. Consequently, the Navy’s copying of Plaintiff’s software was an infringement. 2
As a result, the Federal Circuit tasked this Court with determining damages taking the
form of a hypothetical negotiation. Id. at 951-52 n.5. In order to do so, the Federal Circuit
directed this Court to look at the Gaylord line of cases as a guide. 3 The Federal Circuit further
directed this Court to focus on the “actual usage” of Plaintiff’s software because of the Navy’s
statement: “Contrary to Bitmanagement’s argument [ ], it is not entitled to recover the cost of a
seat license for each installation.” Id. Instead, “the proper measure of damages shall be
determined by the Navy’s actual usage of BS Contact Geo in excess of the limited usage
contemplated by the parties’ implied license.” Id.
In addition, concerning the computation of damages, the Federal Circuit recognized that
the program was copied in two different ways: by an OCX file or EXE file. Regarding the OCX
file, the Federal Circuit held that “at no point [was the OCX file] properly monitored by
Flexera.” Id. at 951-52. Regarding the EXE file version, the Federal Circuit held that the extent
to which “the EXE version was monitored by Flexera [this] appears to be disputed.” Id. The
parties were, therefore, to take into consideration the distinction between the EXE file and the
web plug-in file (OCX) in its damages’ calculation. The parties, however, agree that this
distinction is irrelevant to the calculation of damages. 4
And finally, the Federal Circuit held that “[a]s the party who breached the Flexera
requirement in the implied license, the Navy bears the burden of proving its actual usage of the
BS Contact Geo software and the extent to which any of it fell within the bounds of any existing
license.” Id. at 951-52 n.5.
In response to the remand, Plaintiff filed a Motion for Entry of Judgment alleging
damages in the amount of $155,400,000. ECF No. 136. The United States (“the Navy” or
“Defendant”) filed its opposition and cross-motion. ECF No. 139. Neither party satisfied this
Court with its reasoning for their damages’ calculation; therefore, the Court requested additional
briefing. After three rounds of additional briefing, 5 the Court determined that the testimony of
Defendant’s expert witness, David Kennedy, who had been precluded from testifying in the
original trial, was now relevant. See ECF No. 171. Therefore, the Court reopened the record and
heard the testimony of Mr. Kennedy on June 14, 2022. Plaintiff was afforded the opportunity to
2
“Thus, while the Navy had an implied-in-fact license to copy BS Contact Geo onto its
computers, the Navy’s failure to abide by the Flexera condition of that license renders its
copying of the program copyright infringement.” Bit II at 951.
3
See Gaylord v. United States, 678 F.3d 1339 (Fed. Cir. 2012) (“Gaylord II”) ; Gaylord
v. United States, 112 Fed. Cl. 539 (2013), aff’d 777 F.3d 1363 (Fed. Cir. 2015) (“Gaylord III”).
4
In their respective briefs, ECF No. 155 at 5, ECF No. 158 at 4, the parties state that the
distinction between the Navy’s use of BS Contact Geo’s desktop executable file (EXE) and web
browser plugin file (OCX) is irrelevant because the condition of the implied license “could not
have been met by monitoring only half of each copy.” ECF No. 155 at 5 (quoting Bit II at 951).
5
ECF Nos. 146, 148, 152, 154, 155, 160, 162, 162.
2
have the Court hear a rebuttal witness, but Plaintiff declined. Final briefs were then filed by the
parties, ECF Nos. 184,186. Plaintiff’s damages calculations remained the same. Defendant
offered three damage calculations, $115,800, $235,00 or $200,000 plus delay compensation, to
be determined at a later date, with regard to each amount. 6 ECF No. 186-1. The case is now ripe
for a final decision on damages, notwithstanding the delay compensation award.
For the reasons set forth below, the Court awards $154,400 plus delayed compensation
(to be determined) in damages.
I. Findings of Fact
A. Bitmanagement I 7
In 2002, Peter Schickel and Alex Koerfer created Bitmanagement, a German company.
In 2005, Bitmanagement began working with David Collee of Planet 9 Studios to market and sell
Bitmanagement’s software in the United States. Bitmanagement sold its software on a “PC
license” -basis as well as “website” or “subdomain licenses.” Bitmanagement’s “core product”
was named BS Contact. In 2006, an upgraded product, BS Contact Geo, was released. At this
time, Bitmanagement controlled the use of the downloaded products through separately-provided
license keys.
In 2006, the Navy was developing a software product, SPIDERS 3D, a web-based
platform that provided a virtual reality environment for use by the Navy to view and optimize
configuration of Navy facilities. In developing this program, the Navy purchased one PC license
of Bitmanagement’s BS Contact Geo for $990. This product was to work in tandem with a Navy
product as the rendering component.
BS Contact Geo included both a desktop executable file (EXE version) and a web
browser plugin file (OCX version). The standalone desktop executable version (EXE) allowed
users to launch the software as a standalone application to view three-dimensional data. The
plugin version (OCX) worked in conjunction with a web browser, such as Internet Explorer, so
that when a user accesses three-dimensional data on the internet, the BS Contact Geo plugin is
programmed to automatically launch within the web browser to render data.
The Navy determined that Bitmanagement’s usual licensing scheme, a per-seat license,
would not work for the Navy’s secure environment; as a result, Bitmanagement expressed its
6
The Defendant acknowledges that Plaintiff is entitled to delayed compensation. ECF
No. 186 at 20. Prior to trial, the parties stipulated to the delay compensation rate. See Stip ¶
101.
7
As the Federal Circuit did not disrupt this Court’s findings of fact in Bit I, the Court
repeats the findings of fact as found in Bit I relevant to this opinion.
3
willingness to consider other licensing schemes. Therefore, Bitmanagement provided custom-
designed licensing files to the Navy that were not PC specific.
In 2008, the Navy procured 100 seat licenses of BS Contact Geo for $300 per license. By
2010 the Navy had deployed 80 of the 100 licenses purchased through the 2008 Navy Purchase
Order, leaving it with 20 undeployed licenses. To upgrade these last 20 licenses, the Navy paid
$125 per license.
In 2011, the Navy suggested using the Flexera license manager application in conjunction
with a floating license system. The server would track the users in the domain/sub-domain and,
as a server-based license manager, it would limit the number of simultaneous users that can
access a “Flexera enabled” software program by allowing the program to run only if the number
of persons using the program is less than the number of available licenses. It is also referred to
as “FlexWrapped” software. When a FlexWrapped program is opened, the program alerts the
license server that the program is in use, and when the FlexWrapped program closes, it alerts the
license server that it is no longer in use.
Late 2011, the Navy explained to Bitmanagement that the Navy would deploy the 20
licenses of the upgraded BS Contact Geo version 7.215 within the Navy’s NMCI 8 network. The
Navy reiterated that it would be using a server-side license key management approach in order to
track the usage and demand of the 20 license keys. The Navy and Bitmanagement understood
that BS Contact Geo would be deployed over a broad spectrum of the network and that the use of
BS Contact Geo would be limited by the Flexera license manager application.
Then, in 2012, the Navy procured 18 copies of BS Contact Geo 7.215 for $305 per
license for a total of $5,490.
Beginning in July 2013, the Navy began to install another upgraded product, BS Contact
Geo version 8.011, on all non-classified NMCI computers running Windows. Flexera was to
monitor and restrict the program use.
The Navy and Bitmanagement had a good relationship and Bitmanagement touted the
roll-out of its product to the Navy in advertising and presentations.
On September 15, 2015, the Navy executed a purchase of 88 BS Contact Geo application
license keys for $350 per license for a total of $30,800, with an option to purchase an additional
80 licenses of BS Contact Geo version 8.001 for $370 per license. Bitmanagement did not
provide the license keys, and the contract was terminated.
8
“NMCI” refers to Navy Marine Corps Intranet, which is “the largest private computer
network in the world” and comprises all Navy computers in the continental United States. Stip.
¶ 81; Tr. 843:7–15 (Chambers).
4
On July 15, 2016, Bitmanagement filed the present suit. In September 2016, the Navy
uninstalled BS Contact Geo from all of its computers and subsequently reinstalled the software
on 34 seats, for inventory purposes.
B. Additional Findings of Fact from Trial - April 2019
1. Bitmanagement Finances, Sales, and Types of Sales Offered
In 2013, Bitmanagement’s yearly operating revenue was declining by approximately
50%, See D122.25-26, and was only completing a few licenses per year with respect to BS
Contact Geo. See P011.2-4. As of August 2013, Bitmanagement’s revenues were derived from
sales of BS Contact, related variants (including BS Contact Geo), and associated services. See
Stip. ¶ 23. For 2013, Bitmanagement reported sales revenues of €341,470.50 (compared with
€736,269.07 in 2012), and a net profit of €936.55 (compared with a net loss of €92,477.85 in
2012). See D122.25-26.
Also, in mid-2013, the number of downloads of Bitmanagement’s free test version of BS
Contact Geo was declining. See D515.4. This, according to Bitmanagement, was due to the fact
that potential customers for BS Contact Geo were also considering the use of X3DOM – a free,
open-source framework for 3D graphics. See D131.47 (comparing rendering speeds); Tr. 123:8-
25:25 (Schickel). 9 X3DOM permits a user to view X3D rendering in a browser without
separate plugin software. Tr. 75:6-9 (Schickel); Tr. 727:9-28:17 (Colleen); Tr. 1140:9-42:4, Tr.
1161:4-14 (Brutzman).
Discounts were offered as the number of licenses purchased increased. See generally
J027.1. For instance, in 2005, Bitmanagement proposed offering 500 licenses of BS Contact
VRML/X3D to t h e N av y f or $1.98/license. Stip. ¶ 40; J001.1-3; J002.5. Then, in 2010,
Bitmanagement authorized Planet 9 to offer a license for 50,000 seats of BS Contact to the Navy
for $10/seat. See J009.2-7; Tr. 686:1-14 (Colleen); D209.1. And in 2014, in a sale of its BS
Contact, Bitmanagement proposed a PC-license price of €85/license for an order of more than
251 licenses of BS Contact Geo, as well as offering “an unlimited business license for BS
Contact Geo on up to 3000 PCs for a one-time package price of €125,000.” See D149.1.
On the open market, Bitmanagement offered several standard licensing types for BS
Contact Geo: PC licensing, Website licensing, OEM licensing, CD-ROM/DVD, and IP-range
licensing. D108.1-3; J27.1-2; D136.2; Tr. 603:9-11; Tr. 160:5-9. OEM Licensing is defined as
“the original equipment manufacturer.” Tr. 1046:19 (McCarns). OEM Licensing is software
that “is being integrated into something of the client, and that could be either hardware or
software.” Tr. 603:9-11 (Koerfer). An IP-Range License refers to a license in which “a number
of computers” are placed in a “license file,” and computers “with the right IP address” can view
the content. Tr. 160:5-9 (Schickel). In its dealings with the Navy, Bitmanagement told the Navy
9
This transcript is derived from the proceedings held on April 22, 2019, through April 25, 2019.
(ECF Nos. 122-125).
5
that it was open to other types of licensing. See J005.4-5; D119.1; D120.1-2; see also D160.1
(citing the Navy as a “[s]pecial licensing model”).
In trying to sell BS Contact, Bitmanagement told potential customers that its website
licenses allowed for unlimited downloads, installations, and/or use of its software in connection
with the website. See D016.1; D089.1; D094.1; D103.3; D108.2; D140.3; Tr. 605:18-06:3,
611:19-24 (Koerfer).
Bitmanagement’s website licenses were also based “on the general expected usage of the
viewer in a specific time from a respective Internet or Intranet-address” and identified, inter alia,
the following factors as relevant to pricing:
• What concept BS Contact is used for (e.g. non commercial/small or commercial/big)?
• For how long do you need a license (e.g. one year or unlimited)?
• How many expected users downloading and using BS Contact on that website do you
expect per month?
Stip. ¶ 25; J027.1; Tr. 513:5-25 (Graff) (testifying that the listed factors were appropriate for any
type of negotiated license).
Sales included website/subdomain licenses of BS Contact Geo to approximately four
customers. See Stip. ¶ 26; P011.3-4. None of Bitmanagement’s website licenses restricted the
number of downloads. See D029.1-47; D116.1-9; Tr. 121:12-23:7 (Schickel). None of the
website licenses restricted the number of users. See id.
In addition, Bitmanagement sometimes offered IP- range licensing for its software. See
Tr. 340:7-41:23 (Schickel) (“This is . . . an IP range way for licensing which is basically a
website license.”); D136.2. Using this scheme, Bitmanagement installed its software on 50,000
PCs for a university. See D119.1. Bitmanagement witnesses could not remember the details of
the transaction, but Mr. Schickel described [] it as “a very minor sale.” Tr. 341:19-23 (Schickel);
Tr. 623:1-24 (Koerfer); Tr. 1165:17-66:20 (Brutzman).
Another option offered by Bitmanagement was OEM licenses for situations where its
software was integrated into other hardware or software. See Tr. 603:7-11 (Koerfer). In an
offer to a potential customer, Bitmanagement stated that the price for a PC license, website
license, or OEM license was the “same[,] based on the number of users/licenses per year.”
D157.1; see also Tr. 617:7-10 (Koerfer).
2. The Navy’s Tracking by Flexera and Use of BS Contact Geo
On February 9, 2014, the Navy sent Bitmanagement three Flexera usage reports from
August 31, 2013, through February 1, 2014. See Stip. ¶ 95; D123. These reports only tracked
the Navy’s use of the BS Contact Geo executable file; they did not track the Navy’s use of the
plugin file because Flexera license manager did not monitor or control the use of the BS Contact
Geo plugin as it was supposed to do. Stip. ¶ 95; P257 ¶¶ 120-121; Tr 889:5-90:25 (Chambers).
6
The Navy disabled Flexera for the EXE version altogether in 2015. Tr. 891:25-92:20
(Chambers). For the entire three-year period that the software was installed on computers across
the Navy’s network and elsewhere until it was removed in 2016, the Navy does not have access
records for the plugin version of BS Contact Geo for any of those years, or of the desktop
application for one of those years. 10 Stip. ¶ 95; P257 ¶¶ 120-121; Tr 889:5-90:25 (Chambers);
P137.
The Navy used BS Contact Geo to render X3D for SPIDERS 3D between July 2013 and
November 2017. 11 Stip. ¶ 28. The Navy did not need BS Contact Geo for any other purpose.
See Tr. 905:10-17, 936:4-14 (Viana). The Navy admitted at trial to copying BS Contact Geo
onto 429,604 NMCI computers. Tr. 1113:17-19 (Vadnais). The Navy also admitted that the
software was on 21 ONE-Net computers 12 in August 2016, and the Navy gave one copy to a
Navy contractor who supported SPIDERS 3D. See ECF No. 139 at 32 n.18.
The date of the hypothetical negotiation is July 18, 2013. See ECF 162 at 7 (citing ECF
137 at 31; ECF 148 at 10).
C. Expert Witnesses
1. Testimony of George L. Graff, April 2019
Bitmanagement called George L. Graff (“Mr. Graff”) as its damages’ expert. Mr. Graff
is an attorney, a neutral mediator, and an arbitrator. Tr. 28:6-9. He has been involved in
different aspects of hundreds of license agreements. Tr. 30:6-9. In his professional experience,
he has also engaged in software valuation. Tr. 38:8-12.
Mr. Graff testified that damages would take the form of a hypothetical negotiation for the
Navy’s infringing use where the parties would have agreed to a final negotiated price of $259 per
copy for each of the 600,000 copies of BS Contact Geo made by the Navy. Graff Direct ¶¶ 63-
65. Mr. Graff’s damages calculations focused on the number of copies made, not actual usage.
Mr. Graff further testified that the $259 per copy price represented more than a 75% discount
from Bitmanagement’s full retail price for BS Contact Geo during the relevant time. Graff
Direct ¶ 58; J027.
As a starting point in a hypothetical negotiation, Mr. Graff explained that the parties
would have relied on the commercial price of a seat license for BS Contact Geo—approximately
$1,046—plus the parties’ extensive commercial history negotiating for actual licenses to
Bitmanagement’s software. Graff Direct ¶¶ 41-48; J027.1. Thus, according to Mr. Graff, the
10
As stated previously, the parties indicate that the difference is irrelevant.
11
The stipulation states that BS Contact Geo was used until November 2017. However,
the damages period ended in 2016.
12
“ONE-NET, for all intents and purposes, is a separate network which is quite simply an
NMCI or the outside continental United States.” See Tr. 849:3-6 (Chambers).
7
parties would have started the hypothetical negotiations using the price that the Navy agreed to
pay for the closest equivalent to what the Navy actually copied: the $350-$370 per copy that the
Navy agreed to pay to license BS Contact Geo in 2015. Graff Direct ¶ 48. The rate of $370 per
license already represented a 65% discount off the retail price for BS Contact Geo. Stip. ¶¶ 89-
90; P257 ¶¶ 30-31; J027.1. This amount, Mr. Graff opined, would most likely be further reduced
by an agreed volume discount. Graff Direct ¶¶ 52-56.
Mr. Graff relied on evidence of comparable negotiations of what he considered a
comparable product. In particular, Mr. Graff reviewed the Navy’s contract to purchase seat
licenses for AutoCAD software, a 3D rendering software program. This contract, based on
projected spending of $81 million, was negotiated at a 22% discount off the list price as well as
an additional discount of 1% for each million dollars in any single order up to a maximum
additional discount of 10%, for a total maximum compounded discount of approximately 30%.
Id. ¶¶ 54-55; see also P083.6-P083.79.
Using the AutoCAD software seat licenses as a reference, Mr. Graff concluded that
Bitmanagement and the Navy would have agreed to a similar discount of 30% off the $370 per
copy price for BS Contact Geo 8.001, and the Navy would have ultimately purchased 600,000
PC licenses of BS Contact Geo for $259 per license for a total price of $155,400,000. Graff
Direct ¶¶ 48, 52-58; 63-65; see also P083.6-P083.79.
2. Testimony of David Kennedy, June 14, 2022
Mr. David Kennedy (“Mr. Kennedy”) graduated with a degree in accounting and became
a certified public accountant (“CPA”) in 1987. (2022) Tr. 31:21-32:2. 13 Then he began working
for Coopers & Lybrand, which is now Pricewaterhouse Coopers. (2022) Tr. 31:25-32:2. In
2013, Mr. Kennedy became a Managing Director at Berkeley Research Group. (2022) Tr. 30:12-
13. In this position, he “manage[s] a number of consulting teams that value intellectual property,
negotiate intellectual property transactions, and then also assist[s] clients in litigation to
determine the outcome of a hypothetical negotiation and therefore the damages that would be
related to infringement.” (2022) Tr. 30:17-22. Mr. Kennedy’s responsibilities as a Managing
Director also include working with companies to “value their intellectual property and help them
establish their intellectual property royalty rates.” (2022) Tr. 31:5-7. In addition, Mr. Kennedy
has “helped investors raise capital to acquire intellectual property,” and he has “helped
companies that have patents to sell those patents when they’re not using them to other companies
who are interested in buying them.” (2022) Tr. 31:8-12.
Mr. Kennedy has received an award, “IAM Strategy 300: The World’s Leading IP,” in
recognition as the world’s leading intellectual property strategists for the past ten years. (2022)
Tr. 32:3-10. He has negotiated over 200 patent-related license agreements, which includes
patent sales, negotiations between the parties where he negotiated on behalf of one of the parties,
and software licenses. (2022) Tr. 32:12-17. While serving as an investor and the chairman of a
company, he negotiated license agreements with other companies for their copyrighted software.
(2022) Tr. 32:24-33:5.
13
This transcript is derived from the proceedings held on June 14, 2022. (ECF No. 183).
8
In addition, he has reviewed over 1,000 different license agreements relating to
intellectual property. (2022) Tr. 33:20-24. Mr. Kennedy has provided analysis in litigation
involving intellectual property matters on 50 different occasions. (2022) Tr. 34:1-3. In cases
involving intellectual property, Mr. Kennedy has been accepted by courts as either a damages
expert or licensing expert, or both, approximately 10 to 12 times. (2022) Tr. 34:12-18. He has
also been accepted as a damages’ expert in the Court of Federal Claims about 7 times. (2022)
Tr. 34:19-21.
On February 27, 2019, Bitmanagement moved in limine to partially exclude Mr.
Kennedy’s testimony. See ECF No. 53. Instead, the Court completely excluded his testimony
holding that his focus on “actual use” improperly conflated the exclusive rights protected by
copyright law with those protected by patent law. See ECF No. 80 at 4-5. Thus, the Court
concluded that Mr. Kennedy used the incorrect legal standard, therefore, the testimony was
unreliable. Id. at 5.
After the Federal Circuit’s remand opinion which expressly indicated that “damages shall
be determined by the Navy’s actual usage,” ECF No. 23 n. 5, the Defendant requested that this
Court reconsider its exclusion of Mr. Kennedy’s testimony, which it did. See ECF No. 171 at 2-
4. Thereafter, the trial was re-opened to hear the testimony of Mr. Kennedy.
In his testimony, Mr. Kennedy assumed copyright infringement, see, e.g. (2022) Tr.
38:5-11, 47:10-19, and he opined on the fair market value of the Navy’s actual use of the
assumed infringing copies. In contrast to Mr. Graff, Mr. Kennedy specifically noted that there
was a distinction between used and unused copies of BS Contact Geo. 14 (2022) Tr. 43:5-20.
To determine the number of actual users during the damages period, Mr. Kennedy
analyzed SPIDERS 3D usage from 2013, the date of the hypothetical negotiation, through the
end of the damages period in 2016. (2022) Tr. 47:10-49:23. As a first step, Mr. Kennedy
determined a royalty base. To do so, Mr. Kennedy reviewed the Navy’s “detailed usage logs of
the Spiders 3D activity, which lets you know how many are logged on.” (2022) Tr. 48:7-9. The
Navy only had logs for September 2014 through September 2016, and thus Mr. Kennedy
calculated a per year average for 2013, the year during which the Navy did not have the
SPIDERS 3D logs, from the existing logs for September 2014 through September 2016. (2022)
Tr. 48:7-15. Mr. Kennedy used the average of “the next two years to get within a reasonable
degree of certainty, a reasonable number for July 2013 through August 2014.” (2022) Tr. 49:1-
4.
The logs showed that for the period from September 2014 through August 2015, there
were 224 users, and from September 2015 through September 2016 there were 187 users. See
(2022) Tr. 48:7-49:5. Mr. Kennedy then averaged these two numbers of uses, and he determined
14
Ordinarily the seat licenses would have been infringing copies, which is why this Court
originally precluded Mr. Kennedy’s testimony. But with the Federal Circuit’s remand, usage
will be considered.
9
that for the missing year he estimated that there would have been 206 users. See id. He then
testified that “three figures add up to 617 unique users that used the software.” (2022) Tr. 49:4-
5. He concluded that “there were a maximum number of 617 unique users” during that period of
time . . . . And they had 38 licenses. And so that means there’s 579 unlicensed unique users
during the damages period infringing.” (2022) Tr. 49:15-16.
Regarding price, Mr. Kennedy concluded that the Navy and Bitmanagement would have
agreed to a price of up to $200 per license for 579 licenses—which he attributed to be the
number of “actual uses” of BS Contact Geo. (2022) Tr. 71:22-72:6. In determining the price,
Mr. Kennedy testified that he looked “at the Navy’s side of the equation, and what they had
agreed to previously, and what their use ultimately was of the software, and the limited amount
of use.” (2022) Tr. 69:23-70:1.
For instance, one agreement dated May 2007 that Mr. Kennedy reviewed between
[ ] and Bitmanagement, indicated that [ ] paid a lump sum
amount of €5,900 for Bitmanagement’s software. (2022) Tr. 52-54; see also J09. In addition,
Mr. Kennedy looked at an email dated February 25, 2013, which was in reference to a lump sum
license with an unrestricted number of citizens, or users, for [ ] for €45,000.
(2022) Tr. 54:17-55:10; D9. He used this as a reference as it was around the time of the
hypothetical negotiation. Id. This, according to Mr. Kennedy was useful to give some “idea of
what Bitmanagement was discussing with others around that time regarding pricing.” (2022) Tr.
55:14-16. Mr. Kennedy also noted that the was no differentiation between the “BS Contact
and/or BS Contact Geo in price.
Mr. Kennedy further looked at a July 5, 2013, offer entitled, “Project offer Web-based
software application for 3D visualization of Wind turbines.” (2002) Tr. 55:20-56:5; D103. He
found the offer relevant and considered it had price information for a domain license. (2002) Tr.
56:6-12. In particular, the domain license of the BS Contact Geo, was for €11,000. It included a
license of the 3D view BS Contact Geo unlimited in time and number of users is included in the
scope of services. (2002) Tr. 56:15-19.
And finally, Mr. Kennedy looked at an email chain with an attachment between Axel
Koerfer and [ ] dated October 22, 2013. (2002) Tr. 57:6-11. This indicated a
one-year license for BS Contact Geo from Bitmanagement to [ ]. (2002)
Tr. 57:6-17. [ ]. (2002) Tr. 57:15-17. The agreement
was for a perpetual license for €15,000. (2002) Tr. 57:18-23.
To determine possible volume discounts, Mr. Kennedy reviewed an email chain between
Axel Koerfer and [ ] dated September 15, 2014, to support his report that
Bitmanagement was willing to give significant discounts, even for relatively small volume
differences from $250 a seat for 10 licenses down to $180 per seat for 30 licenses; and those
licenses included PC licenses, domain licenses, and/or OEM licenses. (2022) Tr. 59:2-8.
Looking at larger volume discounts, Mr. Kennedy found relevant evidence that Mr. Schickel,
had contemplated a $10 per seat license for 50,000 seats as well as another offer for a “one-time
10
fee for -- on a per license basis up to 500 licenses, at $1.98, for a total of $990 for up to -- up to
500 licenses.” (2022) Tr. 62-63; J09; J2.5.
He also considered the profitability of the software by evaluating Bitmanagement’s
annual financial report as of December 31, 2013. D122.25. Referencing D122.25, Mr. Kennedy
testified that that document shows “during that fiscal year, sales had dropped by it looks like 50
percent. So that’s an indication of probably how competitive Bitmanagement would be willing
to be to increase sales.” (2022) Tr. 68:13-17.
Mr. Kennedy also looked at Bitmanagement’s “cash position,” referencing D122.23, and
testified that “their total cash position at the time was only $36,000.” (2022) Tr. 68:18-21.
Further, Mr. Kennedy testified that he considered “Bitmanagement’s situation at the time, from a
cash standpoint, and their willingness to negotiate.” (2022) Tr. 70:2-3. He concluded that
Bitmanagement “would have been very willing to negotiate with the government and with the
Navy to get a license and get that revenue back up and their cash back up.” (2022) Tr. 69:7-9.
Thus, Mr. Kennedy testified that his hypothetical negotiation was as follows:
Bitmanagement would come in with the price that they had received just about
that year of $305 [from the 2012 purchase]. The Navy would try to test that in
the negotiation to see how low that they could get Bitmanagement to go for
those 579 licenses, and they might offer $75 to $100. And then I believe the
parties for that number of usage would have ended up agreeing on $200 as a
reasonable compensation for the use of that -- those licenses.
(2022) Tr. 70:5-11. He concluded that the royalty rate be that of a running royalty 15 for a total
damage number of $115,000. (2022) Tr.50:13-16.
II. Legal Standards
A. The Gaylord Cases, Georgia-Pacific Objective Considerations, and the Book of
Wisdom
1. The Gaylord Line of Cases
The Gaylord cases set forth the objective factors a court should consider in its
construction of a hypothetical negotiation. Under 28 U.S.C. § 1498(b), Plaintiff is entitled to
recover “fair and reasonable compensation” for the infringement. In Gaylord II and III, the
Federal Circuit explained that a plaintiff may recover “the fair market value of a license covering
the defendant’s use.” Gaylord II at 1342-43; Gaylord III at 1367. Both parties agree this
standard controls. However, the parties diverge on the definition of “use.”
15
Mr. Kennedy defines a “running royalty” as a royalty that you pay for “each time you
use it.” (2022) Tr. 44:5-6.
11
In its remand, the Federal Circuit indicated that damages should be assessed for “actual
usage.” Bit II, 989 F.3d at 951 n.5. Plaintiff argues that “[the Federal Circuit] envisioned a
calculation of damages of each of the Navy’s ‘unauthorized cop[ies] of BS Contact Geo.’” ECF
No. 184 at 7. Thus, according to Plaintiff, “use” equals “unauthorized copies made.”
In contrast, the Defendant argues that “[t]he Federal Circuit never concluded that
damages must be calculated on a per-copy basis in Gaylord.” ECF No. 186 at 9. This,
Defendant argues, is further supported by “Gaylord’s directive to consider whether ‘different
license fees are appropriate’ for different uses,” id., and “whether an ongoing royalty or a one-
time fee more accurately captures the fair market value” for each. Id. (citing Gaylord II at 1344-
45). The type of royalty for each different use depended on “whether people used the
[infringing copy] specifically because” of the copyrighted expression, or whether the value was
driven by other considerations.” Gaylord II at 1344-45.
2. Georgia-Pacific Objective Considerations
In light of the Gaylord line of cases, and the Federal Circuit’s opinion, which states
“[c]ontrary to Bitmanagement’s argument [ ], it is not entitled to recover the cost of a seat license
for each installation . . . [but] [i]nstead, “the proper measure of damages shall be determined by
the Navy’s actual usage of BS Contact Geo in excess of the limited usage contemplated by the
parties’ implied license,” Bit II, 989 F.3d at 951 n.5, the Court “must consider all evidence
relevant to a hypothetical negotiation” focusing on “objective considerations” using applicable
tools “familiar from patent law.” Gaylord II at 1344; Gaylord III at 1367-68. The Federal
Circuit identified the use of objective factors found in Georgia-Pacific Corp. v. U.S. Plywood
Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). See, e.g., Lucent, 580 F.3d at 1324-35
(endorsing and applying factors from Georgia-Pacific). Objective factors ensure that a
hypothetical negotiation does “not occur in a vacuum of pure logic,” and objective factors
include consideration of, inter alia, facts that relate to the parties’ “relative bargaining strength.”
Georgia-Pacific, 318 F. Supp. at 1121.
3. Book of Wisdom
The parties also disagree on whether post-July 2013 facts may be considered by the Court
as part of the hypothetical negotiation. The “Book of Wisdom” standard in patent law would
allow for consideration of post-July 2013 facts. Focusing on “objective considerations” using
applicable tools “familiar from patent law,” see ECF No. 186 at 9, Defendant advances that the
Court may implement the “Book of Wisdom,” doctrine. ECF No. 186 at 10. Plaintiff disagrees,
arguing that “[t]he Government’s reliance on the so-called “book of wisdom” to smuggle in post-
installation usage is misplaced” as the application of a patent-law standard is “contrary to the
concept of a hypothetical negotiation which would have taken place before the infringement,
introducing hindsight into the negotiations.” ECF No. 184 at 9.
As stated above, the Federal Circuit supported use of “tool[s] familiar from patent law,”
Gaylord III at 1367. In addition, this Court has used the Book of Wisdom in Gaylord and in
Davidson, both Section 1498(b) cases. See Gaylord v. United States, 112 Fed. Cl. 539, 542 n.1
12
(2013) (“Pursuant to the ‘Book of Wisdom’ approach, the Court also considers facts about sales
and market information from after July 27, 2003.”); Davidson v. United States, 138 Fed. Cl.159,
179 (2018) (“The court [may] consider[ ] information that comes to light after the hypothetical
negotiation [pursuant to] the “book of wisdom.”).
Additionally, Plaintiff’s argument is inconsistent because it too relies on facts after the
July 2013 negotiation date for its damages’ calculations. For instance, Plaintiff relies on its
expert’s royalty base calculations, in part, on computers added to the Navy’s network between
2013 and 2016. See ECF 184 at 13 (citing Graff Direct ¶ 59). Plaintiff’s expert further relies on
the per-license price in the Navy’s unfulfilled 2015 purchase order claiming that it “provides the
best analog for the hypothetical negotiation.” Id. at 16-17 (citing Graff Direct ¶ 48); see also id.
at 4 (applying a rate sourced “just two years after . . . July 2013”). Thus, because Plaintiff’s
objections to the Book of Wisdom are inconsistent with its own reliance on subsequent facts in
its damages model, the Court will consider information after the hypothetical negotiation.
III. Discussion
As stated previously, on remand, the Federal Circuit has directed this Court to determine
damages using the form of a hypothetical negotiation guided by the Gaylord line of cases. This
opinion will, therefore, first address the Gaylord holdings related to a hypothetical negotiation.
Thereafter, the Court will turn its attention to the royalty base, then the royalty rate, and then the
proper type of license to determine the fair market value of a license.
A. Using The Hypothetical Negotiation Objective Considerations, The Navy Had a
Stronger Bargaining Position.
1. The Hypothetical Date
Before turning to the objective factors, the Court notes that the parties agree on a
hypothetical negotiation date of July 18, 2013; therefore, this Court adopts that date. See ECF
162 at 7 (citing ECF 137 at 31; ECF 148 at 10).
2. Objective Considerations
The Court finds that the objective considerations establish that the Navy would have been
in a stronger bargaining position than Bitmanagement during the hypothetical negotiation. The
evidence showed that the parties had a good relationship. See Tr. 260:22-61:12, 294:18-95:15
(Schickel); Tr. 933:20-35:3 (Viana); see also Tr. 1186:20-87:18 (Brutzman) (supporting
Bitmanagement with testing and marketing). In addition, the parties successfully resolved
several licensing and technical issues before the hypothetical negotiation. See Bit I at 649-54.
Furthermore, the parties hoped for increased use of their respective software products over time.
See, e.g., Bit I at 658 (“both anticipated a future purchase of additional licenses to cover the Navy’s
usage.”); Tr. 699:9-700:5 (Colleen) (“Both . . . hoped the program [would] grow . . . sometimes
there were false signals of this growth.”); Tr. 720:10-25 (Colleen) (“the uptake of actual users . . .
was ramping up at a fairly modest rate”).
13
With regard to the parties’ “commercial relationship,” Georgia-Pacific, 318 F. Supp. at
1120, the evidence showed that the Navy was one of Bitmanagement’s most important
customers for BS Contact Geo. For example, Bitmanagement touted its work with the Navy in
its advertising and presentations to potential customers. See Bit I at 654 (citing D103.32; Stip. ¶
79; D104.1; D131.11-17; D197.2, .26; Tr. 320:5-23:17 (Schickel); D150.4, .27; D151.6, .51;
D197.26, .75); see also D145.1-2; Stip. ¶ 96; Tr. 306:4-07:1 (Schickel); P170.1-2; P257 ¶ 78.
Georgia-Pacific further instructs that the “profitability of the [work,] . . . its commercial
success[,] and its current popularity,” are relevant to the hypothetical negotiation. Id. at 1120.
In particular, the evidence showed that in July 2013, Bitmanagement was in poor financial
condition. See (2022) Tr. 67:2-69:12; D122.11, 16. The evidence further showed that
Bitmanagement’s market for BS Contact Geo was limited, see Tr. 93:19-24 (Schickel), and that
Bitmanagement was only completing a few licenses per year, at a low total dollar rate. See
P011.3-4. In addition, the free test version of BS Contact Geo was being downloaded at a lower
pace than in previous years. See D515.3-4; Tr. 110:5-17 (Schickel).
However, favorable to the hypothetical negotiation for Plaintiff, is the consideration of
“alternatives available to a potential licensee [that] provide an important constraint in a
hypothetical negotiation.” Gaylord III, 777 F.3d at 1370. Bitmanagement argues that its
software was the only available product to work in conjunction with SPIDERS 3D. Although
this is true, the Court notes that there were alternatives to Bitmanagement’s software that did not
require meshing with SPIDERS 3D. The evidence shows that there were other X3D viewers
available in 2005, see Tr. 667:15-68:22 (Colleen); see also Tr. 903:16-22 (Viana), as well as a
government-owned viewer, in July 2013. Additionally, presently, the Navy uses X3DOM as the
rendering component of SPIDERS 3D. See Tr. 901:1-17, 944:8-46:2 (Viana); Tr. 1106:5-12
(Vadnais); Tr. 1139:13-42:7, 1160:25-61:3 (Brutzman); see also Bit I at 654.
B. The Royalty Base
1. Number of Infringing Copies
Defendant asserts that based on the evidence in the record, the Navy made 429,660
copies of BS Contact Geo 8.001. ECF No. 155 at 3-4. According to Defendant, based on the
law of the case and its defenses, 429,567 copies were infringing. ECF No. 186 at 14. To arrive
at the infringing number, Defendant subtracted all licensed and extraterritorial copies from the
total number of copies made, as summarized in the chart below:
Source Proven Record Infringement Infringing
Copies Citations Defense Copies
NMCI Original 429,604 P010.8; Tr. 884:10-13 License 429,566
Deployment (Chambers); Tr. 1110:9-14:3 (38 computers)
(Vadnais)
14
NMCI 34 P010.8 License 0
Re-Deployment (38 computers)
ONE-Net 21 P010.8-9 Extraterritorial 0
Individual (all computers)
Deployments
Distribution to 1 Tr. 941:22-43:4 (Viana) None 1
SPIDERS 3D
Contractor
Total 429,567
ECF No. 155 at 4.
In contrast, Plaintiff alleges that the number of infringing copies is at least 600,000. ECF
No. 184 at 9. In arriving at this number, Plaintiff asserts that its “royalty base comprises four
components.” Id. at 9-11. First, Plaintiff asserts that the Navy planned to install 558,466 copies
of the software beginning in July 2013. Id. Second, Plaintiff adds an additional 40,000
computers to its royalty base arguing that these 40,000 were cycled onto the NMCI network
between July 2013 and July 2016. See ECF 184 at 10. Third, Plaintiff adds an additional 28,000
ONE-Net installations some of which Plaintiff alleges were installed in U.S. Territories. Id. at
10-11. Fourth, and finally, Plaintiff alleges that the Defendant may have given additional copies to
other contractors. Id. at 11.
The Court notes that Plaintiff’s royalty number calculations are couched in speculative
terms. See ECF 150 at 9 (“would necessarily have,” “may have undercounted”); ECF 146 at 5-8
(“an unknown subset,” “[a]n unknown number”). Although the Defendant has the burden of
proof (according to the Federal Circuit), if the Defendant presents concrete, credible numbers,
the Court may not just accept Plaintiffs numbers. Here, Plaintiff’s numbers seem to be less
grounded than the Defendant’s, as explained below. See Gaylord III at 1368 (cautioning against
“undue speculation”). Consequently, the Court finds that evidence presented showed that the
Navy made 429,604 copies of BS Contact Geo 8.001 on NMCI computers before the Navy
uninstalled the software in September 2016. See P010.6-9; Tr. 1110:9-14:3 (Vadnais); Tr.
884:10-13 (Chambers).
The evidence showed that the deployment schedule included Windows XP seats that
never received the software. Compare J025.8-9 with Bit I at 654 (“BS Contact Geo [was
installed] on all non-classified NMCI computers running Windows 7”); Tr. 1093:1-94:1
(Vadnais); see also D129.5 (identifying Windows 7 as a prerequisite for using SPIDERS 3D);
Tr. 474:22-75:14 (Graff) (“I never saw anything one way or the other as to whether or not they
actually met their goal of installing it on the 558,000 seats.”). From this number of copies made,
the Navy had 38 licenses. Thus, 38 computers were authorized to use BS Contact Geo version
8.00. Bit I at 658 n.10; see Bit II at 951 n.4. Therefore, the Defendant was correct in subtracting
them from the NMCI original deployment amount arriving at 429,566 infringing copies. And
although the Navy “reinstalled the software on 34 seats,” Bit I at 654 (citing P010.8), the
Defendant correctly relies on the 38 licenses it currently held so that these computers with the
15
reinstalled software were covered by the license and were not infringing. This re-deployment
did not add or subtract to the infringement claim.
ONE-Net is the Navy’s “computer network outside the United States” and its users “are
located outside the United States.” Stip. ¶ 86. In January 2014, NAVFAC uploaded BS Contact
Geo 8.001 to the self-service catalog for ONE-Net, the Navy’s computer network outside the
United States. See Stip. ¶¶ 85-87; P010.8-9. In August 2016, the Navy determined that the
software was installed on 21 ONE- Net seats; and in March 2017, the Navy determined that the
software was installed on 13 ONE- Net seats. See P010.8-9; D206.1; D207.1.
The evidence further showed that ONE-NET computers were those based in the
European Union (“EU1”) or the Far East (“FE1”). See P010.8; D207; See P010.8-9; Stip. ¶ 86.
Although Plaintiff alleges some of these computers were located in the U.S. Territories, and as
such are not extraterritorial, Plaintiff has not advanced a number as to how many copies were
copied onto those computers. Thus, Plaintiff’s allegations are too speculative to add to the
infringing number of copies. Therefore, the Court finds that the 21 copies used cannot be
counted as infringing copies as the Defendant has proven that the copies used were outside the
U.S. and are jurisdictionally barred from liability. See 28 U.S.C. § 1498(c); Zoltek Corp. v.
United States, 672 F.3d 1309, 1326 (Fed. Cir. 2012) (“[T]he plain language of § 1498(c)
eliminates Government liability for claims ‘arising in a foreign country.’”).
And finally, the Navy further admitted that one copy of SPIDERS 3D was distributed to a
contractor. See Tr. 941:22-43:4 (Viana). Plaintiff’s claim that there might have been more
copies given to other contractors is too speculative. The Defendant admits and the Court accepts
that one copy was all that was given away.
2. Actual Use Versus Available For Use
The Federal Circuit has instructed this Court as follows: “Contrary to Bitmanagement’s
argument [ ], it is not entitled to recover the cost of a seat license for each installation.” Bit II at
951 n.5. Instead, “the proper measure of damages shall be determined by the Navy’s actual
usage of BS Contact Geo in excess of the limited usage contemplated by the parties’ implied
license.” Id.
Plaintiff argues that “use” equates to the number that were copied onto Navy computers
and accessed as well as those that were downloaded and available for use. ECF No. 150 at 15.
The Flexera condition was not met for either category. Thus, according to Plaintiff, no copy
“fell within the bounds of any existing license,” as the Federal Circuit instructed this Court to
determine, id. at 951 n.5; therefore, the total number of copies made is the appropriate number in
determining usage.” Id. According to Plaintiff, that number was 600,000, the amount of PC
copies made.
In contrast, the Defendant presented evidence to the actual use of the software as well as
how the Navy planned to use the software. According to the Defendant, for the hypothetical
negotiation in 2013, not only would the parties have considered the total number of copies, but
16
its main focus would have been on how the Navy planned to use those copies. ECF No. 155 at
4. Relying on this, Defendant argues that “this hypothetical approach is entirely consistent
with the parties’ actual approach in negotiating the 2012 purchase order.” Id. (citing Bit I at
651-52); D026.1 (“Let’s go for the floating license server approach.”); J018.1 (“we will push it
out . . . to begin tracking the usage and demand signal of the 20 license keys”). It is also
supported by both parties’ reliance on implementing Flexera in order to count the number of uses
and actual demand of the software.
At trial, evidence was admitted by the Defendant which showed the tracking of SPIDERS
3D during the last two years of liability. See J035.1-51. The testimony at trial confirmed the
reliability of the weblogs. Tr. 854:5-14; 861:2-6; 865:14-17 (Chambers). The weblogs showed
that between 8/30/2014-9/2/2016 the maximum uses per day was 36, the number of unique users
was 411 and the total users was 1,142. ECF No. 186 at 5.
Although the Court finds the logs to be accurate, the Court further notes that logs are
missing for the first year of usage of SPIDERS 3D. According to the Plaintiff, during this
missing year, Navy personnel would most likely have used the software more frequently. ECF
No. 184 at 12. In fact, in December 2012, Mr. Viana told Bitmanagement that within the first
six months the Navy anticipated an increased demand for the software. P242.1. The Court
agrees with this assumption. However, the Plaintiff has not provided any calculations that would
capture this year. But Mr. Kennedy has.
For his calculations, Mr. Kennedy calculated an average number of uses for the missing
year by averaging the two reliable weblog user data. His calculations provided for a total of 617
unique user (224 users for September 2014 through August 2015 + 187 users for September
2015 through September 2016 + 206 users for the missing year). (2022) Tr. 49:4-5. However,
because the Court finds that the Navy admitted that it anticipated an increase in demand of the
software in the first year, the Court will take the highest year of users, 224 users for September
2014 - August 2015, for the missing year. Thus, the Court finds a total of 635 unique users. The
Court then picks up from Mr. Kennedy’s calculations subtracting the 38 paid for licenses. The
Court finds 597 unlicensed unique users during the damages period.
The next step in the hypothetical negotiation would have been for the parties to determine
the number of additional licenses necessary to cover the Navy’s use of the software. As
previously indicated, the Navy owned 38 licenses. Those licenses were also intended to allow a
maximum of 38 simultaneous uses of the software. Because the maximum number of uses per
day of SPIDERS 3D was found to be 36, the 38 simultaneous-use licenses would have covered
the Navy’s actual use during the three years of liability.
However, the evidence further showed that the Navy would have agreed to procure more
than 38 simultaneous-use licenses in 2013. The facts showed that both parties hoped to increase
its use of SPIDERS 3D and BS Contact Geo after the Navy-wide deployment of the software.
See Bit I at 658 (“Bitmanagement and the Navy both anticipated a future purchase of additional
licenses to cover the Navy’s usage.”). Indeed, both Plaintiff and Defendant engaged in
discussions to purchase approximately 100 additional licenses between 2013 and 2015. See
17
J023.1-7 (Bitmanagement draft license agreement for 93 licenses in March 2013); Stip. ¶ 78;
Bit I at 654 (citing J031.1-5, 31) (Navy unfulfilled purchase order for 88 licenses in September
2015). Although neither order was fulfilled, the Defendant (and Plaintiff) allege, and the Court
agrees that these orders provide relevant information regarding actual negotiations of the parties
and the parties intent to purchase additional simultaneous-use licenses. The Defendant admits
that it may have purchased an additional 100 licenses in 2013 and in doing so the amount would
have covered the Navy’s actual use during the three years of liability. The Court agrees, and
therefore, concludes that the Navy would have agreed to procure 100 additional simultaneous-
use licenses from Bitmanagement in a hypothetical negotiation in 2013.
The Court, therefore, finds that the royalty base includes 429,567 copies of BS Contact
Geo 8.001 with 597 unique users and 100 additional simultaneous-use licenses.
C. The Royalty Rate
Both parties agree in principle that the Court should consider other licenses and offers
that may be relevant in constructing the hypothetical negotiation to determine the royalty rate. 16
ECF No. 186 at 8.
Plaintiff’s expert witness, Mr. Graff, testified that the parties would have agreed to a
royalty base of $259 per seat license. See also Tr. 511:3-17 (Graff) (“the primary
consideration is what would the customer be willing to pay”). To arrive at this number, Mr.
Graff looked at three purchase orders between Bitmanagement and the Navy. He looked at the
2008 purchase order whereby the Navy procured 100 seat licenses of BS Contact Geo for $300
per license and the 20-seat upgrade for an additional $125.00. 17 He further looked at the 2012
purchase order for 18 licenses for $305 per license. And finally, Mr. Graff, looked at the 2015
purchase order for 88 BS Contact Geo application license keys for $350 per license for a total of
$30,800, with an option to purchase an additional 80 licenses of BS Contact Geo version 8.001
for $370 per license. (This contract was never fulfilled.) Mr. Graff then found that the best
analog for the hypothetical negotiation would be to use the unfulfilled 2015 purchase order.
Although never fulfilled, Mr. Graff noted that this purchase order was the only purchase order
for the product, BS Contact Geo version 8.001, that the Navy copied en masse. Stip. ¶ 67; Graff
direct ¶ 48. He then applied the 30% discount to arrive at $259 per copy.
In response, Defendant notes that Mr. Graff rejected using Bitmanagement’s agreements
and offers between other countries and entities despite the Federal Circuit’s instruction to
contemplate “objective considerations.” Bit II at 951-52 n.5 (The Court is to use the Gaylord
line of cases as a guide.). ECF No. 186 at 24. Instead, Mr. Graff relied on only three
16
Curiously, the Court notes again that although Plaintiff argues against using the Book
of Wisdom doctrine, Plaintiff employs it by using the 2015 agreement to construct its damages
model.
17
The Plaintiff misstates the evidence with regard to this upgrade. Only 20 licenses were
upgraded for a total cost of $425, not all 100 licenses. See ECF No. 184 ($425 per license
header).
18
agreements and offers between Bitmanagement and the Navy. He did not use the other
agreements because they involved: (1) different software (i.e., BS Contact), (2) different
customers, and (3) a different “commercial history.” ECF No. 148 at 27 citing Graff Direct ¶ 49.
Therefore, according to the Defendant, because Mr. Graff does not take into consideration all the
objective considerations as instructed by the Federal Circuit, Mr. Graff’s analysis is wrong.
Mr. Kennedy began his analysis by first locating comparable license agreements and
looking at what technology was being licensed, who the licensor and licensee were, and the date
to determine comparability. Complementing this approach, Mr. Kennedy also concentrated his
opinion on how the Navy planned to use the software. Using this hypothetical approach,
Defendant argues that this “is entirely consistent with the parties’ actual approach in negotiating
the 2012 purchase order.” ECF No. 155 at 4; See, e.g., Bit I at 651-52; D026.1 (“Let’s go for the
floating license server approach.”); J018.1 (“we will push it out . . . to begin tracking the usage
and demand signal of the 20 license keys”). Thus, as a starting point for the hypothetical
negotiation, Mr. Kennedy found that the 2012 agreement for 18 licenses for $305 was the most
relevant as this agreement was for the software right before the hypothetical negotiation date.
(2022) Tr. 50:1-5. He then compared various potential offers and actual offers dated near the
hypothetical date of July 18, 2013. (2022) Tr. 100:13-21; (2022) Tr. 50:2-51:8. He compared
discounts offered, sales, and the financial position of Bitmanagement. (2022) Tr. 59:2-5; (2022)
Tr. 68:13-17; (2022) Tr. 68:18-69:12. After his analysis, he then concluded that the parties
would have agreed to a volume discount of a little more than 30% to arrive at a conclusion that
the Navy would have paid $200 per license. (2022) Tr. 59:22-61:23.
The Court notes that the parties are very close in its royalty rate—$259 versus $250. The
Court also notes that both parties agree on a volume discount of approximately 30%. Plaintiff
argues that Mr. Kennedy’s approach “suffered from several flaws that render Bitmanagement’s
rate more reliable.” ECF No. 184 at17. Plaintiff argues that Mr. Kennedy did not point to any
evidence to support his assumption that Bitmanagement’s financial condition would have
applied a downward pressure on the hypothetical negotiation. Id. In fact, Plaintiff argues there
were many other factors that Mr. Kennedy did not address that would have supported upward
pressure on the price in the hypothetical negotiation. Id. For instance, Mr. Kennedy did not
acknowledge in his hypothetical negotiation that Bitmanagement was the only product the Navy
found to work well with the Navy’s SPIDERS 3D. Id. Nor did Mr. Kennedy acknowledge that
the Navy expected high usage of its product. Id. Specifically, during cross-examination,
Plaintiff asked Mr. Kennedy whether he considered several emails between Bitmanagement and
the Navy leading up to the hypothetical negotiation—he did not. These emails, between
November 2011 through July 2013, indicated that the Navy intended high usage of the software,
more licenses. See (2022) 87:13-89:14-91; 91:17-97:4; 106:7-108:2. Mr. Kennedy agreed that
these were relevant to the hypothetical negotiation. (2022) Tr. 106:7-108:2. In addition, Mr.
Kennedy agreed that the Navy derived a “convenience factor” having BS Contact Geo installed
on every computer in the network, also relevant to the hypothetical negotiation. (2022) Tr.
106:7-14. 18
18
The Court is attracted to the “convenience factor” argument. However, yet again, the
Plaintiff has failed to provide the cost of convenience in its damages’ calculations.
19
Although the cross-examination of Mr. Kennedy showed weaknesses in his valuation, the
Court has no idea how these emails would have impacted the damages calculation because
Plaintiff has limited its evidence to only undermining Mr. Kennedy or to the per seat license
damages calculation. Thus, the Court does not find the weaknesses to be substantial, especially
because Mr. Graff’s valuation did not take into consideration the objective considerations.
Gaylord III at1344, 1368 (“evidence of past license agreements for the work in question is
certainly relevant to a hypothetical negotiation analysis.”) (“The hypothetical-negotiation
determination must be tied to the particular work at issue and its marketplace value . . . .”).
Thus, the marketplace value is informed by all licenses and offers, not only the three agreements
reviewed as relevant by Mr. Graff.
Furthermore, the Court notes that “BS Contact Geo” and “BS Contact” were used
interchangeably in their communications and their agreements. See Tr. 832:1-11(Colleen) (“BS
Contact and BS Contact Geo were interchangeable terms in our daily discussions.”); Tr. 835:10-
15 (Colleen) (stating that it was “common parlance” to refer to BS Contact Geo as BS Contact);
see also J017.21; J022.13; J023.7; J027.1; D108.1; Tr. 817:3-8, 828:19-30:7, 839:3-24 (Colleen).
Therefore, Mr. Graff’s attempt to discredit Mr. Kennedy’s reliance on the distinction between
the versions of the software fails. For instance, in fulfilling the 2008 purchase order,
“Bitmanagement delivered BS Contact Geo” to the Navy “despite the [order’s] express reference
to BS Contact.” Bit I at 650. Furthermore, witnesses who were familiar with both products
testified that there were few differences between the products. See Tr. 832:13-18 (Colleen); Tr.
1160:11-21 (Brutzman) (“I had trouble distinguishing any difference between [BS Contact and
BS Contact Geo].”). Even Mr. Schickel admitted that Bitmanagement sometimes sold the
products at the same price. See Tr. 334:22-24. Accordingly, the BS Contact licenses are
relevant, objective evidence.
The evidence further showed that in its past BS Contact Geo license negotiations, the
Navy would also have looked to the available budget. In 2013, when discussing the possibility
of implementing an unlimited licensing scheme for 500,000 copies, Mr. Colleen testified that
“[he was] pretty skeptical about [the Navy] even coming up with a 1 million for such a license.”
Tr. 720:1-2 (Colleen). One reason, according to Mr. Colleen, is that in 2013, the Navy had a lot
of budget problems. Tr. 720: 3-17 (Colleen).
And finally, Mr. Graff’s rationale that he excluded other offers or agreements that “do not
reflect the commercial history that the Navy had with Bitmanagement and the value of BS
Contact Geo to the Navy” see Graff Direct ¶ 49, is in conflict with the use of objective
considerations under Gaylord II. Gaylord II at 1344. As the Federal Circuit has stated: “the
trial court must consider all evidence relevant to a hypothetical negotiation.” Id.
Mr. Kennedy reviewed several offers and agreements that the Court finds relevant around
the hypothetical date. For instance, other customers’ orders were clearly relevant. Other pricing
schemes were clearly relevant. His conclusion, that the Navy would have paid $200 per license
is, therefore, more reliable. The Court further finds that Mr. Kennedy arrived at his conclusions
using objective considerations, examining “the perspectives of the two parties to the hypothetical
20
negotiation,” Gaylord III at 1370-71, as well as relying on the objective consideration found in
Georgia-Pacific, 318 F. Supp. at 1120, as mandated by the Federal Circuit.
D. Proper License Type and Calculation of Damages
In order to determine the proper license type, the Federal Circuit’s remand instructed:
Contrary to Bitmanagement's argument, see J.A. 10002 ¶ 5, it is not entitled to
recover the cost of a seat license for each installation. If Bitmanagement chooses
not to pursue statutory damages, the proper measure of damages shall be
determined by the Navy's actual usage of BS Contact Geo in excess of the
limited usage contemplated by the parties’ implied license. That analysis should
take the form of a hypothetical negotiation. See Gaylord v. United States , 777
F.3d 1363, 1368–72 (Fed. Cir. 2015); Gaylord I , 678 F.3d at 1342–45.
Bit II at 951 n.5.
In the usual copyright case, recovery is for infringing copies. Here, however, the Federal
Circuit has mandated that Plaintiff is not entitled to damages based on the “cost of a seat license
for each installation.” Instead, the Federal Circuit’s directive to this Court was to consider actual
usage. In addition, the Federal Circuit directed this Court to consider the method of calculation
of damages in the Gaylord line of cases, which would include other licensing options, not just a
per-copy license. 19 Thus, damages cannot be based on number of copies made. Instead, it
appears that the Federal Circuit wants this Court to account for the number of licenses needed to
allow for the number of users that the Navy contemplated at the time of the hypothetical
negotiation. Using the Book of Wisdom, the number of actual users may be calculated.
Therefore, the essence of the damages’ inquiry is how much would the Navy agree to a license
covering this usage.
In contradiction to the Federal Circuits’ mandate, Plaintiff argues that it is entitled to
recover an award for a license for each copy. ECF No. 184 at 1. Specifically, Plaintiff argues:
The Federal Circuit observed in dicta that “[c]ontrary to Bitmanagement’s
argument, see J.A. 10002 ¶ 5, it is not entitled to recover the cost of a seat
license for each installation.” Bitmanagement II, 989 F.3d at 951 n.5. The
Court’s citation is to the complaint’s request for $596,308,103 in damages,
Compl. ¶ 5, which was based on the commercial list price of $1,067.76 per
license, id. ¶ 26. Bitmanagement no longer seeks anywhere near that per-
license price, and its proposed damages figure incorporates a significant
volume discount to reach a per- license royalty rate of $259.
19
From the evidence at trial, the Court could have found that for the hypothetical
negotiation, Plaintiff and Defendant would have negotiated a price per copy of $10 for 429,567
copies resulting in a fair market price of $4,295,670. But this result would not comply with the
Federal Circuit’s mandate.
21
ECF No. 184 at 5 n.1 (citation omitted). Therefore, Plaintiff argues that it should be awarded a
PC license for each copy made because that is what the Navy took, arguing that the Federal
Circuit’s directions were dicta. Id. The Court disagrees. The Court finds it difficult to find that
a sentence that includes the word “shall” is pure dictum: “the proper measure of damages shall
be determined by the Navy’s actual usage of BS Contact Geo . . . .” Bit II, 989 F.3d at 951 n.5
(emphasis added).
Notwithstanding the Federal Circuit’s mandate, Plaintiff has been persistent in focusing
on a per-copy license, despite the Court’s indication that it would follow the Federal Circuit’s
mandate regarding actual usage. And this is despite many opportunities to do so, such as
additional briefing and reopening the trial record to specifically take testimony on actual usage.
See ECF No. 183 (transcript of proceedings held on June 14, 2022). At this subsequent trial,
Plaintiff did not call a rebuttal witness, although this Court gave Plaintiff the opportunity.
Instead, Plaintiff continued its damages theory in disregard to the Federal Circuit’s mandate,
heedless of its own peril. Because the Plaintiff does not engage the Federal Circuit’s mandate
for alternative licensing schemes, the Court turns its attention to the Defendant’s proposals.
The Defendant proposes three different licensing options for the Court, two of which are
found only in its briefs 20 and one of which was presented by Mr. Kennedy, namely, a unique-
user license; a website license (also known as a domain or subdomain license); and a mixed
license. ECF No. 186 at 20, 22; (2022) Tr. 49:1-16.
But the only option supported by Mr. Kennedy’s testimony is a unique-user license.
Here, Mr. Kennedy opined that the parties may have negotiated a purchase of unique-user
licenses. (2022) Tr. 49:1-16. Under this scenario, Mr. Kennedy used a running royalty for 579
unique users at $200 per license. This would have resulted in a purchase of the software for a
total of $115,800. (2022) Tr. 50:13-16, 59:22-63:9.
In a hypothetical negotiation, the parties would have considered the types of licenses that
would have best fit the Navy’s anticipated use of BS Contact Geo. Historically, in 2011,
Bitmanagement offered “three different licensing options” to the Navy, with at least two of the
options based on a set number of “running” clients “in the same sub-domain.” Bit I at 651
(quoting D026.3-4). Upon further negotiation, the parties agreed to use a “floating license
system” to manage 38 licenses of BS Contact Geo. Id. at 650-54; D026.1 (“Let’s go for the
floating license server approach.”). By July 2013 the parties had agreed to non-standard license
terms. Those agreements included negotiations that Bitmanagement was “open for any licensing
scheme” for the Navy and was “willing to do our utmost to enable [another] licensing
functionality.” Bit I at 649 (quoting J005.4-5).
The Court concludes that the evidence put forth by Mr. Kennedy is the appropriate means
to calculate the proper license. However, in addition to the unique-user licenses, the Court adds
20
Two of the options included a damages award of $200,000 for a website license. There
is no evidence, besides Defendant’s briefs, to support this number.
22
100 simultaneous-use licenses. See supra p.17. These licenses are included in the second and
third options in Defendant’s briefs and are tantamount to an admission. The unique-user licenses
and simultaneous-use licenses combine to form a mixed license. Therefore, the Court finds that
the parties would have negotiated this kind of mixed license in 2013.
The Court finds a total of 635 unique users. The Court further finds that Mr. Kennedy’s
price per license of $200 is reliable. As noted previously, in determining the price, Mr. Kennedy
testified that he looked “at the Navy’s side of the equation, and what they had agreed to
previously, and what their use ultimately was of the software, and the limited amount of use.”
The Court feels that Mr. Kennedy’s conclusion is also supported by the “objective
considerations” that he discussed. Furthermore, the Court has no other concrete figure because
Plaintiff’s calculations were based only on per-seat licenses and were determined without
examining objective considerations. From the 635 unique users, the Court must subtract the 38
existing Navy licenses fo r a royalty base of 597 unique unlicensed users. 21 Adopting the $200
per license rate from Mr. Kennedy, the Court finds that Plaintiff is entitled to $119,400 for the
unique-user licenses, a price that the Court finds to be fair and reasonable.
With regard to the simultaneous-use licenses, for the reasons set for forth supra p. 17, the
Navy would have agreed to the $350/license for these 100 as evidenced by both the draft
agreement and the 2015 unfulfilled purchase order. The Court, therefore, adds $35,000 to the
award for a total of $154,400, excluding an award for delayed compensation.
IV. Conclusion
For the reasons set forth above, the Court hereby AWARDS Plaintiff $154,400 for the
Defendant’s copyright infringement.
IT IS SO ORDERED.
s/Edward J. Damich
EDWARD J. DAMICH
Senior Judge
21
This number includes the Court’s projection of increased, first-year use based on the
Navy’s weblogs as explained supra p.17.
23 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488090/ | NONPRECEDENTIAL DISPOSITION
To be cited only in accordance with FED. R. APP. P. 32.1
United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Submitted November 17, 2022 *
Decided November 18, 2022
Before
DIANE P. WOOD, Circuit Judge
AMY J. ST. EVE, Circuit Judge
JOHN Z. LEE, Circuit Judge
No. 22-1654
THADDEUS JOSEPH BEAULIEU, Appeal from the United States District
Plaintiff-Appellant, Court for the Northern District of
Illinois, Eastern Division.
v.
No. 20-cv-02117
ASHFORD UNIVERSITY, LLC, et al.
Defendants-Appellees. Robert M. Dow, Jr.
Judge.
ORDER
Thaddeus Beaulieu failed to submit a complaint that stated a legal claim in a
short and plain statement, despite orders from the district court about how to do so and
*
We have agreed to decide the case without oral argument because the briefs and
record adequately present the facts and legal arguments, and oral argument would not
significantly aid the court. FED. R. APP. P. 34(a)(2)(C).
No. 22-1654 Page 2
the consequence (dismissal) of not doing so. As a result, the court dismissed his suit.
Because that ruling was proper, we affirm.
Beaulieu, who is “partially of African American descent” and Christian, alleged
in his original complaint that he enrolled at Ashford University from 2018 until 2019
and encountered two sets of problems. The first arose in an anthropology class, where
his instructor reprimanded him. According to Beaulieu, his instructor faulted him for
speaking about his religion (Christianity), God, and Jesus Christ. The university
investigated, found that Beaulieu’s classroom behavior violated the university’s
standards, and suspended him. The second problem arose with the Department of
Veterans Affairs (VA). As a military veteran, he sought funding for his education from
the VA. The VA originally provided him with funding, although not as much as
Beaulieu anticipated, because he was not a full-time student under the VA’s rules
(though he was under Ashford’s requirements). Later, the VA discontinued Beaulieu’s
benefits based on its finding that his behavior at Ashford “showed a sustained pattern
of impaired judgment and inappropriate behavior undeterred by Ashford’s previous
warnings.”
Beaulieu filed his suit against Ashford, federal officers, and others in state court.
He claimed that they committed unlawful racial and religious discrimination, fraud,
slander, conspiracy, harassment, and negligence. The defendants removed the case to
federal court, substituted the United States for the federal officers under the Federal
Torts Claims Act, 28 U.S.C. § 2679(d)(1), and moved to dismiss the case.
In an opinion of nearly 30 pages, the district court analyzed and dismissed every
claim. It observed that several claims failed on threshold matters such as standing,
preemption, personal jurisdiction, and failure to exhaust administrative remedies
against the United States. Then it focused on Beaulieu’s allegations of religious and
racial discrimination against Ashford under Titles IV and VI of the Civil Rights Act
of 1964. See 42 U.S.C. § 2000c; 42 U.S.C. § 2000d. It explained that Title IV does not
provide a private right of action, 42 U.S.C. § 2000c-6, and Title VI does not bar religious
discrimination by federally funded educational institutions, though it does bar race
discrimination. See 42 U.S.C. § 2000d. Beaulieu’s race discrimination allegations, the
court thought, “teeter[ed] on the edge of stating such a claim,” but they nonetheless
failed because Beaulieu never alleged that anyone at the university took action against
him because of his race. The remaining state-law claims also failed because the
allegations were too conclusory.
The district court allowed Beaulieu to seek leave to propose a new, amended
complaint if it contained a short and plain statement of his claims, FED. R. CIV. P. 8(a),
No. 22-1654 Page 3
10(b), and added factual details that cured the existing defects. If the amendment did
not do so, the court warned Beaulieu, then it could dismiss his suit with prejudice.
Beaulieu’s proposed amended complaint failed to satisfy the rules. In it, Beaulieu
did not cure the complaint’s defects, and he abandoned all federal claims and
defendants except Ashford. This left only state-law claims against the university for
defamation, violation of the Illinois consumer-fraud statute, 815 ILL. COMP. STAT. 505/1,
and negligence, all set out in a complaint of nearly 80 pages (expanded from the
original complaint of under 10 pages). The court rejected the new complaint. It reasoned
that the proposed complaint did not address adequately Ashford’s qualified privilege
in matters of discipline, and its conclusory allegations continued to “fall well short” of
complying with the Federal Rules.
Beaulieu appeals the district court’s dismissal of his original complaint and his
proposed amendments. We review de novo the dismissal of a complaint for failure to
state a claim, and we review for abuse of discretion the denial of leave to amend. DJM
Logistics, Inc. v. Fedex Ground Package Sys., Inc., 39 F.4th 408, 412–13 (7th Cir. 2022).
The district court properly dismissed Beaulieu’s original complaint. We agree
with the district court that the only allegations there that approached stating a claim
were those that invoked Title VI of the Civil Rights Act of 1964. 42 U.S.C. § 2000d. To
state a claim under that law, a plaintiff must allege, among other things, intentional
discrimination based on race. Alexander v. Sandoval, 532 U.S. 275, 281 (2001). But
Beaulieu did not do so. He mentioned his race and that of other students, and he recited
legal conclusions, but his allegations did not give fair notice to Ashford that he was
asserting that his race motivated Ashford’s actions. This missing notice was fatal.
Cannon v. Univ. of Chi., 648 F.2d 1104, 1109–10 (7th Cir. 1981); see also McReynolds v.
Merrill Lynch & Co., Inc., 694 F.3d 873, 885–86 (7th Cir. 2012). Even after the district court
gave Beaulieu a chance to supply that missing notice, he never did; he abandoned the
claim instead.
The court also properly dismissed Beaulieu’s proposed complaint containing
only state-law allegations against Ashford. District courts have broad discretion to
resolve requests for leave to file amended complaints. Gonzalez-Koeneke v. West, 791 F.3d
801, 807 (7th Cir. 2015). When a district court orders a plaintiff to supply missing
allegations, we “giv[e] the district court the benefit of the doubt” and “treat its order as
one under Rule 12(e)” of the Federal Rules of Civil Procedure. Chapman v. Yellow Cab
Coop., 875 F.3d 846, 848–49 (7th Cir. 2017). That Rule allows a court to strike a complaint
that fails to supply “a more definite statement” that the court has reasonably requested.
No. 22-1654 Page 4
See id. Yet despite such an order and clear guidance from the court, Beaulieu did not do
so in the final version of his complaint.
We first address his defamation claim. A defamation plaintiff may not recover
against a defendant, such as a university, that has a duty to disclose statements (such as
those about misconduct) to third parties unless the defendant intentionally or recklessly
published false statements to others. See Smock v. Nolan, 361 F.3d 367, 372 (7th Cir.
2004); Mauvais-Jarvis v. Wong, 987 N.E.2d 864, 884–86 (Ill. App. Ct. 2013). Although
Beaulieu asserted the legal conclusion that Ashford’s dean had malice or was reckless in
reporting misconduct, the district court permissibly required him to furnish more
definite details about the dean’s alleged actions. But Beaulieu never did nor does he
explain why he could not or should not supply them.
The claim under the Illinois Consumer Fraud Act similarly fails. Beaulieu asserts
that an Ashford counselor did not tell him about the requirements to obtain funding
from the VA. Because this claim involves fraud, Beaulieu had to satisfy the heightened
standard of Rule 9(b) and allege that the counselor deceptively concealed information
with an intent that Beaulieu rely on that deception to his detriment. See Benson v. Fannie
May Confections Brands, Inc., 944 F.3d 639, 646 (7th Cir. 2019) (quoting Vanzant v. Hill’s
Pet Nutrition, Inc., 934 F.3d 730, 736 (7th Cir. 2019)). But Beaulieu never alleged in his
proposed complaint or on appeal that his university counselor intended for him to rely
to his detriment on anything that the counselor did not say.
Finally, Beaulieu did not state a claim against Ashford for negligence. To state a
negligence claim, a plaintiff needs to “plead a duty owed by a defendant to that
plaintiff, a breach of duty, and injury proximately caused by the breach of duty.”
Reynolds v. CB Sports Bar, Inc., 623 F.3d 1143, 1148 (7th Cir. 2010). The district court
ordered Beaulieu to identify the first element of duty, but he did not. He merely
asserted that the university owed him a duty “to not slander” him or to not “use unfair
business practices.” Repackaging the defamation and fraud claims as negligence claims
is futile when the defamation and fraud claims are themselves defective.
AFFIRMED | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488096/ | In the United States Court of Federal Claims
No. 21-2272
(Filed: November 18, 2022)
NOT FOR PUBLICATION
**************************************
DANIEL P. MCCARTHY, *
* Pro Se; Lack of Subject-Matter
Plaintiff, * Jurisdiction; RCFC 12(b)(1); Motion
* to Amend; Military Service Deposit;
v. * Administrative Procedure Act;
* Declaratory Judgment Act; Federal
THE UNITED STATES, * Tort Claims Act; Writ of Mandamus;
* Due Process.
Defendant. *
**************************************
Daniel P. McCarthy, Jackson, MI, pro se.
Kristin E. Olson, U.S. Department of Justice, Civil Division, Washington, DC, counsel for
Defendant.
OPINION AND ORDER
DIETZ, Judge.
Daniel P. McCarthy, a pro se plaintiff, challenges certain actions and decisions made by
the United States Citizenship and Immigration Services (“USCIS”), the Defense Finance and
Accounting Service (“DFAS”) and the Office of Personnel Management (“OPM”) denying his
request to make military service deposits to enhance his civil service retirement annuity
payments. The government moves to dismiss Mr. McCarthy’s complaint for lack of subject-
matter jurisdiction pursuant to Rule 12(b)(1) of the Rules of the United States Court of Federal
Claims (“RCFC”). Because this Court does not have jurisdiction to review a decision by OPM on
retirement benefit claims and Mr. McCarthy otherwise fails to identify a money-mandating
source of law that provides this Court with jurisdiction over his claims, the Court GRANTS the
government’s motion to dismiss.
I. BACKGROUND
Under the Federal Employee Retirement System (“FERS”), a federal civilian employee
who performed military service may be entitled to enhanced civilian annuity payments. See 5
U.S.C. § 8411(c)(1)(B); 5 U.S.C. § 8422(e)(1)(A).1 A federal employee can have their qualifying
1
Mr. McCarthy’s complaint is unclear as to whether he retired under the Civil Service Retirement System (“CSRS”)
or the FERS. A determination of whether Mr. McCarthy retired under the CSRS or FERS is not necessary for the
Court to rule on the government’s motion to dismiss because OPM has the authority to adjudicate all claims under
military service credited toward their years of civil service by paying a deposit into the civilian
retirement fund.2 See 5 U.S.C. § 8411(c)(1)(B); Faris v. Dept. of the Air Force, 2022 WL
4376408, at *2 (Fed. Cir. Sept. 22, 2022). The military service deposit must be paid in full to the
employing agency, which remits the amount to OPM, prior to the federal employee’s retirement
from the civil service. 5 U.S.C. § 8422(e)(1)(A); 5 C.F.R. § 842.307(c). An employee who fails
to pay the deposit prior to their retirement may still make a lump sum payment if OPM rules that
there was an administrative error in processing the employee’s deposit. See 5 C.F.R. §
842.307(a)(3).
On June 28, 2011, Mr. McCarthy, while working at USCIS, began the process for making
his military service deposit. Compl. [ECF 1] ¶¶ 6, 8. Mr. McCarthy sought to make a deposit for
various long-term active-duty service periods and short-term active-duty reserve tours in the
United States Army. See id. ¶¶ 9-10; Ex. A [ECF 1-1]. In January 2013, Mr. McCarthy
successfully made a deposit and received credit for some of his military service. [ECF 1] ¶ 15.
However, because some of Mr. McCarthy’s military service could not be corroborated, he did
not receive credit for all his alleged military service. Id. ¶ 18.
Mr. McCarthy exchanged several communications with the USCIS personnel office,
attempting to receive credit for his disputed service. See id. ¶¶ 19-36. A member of the personnel
office noted “a lot of red flags with the documentation provided [by Mr. McCarthy,] such as
missing signatures on the forms and [the fact that] some forms are hand[]written.” Id. ¶ 30. In an
apparent attempt to assist Mr. McCarthy, the personnel office submitted supplemental
documentation, on behalf of Mr. McCarthy, to DFAS to obtain an estimate of Mr. McCarthy’s
earnings during the disputed military service periods. Id. ¶ 30-32. Nevertheless, on April 15,
2015, DFAS responded that it was unable to process this request because of insufficient
information. [ECF 1] ¶ 35. DFAS advised that Mr. McCarthy should submit new documentation
because he submitted “Chronological Statements of Service, which are not acceptable documents
for estimated earnings” and because some of the documents were illegible. Id. Interestingly, on
October 21, 2015, Mr. McCarthy, after contacting his Senator to request assistance, obtained a
DFAS estimate of his earnings for his disputed period of military service. Id. ¶¶ 38-41.
On October 26, 2015, Mr. McCarthy submitted a claim to OPM seeking to complete a
deposit for active-duty service. Id. ¶¶ 42-43. OPM denied Mr. McCarthy’s request to make a
claim on November 7, 2015. Id. ¶ 43. In response, Mr. McCarthy mailed a request for
reconsideration to OPM on December 7, 2015. Id. ¶ 46. Mr. McCarthy alleges that OPM signed
for receipt of his request of reconsideration on December 9, 2015, however, Mr. McCarthy never
received a decision. Id. ¶ 47; Pl.’s Resp. to Def.’s Mot. to Dismiss [ECF 12] at 8.3 The
government states that OPM has no record of receiving Mr. McCarthy’s alleged request for
reconsideration. See Def.’s Mot. to Dismiss [ECF 10] at 13 n.3.
the CSRS and the FERS. See 5 U.S.C. § 8347 (a)-(b) (CSRS); 5 U.S.C. § 8461(b)-(c) (FERS). For simplicity, the
Court cites to the relevant FERS statutes and regulations.
2
The amount of the deposit is three percent of the military basic pay that the employee earned during their period of
service, plus interest. 5 U.S.C. § 8422(e)(1)(A); 5 C.F.R. § 842. 307(b)(1).
3
All page numbers in the parties’ briefings refer to the page number generated by the CM/ECF system.
2
Mr. McCarthy filed his complaint in this Court on December 7, 2021. [ECF 1]. The
government subsequently filed a motion to dismiss pursuant to RCFC 12(b)(1) for lack of
subject-matter jurisdiction. [ECF 10]. In his response, in addition to opposing the government’s
motion, Mr. McCarthy requested that the Court allow him to amend his complaint if doing so
would avoid dismissal. See [ECF 12] at 1. The government’s motion is now fully briefed, and the
Court has determined that oral argument is not necessary.
II. LEGAL STANDARDS OF REVIEW
Jurisdiction is a threshold issue that the court must address before proceeding to the
merits of the case. See Remote Diagnostic Techs. LLC v. United States, 133 Fed. Cl. 198, 202
(2017) (citing Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94 (1998)). A motion to
dismiss for lack of subject-matter jurisdiction challenges the court’s “general power to adjudicate
in specific areas of substantive law[.]” Palmer v. United States, 168 F.3d 1310, 1313 (Fed. Cir.
1999); see also RCFC 12(b)(1). When considering a motion to dismiss for lack of jurisdiction,
the court “must accept as true all undisputed facts asserted in the plaintiff’s complaint and draw
all reasonable inferences in favor of the plaintiff.” Trusted Integration, Inc. v. United States, 659
F.3d 1159, 1163 (Fed. Cir. 2011). A plaintiff must establish jurisdiction by a preponderance of
the evidence. Brandt v. United States, 710 F.3d 1369, 1373 (Fed. Cir. 2013).
The Court construes pleadings from pro se plaintiffs liberally. See Ottah v. Fiat Chrysler,
884 F.3d 1135, 1141 (Fed. Cir. 2018). The leniency afforded to pro se plaintiffs, however, does
not give the court “discretion to bend . . . [or] take a liberal view of jurisdictional requirements
for pro se litigants[.]” Stanley v. United States, 107 Fed. Cl. 94, 98 (2012). Pro se plaintiffs must
still establish the Court’s jurisdiction by a preponderance of the evidence. See Spengler v. United
States, 688 F. App’x 917, 920 (Fed. Cir. 2017); Trevino v. United States, 113 Fed. Cl. 204, 208
(2013), aff’d, 557 F. App’x 995 (Fed. Cir. 2014).
III. DISCUSSION
While the Court understands Mr. McCarthy’s frustration, the Court lacks jurisdiction to
consider his dispute regarding his civilian annuity enhancement. This Court is a court of limited
jurisdiction. Brown v. United States, 105 F.3d. 621, 623 (Fed. Cir. 1997). This Court’s
jurisdiction is defined by the Tucker Act, which waives the sovereign immunity of the United
States for “any claim against the United States founded either upon the Constitution, or any Act
of Congress or any regulation of an executive department, or upon any express or implied
contract with the United States, or for liquidated or unliquidated damages in cases not sounding
in tort.” 28 U.S.C. 1491(a) (2018). The Tucker Act, however, is “merely a jurisdictional statute
and does not create a substantive cause of action.” Rick’s Mushrooms Serv., Inc. v. United States,
521 F.3d 1338, 1343 (Fed. Cir. 2008) (citing United States v. Testan, 424 U.S. 392, 398 (1976)).
To establish this Court’s jurisdiction, a plaintiff must “identify a substantive source of law that
creates the right to recovery of money damages against the United States.” Id. (citing United
States v. Mitchell, 463 U.S. 206, 216 (1983)). Although Mr. McCarthy asserts multiple causes of
action stemming from his attempts to make military service deposits to enhance his civil service
retirement annuity payments, see [ECF 1] ¶¶ 58-70, none of his causes of action are based on a
money-mandating source of law that grants this Court jurisdiction.
3
Mr. McCarthy’s primary claim is best characterized as a challenge to the merits of
OPM’s denial of his request to make a military service deposit to receive an enhanced civilian
annuity. Mr. McCarthy begins his complaint by stating that “[t]his action seeks enhanced civilian
annuity payments going forward, through a judgment that certain actions and/or administrative
decisions by [USCIS], [DFAS], and [OPM] were and continue to be arbitrary, capricious,
without factual support and contrary to law.” [ECF 1] at 1. Furthermore, in his request for relief,
Mr. McCarthy demands: “[a] declaration that Plaintiff’s evidence already submitted to Defendant
compels a favorable adjudication of civilian annuity entitlement based on active-duty military
service[;]” “an order allowing Plaintiff to remit such sums . . . as a deposit needed to permit the
crediting of civilian annuity enhancement based upon military service[;]” “[a]n injunction
compelling Defendant . . . to properly verify Plaintiff’s performance of qualifying military
service creditable for civilian retirement[;]” and “[m]onetary damages for back pay of
improperly denied civilian annuity amounts[.]” Id. at 15.
The power to review civilian retirement benefits decisions—including decisions related
to civilian annuity payments—rests solely with OPM. See 5 U.S.C. § 8461(c) (stating that OPM
“shall adjudicate all claims” related to retirement under FERS); Anthony v. Off. of Pers. Mgmt.,
58 F.3d 620, 626 (Fed. Cir. 1995); El v. United States, 730 Fed. App’x 928, 929 (Fed. Cir. 2018);
McGhee v. United States, 155 Fed. Cl. 380, 386 (2021). After receiving a decision on a
retirement benefits decision from OPM, the claimant may either petition for reconsideration or
appeal the decision to the Merit Systems Protection Board (“MSPB”). See 5 U.S.C. § 8461(e)(1);
5 C.F.R. § 841.305. A decision by the MSPB is then subject to judicial review by the United
States Court of Appeals. 5 U.S.C. § 7703(b)(1)(A). This Court is noticeably absent from the
structure of the review scheme. Instead, under this scheme, the MSPB possesses the exclusive
jurisdiction to review the merits of an OPM decision with respect to civilian retirement benefits.4
See Stekelman v. United States, 752 F. App’x 1008, 1010 (Fed. Cir. 2018) (“We find no authority
from Congress or otherwise granting the Court of Federal Claims jurisdiction for ‘adjudicating
disputes over retirement annuities and benefits’ when the underlying dispute rests on personnel
action subject to MSPB review); accord Lindahl v. Off. of Pers. Mgmt, 470 U.S. 768, 773-74
(1985); Miller v. Off. of Pers. Mgmt., 449 F.3d 1374, 1377-78 (Fed. Cir. 2006). Accordingly,
review of OPM’s denial of Mr. McCarthy’s request to pay a military service deposit for his years
of service and to receive a civilian annuity enhancement can be heard only by the MSPB and not
by this Court. See Pueschel v. United States, 297 F.3d 1371, 1378 (Fed. Cir. 2002) (“This court
has long held that the Court of Federal Claims does not have jurisdiction over a case that could
be heard by the MSPB.”).5
4
Mr. McCarthy argues that MSPB does not have exclusive jurisdiction over OPM’s decision because 5 U.S.C. §
8461(e)(1) only states that OPM decisions “may” be appealed to the MSBP. See [ECF 12] at 5. The use of “may” in
the context of 5 U.S.C.§ 8461(e)(1) only indicates that Mr. McCarthy has the option to appeal to the MSBP, not that
the MSPB is one of several forums that can review OPM’s decision. See Miller v. Off. of Pers. Mgmt., 449 F.3d
1374, 1377-78 (Fed. Cir. 2006).
5
Mr. McCarthy also argues that he cannot appeal to the MSPB because OPM has not yet issued a final decision on
his request for reconsideration. See [ECF 12] at 5-6. However, OPM’s alleged failure to issue a final decision on a
request for reconsideration does not result in this Court having jurisdiction. The MSPB may assume jurisdiction
when OPM “has refused or improperly failed to issue a final decision.” Stillwell v. Merit Sys. Prot. Bd., 629 F.
4
In addition to Mr. McCarthy’s challenge to OPM’s decision denying him enhanced
civilian annuity, the Court liberally construes Mr. McCarthy’s complaint to also include a
challenge to agency actions under the Administrative Procedures Act (“APA”). Mr. McCarthy
alleges that USCIS, DFAS, and OPM acted “arbitrar[ily], capricious[ly], without factual support
and contrary to law” when computing his enhanced civilian annuity payments. [ECF 1] at 1, see
also id. ¶ 57. While the APA waives sovereign immunity and entitles a person wronged by
agency action to judicial review, see 5 U.S.C. § 703, relief under the APA is limited to “relief
other than money damages.” 5 U.S.C. § 702; see Wopsock v. Natchess, 454 F.3d. 1327, 1333
(Fed. Cir. 2006) (finding that the APA is not a money-mandating statute). Since the APA does
not provide for money damages, APA claims fall outside of this Court’s jurisdiction. See Albino
v. United States, 104 Fed. Cl. 801, 815 (2012); Stroughter v. United States, 89 Fed. Cl. 755, 763
(2009). Accordingly, the Court also lacks jurisdiction to consider any APA challenges related to
the actions of USCIS, DFAS, and OPM, on behalf of the United States, in calculating Mr.
McCarthy’s civilian annuity enhancement.
Mr. McCarthy’s causes of action under the Declaratory Judgement Act, the Federal Tort
Claims Act, and the Mandamus Act do not fare any better at establishing this Court’s
jurisdiction. Mr. McCarthy seeks, under the Declaratory Judgment Act, “an order declaring that
he has a right to have all his military service . . . credited upon payment of a deposit[.]” [ECF 1]
¶ 59. Although other courts have the general power to issue declaratory judgements, such general
power does not extend to this Court, and this Court lacks jurisdiction to consider claims under
the Declaratory Judgement Act without an underlying claim for money damages. See Nat'l Air
Traffic Controllers Ass'n v. United States, 160 F.3d 714, 716 (Fed. Cir. 1998); United States v.
King, 395 U.S. 1, 5 (1969); Bench Creek Ranch, LLC v. United States, 149 Fed. Cl. 222, 226
(2020). Mr. McCarthy also seeks monetary damages under the Federal Tort Claims Act for being
“deprived of the full scope of the civilian annuity to which he may be found entitled[.]” [ECF 1]
¶ 62. United States district courts have “exclusive jurisdiction” over Federal Tort Act claims. See
28 U.S.C. § 1346(b); Robleto v. United States, 634 Fed. Appx. 306, 308 (2015). Furthermore,
under the Tucker Act, this Court explicitly and unambiguously lacks jurisdiction over tort actions
against the United States. 28 U.S.C. § 1491(a)(1); see also Brown v. United States, 105 F.3d 621,
623 (Fed. Cir. 1997). Additionally, Mr. McCarthy seeks a writ of mandamus to compel DFAS to
verify Mr. McCarthy’s disputed service. See [ECF 1] ¶ 65. This Court lacks the authority to issue
a writ of mandamus because that power rests solely with United States district courts. See 28
U.S.C. § 1361; Ross v. United States, 122 Fed. Cl. 343, 348 (2015) (“As a non-Article III court,
this Court does not have authority to issue a writ of mandamus” (citation omitted)); Del Rio v.
United States, 87 Fed. Cl. 536, 540 (2009).6 7
App’x 998, 999 (Fed. Cir. 2015); see also Okello v. Off. of Pers. Mgmt., 120 M.S.P.R. 498, 502 (2014); Easter v.
Off. of Pers. Mgmt., 102 M.S.P.R. 568, 571 (2006).
6
Mr. McCarthy’s complaint alludes to potential due process claims under the Fifth and Fourteenth Amendments.
[ECF 1] ¶¶ 66-70. The Court, however, lacks jurisdiction over due process claims because “[t]he Due Process
clauses of both the Fifth and Fourteenth Amendments do not mandate the payment of money and thus do not
provide a cause of action under the Tucker Act.” Smith v. United States, 709 F.3d 1114, 1116 (Fed. Cir. 2013).
7
Mr. McCarthy’s complaint seeks “entitlement to a military pension from the Department of Defense” and
“[m]onetary damages for back pay of improperly denied military pension benefits[.]” [ECF 1] at 1, 15-16. Mr.
McCarthy does not provide any factual allegations to support these claims. Simply claiming entitlement to military
5
In his response to the government’s motion, Mr. McCarthy requests that the Court
provide instructions “to Plaintiff to amend his [c]omplaint[,]” and he asserts a new military pay
claim. See [ECF 12] at 1-2. The Court construes this as a request to amend his complaint to add a
military pay claim. RCFC 15(a)(2) states that “a party may amend its pleading only with the
opposing party’s written consent or the court’s leave.” Further, it states that “[t]he court should
freely give leave when justice so requires.” RCFC 15(a)(2). The decision to grant leave to amend
a complaint is within the discretion of the Court. Zenith Radio Corp. v. Hazeltine Rsch., Inc., 401
U.S. 321, 331 (1971). However, granting a motion for leave to amend is not appropriate in
certain circumstances, such as when the amendment is futile. Foman v. Davis, 371 U.S. 178, 182
(1962). An amendment is futile if it could not survive a dispositive pretrial motion. Kemin
Foods, L.C. v. Pigmentos Vegetales Del Cenro S.A. de C.V., 464 F.3d 1339, 1354-55 (Fed. Cir.
2006).
The Court denies Mr. McCarthy’s request to amend his complaint because it would be
futile. Mr. McCarthy argues that he should be permitted to amend his complaint to add a military
pay claim because “military pay is inextricably linked, in one way or another, to all of Plaintiff’s
claims.” [ECF 12] at 2. This argument is not persuasive. Even if Mr. McCarthy’s claim is
fashioned as a military pay claim, it is still—at its core—a claim for a civilian annuity
enhancement. Mr. McCarthy admitted as much when, in his response to the government’s
motion to dismiss, he stated that his claim is for military pay “incident to active duty credit
toward civilian annuity enhancement.” Id. As explained above, this Court does not have
jurisdiction to consider a claim for a civilian annuity enhancement. See Pines Residential
Treatment Ctr., Inc. v. United States, 444 F.3d 1379, 1380 (Fed. Cir. 2006) (“Regardless of a
party's characterization of its claim, [the Court] look[s] to the true nature of the action in
determining the existence or not of jurisdiction.” (quotation marks omitted)).8
IV. CONCLUSION
Accordingly, the government's motion to dismiss is GRANTED. Mr. McCarthy’s
complaint is DISMISSED WITHOUT PREJUDICE. The Clerk is DIRECTED to enter
judgment accordingly.
IT IS SO ORDERED.
s/ Thompson M. Dietz
THOMPSON M. DIETZ, Judge
pension benefits without any supporting factual allegations is not sufficient to establish jurisdiction, which must be
established by the plaintiff by a preponderance of the evidence. See Caesar v. United States, 2018 WL 5730181, at
7-8 (Fed. Cl. Nov. 2, 2018); see also Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746, 748 (Fed. Cir. 1988).
8
Mr. McCarthy also argues that the Court can consider some of his claims that would normally be outside of this
Court’s jurisdiction by exercising ancillary jurisdiction. [ECF 12] at 10. Because the Court finds that it lacks
jurisdiction over all of Mr. McCarthy’s claims, however, the Court cannot exercise ancillary jurisdiction. See
Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 378 (1994) (stating that the doctrine of ancillary
jurisdiction “recognizes federal courts’ jurisdiction over some matters (otherwise beyond their competence) that are
incidental to other matters properly before them.”).
6 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488094/ | United States Tax Court
T.C. Memo. 2022-109
BETTY AMOS,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 4331-18. Filed November 10, 2022.
—————
Ayuban A. Tomas, for petitioner.
Derek P. Richman and Daniel C. Munce, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
URDA, Judge: Petitioner, Betty Amos, challenges a notice of
deficiency on which the Internal Revenue Service (IRS) disallowed net
operating loss (NOL) deductions claimed on her 2014 and 2015 tax
returns and determined accuracy-related penalties under section
6662(a). 1 Ms. Amos, a certified public accountant (CPA) and former
owner of multiple Fuddruckers restaurant franchises in Florida and
Tennessee, contends that her declining business fortunes in 1999 and
2000 produced significant NOLs, which she carried forward to 2014 and
2015. The Commissioner responds that she has established neither the
underlying NOLs nor that any portions of those NOLs remained
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation
references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure. We round all monetary amounts to the nearest dollar.
Served 11/10/22
2
[*2] available for use in 2014 and 2015. We will sustain the
Commissioner’s determinations. 2
FINDINGS OF FACT
I. Ms. Amos’s Business Background
Ms. Amos is an accomplished Miami CPA and restaurateur. She
graduated from the University of Miami in 1973, receiving a bachelor of
business administration degree magna cum laude with a major of
accounting. After graduation, Ms. Amos passed the Florida CPA
examination and earned her master of business administration (again
from the University of Miami) in 1976, which allowed her to practice as
a CPA.
During her time in school, Ms. Amos worked as a financial
analyst. She later transitioned to the role of tax adviser and investment
manager for certain high net-worth individuals, including one of the
founders of Burger King. Ms. Amos owned her own accounting firm and
was active in both the American Institute of Certified Public
Accountants and the Florida Institute of Certified Public Accountants.
While living in Miami, Ms. Amos became acquainted with Nick
Buoniconti, a retired National Football League (NFL) Hall of Famer who
had played football both for the University of Notre Dame and the Miami
Dolphins. Mr. Buoniconti was looking for investment opportunities and
decided to invest in the restaurant industry with Ms. Amos, who had
gleaned insights into it from her clients. Ms. Amos and Mr. Buoniconti
ultimately settled on the Fuddruckers restaurant chain after being
alerted to it by another retired NFL player, Fred Willis. Ms. Amos, Mr.
Buoniconti, and Mr. Willis thereafter formed a partnership, Abkey
2 At trial, we reserved ruling on the Commissioner’s relevance objections to
Exhibits 15-P through 18-R and Exhibits 40-P through 47-P. The Commissioner
argued that these exhibits are irrelevant as they relate to tax years different from the
years at issue. While it is true “that every tax year stands on its own,” see Couturier
v. Commissioner, T.C. Memo. 2022-69, at *8, it is “well settled that we may determine
the correct amount of taxable income or net operating loss for a year not in issue . . .
as a preliminary step in determining the correct amount of a net operating loss
carryover” to the year at issue, Lone Manor Farms, Inc. v. Commissioner, 61 T.C. 436,
440 (1974), aff’d without published opinion, 510 F.2d 970 (3d Cir. 1975); Amanda Iris
Gluck Irrevocable Tr. v. Commissioner, 154 T.C. 259, 269 (2020). We will overrule the
Commissioner’s objections.
3
[*3] No. 1, Ltd., 3 in 1983 to become Fuddruckers franchisees in Florida,
signing a multirestaurant development deal.
Mr. Buoniconti and Mr. Willis both moved from Florida before the
first restaurant opened, however. Ms. Amos and Mr. Buoniconti
subsequently bought out Mr. Willis’s interest in the partnership.
Although Mr. Buoniconti was not actively involved in the Fuddruckers
venture, he did maintain a stake in the business. Despite the loss of
active participation of her partners, Ms. Amos pressed ahead, opening
her first Fuddruckers in 1984.
Over the next 27 years Ms. Amos ran a total of 15 different
Fuddruckers restaurants in Florida and Tennessee. Ms. Amos operated
her Fuddruckers enterprise through several partnerships and
subchapter S corporations, each bearing some variation of the Abkey
name (despite Mr. Willis’s departure).
For her efforts, Ms. Amos was honored in 1993 by the National
Association of Women Business Owners as its Outstanding Woman
Business Owner. She was named to the board of trustees of the
University of Miami in 1997, serving as the chair of the audit and
compliance committee.
Ms. Amos’s business fortunes began to decline in the late 1990s
after Mr. Buoniconti brought a lawsuit relating to the business, which
led to his receiving a hefty settlement payment. In 1999 Ms. Amos was
forced to close one of her Fuddruckers locations. Her business fortunes
continued to decline over the next decade, and Ms. Amos closed her last
Fuddruckers restaurant in 2011.
II. 1999 and 2000 Tax Reporting and IRS Audits
Ms. Amos and her then husband, Dr. Thomas Righetti, filed joint
income tax returns for 1999 and 2000, which were prepared by the
accounting firm of Kaufman, Rossin & Co. On their 1999 return, the
couple claimed a refund of $89,908. They reported adjustable gross
income of negative $1,447,749, based upon, inter alia, wage income of
$309,220, interest income of $71,793, and a loss of $1,818,202 from Ms.
Amos’s Fuddruckers enterprise. The couple calculated an NOL of
$1,498,512 (based upon their negative gross income and deductions) and
included on their tax return an election under section 172(b)(3) to forgo
3 The name “Abkey” was an amalgam of the first initials of Amos and
Buoniconti, as well as part of the name of one of Mr. Willis’s companies.
4
[*4] the two-year carryback period. They also attached an “NOL
carryover worksheet,” which set forth the reported NOL amount and
identified it as originating in 1999.
On their 2000 return Ms. Amos and Dr. Righetti claimed a refund
of $75,222. They reported adjustable gross income of negative
$1,826,726, which they calculated by taking into account, inter alia,
wage and interest income, losses of $699,996 from the Fuddruckers
enterprise, and their 1999 NOL carryforward of $1,498,512. The couple
claimed an NOL deduction for their 2000 tax year of $371,663, again
electing to forgo the carryback period under section 172(b)(3). They also
recorded their 2000 NOL on an NOL carryover worksheet, which
reflected that they had a total NOL available (from 1999 and 2000) of
$1,870,175.
The IRS audited Ms. Amos and Dr. Righetti’s 2000 return as well
as the 2000 return of Abkey Management Corp. (one of Ms. Amos’s
companies that managed some of her Fuddruckers establishments). The
IRS ultimately agreed that there was no deficiency in the couple’s 2000
tax.
By the time Ms. Amos filed her 2008 tax return, the NOL
carryforward reported on her tax return had ballooned to $5,747,514. 4
The NOL carryforwards reported on Ms. Amos’ tax returns exceeded
$5.2 million for each of the next three years. For 2012 and 2013, the
NOL carryforwards reported on her returns dipped to $4,375,505 and
$4,302,895, respectively. 5
III. Ms. Amos’s 2014 and 2015 Tax Returns
Ms. Amos prepared and filed her 2014 tax return herself. On that
return she reported individual retirement account (IRA) distributions of
4 Dr. Righetti passed away in 2002, when a MiG-15 jet fighter that he was
piloting for an air show crashed. See Dr. Thomas R. Righetti, The Aspen Times (Oct. 2,
2002), https://www.aspentimes.com/news/dr-thomas-r-righetti/.
5 Ms. Amos received notices from the IRS regarding her 2003, 2005, and 2008
tax years, which stated that she owed nothing or was entitled to a refund. The notice
relating to 2003 reflects adjusted gross income of $4,556,647 and no taxable income.
Ms. Amos petitioned this Court with respect to a notice of deficiency for her 2009 tax
year, which resulted in a stipulated decision determining a deficiency of $11,545 and
additions to tax. The parties stipulated that the deficiency amount did not take into
consideration the claimed NOLs from prior years, with Ms. Amos reserving the right
to claim such NOLs in future years and the IRS reserving the right to challenge any
such claimed losses.
5
[*5] $100,000 (as well as some small, miscellaneous income items) and
claimed an NOL carryforward deduction of $4,220,639, resulting in
negative $4,119,628 of adjusted gross income. After she took her 2014
deductions into account, her NOL decreased to $4,149,326, with a total
tax due of zero. On an attached “net operating loss carryforward
deduction statement,” Ms. Amos stated that the carryforwards were
“from losses incurred prior to 2012.”
As with her 2014 return, Ms. Amos prepared and filed her own
2015 return. She reported IRA distributions of $90,000 (again with
certain miscellaneous income items) and claimed an NOL carryforward
deduction of $4,149,326, resulting in adjusted gross income of negative
$4,058,261. She again reported that her total tax due was zero. And
she attached another “net operating loss carryforward deduction
statement,” which explained only that the carryover “from 2014 [was]
accumulated from prior years.”
IV. Notice of Deficiency and Tax Court Proceedings
In February 2018 the IRS sent Ms. Amos a notice of deficiency
that determined deficiencies of $21,477 and $18,864, respectively, for
her 2014 and 2015 tax years. The notice additionally determined
penalties under section 6662(a)—$4,295 for 2014 and $3,773 for 2015.
In an attachment to the notice the IRS explained that it had disallowed
the claimed NOL deductions of $4,220,639 and $4,149,326 for 2014 and
2015, respectively, on the ground that Ms. Amos had not established
that she sustained the loss in prior years or that any loss was available
to be carried over to 2014 and 2015.
Ms. Amos filed a timely petition in this Court challenging the
IRS’s disallowance of the NOL deductions as reflected in the notice of
deficiency, as well as the accuracy-related penalties. Ms. Amos resided
in Florida when she filed the petition.
OPINION
I. Burden of Proof
The Commissioner’s determinations in a notice of deficiency are
generally presumed correct, and a taxpayer bears the burden of proving
that the Commissioner’s determinations are in error. Rule 142(a); Welch
v. Helvering, 290 U.S. 111, 115 (1933). The taxpayer also bears the
burden of proving her entitlement to any deduction claimed. New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). “If, in any court
6
[*6] proceeding, a taxpayer introduces credible evidence with respect to
any factual issue relevant to ascertaining the liability of the
taxpayer . . . , the [Commissioner] shall have the burden of proof with
respect to such issue.” § 7491(a)(1); see also Higbee v. Commissioner,
116 T.C. 438, 440–41 (2001); Bordelon v. Commissioner, T.C. Memo.
2020-26, at *11.
To avail herself of this burden shift, however, a taxpayer must
have “complied with the requirements . . . to substantiate any item” and
“maintained all records required under this title.” § 7491(a)(2)(A)
and (B). As to the latter, section 6001 provides that the Secretary “may
require any person” to “keep such records, as the Secretary deems
sufficient to show whether or not such person is liable for tax under this
title.” Treasury Regulation § 1.6001-1(a) specifies, in turn, that “any
person subject to tax under subtitle A of the Code . . . shall keep such
permanent books of account or records, including inventories, as are
sufficient to establish the amount of gross income, deductions, credits,
or other matters required to be shown by such person in any return of
such tax or information.” As we will discuss in greater detail, Ms. Amos
neither substantiated the items at issue nor maintained adequate
records, and accordingly she is not entitled to a shift in the burden of
proof under section 7491(a)(1).
II. NOL Deduction
A. General Requirements
Section 172 allows a taxpayer to deduct NOLs for a taxable year.
The amount of the NOL deduction equals the aggregate of the NOL
carryovers and NOL carrybacks to the taxable year. § 172(a).
Section 172(c) defines an NOL as the excess of deductions over gross
income, computed with certain modifications specified in section 172(d).
See, e.g., Jasperson v. Commissioner, T.C. Memo. 2015-186, at *6, aff’d,
658 F. App’x 962 (11th Cir. 2016).
An unused NOL is first required to “be carried to the earliest of
the taxable years to which . . . such loss may be carried.” § 172(b)(2);
McRae v. Commissioner, T.C. Memo. 2019-163, at *23. Any excess NOL
that is not applied in one year is carried to the next earlier year.
§ 172(b)(2). Absent an election under section 172(b)(3), an NOL for any
taxable year first must be carried back 2 years and then carried over 20
years. § 172(b)(1)(A), (2), (3). A taxpayer claiming an NOL must file
with her return “a concise statement setting forth the amount of the net
7
[*7] operating loss deduction claimed and all material and pertinent
facts relative thereto, including a detailed schedule showing the
computation of the net operating loss deduction.” Treas. Reg. § 1.172-
1(c).
“A taxpayer who claims a net operating loss deduction bears the
burden of establishing both the existence of the net operating loss and
the amount that may be carried over to the year involved.” Chico v.
Commissioner, T.C. Memo. 2019-123, at *39 (citing Keith v.
Commissioner, 115 T.C. 605, 621 (2000)), aff’d without published
opinion, No. 20-71017, 2021 WL 4705484 (9th Cir. Oct. 28, 2021). A
taxpayer “cannot rely solely on [her] own income tax returns to establish
the losses [she] sustained.” Barker v. Commissioner, T.C. Memo. 2018-
67, at *13, aff’d, 853 F. App’x 571 (11th Cir. 2021); see also Wilkinson v.
Commissioner, 71 T.C. 633, 639 (1979). Importantly here, the taxpayer
“must establish that the NOL was not fully absorbed in the years
preceding the particular year for which [s]he seeks the NOL deduction.”
Villanueva v. Commissioner, T.C. Memo. 2022-27, at *3. “To meet this
burden [Ms. Amos] must introduce convincing evidence that [she]
incurred NOLs in the taxable years [1999–2000] and also prove [Ms.
Amos’s] taxable income for the period beginning with [2001] and ending
with [2013].” Power v. Commissioner, T.C. Memo. 2016-157, at *14.
B. Analysis
Ms. Amos is not entitled to the claimed NOL carryforward
deductions because (1) she failed to provide sufficient evidence of the
underlying NOLs in 1999 and 2000 and (2) she failed to show that any
NOL was available to carry forward to the years at issue. We will
address each point in turn.
As an initial matter, Ms. Amos failed to establish that she
incurred NOLs in 1999 and 2000. Ms. Amos relied primarily on her tax
returns, as well as her own testimony, to establish these losses. We have
previously held similar proof to be insufficient to substantiate a
taxpayer’s entitlement to a loss carryforward. See Bulakites v.
Commissioner, T.C. Memo. 2017-79, at *8; see also McRae, T.C. Memo.
2019-163, at *26; Ghafouri v. Commissioner, T.C. Memo. 2016-6, at *9
(“The prior tax returns show only that [the taxpayers] claimed NOL
carryforward deductions. They do not provide evidence that [the
taxpayers] are entitled to them.”); Wagner v. Commissioner, T.C. Memo.
2015-120, at *26–27.
8
[*8] More specifically, Ms. Amos failed to adduce evidence that would
give a full picture of her gross income and deductions as necessary to
substantiate the claimed losses of $1,498,512 and $371,663 for 1999 and
2000, respectively. Although the record contains some documents (such
as tax returns for the year 2000 from various Abkey entities, business
ledgers, and documentation of loan defaults) that support her claim of
losses, Ms. Amos failed to link these documents to the purported NOLs
either at trial or in her posttrial briefing. See, e.g., Jasperson, T.C.
Memo. 2015-186, at *9 (“[W]ithout any sort of direction as to the
contents of these documents, this type of voluminous, unverified, and
indiscriminate documentation does not provide adequate substantiation
of the items [the taxpayer] reported . . . .”). The fragmentary record
before us is inadequate to establish her 1999 and 2000 income and
deductions so as to substantiate the NOLs at issue. 6
Even assuming arguendo that Ms. Amos incurred the purported
losses in 1999 and 2000, she nonetheless failed to establish her
entitlement to NOL carryforward deductions for 2014 and 2015. To
start, Ms. Amos did not include with the returns at issue (or the returns
for earlier years for which an NOL carryforward deduction had been
claimed) either a concise statement that set forth the material and
relevant facts or a detailed schedule showing a computation of the NOL
amount. See Ghafouri, T.C. Memo. 2016-6, at *9; Treas. Reg. § 1.172-
1(c).
6 At trial, Ms. Amos argued that the Commissioner should be estopped from
disallowing the NOL deductions because the IRS had not disallowed NOL deductions
purportedly stemming from the same underlying losses in other years. Ms. Amos failed
to raise this issue either in her petition or in her posttrial briefs, and thus has conceded
or abandoned the issue. See, e.g., Rule 34(b)(4); Mendes v. Commissioner, 121 T.C. 308,
312–13 (2003) (“If an argument is not pursued on brief, we may conclude that it has
been abandoned.”); Elbasha v. Commissioner, T.C. Memo. 2022-1, at *22 (failing to
raise issue in petition deemed a concession). In any event the IRS’s prior allowance of
a deduction does not bind the agency with respect to other years. See, e.g., Black v.
Commissioner, T.C. Memo. 2007-364, 2007 WL 4302432, at *15 (“[The Commissioner’s]
failure to audit or disallow a loss claimed on a return for one year does not estop [him]
from disallowing an NOL carryover of that loss to a future year.”); Frische v.
Commissioner, T.C. Memo. 2000-237, 2000 WL 1073327, at *3; see also Taylor v.
Commissioner, T.C. Memo. 2009-235, 2009 WL 3326640, at *7 (“[T]he Commissioner
may challenge in a succeeding year what was condoned or agreed to in a former year.”);
Forste v. Commissioner, T.C. Memo. 2003-103, 2003 WL 1889626, at *15 (“The doctrine
of equitable estoppel does not bar [the Commissioner] from correcting mistakes of
law.”). Nor do we believe that Ms. Amos has established that she satisfied the
requirements for equitable estoppel (or collateral estoppel). See, e.g., Korean-Am.
Senior Mut. Ass’n, Inc. v. Commissioner, T.C. Memo. 2020-129, at *30.
9
[*9] Ms. Amos failed to establish how much of the claimed 1999 and
2000 NOLs had been absorbed before the years at issue. Specifically,
she did not introduce a complete set of her 2001–13 tax returns as might
allow us to determine how much of the purported NOL had been used.
Although Ms. Amos provided the first two pages of each of her tax
returns from 2008–13, these snippets, lacking in context, give us no
insight into the absorption of the 1999 and 2000 NOLs during this
period. Ms. Amos also relies on certain worksheets that she prepared,
which showed that she had used a portion of each NOL as carryforward
deductions for 2004, 2006–08, and 2012–13. Ms. Amos, however, failed
to introduce any support that might lend credence to the specific
assertions in her worksheets.
In sum, we find that Ms. Amos failed to establish her entitlement
to NOL carryforward deductions for 2014 and 2015, and we will sustain
the Commissioner’s disallowance of these deductions. 7
III. Accuracy-Related Penalty
An accuracy-related penalty of 20% is imposed on the portion of
an underpayment of tax attributable to negligence. 8 § 6662(a) and
(b)(1). Negligence includes the failure to properly substantiate items
claimed on the return. Treas. Reg. § 1.6662-3(b)(1). The Commissioner
bears the burden of production with respect to a taxpayer’s liability for
the section 6662(a) penalty and must produce evidence that the
7 Ms. Amos suggests that she has introduced enough evidence to permit this
Court to approximate her allowable NOL carryforward deductions. “While we may
estimate the amount of allowable deductions where there is evidence that deductible
expenses were incurred, we must have some basis on which an estimate may be made.”
Deutsch v. Commissioner, T.C. Memo. 2012-318, at *19 n.20. Given the dearth of
evidence in this case, we have no basis upon which to make an estimate and, therefore,
decline to do so.
8 In the notice of deficiency the IRS determined an accuracy-related penalty
under section 6662(a) on the grounds of negligence and substantial understatement of
income tax. The Commissioner has not addressed the ground of substantial
understatement in his briefs, however, and we thus conclude that the Commissioner
has decided to forgo or has otherwise waived this argument. See, e.g., Marks v.
Commissioner, T.C. Memo. 2018-49, at *8; Estate of Richard v. Commissioner, T.C.
Memo. 2012-173, 2012 WL 2344649, at *5 n.18.
10
[*10] imposition of the penalty is appropriate. See § 7491(c); see also
Higbee, 116 T.C. at 446. 9
The Commissioner has met his prima facie burden. Ms. Amos
failed to substantiate the NOL carryover deductions claimed for 2014
and 2015, and the Commissioner thus has established negligence. See
Treas. Reg. § 1.6662-3(b)(1); see also Velez v. Commissioner, T.C. Memo.
2018-46, at *10 (“[The Commissioner] satisfied his burden of production
with regard to negligence by establishing that [the taxpayer] did not
maintain sufficient records to support the . . . deduction.”).
The accuracy-related penalty does not apply to any part of an
underpayment of tax if it is shown that the taxpayer acted with
reasonable cause and in good faith with respect to that portion.
§ 6664(c)(1); Rogers v. Commissioner, T.C. Memo. 2019-61, at *31, aff’d,
9 F.4th 576 (7th Cir. 2021). The determination of whether a taxpayer
acted in good faith is made on a case-by-case basis, considering all the
pertinent facts and circumstances. Treas. Reg. § 1.6664-4(b)(1). “A
taxpayer’s knowledge, education, and experience are relevant factors to
indicate reasonable cause and good faith.” Rogers, T.C. Memo. 2019-61,
at *31. Ms. Amos bears the burden of proving that she had reasonable
cause and acted in good faith with respect to the underpayments. See
Higbee, 116 T.C. at 449.
Ms. Amos claims that she acted with reasonable cause and in good
faith, contending that she relied on professional advice in claiming the
deductions and that it was reasonable for her to claim them because the
IRS had allowed similar deductions in prior years. As an initial matter,
Ms. Amos did not rely on any professional advice with respect to the
2014 and 2015 returns on which she claimed the NOL carryforward
deductions. See McRae, T.C. Memo. 2019-163, at *29. Although Ms.
Amos and Dr. Righetti retained the services of the Kaufman firm to
prepare their 1999 and 2000 tax returns, those are not the years at
9 Ms. Amos has not raised the issue of whether the Commissioner complied
with the supervisory approval requirements of section 6751. In any event, the record
establishes that the revenue agent received written supervisory approval on July 5,
2017. As assessment has not yet occurred, see § 6215(a), the IRS has plainly satisfied
the section 6751 requirement as interpreted by the Court of Appeals for the Eleventh
Circuit, to which an appeal in this case would ordinarily lie, see Kroner v.
Commissioner, 48 F.4th 1272, 1276 (11th Cir. 2022), rev’g in part T.C. Memo. 2020-73;
cf. Golsen v. Commissioner, 54 T.C. 742, 757 (1970) (“[I]t is our best judgment that
better judicial administration requires us to follow a Court of Appeals decision which
is squarely in point where appeal from our decision lies to that Court of Appeals and
to that court alone.” (Footnote omitted.)), aff’d, 445 F.2d 985 (10th Cir. 1971).
11
[*11] issue, and the firm did not opine on Ms. Amos’s entitlement to
claim the NOL carryforward deductions for 2014 and 2015. See Cooper
v. Commissioner, 143 T.C. 194, 223 (2014), aff’d, 877 F.3d 1086 (9th Cir.
2017).
Ms. Amos’s claim that she acted with reasonable cause and in
good faith given the IRS’s acquiescence to her tax positions in previous
tax years fares no better. As an initial matter, the record contains little
information regarding the previous tax years, leaving us unable to
determine whether they were at all apposite. More significantly, Ms.
Amos is a longtime CPA who has worked for high-profile clients, owned
her own accounting firm, and been involved with national and state CPA
associations. See Donoghue v. Commissioner, T.C. Memo. 2019-71,
at *47–48, aff’d, No. 19-2265, 2021 WL 6129132 (1st Cir. June 2, 2021).
It beggars belief that she would be unaware that each tax year stands
alone and that it was her responsibility to demonstrate her entitlement
to the deductions she claimed. See Rogers, T.C. Memo. 2019-61, at *31–
32; cf. Ochsner v. Commissioner, T.C. Memo. 2010-122, 2010 WL
2220305, at *7–8. We cannot find that Ms. Amos established that she
acted with reasonable cause and in good faith when claiming the NOL
carryforward deductions for 2014 and 2015. As a result, Ms. Amos is
liable for accuracy-related penalties under section 6662(a).
IV. Conclusion
We uphold the determinations in the notice of deficiency to
disallow the NOL deductions Ms. Amos claimed for her 2014 and 2015
tax years. We also conclude that Ms. Amos is liable for the
section 6662(a) penalties.
To reflect the foregoing,
Decision will be entered for respondent. | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488092/ | United States Tax Court
T.C. Memo. 2022-110
HAYWOOD EARL PARKER, JR.,
Petitioner,
AND JACQUELINE ANN PARKER,
Intervenor
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 6054-19. Filed November 15, 2022.
—————
Lee A. Moore and Michael L. Boman, for petitioner.
Jacqueline Ann Parker, pro se.
Britton G. Wilson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARIS, Judge: By notice of deficiency dated March 25, 2019,
respondent determined a deficiency in federal income tax of $82,592 and
an accuracy-related penalty of $16,518 pursuant to section 6662(a) 1 for
petitioner and intervenor’s 2016 tax year. The parties have resolved the
deficiency amount, 2 and the only issue for decision is whether petitioner
is entitled to relief from joint and several liability pursuant to section
6015(f).
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
2 The parties have stipulated that the amount of the deficiency is $39,318 and
that there is no penalty under section 6662(a).
Served 11/15/22
2
[*2] FINDINGS OF FACT
Petitioner resided in Missouri when he filed the Petition. He and
intervenor were married from March 1988 until they divorced in 2018.
Petitioner has a history of serious health problems. His only
source of income is Social Security disability payments, which he began
receiving in 2012. He receives approximately $28,300 annually.
On March 7, 2016, intervenor signed a “Settlement Agreement
and Release,” settling an employment discrimination lawsuit against
her previous employer for $325,000. Pursuant to the settlement
agreement, intervenor received $39,000, subject to applicable
withholding, for backpay; $156,000 for noneconomic and compensatory
damages; and $130,000 for attorney’s fees, which were paid directly to
her lawyer. Both Form W–2, Wage and Tax Statement, and Form
1099–MISC, Miscellaneous Income, were to be issued to intervenor
under the terms of the Settlement Agreement.
In March 2016 intervenor received two checks for settlement
proceeds of $23,536.50 and $156,000, both of which she deposited in the
checking account she shared with petitioner. Petitioner and intervenor
used the funds to refinance and renovate their home and pay off debts.
Petitioner prepared and timely filed a joint income tax return for
2016. Form W–2 was issued to intervenor for her backpay income. Form
1099–MISC reporting $286,000 was also issued to intervenor. Petitioner
reported as income the portion of the settlement attributable to backpay
but did not include the portions attributable to attorney’s fees or
noneconomic and compensatory damages. The Form 1099–MISC listed
$286,000 in box 3, Other income, despite intervenor’s having received a
check for only $156,000. Both petitioner and intervenor agree that the
amount was confusing and that petitioner called the IRS customer
service line, described the terms of the settlement, and concluded from
that call that the attorney’s fees and damages proceeds were nontaxable.
Petitioner and intervenor divorced in April 2018. Under the terms
of the Judgment Decree of Dissolution of Marriage (divorce decree),
petitioner executed a quitclaim deed, conveying title to their shared
home to intervenor, and intervenor paid petitioner $50,000,
representing his share of equity in the home. With respect to prior
income tax returns, the divorce decree provided as follows:
3
[*3] The parties represent that all federal, state and local tax
returns required to be filed since the date of the marriage
have been filed and all federal, state and local taxes,
penalties and interest required to be paid with respect to
the periods covered by such returns are paid in full. For
each calendar year in which the parties filed or will file
joint federal and state income tax returns, the Husband
and Wife shall be equally liable to promptly pay when due,
all taxes, interest and penalties arising from a successfully
asserted joint tax return deficiency unless the same was
caused by a spouse’s failure to disclose income which
should be included on such return in which case that
spouse shall be solely responsible for all amounts due
deriving from the said failure.
Respondent examined the jointly filed 2016 return and, on the
basis of the unreported settlement proceeds, determined the deficiency
and the accuracy-related penalty. The adjustments in the notice of
deficiency relate solely to the unreported settlement proceeds.
Petitioner and intervenor, who were divorced when the notice of
deficiency was issued, filed separate Petitions with the Court. In
intervenor’s case, at docket No. 10489-19, intervenor challenged the
deficiency amount, arguing that the unreported settlement proceeds
were not taxable income. The Court entered a stipulated decision, in
which respondent and intervenor agreed that the amount of the
deficiency for 2016 is $39,318 and that there is no accuracy-related
penalty. 3
In his own Petition, filed April 4, 2019, petitioner also challenged
the deficiency amount and further requested relief from joint and
several liability pursuant to section 6015. Petitioner and respondent
have stipulated that the deficiency amount is $39,318 and that there is
no accuracy-related penalty.
After petitioner filed the Petition, respondent’s counsel requested
respondent’s innocent spouse unit to consider petitioner’s request for
relief from joint and several liability. Petitioner submitted Form 8857,
Request for Innocent Spouse Relief, on which he described his health
3 Specifically, respondent and intervenor agreed that the settlement proceeds
were taxable income, but that intervenor was entitled to a deduction for her attorney’s
fees.
4
[*4] problems and reported monthly income of $2,042 and monthly
expenses totaling $2,035.
Respondent’s innocent spouse unit initially determined that
petitioner was not eligible for relief. But respondent now agrees, after
review of additional supporting documentation, that petitioner is
entitled to complete relief pursuant to section 6015(f).
Intervenor timely filed a Motion to Intervene in this case and
opposes any relief.
OPINION
I. Overview
Married taxpayers may elect to file a joint federal income tax
return. § 6013(a). If a joint return is made, generally each spouse is
jointly and severally liable for the entire tax due on their aggregate
income for that year. § 6013(d)(3). In certain circumstances, however,
section 6015 allows a spouse to obtain relief from joint and several
liability. § 6015(a). Under section 6015(a), a spouse may seek relief from
joint and several liability under section 6015(b) or, if eligible, may
allocate liability according to provisions set forth in section 6015(c). If a
taxpayer does not qualify for relief under section 6015(b) or (c), the
taxpayer may seek equitable relief under section 6015(f). Petitioner and
respondent agree that petitioner is not entitled to relief under section
6015(b) or (c) because he had actual knowledge of the item giving rise to
the deficiency.
This Court has jurisdiction to determine the appropriate relief
available to a requesting spouse under section 6015(f). See
§ 6015(e)(1)(A). In determining whether a taxpayer is entitled to relief
under section 6015(f), the Court applies a de novo standard and scope of
review. 4 Porter v. Commissioner, 132 T.C. 203, 210 (2009). Petitioner
generally bears the burden of proving that he is entitled to equitable
relief under section 6015(f). See Porter, 132 T.C. at 210; see also Rule
142(a)(1).
4 Because petitioner filed his Petition before July 1, 2019, section 6015(e)(7)
does not apply to this case. See Sutherland v. Commissioner, 155 T.C. 95, 104 (2020).
5
[*5] II. Section 6015(f)
As directed by section 6015(f), the Commissioner has prescribed
procedures to determine whether a requesting spouse is entitled to
equitable relief from joint and several liability. Those procedures are set
forth in Rev. Proc. 2013-34, § 4, 2013-43 I.R.B. 397, 399–403. Although
the Court is not bound by the eligibility guidelines set forth in Rev. Proc.
2013-34, the Court considers those factors when reviewing a taxpayer’s
claim for relief under section 6015(f). See Pullins v. Commissioner, 136
T.C. 432, 438–39 (2011); Pocock v. Commissioner, T.C. Memo. 2022-55,
at *14. Ultimately the Court’s determination rests on an evaluation of
all the facts and circumstances. Porter, 132 T.C. at 210.
A. Threshold Conditions
Rev. Proc. 2013-34, § 4.01, 2013-43 I.R.B. at 399–400, establishes
several threshold conditions that the requesting spouse must satisfy to
be considered for equitable relief: (1) a joint return was filed for the
year(s) at issue; (2) the tax liability from which the requesting spouse
seeks relief is attributable in full or in part to an item of the
nonrequesting spouse; (3) relief is not available to the requesting spouse
under section 6015(b) or (c); (4) no assets were transferred between the
spouses as part of a fraudulent scheme; (5) the nonrequesting spouse did
not transfer disqualified assets (as defined by section 6015(c)(4)(B)) to
the requesting spouse; (6) the requesting spouse did not knowingly
participate in the filing of a fraudulent joint return; and (7) the claim for
relief is timely filed. The parties agree that petitioner satisfies these
threshold conditions.
B. Streamlined Determination
Once a taxpayer has satisfied the threshold conditions, the Court
will consider whether the requesting spouse is eligible for streamlined
relief. Streamlined determinations granting equitable relief under
section 6015(f) are available if the requesting spouse can establish that
he or she (1) is no longer married to the nonrequesting spouse; (2) would
suffer economic hardship if relief were not granted; and (3) lacked
knowledge or reason to know of the understatement at the time the
return at issue was signed. Rev. Proc. 2013-34, § 4.02, 2013-43 I.R.B.
at 400. Petitioner is not entitled to streamlined relief because he had
knowledge of the settlement proceeds.
6
[*6] C. Equitable Factors
Rev. Proc. 2013-34, § 4.03(2), 2013-43 I.R.B. at 400–03, sets forth
the following seven nonexclusive factors to be considered in determining
whether, taking into account all facts and circumstances, equitable
relief under section 6015(f) should be granted: (1) the current marital
status of the spouses; (2) whether the requesting spouse will suffer
economic hardship if relief is not granted; (3) whether the requesting
spouse knew or had reason to know of the item giving rise to the
understatement; (4) whether either spouse has a legal obligation to pay
the outstanding federal income tax liability; (5) whether the requesting
spouse significantly benefited from the understatement; (6) whether the
requesting spouse has made a good faith effort to comply with income
tax laws in the years following the year for which relief is sought; and
(7) whether the requesting spouse was in poor mental or physical health
when the return at issue was filed, when the request for relief was made,
or at the time of trial. See Pullins, 136 T.C. at 448.
In making a determination under section 6015(f), the Court
considers the enumerated factors as well as any other relevant facts. No
single factor is dispositive, and “[t]he degree of importance of each factor
varies depending on the requesting spouse’s facts and circumstances.”
Rev. Proc. 2013-34, § 4.03(2); see Pullins, 136 T.C. at 448; Hall v.
Commissioner, T.C. Memo. 2014-171, at *38.
1. Marital Status
If the requesting spouse is no longer married to the nonrequesting
spouse, this factor will weigh in favor of granting relief. See Rev. Proc.
2013-34, § 4.03(2)(a), 2013-43 I.R.B. at 400. If the requesting spouse is
still married to the nonrequesting spouse, this factor is neutral. Id.
Petitioner and intervenor divorced in 2018. This factor favors relief.
2. Economic Hardship
Economic hardship exists if satisfaction of the tax liability, in
whole or in part, would result in the requesting spouse’s being unable to
meet his reasonable basic living expenses. Id. § 4.03(2)(b), 2013-43 I.R.B
at 401. Where the requesting spouse’s income is below 250% of the
federal poverty guidelines, this factor will weigh in favor of relief, unless
the requesting spouse has assets out of which he can make payments
towards the tax liability and still adequately meet his reasonable basic
living expenses. Id. If denying relief from joint and several liability will
7
[*7] not cause the requesting spouse to suffer economic hardship, this
factor will be neutral. Id.
Petitioner’s health condition prevents him from holding full-time
employment, and his only source of income is Social Security disability
payments. His annual income of $28,300 is below 250% of the federal
poverty guidelines. 5 This factor favors relief.
3. Knowledge or Reason to Know
If the requesting spouse knew or had reason to know of the items
giving rise to the understatement when the return was filed, this factor
will weigh against relief. Id. § 4.03(2)(c), 2013-43 I.R.B. at 401–02. If the
requesting spouse did not know or have reason to know of the
understatement, this factor will weigh in favor of relief. Id. Actual
knowledge of the item giving rise to the understatement or deficiency
will not be weighted more heavily than any other factor. Id.
Petitioner knew of the settlement proceeds and prepared the
return that failed to report them as income. This factor weighs against
relief.
4. Legal Obligation
This factor will favor relief where the nonrequesting spouse has
the sole obligation to pay an outstanding federal tax liability pursuant
to a divorce decree or other legally binding agreement. Id. § 4.03(2)(d),
2013-43 I.R.B. at 402. This factor is neutral where both spouses have
such an obligation or the divorce decree or agreement is silent as to any
such obligation. Id.
Under the terms of the divorce decree, both spouses have a legal
obligation to pay any taxes, interest, and penalties arising from their
jointly filed tax returns. This factor is neutral.
5. Significant Benefit
A significant benefit is any benefit in excess of normal support.
Id. § 4.03(2)(e), 2013-43 I.R.B. at 402. If the requesting spouse has
received a significant benefit, enjoying the “benefits of a lavish lifestyle,
5 The federal poverty line for an individual living in the contiguous 48 states
in 2022 is $13,590. Annual Update of the HHS Poverty Guidelines, 87 Fed. Reg. 3315,
3316 (Jan. 21, 2022). Two-hundred fifty percent of this amount is $33,975.
8
[*8] such as owning luxury assets and taking expensive vacations,” this
factor weighs against relief. Id. If the amount of unpaid tax or
understatement was small such that neither spouse received a
significant benefit, this factor is neutral. Id. Whether the amount of
unpaid tax or understatement is small such that neither spouse received
a significant benefit will vary depending on the facts and circumstances
of each case.
Petitioner and intervenor did not live a lavish lifestyle. They used
the funds from the settlement to pay off debts and make renovations to
their home. The Court finds that neither spouse received a significant
benefit from the unpaid tax. This factor is neutral.
6. Compliance with Income Tax Laws
This factor weighs in favor of relief if the requesting spouse is in
compliance with the income tax laws for taxable years after being
divorced from the nonrequesting spouse. Id. § 4.03(2)(f)(i), 2013-43
I.R.B. at 402. If the requesting spouse is not in compliance, this factor
will weigh against relief, unless he made a good faith effort to comply
with the tax laws but was unable to fully comply. Id.
The parties have stipulated that petitioner’s income is below the
filing requirements for an individual receiving Social Security disability
payments and that he did not have an obligation to file an individual
income tax return for tax years 2017 through 2020. This factor favors
relief.
7. Mental or Physical Health
If the requesting spouse was in poor mental or physical health at
the time the return was filed or at the time he requested relief, this
factor will weigh in favor of relief. Id. § 4.03(2)(g), 2013-43 I.R.B. at 403.
The Court also considers a taxpayer’s mental and physical health at the
time of trial. See Pullins, 136 T.C. at 454; Bell v. Commissioner, T.C.
Memo. 2011-152.
Petitioner was in poor physical health at all relevant times, and
the Social Security Administration has determined that he is disabled.
This factor favors relief.
9
[*9] 8. Conclusion
Four of the above factors weigh in favor of relief, two are neutral,
and one weighs against relief. In considering whether a taxpayer is
entitled to relief under section 6015(f), however, the Court does not
simply count factors. Rather, the Court evaluates all of the relevant facts
and circumstances to reach a conclusion. See Pullins, 136 T.C. at 448.
Petitioner’s poor physical health has left him disabled to the point
that he is unable to work. His only source of income is Social Security
disability payments, which allow him to meet his monthly expenses, but
little else. Payment of the deficiency would create financial hardship.
Although he did have knowledge of the income that gave rise to the
deficiency in this case, petitioner credibly testified that he made a good-
faith effort, despite confusing advice and reporting documents, to comply
with the tax law but erroneously believed that the settlement funds were
not taxable. He has remained in compliance with the federal income tax
laws in subsequent years. On consideration of all of the relevant facts
and circumstances, the Court concludes that petitioner is entitled to
complete relief.
The Court has considered all of the parties’ arguments and, to the
extent they are not discussed herein, finds them to be irrelevant, moot,
or without merit.
To reflect the foregoing,
An appropriate decision will be entered. | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488089/ | United States Court of Appeals
For the First Circuit
_____________________
No. 21-1785
UNITED STATES OF AMERICA,
Appellee,
v.
STEFAN R. GAUTHIER,
Defendant, Appellant.
_____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Steven J. McAuliffe, U.S. District Judge]
_____________________
Before
Kayatta and Howard, Circuit Judges,
and Walker, District Judge.*
_____________________
Donna J. Brown for appellant.
Alexander S. Chen, Assistant United States Attorney, with
Jane E. Young, United States Attorney, and Seth R. Aframe,
Assistant United States Attorney, on brief, for appellee.
_____________________
November 18, 2022
_____________________
____________________
* Of the District of Maine, sitting by designation.
WALKER, District Judge. After trial in the United States
District Court for the District of New Hampshire, a jury convicted
Stefan R. Gauthier of two counts of possession with intent to
distribute methamphetamine but acquitted him of two related
firearm charges. At sentencing, Gauthier requested credit for
accepting responsibility for the two offenses of conviction
because he had offered to plead guilty to those offenses and,
following the failure of that effort, declined to contest the
offenses at trial. The District Court denied Gauthier’s request,
concluding that Gauthier’s failure to plead guilty to the offenses
of conviction or stipulate to his culpability at trial belied his
claim to have accepted responsibility for the offenses at issue.
We see no error in the District Court’s determination, and affirm
the sentence below.
I.
On November 1, 2018, law enforcement officers observed Stefan
R. Gauthier passed out behind the wheel of a pickup truck in
Tilton, NH. Officers approached Gauthier and, upon discovering
that his license was suspended, searched him. Gauthier was found
to be in possession of 0.659 grams of methamphetamine and $1,375
in cash, and was arrested. In a subsequent search of the pickup
truck, law enforcement identified an additional 356 grams of
methamphetamine, $1,500 in cash, drug paraphernalia including
baggies and a digital scale, and a .22 caliber firearm. One month
- 2 -
later, on December 2, 2018, law enforcement discovered Gauthier
passed out behind the wheel of a different vehicle, arrested him,
and found 111.1 grams of methamphetamine in his possession.
Based on this conduct, a grand jury indicted Gauthier on two
counts of possession of methamphetamine with intent to distribute.
The grand jury also indicted Gauthier on one count of being a felon
in possession of a firearm and one count of possessing a firearm
in furtherance of a drug trafficking crime, both stemming from the
presence of the firearm recovered from the vehicle during
Gauthier’s November arrest. Finally, the grand jury indicted
Gauthier on an unrelated charge of unlawfully distributing
fentanyl, based on an informant’s assertion that Gauthier provided
fentanyl that resulted in the fatal overdose of a local man
identified as N.R.
Defense counsel attempted unsuccessfully to negotiate a plea
agreement. Gauthier admitted that he was guilty of the two
methamphetamine charges and indicated his willingness to enter a
guilty plea as to those counts. However, Gauthier refused to plead
guilty on the firearm charges, insisting that the gun belonged to
his girlfriend. Gauthier also maintained that he had not provided
the fentanyl that killed N.R. and declined to plead guilty on that
charge. The record suggests that Gauthier attempted to negotiate
the dismissal of one or both of the firearm charges and the
fentanyl charge in exchange for pleading guilty to the
- 3 -
methamphetamine charges. Prosecutors were unwilling to accept
Gauthier’s proposed terms.
On the eve of trial, the government moved to dismiss without
prejudice the fentanyl count against Gauthier. The court granted
the government’s motion.
At trial on the methamphetamine and firearm counts the parties
stipulated as to several factual elements of the offenses,
including stipulating as to the amount, identity, and authenticity
of the methamphetamine found in Gauthier’s possession. Gauthier
did not stipulate that he possessed or that he intended to
distribute the methamphetamine -- necessary elements of the
offenses with which he was charged -- nor did he admit, at any
point during the trial, that he was guilty of any of the counts
before the court. However, Gauthier did not attempt to rebut the
government’s arguments regarding the methamphetamine offenses and
defense counsel instead focused the examination of the
government’s witnesses on issues related to the firearm offenses.
After a brief trial, the jury convicted Gauthier of both counts of
possession of methamphetamine with intent to distribute, but
acquitted him of both firearm counts.
In advance of sentencing, Gauthier raised a number of
objections to the calculation of his offense level reflected in
the presentence investigation report. Specifically, Gauthier
requested a two-level reduction in offense level for acceptance of
- 4 -
responsibility, arguing that he was entitled to the reduction in
this instance because he had admitted his guilt to prosecutors,
stipulated to the basic factual elements of the methamphetamine
offenses, and enrolled in drug rehabilitation programs following
his arrests. However, defense counsel admitted to the judge at
sentencing that Gauthier’s decision to proceed to trial on all of
the counts, rather than pleading guilty to the methamphetamine
charges while taking the firearm and fentanyl counts to trial, had
been a “tactical” judgment. Gauthier further objected to the
sentencing report’s inclusion of the fentanyl charge that had been
dismissed and the firearm charges of which he had been acquitted,
charges that the report characterized as relevant conduct for the
purpose of sentencing.
The government, for its part, opposed Gauthier’s objections.
With respect to the acceptance of responsibility credit, the
government argued that Gauthier’s failure to plead guilty to the
methamphetamine offenses precluded the availability of the
sentencing credit. The government also argued that Gauthier’s
denial of responsibility for other relevant conduct --
specifically, the fentanyl charge that was dismissed on the eve of
trial –- would render him ineligible for the acceptance of
responsibility credit even if he had otherwise expressed
contrition with respect to the methamphetamine offenses.
- 5 -
Based on this record, the sentencing judge determined that
Gauthier was not entitled to the acceptance of responsibility
credit. The District Court sentenced Gauthier to 180 months
imprisonment, within the Sentencing Guideline range of 168 to 210
months and below the government’s recommendation of 210 months.
Gauthier now appeals his sentence, arguing that the District
Court erred in denying him credit for acceptance of responsibility.
II.
When reviewing a sentence on appeal, “we assay the district
court’s factfinding for clear error and afford de novo
consideration to its interpretation and application of the
sentencing guidelines.” United States v. Flores-Machicote, 706
F.3d 16, 20 (1st Cir. 2013). Because “[t]he sentencing judge is
in a unique position to evaluate a defendant’s acceptance of
responsibility,” U.S.S.G. § 3E1.1 cmt. n.5 (U.S. Sentencing Comm’n
2021), we will set aside the district court’s determination only
if it lacks an “articulable basis or foundation” in the record.
United States v. Bennett, 37 F.3d 687, 696 (1st Cir. 1994).
The Guidelines provide for a two-level decrease in a
defendant’s offense level where “the defendant clearly
demonstrates acceptance of responsibility for his offense.”
U.S.S.G. § 3E1.1(a). “In determining whether a defendant
qualifies” for the sentencing reduction, a sentencing judge makes
a holistic assessment based on a defendant’s post-offense conduct
- 6 -
as well as his statements about the crime of conviction and other
relevant conduct. See U.S.S.G. § 3E1.1 cmt. n.1.
A defendant who is convicted at trial after denying “essential
factual elements of guilt” generally is not entitled to the
acceptance of responsibility reduction. U.S.S.G. § 3E1.1 cmt.
n.2. A “conviction by trial . . . does not automatically preclude”
a finding of acceptance of responsibility. Id. But “proceeding
to trial creates a rebuttable presumption” that the defendant has
not accepted responsibility, which the defendant bears the burden
of overcoming. United States v. Garrasteguy, 559 F.3d 34, 38-39
(1st Cir. 2009). As a result, we generally will “sustain a
district court that denies acceptance of responsibility to a
defendant who declined to plead guilty.” United States v. De Leon
Ruiz, 47 F.3d 452, 456 (1st Cir. 1995).
In “rare situations,” a defendant may be found to have
“clearly demonstrate[ed] an acceptance of responsibility for his
criminal conduct” despite having “exercise[d] his constitutional
right to a trial.” U.S.S.G. § 3E1.1 cmt. n.2. By way of example,
the guideline commentary states that a defendant who goes to trial
to raise “issues that do not relate to factual guilt” -- such as
challenges to the constitutionality or applicability of a statute
-– may be entitled to the acceptance of responsibility credit.
Id. But this is merely an example, see De Leon Ruiz, 47 F.3d at
455, and we have previously recognized that a defendant who fails
- 7 -
to acknowledge his factual guilt may be entitled to the acceptance
of responsibility credit “in unusual circumstances.” United
States v. Hines, 196 F.3d 270, 274 (1st Cir. 1999).
Gauthier argues that his attempt to negotiate a guilty plea
and his stipulation as to certain elements of the methamphetamine
offenses present one such unusual circumstance. But our
precedents, and persuasive authority from our sister circuits,
belie that contention. We have never reversed a district court’s
denial of the acceptance of responsibility credit where a defendant
failed to admit factual guilt at or before trial. Cf. United States
v. Ellis, 168 F.3d 558, 560, 564-65 (1st Cir. 1999) (remanding for
resentencing where the defendant admitted in his opening argument
and during his testimony his role in one crime of which he was
convicted and the district court’s reasoning for denying the credit
at sentencing was unclear).
As for persuasive authority from sister circuits, we have
considered three cases involving remands for resentencing based on
the acceptance of responsibility credit despite the defendants’
failure to admit guilt through a plea or at trial. However, all
three involved factual circumstances dissimilar to our own and in
two the courts also analyzed a prior version of the sentencing
guidelines containing the following provision that has since been
removed: "A defendant may be given consideration under this section
without regard to whether his conviction is based upon a guilty
- 8 -
plea or a finding of guilt by the court or jury or the practical
certainty of conviction at trial." U.S.S.G. § 3E1.1(b) (1990,
1991). See United States v. Guerrero-Cortez, 110 F.3d 647, 656
(8th Cir. 1997) (remanding for reevaluation of acceptance credit
where defendant offered to plead guilty to trafficking two
kilograms, the government refused the offer absent a plea involving
five kilograms, and the court ultimately found defendant
responsible for two kilograms)1; United States v. McKinney, 15 F.3d
849, 851-52 & nn.2-3 (9th Cir. 1994) (relying on prior guidelines
provision and remanding with instruction to award acceptance
credit where defendant tried, both before and after jury selection,
to change his plea to guilty but the court denied him the
opportunity); United States v. Rodriguez, 975 F.2d 999, 1008 (3d
Cir. 1992) (relying on prior guidelines provision and remanding
for reevaluation of acceptance credit where the government revoked
two co-defendants’ plea agreements after it failed to reach a plea
agreement with the third co-defendant).2
1 The defendant in Guerrero-Cortez attempted to plead guilty to a
drug crime involving a specified lesser quantity (of which he was
ultimately convicted), whereas Gauthier attempted to plead guilty
to drug crimes (of which he was convicted), but only if the
government dismissed the related firearm counts. Unlike the
defendant in Guerrero-Cortez, who would have but practically could
not have plead guilty to his ultimate crime of conviction, Gauthier
could have but chose not to for tactical reasons.
2 Rodriguez also specifically held, in contrast to the facts of
the instant case, that the trial court "fail[ed] to consider the
- 9 -
By contrast, where, as here, a defendant “retain[s] the option
to plead guilty” to one or more charges while contesting others,
and instead chooses “to roll the dice,” a sentencing court acts
within its discretion in finding that the defendant is not entitled
to the acceptance of responsibility credit. De Leon Ruiz, 47 F.3d
at 455.
We see ample support in the record for the District Court’s
finding that Gauthier had the opportunity to plead guilty and
accept all of the factual elements of the offenses of conviction
but failed to do so. The District Court noted that Gauthier
stipulated to the amounts and identity of the methamphetamine
seized from his person and did not otherwise contest the
Government’s argument with respect to the methamphetamine charges.
But the District Court reasonably concluded that this only amounted
to a partial acceptance of responsibility, given Gauthier’s
failure to admit to possessing either the methamphetamine or the
intent to distribute it. Furthermore, defense counsel
acknowledged at sentencing that Gauthier could have plead guilty
on the methamphetamine charges while contesting the fentanyl and
firearm charges, and stated that “from a tactical viewpoint
[counsel] felt it was better” for Gauthier to proceed to trial on
all charges. As we have previously made clear, this sort of pre-
reasons for which [the defendants] refused to plead." 975 F.2d
at 1009.
- 10 -
trial calculation is strong evidence militating against credit for
acceptance of responsibility. See De Leon Ruiz, 47 F.3d at 455.
Based on this record, it was not error to deny Gauthier the
acceptance of responsibility credit.3
III.
For the foregoing reasons, the District Court’s order
sentencing Gauthier to 180 months in prison is affirmed.
3 To the extent that the Appellant argues that the District Court
mistakenly believed that it was precluded from awarding the
acceptance of responsibility credit where no guilty plea was
entered, we find this argument unpersuasive. In his sentencing
brief, as here, Gauthier heavily relied upon the relevant
guidelines commentary to establish that “[c]onviction by trial
. . . does not automatically preclude a defendant from
consideration for [the acceptance] reduction.” U.S.S.G. § 3E1.1
cmt. n.2. At sentencing, the District Court expressly noted that
it had read Gauthier's brief, but that it agreed with the
government that Gauthier was not entitled to the credit because he
did not stipulate to essential elements of the charges against
him. We can infer from this record that the District Court
understood and applied the correct standard but concluded that
Gauthier's conduct did not warrant credit for acceptance of
responsibility. See United States v. Jiminez-Beltre, 440 F.3d
514, 519 (1st Cir. 2006), abrogated on other grounds, Rita v.
United States, 551 U.S. 338 (2007) (“[A] court's reasoning can
often be inferred by comparing what was argued by the parties or
contained in the pre-sentence report with what the judge did.”);
see also United States v. DelPiano, 183 F. App’x 9, 10-11 (1st
Cir. 2006) (unpublished) (inferring that the sentencing court
“rejected [defendant’s] request for an acceptance-of-
responsibility reduction for the primary reason argued by the
government,” where its denial “was consistent with [those]
implicit reasons”). This situation stands in contrast to that in
Ellis, in which this court vacated the defendant’s sentence and
remanded for resentencing in part because it was “possible” that
the district court had misunderstood and incorrectly applied the
standard contained in U.S.S.G § 3E1.1. United States v. Ellis,
168 F.3d 558, 560 (1st Cir. 1999).
- 11 - | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488093/ | United States Tax Court
T.C. Summary Opinion 2022-22
JENNIFER JOY FIELDS AND WALTER T. FIELDS,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 2925-20S. Filed November 10, 2022.
—————
Jennifer Joy Fields and Walter T. Fields, pro sese.
Deborah R. Kelessidis, for respondent.
SUMMARY OPINION
PANUTHOS, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed. 1 Pursuant to section 7463(b), the decision
to be entered is not reviewable by any other court, and this opinion shall
not be treated as precedent for any other case.
In a notice of deficiency dated January 6, 2020, respondent
determined a deficiency in federal income tax of $25,917 and a section
6662(a) accuracy-related penalty of $5,133 for petitioners’ taxable year
2017 (year in issue). After concessions, 2 the issues for decision are:
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references
are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant
times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
2 Petitioners conceded they were required to include $6,413 in taxable wages
from LTF Club Management Co., LLC (LTF), for the year in issue.
Served 11/10/22
2
(1) whether petitioners failed to report income of $79,581 for
the year in issue; and
(2) whether petitioners are liable for a section 6662(a)
accuracy-related penalty for the year in issue.
Background
Some of the facts have been stipulated and are so found. We
incorporate the Stipulation of Facts and the attached Exhibits by this
reference. The record consists of the Stipulation of Facts with attached
Exhibits and the testimony of Jennifer Joy Fields (petitioner).
Petitioners resided in California when the Petition was timely
filed.
I. Petitioner’s Employment
From January 2009 to January 2017, petitioner was an employee
of Paragon Canada ULC. Paragon Canada ULC operated in Canada,
and it operated in the United States as Paragon Gaming (collectively,
Paragon). Petitioner was employed as vice president of customer
development and marketing at Paragon and worked in Vancouver,
British Columbia, Canada. During the time of petitioner’s employment,
the chief executive officer of Paragon was Scott Menke. 3 Text messages
and emails between petitioner and Mr. Menke reflect a relationship
between the two outside the workplace.
On February 29, 2012, Paragon wired $35,000 Canadian dollars
(CAD) to petitioner’s bank account. Paragon’s internal records noted the
wire payment as “Outgoing Wire Transfer~~Jennifer Fields.”
In 2014 petitioner purchased a home in Point Roberts,
Washington, for $370,000. The downpayment on the purchase was
$53,020, and on March 20, 2014, Paragon wired $53,020 to Chicago Title
in Whatcom County, Washington. Paragon’s internal records noted the
wire payment as “Cash-General” and as “Wire Payment Chicago Title-
J Fields.”
On January 13, 2017, petitioner separated from Paragon. At the
time of separation, petitioner was working at Edgewater Casino LP in
Vancouver, which was being managed by Paragon. In a severance
3 Scott Menke died in October 2020.
3
agreement signed by a representative of Paragon and petitioner on
January 13, 2017, the respective parties, in addition to providing for
severance payments, agreed as follows:
Write off of Employee Advances: The $79,581.50[4] in
employee advances that are currently outstanding with the
company and owed by you will be written off. You will
provide the company with a complete W–9 form. The
company will subsequently issue you a 1099, and you will
be responsible for remitting any applicable taxes.
Before separation, petitioner’s attorney had corresponded with
Paragon to discuss possible revised terms of separation. Pursuant to a
purported oral agreement between petitioner and Scott Menke, a
second, revised severance agreement was drafted. The revised draft
severance agreement removed the above-mentioned provision, instead
providing:
Repayment of Loan: The $88,000 in personal loans for the
company to you, will be withheld from the total severance
amounts described above, provided that you have signed
and returned copies of this letter and the Final Release.
This revised draft severance agreement was not signed.
On January 13, 2017, petitioner executed a Form W–9, Request
for Taxpayer Identification Number and Certification, which was
provided to Paragon. Paragon subsequently issued to petitioner and
filed with the Internal Revenue Service (IRS) a Form 1099–MISC,
Miscellaneous Income, reporting $79,581 in other income for the year in
issue.
After petitioner’s separation from Paragon in January 2017,
petitioner engaged in other projects with Mr. Menke and Paragon in a
consulting role in 2017 and 2019.
4 This amount, $79,581.50, was the total in U.S. dollars (USD) on January 12,
2017. Paragon wired $35,000 CAD to petitioner on February 29, 2012. This amount
was converted to $26,561.50 USD on January 12, 2017, at the exchange rate of 1 CAD
to .7590 USD. This amount, in addition to the $53,020 USD wired on March 20, 2014,
totaled $79,581.50.
4
II. Petitioner’s Tax Return and Examination
Petitioners timely filed Form 1040, U.S. Individual Income Tax
Return, for the year in issue on March 5, 2018. Petitioners were assisted
in preparing the return by a paid preparer. The return did not include
any amounts reported on the Form 1099–MISC that Paragon filed with
the IRS by Paragon.
The IRS Automated Underreporter (AUR) Program 5 determined
a mismatch between the reported income on petitioners’ Form 1040 and
the amount reported on the filed Form 1099–MISC from Paragon.
On January 6, 2020, respondent issued a notice of deficiency to
petitioners for the year in issue, adjusting petitioners’ income to include
$79,581 in other income from Paragon and $6,413 in taxable wages from
LTF. Respondent also determined that petitioners were liable for a
section 6662(a) and (b)(2) accuracy-related penalty for an underpayment
attributable to a substantial understatement of income tax.
Discussion
Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer bears the burden of
proving that those determinations are erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). 6 In order for the presumption of
correctness to attach to the deficiency determination in unreported
income cases in the U.S. Court of Appeals for the Ninth Circuit, the
Commissioner must establish “some evidentiary foundation” connecting
the taxpayer with the income-producing activity or demonstrate that the
taxpayer received unreported income. Weimerskirch v. Commissioner,
596 F.2d 358, 361–62 (9th Cir. 1979), rev’g 67 T.C. 672 (1977). Once the
Commissioner introduces such evidence, the burden shifts to the
5 The AUR program matches “third-party-reported payment information
against [a taxpayer’s] already-filed” tax return. Essner v. Commissioner, T.C. Memo.
2020-23, at *11. When there is a discrepancy, the AUR program calculates a proposed
deficiency based on the statutory scheme and prepares a letter to the taxpayer
requesting an explanation for the discrepancy. Service Center Notice 200211040 (Mar.
15, 2002). If the taxpayer does not respond, the program will issue a notice of
deficiency. Id. If the taxpayer does not respond to the notice of deficiency, the
deficiency will be assessed. Id.
6 Pursuant to section 7491(a), the burden of proof as to factual matters shifts
to the Commissioner under certain circumstances. Petitioners have neither alleged
that section 7491(a) applies nor established their compliance with its requirements.
Therefore, petitioners bear the burden of proof.
5
taxpayer to show by a preponderance of the evidence that the
determination was arbitrary or erroneous. Klootwyk v. Commissioner,
T.C. Memo. 2006-130, slip op. at 4–5.
Petitioners do not dispute the amount reported on the Form
1099–MISC or that they received the amount reported. Petitioners
instead assert that the amount was nontaxable because it was a gift. On
the basis of petitioners’ stipulated receipt of the amount reported and
the Form 1099–MISC filed with the IRS by Paragon, respondent has
met his burden as to the unreported income. Accordingly, the burden of
proof shifts to petitioners.
I. Unreported Income
Gross income includes “all income from whatever source derived.”
See § 61(a). Payments that are “undeniable accessions to wealth, clearly
realized, and over which the taxpayers have complete dominion” are
taxable as income unless an exclusion applies. Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 431 (1955).
Section 102(a) excludes from gross income the value of property
acquired by gift from gross income. Generally, amounts transferred by
or for an employer to, or for the benefit of, an employee are includible in
gross income. § 102(c)(1). A gift must proceed from a detached and
disinterested generosity, motivated by affection, respect, admiration,
charity, or the like. See Commissioner v. Duberstein, 363 U.S. 278, 285
(1960). There is a strong presumption that payments made beyond an
employee’s salary are compensation for services and not gifts. See Van
Dusen v. Commissioner, 166 F.2d 647 (9th Cir. 1948), aff’g 8 T.C. 388
(1947). A payment between an employer and an employee may be a gift
when the relationship between the employer and the employee is
personal and unrelated to work. Caglia v. Commissioner, T.C. Memo.
1989-143; Harrington v. Commissioner, T.C. Memo. 1958-194.
Petitioner offered testimony as to her personal relationship with
Mr. Menke. In support of her assertion of a personal relationship and
Mr. Menke’s intent to make a gift, petitioner produced emails, text
messages, and an unsigned draft severance agreement that removed the
text pertaining to the $79,581 being written off as an employee advance.
The communications presented consist of an email with Mr.
Menke’s administrator scheduling dinner in 2017, a meeting scheduling
email with Paragon stakeholders in 2019, and unverified text messages
from petitioner to Mr. Menke. While petitioner and Mr. Menke
6
corresponded after her separation from Paragon, their communications
do not demonstrate that the payments were intended to be a gift. While
petitioner and Mr. Menke reached an oral compromise regarding the
terms of separation, the second, revised draft severance agreement was
not signed. Even considering the revised agreement and a relevant
provision, it is ambiguous at best. The text of the revised draft
severance agreement does not necessarily support petitioner’s position
that the employer intended a gift to petitioner. At best, it reflects
petitioner’s attempt to recharacterize the payments as a gift, which
apparently neither Mr. Menke nor Paragon agreed to. There is no
evidence in the record from which the Court could conclude that Mr.
Menke or Paragon intended to make a gift to petitioner. The payments
were made from Paragon to petitioner and recorded as accounts
receivables in Paragon’s accounting records. Paragon’s inclusion of the
disputed amount in the signed and executed severance agreement and
the subsequent issuance of a Form 1099–MISC indicates that the
payments were not intended to be a gift.
We find petitioner’s testimony that she had a personal
relationship with Mr. Menke is insufficient to support her contention
that the payments were a gift.
Petitioner has failed to establish that the $79,581 amount was a
gift. Accordingly, we sustain respondent’s determination.
II. Section 6662(a) Accuracy-Related Penalty
Respondent determined that petitioners are liable for an
accuracy-related penalty on their underpayment of tax for the year in
issue because of a substantial understatement of income tax. Section
6662(a) and (b)(2) imposes an accuracy-related penalty of 20% on any
portion of an underpayment of tax required to be shown on a return
attributable to the taxpayer’s “substantial understatement of income
tax.” An understatement of income tax is substantial if the amount of
the understatement for the taxable year exceeds the greater of 10% of
the tax required to be shown on the return or $5,000. § 6662(d)(1)(A).
A. Burden of Proof
The Commissioner generally bears the burden of production with
respect to a section 6662 penalty. See § 7491(c). To satisfy that burden
the Commissioner must offer sufficient evidence to indicate that it is
appropriate to impose the penalty. See Higbee v. Commissioner, 116
T.C. 438, 446 (2001). Once the Commissioner meets his burden of
7
production, the taxpayer must come forward with evidence sufficient to
show the Court that the determination is incorrect. Id. at 446–47. If
the understatement of income tax for the year in issue is substantial,
the Commissioner has satisfied the burden of producing evidence that
the penalty is justified.
Respondent determined a deficiency in tax, increasing
petitioners’ total tax liability to $25,917. Respondent has met his
burden because the amount of petitioners’ understatement for the year
in issue was “substantial” in that it exceeded the greater of 10% of the
tax required to be shown on the return or $5,000. See § 6662(d)(1)(A).
The Court has held that accuracy-related penalties determined
by an IRS computer program without human review are “automatically
calculated through electronic means” and are thus exempt from the
written supervisory approval requirement 7 that generally applies to
such penalties. See Walquist v. Commissioner, 152 T.C. 61, 73 (2019).
This exception includes returns processed through the AUR program
when the IRS issues a CP2000 notice to a taxpayer and the taxpayer
fails to respond to the notice. See Walton v. Commissioner, T.C. Memo.
2021-40, at *9–10; Ball v. Commissioner, T.C. Memo. 2020-152, at *12–
13.
Respondent asserts, and the record supports him, that the
accuracy-related penalty at issue was automatically calculated through
electronic means and, therefore, falls within the section 6751(b)(2)(B)
exception to the written supervisory approval requirement.
B. Reasonable Cause and Good Faith
Once the Commissioner has met his burden, the taxpayer may
avoid a section 6662(a) accuracy-related penalty to the extent that he or
she can demonstrate (1) reasonable cause for the underpayment and
(2) that he or she acted in good faith with respect to the underpayment.
§ 6664(c)(1). The decision as to whether a taxpayer acted with
reasonable cause and in good faith is made on a case-by-case basis,
considering all pertinent facts and circumstances, including: (1) the
taxpayer’s efforts to assess the proper tax liability, (2) the knowledge
7 Generally, the burden of production includes producing evidence establishing
that the penalty was “personally approved (in writing) by the immediate supervisor of
the individual making such determination” unless a statutory exception applies.
§ 6751(b)(1).
8
and experience of the taxpayer, and (3) reliance on the advice of a tax
professional. Treas. Reg. § 1.6664-4(b)(1).
An honest misunderstanding of the law that is reasonable in the
light of the facts and circumstances may support a conclusion that a
taxpayer acted with reasonable cause and in good faith with respect to
a reported position. Id.; see also Higbee, 116 T.C. at 448–49. Generally,
the most important factor is the extent of the taxpayer’s efforts to assess
his or her proper tax liability. Treas. Reg. § 1.6664-4(b)(1). Statutory
complexity alone does not constitute reasonable cause. Barnes v.
Commissioner, T.C. Memo. 2012-80, aff’d, 712 F.3d 581 (D.C. Cir. 2013).
While they were assisted in preparing their tax return and timely
filed their return, petitioners were aware of the provisions of the
Paragon Severance agreement and the subsequently issued Form 1099–
MISC. Also, they conceded that the taxable wages of $6,413 attributable
to LTF were required to be included in their income for the year in issue
and did not provide any further explanation as to why that amount was
not reported in their return. Petitioners have not established they acted
in good faith to properly report their tax liability and accordingly have
not established that they had reasonable cause for the underpayment.
Petitioners are liable for the accuracy-related penalty for an
underpayment due to a substantial understatement of income tax for
taxable year 2017. Respondent’s determination is sustained.
We have considered all of petitioners’ arguments, and, to the
extent not addressed herein, we conclude that they are moot, irrelevant,
or without merit.
To reflect the foregoing,
Decision will be entered for respondent. | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488088/ | United States Court of Appeals
For the First Circuit
No. 22-1075
UNITED STATES OF AMERICA,
Appellee,
v.
MARK MOFFETT,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William D. Young, U.S. District Judge]
Before
Barron, Chief Judge,
Lynch and Gelpí, Circuit Judges.
Michael Pabian, with whom Martin G. Weinberg was on brief,
for appellant.
Karen L. Eisenstadt, Assistant United States Attorney, with
whom Rachael S. Rollins, United States Attorney, was on brief, for
appellee.
November 18, 2022
BARRON, Chief Judge. Mark Moffett was charged in 2019
in the United States District Court for the District of
Massachusetts with nine counts of wire fraud and six counts of
aggravated identity theft for his participation in an alleged
health insurance fraud scheme. After a ten-day jury trial, he was
convicted on all counts. Moffett contends in this appeal that the
convictions must be vacated on a number of distinct grounds,
including the one that we conclude is decisive -- namely, that the
verdict form that was submitted to the jury violated Moffett's
federal constitutional right to a jury trial by expressly referring
to certain trial exhibits that the government alone selected while
not otherwise referring to any of the evidence in the case.
I.
Moffett joined Aegerion, a Cambridge, Massachusetts-
based pharmaceutical company, as a sales representative in 2014.
The company at that time promoted and sold a cholesterol-lowering
drug, "Juxtapid." The sticker price for Juxtapid was as high as
several hundreds of thousands of dollars per patient, per year.
For each "sale" of the drug, sales representatives for Aegerion
like Moffett received a bonus.
The U.S. Food and Drug Administration ("FDA") as of that
time had approved Juxtapid only for the treatment of a specific
disease, homozygous familial hypercholesterolemia ("HoFH"). Many
health insurance companies in turn had approved coverage for
- 2 -
Juxtapid only if it had been prescribed to a patient to treat a
qualifying HoFH diagnosis. Moffett often assisted doctors and
their offices with completing health insurance paperwork,
including documents necessary to demonstrate the requisite
indication of such a diagnosis so that a prescription for Juxtapid
would be covered by the patient's insurance.
In 2019, a federal grand jury in the District of
Massachusetts indicted Moffett on nine counts of wire fraud under
18 U.S.C. § 1343 and six counts of aggravated identity theft under
18 U.S.C. § 1028A. 1 The indictment alleged that Moffett
"devised . . . a scheme and artifice to defraud, and to obtain
money from health insurance companies to pay [Aegerion] for
[Juxtapid] by falsely representing that patients for whom doctors
had prescribed [the drug] met the health insurance companies'
coverage criteria."
1 The wire fraud statute, 18 U.S.C. § 1343, provides that
"[w]hoever, having devised or intending to devise any scheme or
artifice to defraud, or for obtaining money or property by means
of false or fraudulent pretenses, representations, or promises,
transmits or causes to be transmitted by means of
wire . . . communication in interstate or foreign commerce, any
writings . . . for the purpose of executing such scheme or
artifice, shall be fined under this title or imprisoned not more
than 20 years, or both."
The aggravated identity theft statute, 18 U.S.C. § 1028A, as
relevant here, provides that "[w]hoever, during and in relation to
[a wire fraud offense], knowingly . . . uses, without lawful
authority, a means of identification of another person shall, in
addition to the punishment provided for such felony, be sentenced
to a term of imprisonment of 2 years."
- 3 -
A ten-day jury trial was held in the District of
Massachusetts in December 2019. The government introduced
evidence at trial of communications that it claimed included false
statements about patient diagnoses that had been submitted to
health insurers to obtain reimbursement from them for
prescriptions for Juxtapid. The government also put on witnesses
-- including five doctors and some of their staff members -- to
show that Moffett made or caused those false statements to be made
regarding the diagnoses of the patients for whom Juxtapid had been
prescribed and for which reimbursement from the health insurers
had been sought.
According to the government, Moffett's alleged false
statements on the insurance documents were communicated to health
insurers through "wires." 18 U.S.C. § 1343. The government also
alleged that Moffett included the doctors' identifying information
on some of those documents in a manner that constituted the
unauthorized "uses" of that identifying information for purposes
of the federal statute that makes identity theft a crime. 18
U.S.C. § 1028A.
Moffett introduced evidence at trial of email exchanges
with doctors that he argued demonstrated that they were aware of
the only approved use of Juxtapid and that he did not actually
encourage "off label" prescriptions for that drug. He also
elicited testimony for the purpose of impugning the credibility of
- 4 -
the witnesses whose testimony tended to suggest that Moffett added
false information or signatures to insurance letters and
authorization forms. He further introduced evidence that sought
to show that at least some of the doctors personally approved and
signed the allegedly fraudulent documents.
On the second day of trial, after the jury had been
dismissed, the District Court informed the parties that it had
been working on a verdict form to give to the jury that would
"organize[] the case in a logical foundation." The next day the
District Court provided the parties with the draft verdict form
and invited the government to select an exhibit that constituted
the alleged "wire" for each of the wire fraud counts, as well as
an exhibit that constituted the alleged "use" for each of the
"identity theft" counts, so that the selected exhibit could be
identified on the verdict form in relation to the relevant count.
The government obliged.
Moffett objected both orally and in a written filing to
the proposed verdict form insofar as it would reference the
government-selected exhibits. 2 Moffett argued that if the
District Court submitted to the jury such a verdict form, then the
District Court would be "invading the province of the jury to
2 Moffett also objected to the District Court's decision to
re-order the counts on the verdict form, but he does not press
that theory of error on appeal, and we therefore do not address
it.
- 5 -
deliberate how it wants to deliberate and . . . relieving the
government of [its] burden" to "identify and prove which
communications are the subject of the various counts in the
indictment without assistance from the court or suggestion from
the verdict slip." Moffett proposed that the District Court
instead provide the jury a verdict form that did not list any
exhibits. The District Court denied the objection, noting that
"[y]our rights are saved, but we're going to use the verdict slip
as [the District Court] proposed it." 3F
Five of the nine exhibits that the government selected
to support the wire fraud counts contained the document that the
government alleged Moffett had faxed to insurance companies
(Counts 3, 4, 7, 8, and 9), two of the nine exhibits contained
emails that Moffett had sent about new Juxtapid prescriptions
(Counts 5 and 6), and the other two exhibits contained "[s]creen
shots" of Aegerion's salesforce.com account showing data entries
about various communications between Aegerion and insurance
companies (Counts 1 and 2).
Each of the six aggravated identity theft counts was
based on an alleged use of a doctor's identifying information in
an insurance document associated with one of the faxes or emails
that the government alleged constituted a fraudulent wire. Thus,
the exhibits selected by the government to support the aggravated
identity theft counts -- except for one -- were the same exhibits
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that it had selected to support the corresponding wire fraud counts
(Counts 10, 11, 13, 14, and 15).
The other exhibit referenced on the verdict form that
had been selected by the government pertained to Count 12. This
exhibit contained an insurance authorization form that Moffett had
allegedly faxed and which he had referenced in an email the same
day, which the government alleged was the corresponding "wire."
The resulting verdict form that the District Court
provided to the jury for it to use appeared as follows:
* * *
We find Mark T. Moffett as to
1. Count 2, charging wire fraud on or about
May 7, 2014 (Exhibit 53):
_______ not guilty _______ guilty
2. Count 3, charging wire fraud on or about
May 14, 2014 concerning a certain FAX
(Exhibit 66):
_______ not guilty _______ guilty
3. Count 10, charging aggravated identity
theft on or about May 14, 2014 concerning
a certain FAX (Exhibit 66):
_______ not guilty _______ guilty
4. Count 1, charging wire fraud on or about
May 19, 2014 (Exhibit 42):
_______ not guilty _______ guilty
5. Count 4, charging wire fraud on or about
May 22, 2014 concerning a certain FAX
(Exhibit 77):
- 7 -
_______ not guilty _______ guilty
6. Count 11, charging aggravated identity
theft on or about May 22, 2014 concerning
a certain FAX (Exhibit 77):
_______ not guilty _______ guilty
7. Count 5, charging wire fraud on or about
August 5, 2014 concerning a certain e-mail
(Exhibit 86):
_______ not guilty _______ guilty
8. Count 12, charging aggravated identity
theft on or about August 5, 2014 concerning
a certain FAX (Exhibit 93):
_______ not guilty _______ guilty
9. Count 8, charging wire fraud on or about
August 15, 2014 concerning a certain FAX
(Exhibit 124):
_______ not guilty _______ guilty
10.Count 6, charging wire fraud on or about
August 20, 2014 concerning a certain e-mail
(Exhibit 96):
_______ not guilty _______ guilty
11.Count 13, charging aggravated identity
theft on or about August 20, 2014
concerning a certain email (Exhibit 96):
_______ not guilty _______ guilty
12.Count 7, charging wire fraud on or about
September 17, 2014 concerning a certain FAX
(Exhibit 109):
_______ not guilty _______ guilty
- 8 -
13.Count 14, charging aggravated identity
[sic] on or about September 17, 2014
concerning a certain FAX (Exhibit 109):
_______ not guilty _______ guilty
14.Count 9, charging wire fraud on or about
September 4, 2015 concerning a certain FAX
(Exhibit 148):
_______ not guilty _______ guilty
15.Count 15, charging aggravated identity
theft on or about September 4, 2015
concerning a certain FAX (Exhibit 148):
_______ not guilty _______ guilty
* * *
On the final day of trial, after the close of evidence
and closing arguments, the District Court prepared the jury for
its deliberations. In doing so, the District Court provided the
following instructions about the verdict form:
Take a look at the verdict slip. I set it up
-- simply because I think it may be helpful to
you in analyzing the case, I simply put the
counts and I set them up chronologically.
There's 15 of them. There's two types of
counts.
One type charges wire fraud . . . . The other
type of charge is aggravated identity theft.
The reason that there are different counts are
each time the government has alleged that the
crime was committed, that's a separate crime,
it involved a different, um, document or a
different setting. The government has argued
that it's the same scheme. I have nothing to
say about that. But each -- the law is that
each time the law is violated, that's a
different crime. That's what the counts
allege.
- 9 -
And then I've explained each one and, um, you
have a large mass of exhibits and the
government suggests -- this is not me
suggesting, but I've at least adopted their
numbering, the government suggests that the
actual document, which is the evidence of the
particular crime being committed, where there
is a particular document is set forth with the
exhibit number. That's what they suggest,
it's not what I suggest, but this is so that
you'll look there in order to do your
analysis.
Let me say one other thing and we'll get into
it. On this evidence your verdict on each of
the 15 counts can be not guilty, it can be
guilty, or it can be any combination of not
guilty or guilty, with the following
exception. Let me take a look at Numbers 2
and 3, this is the example, but you'll see
this again in other pairings throughout this
verdict slip, and I use my Numbers 2 and 3
just to illustrate it.
The government says, they've charged in Count
3 that certain facts, which they say is
Exhibit 66, is evidence of wire fraud. They
also say, in Count 10, that the same facts is
evidence of aggravated identity theft. And
there is a relationship, and it's this. If
you find Mr. Moffett not guilty on Count 3,
the wire fraud, you must find him not guilty
on the related Count 10, aggravated identity
theft. The contrary is not true. If you find
Mr. Moffett guilty of wire fraud on Count 3,
he's not necessarily guilty on Count 10, and
you must go on and evaluate that.
At sidebar following that instruction, counsel for the
government asked the District Court to clarify the instruction.
The government explained that the District Court had told "the
jury that the exhibit number [on the verdict slip was] the evidence
- 10 -
of a crime, but that's actually a reference to the wire, which is
a unit of the charge." Back in front of the jury, the District
Court then sought to clarify the instruction:
I think I said, um, trying to be helpful, I
pointed out that, um, the reference to a
specific exhibit was what the government says
is evidence of the -- of the wire fraud or the
aggravated identity theft. More specifically
it's pointed out that that is the document
that supposedly went over the wires. There
may be other documents that they claim is
evidence, but that's supposedly the document
that went over the wires.
The District Court released the jury to begin its
deliberations after providing the jury with other instructions not
relevant here. Following approximately an hour of deliberations,
the jury sent a note to the District Court. The note inquired,
"Can we please have a written description of what the charges are,
definitions and qualifications of wire fraud and identity theft?"
With the jury back in the courtroom, the District Court informed
the jurors that the answer to their question was yes, "but not
right away." The District Court explained that it would likely
take until the following morning for the court reporter to prepare
an exact version of what the court had said, but that the jurors
were free to reach a verdict in the meantime. The jury then
resumed deliberations and, just over two hours later, returned a
guilty verdict on all 15 charges.
- 11 -
The District Court sentenced Moffett to 54 months in
prison on October 28, 2021, and final judgment issued on January
26, 2022. Moffett now timely appeals his convictions.
II.
Moffett contends on appeal that the District Court
deprived Moffett of his "right to a trial by jury" under the Sixth
Amendment to the U.S. Constitution by submitting the verdict form
for the jury's use. He further contends that the government has
failed to show that the constitutional violation was harmless
beyond a reasonable doubt and thus that each of the convictions
must be vacated. We agree.
A.
The Sixth Amendment provides in relevant part:
In all criminal prosecutions, the accused
shall enjoy the right to a speedy and public
trial, by an impartial jury of the State and
district wherein the crime shall have been
committed, which district shall have been
previously ascertained by law, and to be
informed of the nature and cause of the
accusation . . . .
The Supreme Court of the United States in construing
this constitutional guarantee has long recognized that district
courts have substantial discretion both in administering trials in
criminal cases and in managing jury deliberations in such trials.
See Quercia v. United States, 289 U.S. 466, 469–70 (1933);
Bollenbach v. United States, 326 U.S. 607, 612 (1946). The Court
- 12 -
has also long made clear, however, that there are "inherent
limitations" on the "privilege of the judge to comment on the
facts." Quercia, 289 U.S. at 470. 4F
These "inherent limitations" reflect the practical
reality that "under any system of jury trials the influence of the
trial judge on the jury is necessarily and properly of great
weight" and that a trial judge's "lightest word or intimation is
received with deference[.]" Starr v. United States, 153 U.S. 614,
626 (1894). The Court for that reason has long admonished trial
judges that, in addressing the evidence, "great care should be
exercised that such expression should be so given as not to
mislead, and especially that it should not be one-sided." Id.
The caution aims to ensure that trial judges do not in addressing
the evidence "interfere with the jurors' independent judgment in
a manner contrary to the interests of the accused." United States
v. Martin Linen Supply Co., 430 U.S. 564, 573 (1977).
Consistent with this understanding of the Sixth
Amendment, our precedents recognize that the jury must be free not
only from "direct control in its verdict" by the district court
but also "from judicial pressure" "[i]n the exercise of its
functions." United States v. Spock, 416 F.2d 165, 181 (1st Cir.
1969) ("Put simply, the right to be tried by a jury of one's peers
finally exacted from the king would be meaningless if the king's
judges could call the turn."). We have thus explained that a
- 13 -
district court in commenting on the evidence to the jury in a
criminal case may not do so in a manner that "usurp[s] the jury's
factfinding role," United States v. Rivera-Santiago, 107 F.3d 960,
965 (1st Cir. 1997) (per curiam), or "relieve[s] the prosecution
of [its] burden in an unfair way," United States v. Argentine, 814
F.2d 783, 787–89 (1st Cir. 1987).
Accordingly, in Rivera-Santiago, we held that a district
court's answer to a jury's question that "selected only a part of
[a witness's] testimony given on direct examination to be read"
back to the jury violated the defendants' Sixth Amendment right to
a trial by jury. 107 F.3d at 965-67. We explained that the
violation resulted because the district court's answer to the
jury's question "culled the evidence" in a manner that was contrary
to the defendants' interests. Id. at 967. That was so, we
explained, because the district court through the answer
effectively directed the jury to consider only certain testimony
that favored the government, even though "defendants [a]re
entitled to have their theory of the case, as developed through
their evidence, presented to the jury on an equal footing with the
government's theory of the case." Id.
We also have indicated that a district court may cross
the constitutional line even without in effect directing the jury
to consider only the government's evidence. We have indicated
that the constitutional line also may be crossed whenever the
- 14 -
district court, in addressing the jury regarding evidence, places
"undue weight" on portions of the government's evidence and thereby
tilts the trial in that party's favor. United States v. Almonte,
594 F.2d 261, 265 (1st Cir. 1979) (holding that the district court
did not err in declining to answer a jury question seeking
reutterance of trial testimony related to "the timing of [a
particular day's] events," citing United States v. Baxter, 492
F.2d 150, 175 (9th Cir. 1973)); Baxter, 492 F.2d at 175 n.19
(explaining that the district court's denial of a jury's request
for testimony from specific witnesses was proper because doing so
would have "give[n] over-emphasis to that particular area of
evidence").
B.
We do not confront here a district court's response to
a jury's question regarding the evidence as we confronted in prior
cases that have addressed Sixth Amendment challenges based on
contentions that the district court had commented on the evidence
in an impermissible manner. Nor do we consider here an instance
of a trial judge commenting on the evidence in a criminal case
that precisely mirrors any fact pattern that either our Circuit or
-- as far as we are aware -- any other has encountered. But, the
novelty of this fact pattern does not insulate the District Court's
choice to invite the government to select the exhibit to be
referenced with respect to each count on the verdict form from
- 15 -
Sixth Amendment review. If anything, the novelty of that choice
tends to heighten our concern that, as Moffett contends, that
choice fell outside the District Court's considerable discretion
to manage a criminal trial. See Spock, 416 F.2d at 183 ("We are
not necessarily opposed to new [criminal] procedures just because
they are new, but they should be adopted with great hesitation.").
That said, the novelty of the District Court's choice in
this case does not suffice in and of itself to show that the
procedure was violative of the Sixth Amendment. Instead, under
our precedents, we must conduct a "review of the record" so that
we may determine whether, given the surrounding "context," the
District Court's submission of this verdict form for use by the
jury "usurped the jury's factfinding role," Rivera-Santiago, 107
F.3d at 965, in a "manner contrary to the interests of the
accused," Martin Linen Supply, 430 U.S. at 573.
The parties appear to agree that, in conducting this
inquiry, we must review the District Court's choice to submit this
verdict form to the jury under an abuse of discretion standard,
given that Moffett preserved this challenge below. We proceed on
that understanding. See United States v. Ellis, 168 F.3d 558, 562
(1st Cir. 1999); see also Rivera-Santiago, 107 F.3d at 966 n.6
(citing United States v. Aubin, 961 F.2d 980, 983 (1st Cir. 1992)).
And, as we will explain, we conclude that the District Court did
abuse its discretion here, even after accounting for the jury
- 16 -
instructions that the District Court gave that pertained to the
verdict form.
The government is right that the inclusion of the exhibit
numbers on the verdict form did not implicitly "direct the jury"
to find Moffett guilty based on certain pieces of evidence.
Indeed, the District Court clarified in instructing the jury that
the listed exhibits represented only what the government had
alleged were the "wires" and "uses." But, we are nonetheless
persuaded that -- in context -- the District Court, through the
verdict form and the instructions given to the jury that pertained
to that form, invaded the jury's power over factfinding by over-
emphasizing certain of the government's evidence in a manner that
was contrary to Moffett's interests.
1.
The District Court gave the verdict form directly to the
jury and that form was printed under official court caption. The
form then referred to a single government-selected exhibit -- and
only that government-selected exhibit, among all the evidence
introduced at trial -- for each of the listed counts.
Moreover, the verdict form did not contain any language
that suggested that the exhibit that was referenced for each count
was to be considered only for a limited purpose as to that count.
Instead, the form simply identified the government-selected
- 17 -
exhibit in parentheses next to each count, while refencing no other
evidence.
To be sure, none of the government-selected exhibits
that is uniquely listed for each count on its own contained
sufficient evidence to prove all of the elements of the offense
charged for that count. But, the exhibit referenced in each
instance contained the very evidence that the government claimed
at trial established that Moffett had made the alleged
"false . . . representations," 18 U.S.C. § 1343, and/or "uses [of]
a means of identification of another person," 18 U.S.C. § 1028A.
Thus, for each count, an especially salient component of the
evidence on which the government relied in support of the various
charges was singled out, while no reference was made to any exhibit
or other evidence that Moffett had highlighted at trial in his
defense to those same charges.
2.
The government does not -- because it cannot -- deny
that the verdict form had the qualities that we have just
described. The government nonetheless contends that the District
Court's choice to submit such a verdict form to the jury did not
constitute an abuse of discretion for Sixth Amendment purposes in
light of the instructions that the District Court gave to the jury
that pertained both to the verdict form and to the evidence more
generally.
- 18 -
Specifically, the government contends that the District
Court explained in those instructions that the exhibits were
referenced on the verdict form only for the purpose of identifying
which "wire" and which "use" of a doctor's information was at issue
in each count. The government then adds that Moffett did not
dispute at trial -- nor does he dispute on appeal -- that the
referenced exhibit did in fact refer to a "wire" or "use" of
information that had occurred, or that the "wire" or "use" to which
each exhibit referred was in fact the "wire" or "use" that the
government identified as the predicate "wire" or "use" for the
charge set forth in the count. In addition, the government
emphasizes that the District Court instructed the jury to review
all the evidence in reaching its own conclusions about the ultimate
question of whether the government had proved the elements
necessary to establish each crime.
The problem with the government's attempt to fend off
Moffett's Sixth Amendment challenge by pointing to the jury
instructions is that in certain respects the instructions added to
the emphasis that the verdict form already gave to the government-
selected exhibits merely by referencing them while not otherwise
referencing any other evidence. For example, in the course of
explaining the verdict form to the jury and the references to the
exhibits that the form contains, the District Court stated: "you
have a large mass of exhibits and . . . the government suggests
- 19 -
that the [exhibits listed on the form are] the evidence of the
particular crime being committed." (Emphasis added.) The District
Court then added, "it's not what I suggest, but this is so that
you'll look there in order to do your analysis." (Emphasis added.)
The District Court went on thereafter to state that "some of these
exhibits, which the government says are evidence of wire fraud,
the government also says are evidence that Mr. Moffett is guilty
of aggravated identity theft." And, even after the government
asked the District Court to clarify the purpose for which the
verdict form was referencing the government-selected exhibits, the
District Court simply instructed the jury that "I pointed out
that . . . the reference to a specific exhibit was what the
government says is evidence of the . . . wire fraud or the
aggravated identity theft. More specifically it's pointed out
that that is the document that supposedly went over the wires."
Thus, the record shows that the District Court
instructed the jury that the government-selected exhibit
referenced in each count constituted what the government alleged
was "the evidence of the particular crime being committed" and
that the jury was to "look there in order to do [its] analysis."
(Emphases added.) As a result, even when considered in the context
of the jury instructions, the verdict form did not merely direct
the jury's attention in a neutral manner to the "parts of [the
evidence] which" the District Court appropriately deemed to be
- 20 -
"important." United States v. Brennan, 994 F.2d 918, 929 (1st
Cir. 1993) (quoting Quercia, 289 U.S. at 469)). Rather, even when
considered in that fuller context, the verdict form impermissibly
privileged a portion of the government's evidence over that of the
defendant's, at least by giving "undue weight" to that evidence by
singling it out in such a salient manner. Almonte, 594 F.2d at
265; see Quercia, 289 U.S. at 470.
After all, unlike in Brennan, the District Court did not
indicate that certain categories of evidence may be relevant to
particular issues.3 Rather, here, the District Court singled out
certain exhibits that were being relied on by the government --
and the government alone -- to make out its criminal case against
the defendant.
3.
The government's remaining argument as to why we should
not find error also comes up short. Here, the government claims
that the District Court's decision to list a government-selected
exhibit for each count on the verdict form was intended only to
serve the limited purpose of matching the "wires" and "uses"
alleged in the indictment to the charged counts on the verdict
3 The challenged instruction in Brennan was: "In addition,
with regard to these charges, you may also consider the evidence
concerning Mr. McHugh's loan authority and question whether he
acted with intent to injure [the Bank] in his dealings with Mr.
Brennan." 994 F.2d at 929. The district court there did not
identify particular evidence or link it to particular counts. Id.
- 21 -
form. The government proceeds to argue that, due to this limited
purpose, the District Court's decision to construct the verdict
form in a manner that included the references to the government-
selected exhibits should be understood as a matter of mere trial
administration that fell within the broad range of discretion that
a district court has to manage a complicated trial.
To assess the government's contention in this regard, it
helps to add some further detail about each of the exhibits in
question. We thus briefly summarize each of them:
• Exhibit 42 (Count 1) (Wire Fraud): "[S]creen shot[s]" of
Aegerion's salesforce.com account from May 2014 showing
data entries regarding various communications with
insurance companies about patients' medical diagnoses.
Testimony elicited by the government at trial suggested
that the information communicated to the insurance
companies was false.
• Exhibit 53 (Count 2) (Wire Fraud): "[S]creen shot[s]" of
Aegerion's salesforce.com account from May 2014 showing
data entries regarding various communications with
insurance companies about patients' medical diagnoses.
Testimony elicited by the government at trial suggested
that the information communicated to the insurance
companies was false.
• Exhibit 66 (Counts 3 & 10) (Wire Fraud & Aggravated
Identity Theft): A May 14, 2014 fax of a letter sent
from a healthcare provider to an insurance company
appealing the denial of coverage for Juxtapid for a
patient. Testimony elicited by the government at trial
suggested that the letter contained false information
about the patient's medical diagnoses and that the fax
cover sheet contained Moffett's handwriting.
• Exhibit 77 (Counts 4 & 11) (Wire Fraud & Aggravated
Identity Theft): A May 14, 2014 fax of a letter sent
from a healthcare provider to an insurance company
seeking coverage for Juxtapid for a patient. Testimony
- 22 -
elicited by the government at trial suggested that
Moffett had prepared the letter but that a doctor refused
to sign it because it contained false medical
information, and that the fax cover sheet contained
Moffett's handwriting.
• Exhibit 86 (Count 5) (Wire Fraud): An August 5, 2014
email from Moffett to an Aegerion employee stating that
"new prescriptions for patients" had been faxed to a
provider. Testimony elicited by the government at trial
suggested that the patient's diagnostic information in
the faxed documents was false.
• Exhibit 93 (Count 12) (Aggravated Identity Theft): An
August 5, 2014 fax of a drug authorization form sent
from a healthcare provider to an insurance company
seeking coverage for Juxtapid. Testimony elicited by
the government at trial suggested that the information
on the form had been falsified and that the form
contained Moffett's handwriting.
• Exhibit 96 (Counts 6 & 13) (Wire Fraud and Aggravated
Identity Theft): An August 20, 2014 email from Moffett
to an Aegerion employee with attachments showing a fax
of the same date sent from a healthcare provider to
Aegerion containing a patient's medical documents, some
of which contained information that the testimony
elicited by the government at trial suggested was false.
Testimony also suggested the fax cover sheet contained
Moffett's handwriting.
• Exhibit 109 (Counts 7 & 14) (Wire Fraud & Aggravated
Identity Theft): A September 17, 2014 fax of a letter
sent from a healthcare provider to an insurance company
appealing the denial of coverage for Juxtapid for a
patient. Testimony elicited by the government at trial
suggested that the doctor was not familiar with the
letter, that it contained false information about the
patient's medical diagnoses, and that the fax cover
sheet contained Moffett's handwriting.
• Exhibit 124 (Count 8) (Wire Fraud): An August 14, 2014
fax of a letter sent from a healthcare provider to an
insurance company appealing the denial of coverage for
Juxtapid for a patient. Testimony elicited by the
government at trial suggested that the doctor whose
- 23 -
signature appeared on the letter had never approved or
signed it, that the letter contained false medical
information, and that the fax cover sheet contained the
handwriting of Moffett's ex-girlfriend, who testified
that Moffett provided her with information necessary to
fill out such forms.
• Exhibit 148 (Counts 9 & 15) (Wire Fraud & Aggravated
Identity Theft): A September 4, 2015 fax of an
authorization form sent from a healthcare provider to an
insurance company seeking coverage for Juxtapid for a
patient. Testimony elicited by the government at trial
suggested that the medical information was false, that
the doctor had not approved the form, and that it
contained Moffett's handwriting.
These summaries of the contents of the referenced
government-selected exhibits reveal that, with respect to the wire
fraud counts, the listing of the government-selected exhibits on
the verdict form did more than simply provide proof that a certain
"wire" had been sent, in the way that, say, evidence of meta-data
about a wire transmission might. Instead, these summaries make
clear that the referenced exhibits constituted evidence of the
content of the communication contained in the "wire" that pertained
to each count that plainly bears not only on the element of the
wire fraud offense that concerns whether there was a "wire" but
also on other elements of that offense. For example, in addition
to constituting the "wires" themselves, each exhibit contained or
referred to medical information that the government argued at trial
constituted false statements that Moffett himself added or caused
to be added to the documents that constituted the alleged "wires"
themselves. It should therefore be unsurprising that each of the
- 24 -
exhibits was also the subject of significant trial testimony that
the government argued tended to link Moffett to each "wire."
The same is no less true if we consider the exhibits
referenced in connection with the aggravated identity theft
counts, as they, too, were hardly barebones. They each contained
not only the doctor's information that the government alleged that
Moffett had "used," but also the handwriting that the government
had labored at trial to convince the jury was Moffett's.
Thus, even if the "wire" element was not itself in
material dispute for any of the wire fraud counts, and even if the
fact that a doctor's information was "used" was similarly not in
material dispute for any of the identity theft counts, it cannot
be said that the exhibits were relevant to the jury's consideration
of the charges only for the purpose of proving those singular
elements of any of the charged offenses. And, as noted, the
government makes no such contention, despite asserting that the
exhibits were listed for the limited purpose of identifying the
"wires" and "uses" at issue.4 We thus reject the government's
contention that, in context, the references to the exhibits on the
verdict form did not "place undue weight" on specific parts of the
4 The District Court did not provide an instruction that the
jury could consider the referenced exhibits only for such a limited
purpose, and we therefore do not consider what the effect of such
an instruction would be on the error or harm identified in this
case.
- 25 -
government's evidence, Almonte, 594 F.2d at 265, because the
exhibits that were referred to on the jury form bore only on
uncontested aspects of the case against Moffett. For, because the
record shows otherwise, it follows that we cannot accept the
government's argument that the District Court's choice to submit
this verdict form fell within the District Court's considerable
discretion to organize a complicated criminal trial in a manner
that would avoid jury confusion. See United States v. Miller, 738
F.3d 361, 383 (D.C. Cir. 2013) (noting the availability of "other
options" that do not implicate the "line between judicial
clarification and impermissible judicial interference" in holding
that the district court abused its discretion in referring to
evidence in its answer to the jury's question). Indeed, at oral
argument, the government itself acknowledged (though it did not
raise this concern to the District Court) that "this is not
something district courts should be doing."
III.
Having determined that the District Court abused its
discretion in violation of Moffett's Sixth Amendment right by
submitting the verdict form that we have described, we still must
determine "whether or not the error is such that it requires us to
reverse the convictions on some or all of the wire fraud [and
identity theft] counts." Argentine, 814 F.2d at 788–89. In other
words, we must determine whether the error was a harmless one.
- 26 -
Because the District Court's error in submitting this
verdict form to the jury is of a "constitutional dimension," the
government bears the burden of establishing that the error was
harmless beyond a reasonable doubt. Rivera-Santiago, 107 F.3d at
966–67; see also Argentine, 814 F.2d at 789. Thus, the government
must show that, on this record, there is no "reasonable possibility
that the error at issue influenced the jury in reaching the
verdict." Rivera-Santiago, 107 F.3d at 967.5
To prove each wire fraud violation, the government had
the burden of proving beyond a reasonable doubt that Moffett
"devised or intend[ed] to devise" a "scheme or artifice to defraud,
or for obtaining money or property by means of false or fraudulent
pretenses, representations, or promises," and "transmit[ed] or
cause[d] to be transmitted by means of wire" a communication in
interstate or foreign commerce "for the purpose of executing such
scheme or artifice." 18 U.S.C. § 1343. And, to prove each
5 In arguing that any error here was harmless, the government
cites to a case articulating our harmless error standard for "non-
constitutional evidentiary errors." United States v. Hicks, 575
F.3d 130, 143 (1st Cir. 2009) ("We review non-constitutional
evidentiary errors for harmlessness; an error is harmless if it is
'highly probable that the error did not influence the verdict.'"
(quoting United States v. Roberson, 459 F.3d 39, 49 (1st Cir.
2006))). Because we find a constitutional error similar in kind
to the errors that we found in Rivera-Santiago and Argentine,
however, we follow those cases and consider the error here to be
of a "constitutional dimension." 107 F.3d at 967; 814 F.2d at
789. And, aside from citing Hicks, the government develops no
argument as to why we should not do so.
- 27 -
aggravated identity theft count, the government had the burden of
proving that, "in relation to [one of the wire fraud offenses],"
Moffett "knowingly . . . use[d], without lawful authority, a means
of identification of another person."6
In arguing that any error with respect to the verdict
form was harmless, the government presses a similar argument to
the one that, as we have just seen, it advanced in service of its
argument that there was no error at all. Specifically, the
government argues that the District Court's inclusion of the
exhibits on the verdict form was harmless even if in error because
their inclusion on that form at most placed emphasis on evidence
that established what was in the end only an uncontested fact --
that a communication qualifying as a "wire" for each count had
been sent, or that a doctor's information had been "use[d]." But,
as we have already explained, the exhibits themselves demonstrate
that they contain evidence relevant not only to establishing those
6 The nature of the identity theft statute is such that the
government's ability to prove those charges turns on its ability
to prove the wire fraud charges. See 18 U.S.C. § 1028A ("Whoever
during and in relation to [a wire fraud offense],
knowingly . . . uses, without lawful authority, a means of
identification of another person shall, in addition to the
punishment provided for such felony, be sentenced to a term of
imprisonment of 2 years."). Thus, because each identity theft
count is necessarily tied to a wire fraud count, it follows that
if the District Court's error was not harmless with respect to a
wire fraud count, the error was not harmless with respect to the
corresponding identity theft count. Regardless, though, we
conclude that the error cannot be construed as harmless as to any
of the counts in any event.
- 28 -
singular elements but also to the jury's consideration of other
elements of the charged crimes. Thus, the content of the exhibits
is such that there is reason to be concerned that the verdict form,
at least when combined with the District Court's instruction to
the jury that the exhibits referenced on the verdict form
constituted "the evidence" of the charged offenses and to "look
there" to do "your analysis," had the effect of tilting the playing
field to the government's advantage. Given the nature of the
exhibits, there is reason to be concerned that the express
reference to them -- and to no other evidence -- on the verdict
form would draw the jurors' attention away from the evidence that
Moffett put forward to show that he was not guilty of any of the
charged offenses beyond reasonable doubt and toward the case that
the government was making for finding him guilty of each of those
offenses.7
7To the extent that the government suggests that we should
assign any weight to Moffett's failure to specifically contest the
existence of the wires at trial, we reject the argument. Indeed,
in Argentine, the government argued that the Court should write
off any concerns about the implicit suggestion that the defendant
had in fact participated in the wires at issue (there telephone
calls) because "these matters were undisputed." 814 F.2d at 788.
As we recognized, this "misses the point" because "it
is . . . settled, in a criminal case, that '[t]he plea of not
guilty places every issue in doubt, and not even undisputed fact
may be removed from the jury's consideration,'" and therefore "[n]o
matter how persuasive the government's evidence may seem to the
court, there is no burden on a defendant to dispute it." Id.
(alterations in original) (first quoting United States v. Natale,
526 F.2d 1160, 1167 (2d Cir. 1975), cert. denied, 425 U.S. 950
- 29 -
To be sure, the government does also appear to suggest
that any error here was harmless for the distinct reason that any
such worry is misplaced simply because none of the exhibits in and
of itself sufficed to prove all of the elements of the offense
charged in any count. That is significant, the government
contends, because we must assume that the jury followed the
District Court's general instruction to consider all the evidence
in the record on equal footing. Thus, the government reasons,
with some force, that we should not understand the jury's
evaluation of the evidentiary record to have been influenced by
any emphasis of the government-selected exhibits on the verdict
form, because the jury to convict would have had to have looked
beyond the exhibits referenced on the verdict form in any event
and so must be assumed to have accounted for any competing evidence
before it that Moffett had introduced.
The problem with the government's theory in this regard,
however, is that it was the jury's task to weigh a "large mass" of
evidence to determine as to each wire fraud count whether Moffett
was guilty of devising or intending to devise a scheme to defraud
or to obtain money by means of false representations in an
interstate wire. 18 U.S.C. § 1343. And, it was the jury's task
to then weigh that same evidence to determine whether Moffett had
(1976), then DeCecco v. United States, 338 F.2d 797, 798 (1st Cir.
1964)).
- 30 -
"knowingly . . . use[d], without lawful authority, a means of
identification of another person" in the commission of each wire
fraud offense. 18 U.S.C. § 1028A. The concern is thus that this
process "might well have been shortcircuited by [the District
Court's] injection of the incriminating aspect[s] of the evidence"
through the references to the government-selected exhibits on the
verdict form. Rivera-Santiago, 107 F.3d at 967 (rejecting
harmless error argument on this basis).
True, the government makes a strong case for our
understanding that the jury did not stop its assessment of the
record after consulting only the exhibits referenced on the verdict
form. But the jury's neutral assessment of the evidence could
have been knocked off course nonetheless in making its way through
the evidentiary morass. In particular, there is reason to be
concerned that the jury would have started with the government's
hand-picked exhibits referenced on the verdict form -- and then
considered the case through the framing of it that the government
had pressed -- not because it chose on its own to do so for reasons
of efficiency but because it understood the District Court to have
encouraged it to do so.
Thus, even if the circumstantial evidence of Moffett's
guilt was "significant," we cannot be assured that the jury would
have ultimately viewed all the evidence together -- including
Moffett's exculpatory evidence -- in the same neutral manner that
- 31 -
it would have absent the District Court's decision to list on the
verdict form only the precise exhibits that the government was
arguing showed through their contents that Moffett had committed
the charged crimes and then to instruct the jury both that those
exhibits were in the government's view "the evidence of the
particular crime" and to "look there in order to do your analysis."
See id.; see also Spock, 416 F.2d at 182 (explaining that special
verdict forms are disfavored in criminal cases because a jury's
consideration of charges from the lens of a "step by step"
framework favors the government and is more likely to lead to a
guilty verdict); cf. Braley v. Gladden, 403 F.2d 858, 860 (9th
Cir. 1968) (where the district court had failed to include a "not
guilty" option on the verdict form, noting that, while "it may not
[have been] unreasonable to assume that the jury inferred from the
[the district court's] instructions that it might be empowered to
write its own form of a verdict of not guilty, it [would have been]
equally reasonable to assume that the jury inferred that the judge
intended that only one verdict was possible"). And as this is not
a case in which the evidence of guilt is overwhelming, we conclude
that "there is a reasonable possibility that the error at issue
influenced the jury in reaching its verdicts in this case" and
thus that "the verdicts cannot stand." Rivera-Santiago, 107 F.3d
at 967.
- 32 -
IV.
For the foregoing reasons, we VACATE Moffett's
convictions as to all counts and REMAND for further proceedings
not inconsistent with this opinion.
- 33 - | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488102/ | Filed 11/18/22 P. v. Rubio-Baez CA1/2
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or
ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION TWO
THE PEOPLE,
Plaintiff and
Respondent, A163056
v. (San Mateo County
MARCO ANTONIO RUBIO- Super. Ct. No. SC077948A)
BAEZ,
Defendant and
Appellant.
Defendant and appellant Marco Antonio Rubio-Baez was convicted of
robbery on a plea of no contest in 2013. In 2021, he moved to vacate the
conviction pursuant to Penal Code section 1473.7,1 which permits individuals
who are no longer in custody to move to vacate a conviction or sentence on the
ground that it is “legally invalid due to prejudicial error damaging the
moving party’s ability to meaningfully understand, defend against, or
knowingly accept the actual or potential adverse immigration consequences
of” the plea. (§ 1473.7, subd. (a)(1).) He appeals from the denial of this
motion. We affirm.
Further statutory references will be to the Penal Code except as
1
otherwise specified.
1
BACKGROUND
I.
The 2013 Conviction
In 2013, Rubio-Baez was apprehended near a bank that had just been
robbed, identified by bank employees as the person who had committed the
robbery, and found to be in possession of the stolen bag of money and
.31 gram of methamphetamine. The victim reported that Rubio-Baez had
handed him a demand note, said he had five minutes to give him the money
and started counting; the victim handed him a bag containing $4,000 cash
and Rubio-Baez left. Rubio-Baez told the police he entered the bank with the
intent to commit a robbery, gave a demand note to a banker and told him he
had five seconds to hand over the money, then fled the bank with the money
the banker gave him. Rubio-Baez said he knew it was wrong to rob the bank,
but he needed the money to pay rent, buy a cell phone and send money to his
mother in Mexico.
Rubio-Baez was charged with second degree robbery (§ 212.5,
subd. (c)),2 possession of methamphetamine (Health & Saf. Code, § 11377,
subd. (a)), burglary (§ 460, subd. (b)), theft of property exceeding $950 (§ 487,
subd. (a)), and possession of stolen property (§ 496, subd. (a)). Pursuant to a
negotiated plea agreement, he entered a plea of no contest to the robbery
charge and admitted the offense was a serious felony under section 1192.7,
subdivision (c)(19), and a violent felony under section 667.5,
2 The definition of robbery appears in section 211. Section 212.5
describes the degrees of robbery: Subdivisions (a) and (b) list types of robbery
constituting first degree robbery and subdivision (c) specifies that “[a]ll kinds
of robbery other than those listed in subdivisions (a) and (b) are of the second
degree.”
2
subdivision (c)(9). The remaining counts were dismissed, as were two
separate misdemeanor cases.
The plea form Rubio-Baez signed stated, “I understand that if I am not
a citizen, conviction of the offense for which I have been charged will have
the consequences of deportation, exclusion from the United States or a denial
of naturalization.” The form also stated that counsel had explained that the
maximum penalty for the offense was five years in prison, four years parole,
and specified fines; that the offense was a strike; and that Rubio-Baez had
not been induced to plead guilty or nolo contendere by any promise or
representation except, “2 year TOP & refer consider residential treatment
program—indicated” and dismissal of two misdemeanor cases with Harvey
waivers.3
At the hearing on the plea, Rubio-Baez responded “yes” when the court
asked, “Do you understand that if you are not a citizen of this country this
conviction will have the consequence of deportation, exclusion from admission
to the United States and denial of naturalization.” The court explained that
the low term of two years was an indicated sentence and not a promise, and
that the sentencing court could impose up to the maximum term of five years,
and Rubio-Baez acknowledged he understood.
At sentencing, noting its view that Rubio-Baez realized his offense was
“a big mistake” and “because of [his] drug use,” the trial court suspended
imposition of sentence and placed Rubio-Baez on three years’ supervised
probation with one year in county jail, modifiable to a residential treatment
program approved by probation.
3 People v. Harvey (1979) 25 Cal.3d 754.
3
In 2016, Rubio-Baez’s conviction was dismissed in the interests of
justice pursuant to section 1203.4.4
II.
The Current Motion to Vacate
On January 26, 2021, Rubio-Baez filed a motion to withdraw his no
contest plea pursuant to section 1437.7 on the ground that when he entered
his plea, he was unaware the conviction would render him subject to
“mandatory removal and certain denial of benefits from the United States.”
The motion emphasized the complexity of immigration law and fact that the
Ninth Circuit did not clarify that a robbery conviction was an “aggravated
felony” for purposes of immigration law until years after Rubio-Baez’s plea.
Rubio-Baez submitted a declaration in which he stated that he entered
the plea “based on the understanding that [he] would not have any serious
immigration consequences,” he “did not meaningfully understand that this
conviction could become [a] removable offense many years after my plea
because of the complexities of immigration law,” and he “would not have
accepted this plea if [he] knew that this conviction could result in certain
removal and denial of benefits and relief.” Rubio-Baez declared that “[t]he
right to remain in the United States was more important to [him] than any
potential jail sentence” and that he “had family, community ties, obligations,
and opportunities in the United States” and “would have faced extreme
4 Section 1203.4, with certain exceptions, provides for dismissal of a
conviction when the defendant “ ‘has fulfilled the conditions of probation for
the entire period of probation,’ ” “ ‘has been discharged prior to the
termination of the period of probation,’ ” or “ ‘in any other case in which a
court, in its discretion and the interests of justice, determines that a
defendant should be granted the relief available under’ section 1203.4.”
(People v. Seymour (2015) 239 Cal.App.4th 1418, 1429-1430, quoting
section 1203.4, subdivision (a).)
4
hardship if [he] was deported to [his] country.” According to his declaration,
at the time of his plea, Rubio-Baez was “going through terrible depression
due to a [serious] family illness,” and he had since recovered through
involvement with church and a rehabilitation program, had become a
“conscientious productive member of society” and had not gotten into further
trouble with the law.
Rubio-Baez declared that he had been in the United States “a long
time” and had “graduated high school here in 2005.” He had obtained a “U
visa” 5 in 2011, which allowed him to work legally, and had been gainfully
employed ever since. At the time of his plea he was afraid to return to his
home state in Mexico, which was “very dangerous” due to crimes such as
abductions, robberies and killings, and was on the “U.S. Travel’s Do not
travel list.” Rubio-Baez declared, “I would not have knowingly taken a plea
that would risk going back there and giving up my U.S. life and my U-visa
status. [¶] There was little to gain by accepting the plea offer, if I’m forced to
return to my country and spend years in immigration custody.”6
5 A U visa is “a temporary nonimmigrant visa created by Congress to
provide legal status for noncitizens who assist in the investigation of serious
crimes in which they have been victimized. (See 8 U.S.C. § 1101(a)(15)(U);
Fonseca-Sanchez v. Gonzales (7th Cir. 2007) 484 F.3d 439, 442, fn. 4.)”
(People v. Morales (2018) 25 Cal.App.5th 502, 506.)
According to the 2013 probation report, “[i]n 2001 [Rubio-Baez] was
reportedly granted legal residency, as he was the victim of domestic violence
by an ex-partner.” Rubio-Baez’s declaration states that he obtained a U visa
in January 2011, and a copy of the visa documents its validity from
January 27, 2011, to January 26, 2015.
6 Rubio-Baez’s attorney stated at the hearing that conviction of an
aggravated felony would preclude Rubio-Baez from obtaining a bond for
release if he was put into removal proceedings.
5
At the hearing, Rubio-Baez testified that he came to the United States
in 2003, at age 17. When he entered his plea in 2013, he did not know it
would subject him to mandatory removal for life and no one ever talked to
him about the term “ ‘aggravated felony.’ ” He would not have taken the plea
bargain if he had known of these consequences because “it’s really important
for me to be in the United States since I’ve been in the United States for a
long time” and “I’ve been here since I was 17 years old, so it is really
important for me to be around my family.”
Rubio-Baez’s current attorney stipulated that a section 1016.5
advisement7 was given at the time of the plea. Rubio-Baez acknowledged
that his plea form highlighted a provision stating, “ ‘you will be subject to
deportation,’ ” but testified that this did not mean he understood the
consequences because he never got to discuss it with an immigration attorney
and his public defender did not “have the whole knowledge of this.” He told
his attorney about his immigration status and the attorney’s response was,
“ ‘This is the deal that I got for you.’ ” The attorney did not offer Rubio-Baez
an opportunity to speak with an immigration lawyer and he did not know he
could do so. Rubio-Baez acknowledged that the trial court at his plea hearing
told him the conviction “ ‘will have consequences of deportation’ ” but
testified, “that doesn’t mean I understand fully what those consequences
7 Section 1016.5, subdivision (a), provides: “Prior to acceptance of a
plea of guilty or nolo contendere to any offense punishable as a crime under
state law, except offenses designated as infractions under state law, the court
shall administer the following advisement on the record to the defendant:
“If you are not a citizen, you are hereby advised that conviction of the
offense for which you have been charged may have the consequences of
deportation, exclusion from admission to the United States, or denial of
naturalization pursuant to the laws of the United States.”
6
were meant to be in the future. [¶] . . .[¶] It’s not telling me that I’ll be
deported for life. It’s not telling me that if I get deported to Mexico, I would
never to come back to the states as other people get the chance.”
Rubio-Baez testified that he went back to court in 2016 to get his
conviction dismissed because he was “trying to find a better solution” or
“adjust my status,” and this was when he learned he was “stuck” because of
the plea. He was not currently facing deportation, exclusion or denial of a
naturalization application.
Defense counsel argued the only relevant question under section 1473.7
is whether Rubio-Baez understood the consequences of his plea, regardless of
the reasons for any lack of understanding. His main argument was that in
2013 the law “was misunderstood” as providing that robbery was not an
aggravated felony, so there was “no way anybody could have known these
radical consequences.” Counsel maintained that the fact it took until 2019
for the Ninth Circuit to clarify the law “shows the complexity of immigration
law when it refers to this statute. And if it’s so complex that attorneys and
appellate courts couldn’t figure this out until 2019, how could a layperson
understand it?”
Counsel also argued it did not matter whether another plea deal was
available, only whether Rubio-Baez understood the consequences of this one.
Counsel maintained that Rubio-Baez’s assertions were corroborated by the
facts that he had a U visa and gainful employment, making it less likely he
would knowingly “take something unsafe”; he had a fear of returning to
Mexico; and he had a long history of ties to the United States. Counsel
further argued that the motion to vacate should be granted in the interest of
justice; that Rubio-Baez had already served his time and become a productive
member of society, leaving only the immigration consequences of his offense
7
at stake; and that the 2016 dismissal of the conviction under section 2013.4
meant it should be “good enough to be dismissed” now.
III.
The Trial Court’s Decision
The court emphasized the fact that the plea form and on the record
advisement from the court informed Rubio-Baez that the consequences of the
plea “will be deportation, exclusion from admission to the United States, or
denial of naturalization”: “He was advised not ‘can’ or ‘could.’ He was
advised these will be the consequences . . . .” Acknowledging that Rubio-Baez
had served his time and appeared to be a contributing member of society, the
court stated the issue “is whether or not I can find [Rubio-Baez] truly didn’t
know what he was doing or didn’t understand what he was getting into when
he pled way back in 2013. And based on this record, I cannot make that
finding.” Given that Rubio-Baez knew he was pleading to a “very serious
offense,” the court found it sufficient that he was advised the conviction “will
lead to deportation.”
The court found no corroboration for Rubio-Baez’s statements, noting
that the only evidence of what his plea attorney did or did not tell him came
from Rubio-Baez; there was no evidence about the strength of the case
against him; the plea bargain included not only a top sentence of two years
but also dismissal of two separate misdemeanor cases; and there was no
evidence Rubio-Baez had reason to expect or hope for a different bargain.
The court also found parts of Rubio-Baez’s declaration vague: He said he had
family in the United States, but he did not have a wife or children at that
time, and he did not explain what he meant by community ties or obligations.
His rehabilitation and good conduct after the offense, the court observed, was
8
not relevant to his understanding of the consequences of the plea at the time
he entered it.
In short, the court found “the only thing really . . . contrary to the plea
form and the transcript [of the plea hearing] [is] his declaration from many,
many years later.”
The court denied the section 1473.7 motion and this appeal followed.
DISCUSSION
I.
Principles Governing a Section 1473.7 Motion to Vacate
As the California Supreme Court has explained, “[w]hen long-standing
noncitizen residents of this country are accused of committing a crime, the
most devastating consequence may not be a prison sentence, but their
removal and exclusion from the United States. (See People v. Martinez (2013)
57 Cal.4th 555, 563 (Martinez).) Because the prospect of deportation ‘is an
integral part,’ and often even ‘the most important part,’ of a noncitizen
defendant’s calculus in responding to certain criminal charges (Padilla v.
Kentucky (2010) 559 U.S. 356, 364 (Padilla)), both the Legislature and the
courts have sought to ensure these defendants receive clear and accurate
advice about the impact of criminal convictions on their immigration status,
along with effective remedies when such advice is deficient. (E.g., Pen. Code,
§§ 1016.2 et seq., 1473.7; Jae Lee v. United States (2017) __ U.S. __, [137 S.Ct.
1958], 198 L.Ed.2d 476 (Lee); Padilla, at p. 360, 130 S.Ct. 1473; Martinez, at
p. 559; People v. Superior Court (Giron) (1974) 11 Cal.3d 793, 798.)” (People
v. Vivar (2021) 11 Cal.5th 510, 516 (Vivar).)
Section 1473.7, subdivision (a)(1), provides that “[a] person who is no
longer in criminal custody may file a motion to vacate a conviction” on the
ground that it “is legally invalid due to prejudicial error damaging the
9
moving party's ability to meaningfully understand, defend against, or
knowingly accept the actual or potential adverse immigration consequences
of a conviction or sentence. A finding of legal invalidity may, but need not,
include a finding of ineffective assistance of counsel.” If the moving party
establishes this ground for relief by a preponderance of the evidence, the
court “shall” grant the motion. (§ 1473.7, subd. (e)(1).) “When ruling on a
motion under paragraph (1) of subdivision (a), the only finding that the court
is required to make is whether the conviction is legally invalid due to
prejudicial error damaging the moving party’s ability to meaningfully
understand, defend against, or knowingly accept the actual or potential
adverse immigration consequences of a conviction or sentence.” (§ 1473.7,
subd. (e)(4).)
“[S]howing prejudicial error under section 1473.7, subdivision (a)(1)
means demonstrating a reasonable probability that the defendant would have
rejected the plea if the defendant had correctly understood its actual or
potential immigration consequences. When courts assess whether a
petitioner has shown that reasonable probability, they consider the totality of
the circumstances. (Lee, supra, [582] U.S. __, [137 S.Ct. at p. 1966].) Factors
particularly relevant to this inquiry include the defendant’s ties to the United
States, the importance the defendant placed on avoiding deportation, the
defendant’s priorities in seeking a plea bargain, and whether the defendant
had reason to believe an immigration-neutral negotiated disposition was
possible. (See id. at p. __ [137 S.Ct. at pp. 1967-1969]; Martinez, supra,
57 Cal.4th at p. 568.)” (Vivar, supra, 11 Cal.5th at pp. 529-530.)
“[M]ovants under section 1473.7 must provide evidence corroborating
their assertions. ‘ “Courts should not upset a plea solely because of post hoc
assertions from a defendant about how he would have pleaded but for his
10
attorney’s deficiencies. Judges should instead look to contemporaneous
evidence to substantiate a defendant’s expressed preferences.” ’
(People v. Ogunmowo (2018) 23 Cal.App.5th 67, 78, quoting [Lee, supra,]
582 U.S. ––, [137 S.Ct. 1958, 1967] [discussing how to evaluate the
‘reasonable probability’ that a defendant who would have rejected a plea deal
but for counsel’s erroneous advice about deportation in an ineffective
assistance of counsel case].)” (People v. Rodriguez (2021) 68 Cal.App.5th 301,
322 (Rodriguez); Vivar, supra, 11 Cal.5th at p. 530 [“when a defendant seeks
to withdraw a plea based on inadequate advisement of immigration
consequences, we have long required the defendant corroborate such
assertions with ‘ “objective evidence” ’ ”].)
“[A]ppeals from section 1473.7 hearings are subject to independent
review. (Vivar, supra, 11 Cal.5th 510, 525.) Under this standard, ‘ “an
appellate court exercises its independent judgment to determine whether the
facts satisfy the rule of law.” ’ (Ibid.) Independent review extends particular
deference to trial court findings ‘that are based on “ ‘the credibility of
witnesses the [superior court] heard and observed’ ” ’ but not to findings
drawn from the ‘cold record’ in the proceeding, since the trial and appellate
courts are in the same position when tasked with interpreting such
materials. (Id. at p. 527.)” (People v. Alatorre (2021) 70 Cal.App.5th 747,
755.)
II.
Relevant Federal Immigration Principles
“The Immigration and Nationality Act (INA) renders deportable any
alien convicted of an ‘aggravated felony’ after entering the United States.
8 U.S.C. § 1227(a)(2)(A)(iii). Such an alien is also ineligible for cancellation of
removal, a form of discretionary relief allowing some deportable aliens to
11
remain in the country. See §§ 1229b(a)(3), (b)(1)(C). Accordingly, removal is
a virtual certainty for an alien found to have an aggravated felony conviction,
no matter how long he has previously resided here.” (Sessions v.
Dimaya (2018) ___ U.S. ___, [138 S.Ct. 1204, 1210-1211].) As relevant here,
the term “aggravated felony” includes “a crime of violence . . . for which the
term of imprisonment [is] at least one year” (8 U.S.C. § 1101(a)(43)(F)) and “a
theft offense (including receipt of stolen property) or burglary offense for
which the term of imprisonment [is] at least one year” (8 U.S.C.
§ 1101(a)(43)(G)).8
To decide whether a state conviction “qualifies as an ‘aggravated felony’
under the INA,” federal courts “employ a ‘categorical approach’ to determine
whether the state offense is comparable to an offense listed in the INA.”
(Moncrieffe v. Holder (2013) 569 U.S. 184, 190.) “Under this approach we
look ‘not to the facts of the particular prior case,’ but instead to whether ‘the
state statute defining the crime of conviction’ categorically fits within the
‘generic’ federal definition of a corresponding aggravated felony.” (Ibid.) “[A]
state offense is a categorical match with a generic federal offense only if a
conviction of the state offense ‘ “necessarily” involved . . . facts equating to
[the] generic [federal offense].’ ” (Ibid., quoting Shepard v. U.S. (2005)
544 U.S. 13, 24 (plur. opn.).) “ ‘The prior conviction qualifies as [the generic
offense] only if the statute's elements are the same as, or narrower than,
those of the generic offense.’ [(Descamps v. U.S. (2013) 570 U.S. 254, 257.)] A
state offense qualifies as a generic offense—and therefore, in this case, as an
8 Regarding the bracketed insertion of “is” into the quoted portions of
title 8 of the United States Code (8 U.S.C.), section 1101(a)(43), federal courts
have concluded that “the verb ‘is’ is missing from the statute and should be
read into it.” (U.S. v. Corona-Sanchez (9th Cir. 2002) 291 F.3d 1201, 1204,
fn. 3.)
12
aggravated felony—only if ‘the “full range of conduct covered by [the state
statute] falls within the meaning” ’ of the generic offense.” (U.S. v. Alvarado-
Pineda (9th Cir. 2014) 774 F.3d 1198, 1202 (Alvarado-Pineda).)
Prior to 2011, the Ninth Circuit treated robbery under section 211 as a
crime of violence under 8 U.S.C. § 1101(a)(43)(F). (U.S. v. Martinez-
Hernandez (9th Cir. 2019) 932 F.3d 1198, 1203 (Martinez-Hernandez).) “But,
in 2011, the California Supreme Court clarified that [section] 211 can be
violated by the accidental use of force” (ibid., citing People v. Anderson (2011)
51 Cal.4th 989), and the Ninth Circuit subsequently held in 2015 that a
section 211 conviction is not categorically a violent felony as defined in the
Armed Career Criminal Act (18 U.S.C. § 924(e)(1)). (Martinez-Hernandez, at
p. 1203.) In 2019, Martinez-Hernandez confirmed that a section 211
conviction also is not categorically an aggravated a violent felony under the
INA. (Martinez-Hernandez, at p. 1203.)9
Martinez-Hernandez held, however, that a section 211 conviction is an
aggravated felony under 8 U.S.C. § 1101(a)(43)(G), “a theft offense . . . for
which the term of imprisonment at [is] least one year.” (Martinez-Hernandez,
supra, 932 F.3d at pp. 1206-1207.) The court noted that the Ninth Circuit
had “not addressed in a published opinion whether [section] 211 robbery is
categorically a generic theft offense under 8 U.S.C. § 1101(a)(43(G)” but, in
2014, had “held that a virtually identical Washington statute . . . was a
categorical theft offense.” (Martinez-Hernandez, at p. 1206, citing Alvarado-
Pineda, supra, 774 F.3d at p. 1202.)
9 The definition of “violent felony” used in the INA is “materially
indistinguishable” from the definition used in the Armed Career Criminal
Act. (Martinez-Hernandez, supra, 932 F.3d at p. 1203; 8 U.S.C.
§ 1101(a)(43)(F); 18 U.S.C. § 16(a); 18 U.S.C. § 924(e)(2)(B)(i).)
13
III.
Analysis
A. Rubio-Baez Failed to Demonstrate an Error Prejudicing His
Ability to Understand the Immigration Consequences of His
Plea.
Rubio-Baez maintains that when he entered his plea of no contest to
robbery in 2013, he was not aware this offense was an aggravated felony for
purposes of federal immigration law, conviction of which would make him
inadmissible to the United States for life and preclude relief from removal.
He urges that he made a mistake in believing he would not have immigration
consequences because he had a U visa, and therefore did not “meaningfully
understand, defend against, or knowingly accept the actual or potential
adverse immigration consequences of the plea.”
As Rubio-Baez emphasizes, “[p]rejudicial error” for purposes of
section 1473.7 may result from “the moving party’s own mistake of law or
inability to understand the potential adverse immigration consequences of
the plea.” (People v. Jung (2020) 59 Cal.App.5th 842, 856, disapproved on
other grounds in Vivar, supra, 11 Cal.5th at p. 526, fn. 4; Rodriguez, supra,
68 Cal.App.5th at p. 321; People v. Mejia (2019) 36 Cal.App.5th 859, 871
(Mejia); People v. Camacho (2019) 32 Cal.App.5th 998, 1009 (Camacho).)
But, as earlier noted, it is not enough for the moving party to simply assert
he or she did not fully understand the consequences of a plea; the assertions
must be corroborated with “ ‘ “objective evidence.” ’ ” (Vivar, supra,
11 Cal.5th at p. 530.)
Here, Rubio-Baez stated in his declaration and testimony that at the
time of his plea he understood it “would not have any serious immigration
consequences,” did not understand the conviction “could become [a]
removable offense many years after [the] plea because of the complexities of
14
immigration law,” and would not have accepted the plea bargain if he had
known the conviction could result in “certain removal and denial of benefits
and relief.” He testified that when he told his public defender about his
immigration status, the attorney responded that “this is the deal that I got
for you”; he was never offered the opportunity to speak with an immigration
attorney; and the public defender did not “have the whole knowledge of this.”
In denying the motion, the trial court stressed that the plea form and
the oral advisement from the court at the plea hearing both informed Rubio-
Baez that the consequences of the plea “will” be deportation, exclusion from
admission to the United States, or denial of naturalization, not just that
these consequences might result. Given this language and the fact that
Rubio-Baez was pleading to a “very serious offense,” the trial court found it
was not necessary for him to have been told the immigration consequences
would be “permanent.” As we have said, the trial court found no
corroboration for Rubio-Baez’s statements, concluding “the only thing
really . . . contrary to the plea form and the transcript [of the plea hearing]
[is] his declaration from many, many years later.”
Rubio-Baez argues that his inability to understand that a robbery
conviction qualifies as a theft offense, and therefore an aggravated felony,
under federal immigration law was corroborated by “contemporaneous
objective facts” (Vivar, supra, 11 Cal.4th at p. 530) in that federal courts, at
the time of his plea in 2013, had not held in a published opinion that robbery
under section 211 is categorically an aggravated felony theft offense under
the INA. This point was only clarified, he asserts, by the federal Board of
Immigration Appeal in 2016 (Matter of Ibarra (BIA 2016) 26 I&N Dec. 809,
810) and by the Ninth Circuit in 2019 (Martinez-Hernandez, supra, 932 F.3d
1198, 1205).
15
The fact that the Ninth Circuit had not issued a published opinion
holding robbery under section 211 to be an aggravated felony as a theft
offense under 8 U.S.C. section 1101(a)(43)(G) does not necessarily indicate
the issue was as complicated as Rubio-Baez portrays it. Rubio-Baez does not
suggest that, prior to the decisions he cites, the Ninth Circuit held robbery
under section 211 was not an aggravated felony as a “theft offense”; it had
been treated as a “crime of violence” aggravated felony. The alternate basis
for concluding robbery is an aggravated felony became significant, we
presume, only after the Ninth Circuit, in response to the California Supreme
Court’s clarification of California law in 2011, stopped treating section 211
robbery as a crime of violence. (Martinez-Hernandez, supra, 932 F.3d at
p. 1203.)
Although Martinez-Hernandez was not decided until 2019, there would
have been no reason for anyone with knowledge of immigration law,
considering the question in 2013, to expect federal courts would not treat a
conviction under section 211 as a “theft offense” aggravated felony.10 It had
long been established that federal courts determine whether a state
conviction is an “aggravated felony” under federal law by use of the
categorical approach, comparing the statutory definition of the state crime
with the generic federal definition of the corresponding federal offense.
(Gonzales v. Duenas-Alvarez (2007) 549 U.S. 183, 185-186; Huerta-Guevara v.
10 The People point to the Martinez-Hernandez court’s discussion of
Alvarado-Pineda, in which the Ninth Circuit held that a Washington statute
“virtually identical” to section 211 “was a categorical theft offense.”
(Martinez-Hernandez, supra, 932 F.3d at p. 1206, citing Alvarado-Pineda,
supra, 774 F.3d at pp. 1202-1203.) Alvarado-Pineda, while predating
Martinez-Hernandez by several years, was still decided several years after
Rubio-Baez’s plea.
16
Ashcroft (9th Cir. 2003) 321 F.3d 883, 886-887; Taylor v. U.S. (1990) 495 U.S.
575, 602.) The federal definition of a “generic” theft offense relied upon in
Martinez-Hernandez and Alvarado-Pineda had been established well before
Rubio-Baez entered his plea. (E.g., Mandujano-Real v. Mukasey (9th Cir.
2008) 526 F.3d 585, 589-590; U.S. v. Corona–Sanchez (9th Cir. 2002) 291 F.3d
1201, 1205 (en banc), superseded by statute on other grounds; Gonzales v.
Duenas-Alvarez, at p. 189 [noting generic definition of theft adopted by Ninth
Circuit also adopted by “other Circuits and the BIA”].) The federal definition,
as we have said, is “ ‘a taking of property or an exercise of control over
property without consent with the criminal intent to deprive the owner of the
rights and benefits of ownership.’ ” (Martinez-Hernandez, at p. 1205, quoting
Alvarado-Pineda, supra, 774 F.3d at p. 1202.) Section 211 defines robbery as
the “felonious taking of personal property in the possession of another, from
his person or immediate presence, and against his will, accomplished by
means of force or fear”; “ ‘felonious taking’ ” means “a taking accomplished
with felonious intent, that is, the intent to steal.” (People v. Tufunga (1999)
21 Cal.4th 935, 938-939.) As Alvarado-Pineda and Martinez-Hernandez
demonstrate, a straightforward comparison of the elements of the state and
federal offenses shows “the ‘full range of conduct’ criminalized by
[section 211] falls within the meaning of generic theft in that both require (1)
the taking of (2) personal property (3) without consent and (4) with the
specific intent to steal” (Alvarado-Pineda, supra, 774 F.3d at p. 1203),
making the state offense categorically a federal generic theft offense.11
11 At least one unpublished Ninth Circuit case had treated robbery
under section 211 as an “aggravated felony theft offense,” albeit without
discussion. (Castillo-Interiano v. Holder (9th Cir. 2012) 474 Fed.Appx. 691.)
Unpublished Ninth Circuit decisions issued after January 1, 2007, are citable
17
In our view, the absence of an on-point published decision from the
Ninth Circuit does not demonstrate a likelihood that Rubio-Baez would not
have been advised his robbery conviction would be an aggravated felony for
purposes of the INA. At the very least, it should have been clear even before
Martinez-Hernandez that there was reason to anticipate robbery would be
considered an aggravated felony under 8 U.S.C. section 1101(a)(43)(G).12 The
to courts within the circuit for persuasive value. (U.S. Cir.Ct. Rules (9th
Cir.), rule 36-3; Fed. Rules App.Proc., rule 32.1 and Advisory Com. Notes to
subd. (a) [citation for persuasive value].)
12 As the People suggest, Rubio-Baez might also be deportable under
8 U.S.C. section 1227(a)(2)(A)(i), for commission of a crime involving moral
turpitude for which a term of at least one year was imposed. Robbery under
section 211 is a crime of moral turpitude for this purpose. (Mendoza v.
Holder (1990) 623 F.3d 1299, 1303-1304.)
Whether 8 U.S.C. section 1227(a)(2)(A)(i) applies to Rubio-Baez’s 2013
offense appears to depend on what date he is determined to have lawfully
entered the United States. The moral turpitude provision makes deportable
“[a]ny alien who . . . is convicted of a crime involving moral turpitude
committed within five years (or 10 years in the case of an alien provided
lawful permanent resident status under section 1255(j) of this title) after the
date of admission . . . .” (8 U.S.C. § 1227(a)(2)(A)(i), italics added.) The INA
defines “admission” and “admitted” as “the lawful entry of the alien into the
United States after inspection and authorization by an immigration officer.”
(8 U.S.C. § 1101(a)(13)(A).)
Rubio-Baez testified that he came to this country with his parents in
2003 but did not say whether their entry was lawful. If it was, the 2013
robbery might not have qualified as a moral turpitude aggravated felony
because it would have been committed more than five years after Rubio-
Baez’s date of admission. But the probation report stated that Rubio-Baez
was undocumented when he entered, in which case the date of entry would
not be considered his date of admission. Rubio-Baez obtained temporary
legal status when he received his U visa in 2011; if issuance of the visa
establishes his date of admission, it would appear the 2013 robbery would be
considered an aggravated felony under 8 U.S.C. section 1227(a)(2)(A)(i).
18
state of the law therefore does not provide contemporaneous corroboration of
Rubio-Baez’s inability to understand this consequence of his plea.
Rubio-Baez, of course, asserts that his public defender did not explain
these immigration consequences to him. He maintains the trial court
rejected this assertion based on the facts that he signed the plea form saying
the plea “will” have immigration consequences and that the attorney who
represented him in 2013 did not submit an affidavit. As to the latter, Rubio-
Baez argues the trial court erred because “[a]n affidavit of counsel is not
required as long as there is some contemporary corroborating evidence”
(Rodriguez, supra, 68 Cal.App.5th at p. 322), which he believes there is in
this case.
In Rodriguez, although the public defender who represented the
defendant at the time of her plea in 2005 did not submit an affidavit, the
supervising attorney for the public defender’s office at the time declared that
he had maintained custody and control of the closed case files and there was
no indication in the extensive file notes written by the attorney who
represented the defendant that the attorney ever examined the immigration
consequences of the plea or advised the defendant about them. (Rodriguez,
supra, 68 Cal.App.5th at p. 317.) Moreover, the declarant stated that prior to
the 2010 decision in Padilla, supra, 559 U.S. 356, which held that an
attorney’s failure to advise a client of the potential immigration consequences
of pleading guilty to a criminal charge constitutes ineffective assistance of
counsel, “ ‘it was not the common practice of defense counsel to research or
The record is not sufficiently developed on this point for us to reach any
conclusion, nor should we attempt to do so when the issue was not raised in
the trial court.
19
advise clients regarding the specific immigration consequences of a particular
plea.’ ” (Rodriguez, at p. 317.)
Rubio-Baez did not present the trial court with any such corroborating
evidence. The trial court observed that there was no evidence from Rubio-
Baez’s attorney at the time of the plea to show what he did or failed to do, or
what his regular practice would have been, and that Rubio-Baez had a motive
to portray the conversation in his own favor. Regarding the statement in
Rubio-Baez’s declaration that his plea was based on the understanding he
“ ‘would not have any serious immigration consequences,’ ” the trial court
stated, “without knowing what [his attorney] did or at least what his
practices were if he couldn’t remember the case, the idea that . . . my attorney
said don’t worry about it, it just doesn’t ring true.” Although the court was
discussing his declaration, it also heard Rubio-Baez testify and its credibility
determination based on that testimony must be afforded “particular
deference.” (People v. Alatorre, supra, 70 Cal.App.5th at p. 755.) “An
appellate court may not simply second-guess factual findings that are based
on the trial court’s own observations.” (Vivar, supra, 11 Cal.5th at p. 527.)
As to the advisement, Rubio-Baez correctly observes that the fact a
section 1016.5 advisement was given is not conclusive proof the defendant
understood and accepted the immigration consequences of the plea. (People
v. Patterson (2017) 2 Cal.5th 885, 895-896 (Patterson).) Although he
recognizes that the advisement he received stated the immigration
consequences “will” result, rather than “may” result as stated in
section 1016.5, Rubio-Baez fails to sufficiently grapple with the significance
of this difference.
Several cases have held the more definitive advisement does not
necessarily preclude a defendant from establishing that he or she did not
20
understand the immigration consequences of a plea. (People v. Lopez (2021)
66 Cal.App.5th 561, 577 (Lopez); In re Hernandez (2019) 33 Cal.App.5th 530,
545 (Hernandez); Camacho, supra, 32 Cal.App.5th at p. 1011, fn. 8.) But that
is not to say the distinction between advisements stated in terms of “will”
rather than “may” is irrelevant.
Patterson made this point in explaining why the section 1016.5
advisement that a conviction “ ‘may’ ” have adverse immigration
consequences cannot be taken as providing notice that a given defendant
faces an “ ‘actual risk’ ” in the circumstances of his or her case. (Patterson,
supra, 2 Cal.5th at pp. 895-896.) “A defendant entering a guilty plea may be
aware that some criminal convictions may have immigration consequences as
a general matter, and yet be unaware that a conviction for a specific charged
offense will render the defendant subject to mandatory removal. . . . And for
many noncitizen defendants deciding whether to plead guilty, the ‘actual risk’
that the conviction will lead to deportation—as opposed to general awareness
that a criminal conviction ‘may’ have adverse immigration consequences—
will undoubtedly be a ‘material matter[]’ that may factor heavily in the
decision whether to plead guilty.” (Ibid.) Patterson explained that while it
may be sufficient to inform a defendant that a plea “may” have adverse
immigration consequences where the consequences are unclear or uncertain,
when federal law makes clear that a conviction will result in deportability,
counsel has the obligation to so advise the defendant and “[t]he generic
advisement under section 1016.5 is not designed, nor does it operate, as a
substitute for such advice.” (Id. at p. 898.)
Lopez and Hernandez relied on Patterson in holding that an advisement
stating adverse immigration consequences “will” result from a plea is “ ‘akin
to the “generic advisement” ’ ” required by section 1016.5 and therefore does
21
not substitute for advice of counsel in every case. (Lopez, supra,
66 Cal.App.5th at p. 577; Hernandez, supra, 33 Cal.App.5th at p. 545.) But,
as Lopez expressly acknowledged, the effect of the advisement “depend[s] on
the surrounding circumstances.” (Lopez, at p. 577.) Patterson explained that
a trial court “may take into consideration the defendant’s reaction to the
section 1016.5 advisement—for example, whether the defendant
acknowledged understanding the advisement and whether he or she
expressed concerns about possible deportation consequences or sought
additional time to consult with counsel. These considerations, along with any
others that bear on the defendant’s state of mind at the time of the plea, may
assist courts in evaluating a later claim that the defendant would not have
entered the plea had he or she understood the plea would render the
defendant deportable.” (Patterson, supra, 2 Cal.5th at p. 899.)
In Lopez and Hernandez, the circumstances dictated that the
immigration advisement not be taken as conclusive. In Lopez, according to
both the defendant and his attorney, review of the eight-page plea form took
no more than five minutes, and they did not discuss the immigration
paragraph; the attorney testified that he read the paragraph verbatim from
the form and did not explain or expand on it. (Lopez, supra, 66 Cal.App.5th
at p. 578.) In Hernandez, the attorney did not recall discussing whether the
conviction could affect the defendant’s immigration status, being aware of her
status or thinking she could be deported, and his declaration said nothing
about his custom or practice with regard to clients’ immigration status,
researching potential immigration consequences and advising clients about
such consequences before they entered guilty pleas. (Hernandez, supra,
33 Cal.App.5th at pp. 545-546.) Also, the trial court in Hernandez did not
22
refer to immigration consequences when it took the defendant’s plea. (Id. at
pp. 537-538.)13
On the other hand, the court in People v. Abdelsalam (2022)
73 Cal.App.5th 654, relied on the “mandatory” language of the immigration
advisement in rejecting a defendant’s claim that his attorney did not explain
the immigration consequences of his plea and he would not have accepted it if
he had been advised. Unlike the situations in Lopez and Hernandez,
Abdelsalam’s attorney told the court at the plea hearing that she had had
sufficient time to discuss immigration consequences with the defendant and
had explained them to him, contradicting the defendant’s claim that counsel
had not explained the consequences, and the defendant “presented no
independent evidence that he was told anything other than that he would be
deported.” (Abdelsalam, at pp. 660, 664.) The Abdelsalam court reasoned:
“During the taking of the plea, [the defendant] was told orally and in writing
that he will be deported. Not that he ‘might’ be deported, or that he ‘could’ be
13 In Camacho, supra, 32 Cal.App.5th 998, the court noted, “Although
in the trial court defendant was advised that his plea ‘will result’ (italics
added) in adverse immigration consequences, defendant presented sufficient
evidence of his lack of understanding such that the court’s advisement cannot
be taken as irrebuttable proof that defendant likely would have entered his
plea notwithstanding those consequences.” (Id. at p. 1011, fn. 8.)
Curiously, Rubio-Baez asserts that the advisement he was given was
“not as strongly worded” as the one in Camacho. The advisement in
Camacho stated, “If you are not a citizen of the United States your conviction
in this case will result in your being deported, excluded from the U.S., and
denied naturalization.” (Camacho, supra, 32 Cal.App.5th at p. 1002, fn. 2.)
Rubio-Baez’s plea form, as we have described, stated that the conviction “will
have the consequences of deportation, exclusion from admission to the United
States or a denial of naturalization,” and the oral advisement told him the
conviction “will have the consequence of deportation, exclusion from
admission to the United States and denial of naturalization.” We perceive no
meaningful difference between the advisements in this case and in Camacho.
23
deported. [The defendant’s] argument that he was not aware of the
mandatory nature of the deportation flies in the face of the mandatory
language used to describe the likelihood of deportation. [The defendant] is
not entitled to simply ignore the admonitions he was given about the
consequences of the plea and argue that he unilaterally assumed he would be
treated in direct contravention of what he was advised orally and in writing.”
(Id. at p. 663.)
The present case is more like Abdelsalam than like Lopez and
Hernandez with respect to the significance of the mandatory language in the
immigration advisement.14 On the plea form, the preprinted language of
paragraph 8 states: “I understand that if I am not a citizen, conviction of the
offense for which I have been charged will have the consequences of
deportation, exclusion from admission to the United States or a denial of
naturalization.” In addition to the bold printed text highlighting the form
language, the word “will” is underlined in handwriting, as are the words
“deportation” and “exclusion.” These notations not only support an inference
that the provision was discussed, consistent with Rubio-Baez’s
acknowledgement that he discussed his immigration status with his attorney,
but also suggest its essential terms were emphasized. At the hearing, the
14 Factually, Abdelsalam was quite different from the present case.
The defendant’s ties to the United States were the opposite of compelling: He
had only recently arrived, had been admitted on a fraudulently procured
fiancé visa and had been arrested for stalking, assaulting, burglarizing and
threatening the defrauded fiancée. (Abdelsalam, supra, 73 Cal.App.5th at
p. 658.) Regarding the defendant’s failure to present evidence that he had
reason to expect an immigration neutral disposition was possible, the
Abdelsalam court commented, “[a]ppellant has not explained why anyone
would reasonably have expected that ICE would forgo deportation
proceedings against someone who admitted in writing they were temporarily
getting married solely to obtain citizenship.” (Id. at p. 666.)
24
court asked Rubio-Baez if he understood that his conviction “will” have the
consequence of deportation, exclusion and denial of naturalization, and he
responded, “Yes.”15 Rubio-Baez gave no indication he had any questions
about the plea or its consequences. (Abdelsalam, supra, 73 Cal.App.5th at
p. 664 [“Nothing about appellant’s oral and written responses during the plea
process indicated he was confused about the multiple advisals that he would
be deported”].) The circumstances do not militate in favor of dismissing the
advisement as a generic warning contradicted by the evidence.
At the hearing on his motion to vacate, Rubio-Baez testified that his
attorney did not tell him these immigration consequences were mandatory
and permanent and did not advise him he could consult with an immigration
attorney. But he presented no evidence other than his own testimony
regarding what his attorney told him or failed to tell him, what his attorney’s
general practices were with respect to advising clients about immigration
issues or what his attorney did or did not understand about the immigration
consequences of a second degree robbery conviction. In light of the facts that
Rubio-Baez was told the plea “will”—not “may”—result in stated adverse
immigration consequences, and that robbery “is obviously a very serious
offense,” the trial court did not find credible Rubio-Baez’s uncorroborated
statements that he did not think the conviction would have serious
immigration consequences. As this determination was based on Rubio-Baez’s
15 Rubio-Baez urges that because the plea form he signed stated the
conviction will have the “consequence” (singular) of deportation, exclusion
“or” denial of naturalization (disjunctive), it could be read as meaning only
one of the three consequences would be implemented. In fact, the form uses
the plural “consequences.” The trial court asked Rubio-Baez if he understood
the plea would have the “consequence of deportation, exclusion from the
United States and denial of naturalization” (italics added), and he said he
did.
25
testimony at the hearing as well as on his written declaration, we must defer
to the trial court’s credibility determination.
B. Rubio-Baez Has Not Demonstrated Prejudice.
With respect to corroboration of his assertions that he would not have
entered his plea if he had properly understood the immigration consequences,
Rubio-Baez argues the trial court “gave short shrift to the evidence of his
lifelong residence in and connection to the United States and the presence of
his family here. As the trial court stated, Rubio-Baez’s statements on these
matters were vague. He declared that at the time of the plea, “I had family,
community ties, obligations, and opportunities in the United States, and I
would have faced extreme hardship if I was deported to my country.” He did
not further explain his ties to the United States. The record reflects that in
2013 he had been in this country for 10 years, from age 17 to 27. He had
graduated from high school in 2005, attended two years of junior college, and
worked in the financial services industry until he lost his job in
November 2012. According to the probation report, although he had come to
the United States with his parents, both parents had subsequently returned
to Mexico; Rubio-Baez told the police that part of his motivation for the
robbery was to obtain money to send to his mother in Mexico. He had never
been married and had no children. He was living alone at the time of his
arrest and planned to live with a cousin in San Jose upon release from
custody.
Rubio-Baez likens the “objective evidence . . . of details” about his
“strong personal ties” to the United States to those found to establish
contemporaneous corroboration in Vivar. To the contrary, comparison with
Vivar illustrates how little Rubio-Baez offered to corroborate his assertion
that, at the time of his plea, “[t]he right to remain in the United States was
26
more important to me than any potential jail sentence.” The defendant in
Vivar had been in the United States for 40 years, having been brought here
as a lawful resident at age six; his mother, wife, children and grandchildren
were all citizens; and at the time he was deported, his wife was undergoing
radiation treatment for a medical condition and his son, who was serving in
the United States Air Force, was about to be deployed to the Middle East.
(Vivar, supra, 11 Cal.5th at pp. 516-517, 530.) Moreover, there was evidence
of his state of mind at the time he entered his plea: His attorney’s
recollection and contemporaneous notes reflected Vivar’s concern with the
immigration consequences of his plea; a letter Vivar wrote to the court a
month after his plea described his connections to the United States and
pleaded to be allowed to stay; and a letter he wrote a few months later stated
that counsel had never advised him his plea would result in deportation and
he never would have entered the plea if he had been aware of this. (Id. at
pp. 530- 531.) Nothing like this contemporaneous evidence exists in the
present case.
Other cases similarly illustrate the point. In Mejia, for example, the
defendant had been in the United States for eight years, since age 14; his
wife and baby, his mother and six siblings were all here; and the only family
member remaining in Mexico, his father, had died just before the defendant
entered his plea. (Mejia, supra, 36 Cal.App.5th at p. 872.) The defendant in
Rodriguez had been in the United States since she was one year old; her
mother was a citizen, her father was a lawful resident pending
naturalization, and her sisters all lived here; and at the time of her plea, she
was in a committed relationship, had two children and was pregnant with
her third. (Rodriguez, supra, 68 Cal.App.5th at p. 316.) We do not mean to
suggest these cases set some sort of minimum ties to corroborate a later-
27
expressed statement about the significance the defendant attached to
remaining in the United States at the time of the plea. They do, however,
illustrate how little Rubio-Baez provided in this regard to corroborate his
statements in 2021 that staying in the United States was his paramount
concern when he entered his plea in 2013.
Other factors in the record also lead us to conclude Rubio-Baez failed to
demonstrate a reasonable probability that he would not have accepted the
plea bargain if he had been fully apprised of the immigration consequences.
While the trial court observed that it had no information about the strength
of the case against Rubio-Baez, the probation report in our record indicates
the case was extremely strong: Rubio-Baez was found near the bank just
after the robbery, in possession of the stolen money; was identified by the
bank employee from whom the money was taken; and admitted the robbery
to the police. His chances of avoiding conviction at trial were minimal and, in
addition to a potentially longer sentence, conviction after trial would have
carried the same immigration consequences.
The plea bargain offered Rubio-Baez a possibility of avoiding a
conviction that would be deemed an aggravated felony under federal law. As
earlier indicated, 8 U.S.C. section 1101(a)(43)(G) defines as an aggravated
felony a theft offense “for which the term of imprisonment [is] at least one
year.” This qualification refers “to the actual sentence imposed by the trial
judge.” (Alberto-Gonzalez v. I.N.S. (9th Cir. 2000) 215 F.3d 906, 910.) Rubio-
Baez’s plea bargain specified a maximum sentence of two years (the lower
term for second degree robbery (§ 213, subd. (a)(2)) but it did not require the
court to impose a prison term and did not specify the length of any jail term
imposed in granting probation. In fact, Rubio-Baez was granted probation
with a one-year jail term, but the court could have imposed a shorter jail
28
term and, if it had done so, Rubio-Baez’s offense would not have qualified as
an aggravated felony under 8 U.S.C. section 1101(a)(43)(G). Such a
possibility would have been far less likely if he had been convicted after trial.
The record also indicates Rubio-Baez would have had no reason to
expect to be able to negotiate a more advantageous plea bargain. In addition
to robbery, Rubio-Baez was charged with three other theft-related offenses—
burglary (§ 460, subd. (b)), theft of property exceeding $950 (§ 487, subd. (a)),
and possession of stolen property (§ 496, subd. (a))—as well as possession of
methamphetamine (Health & Saf. Code, § 11377, subd. (a)). Under Rubio-
Baez’s plea bargain, he obtained the benefit of having these four additional
charges dismissed, as well as two separate misdemeanor cases; limiting his
sentence exposure to two years; and having the court consider residential
treatment.16 Robbery—a strike offense (§§ 667.5, subd. (c)(9), 1192.7,
subd. (c)), as the plea agreement specified and required Rubio-Baez to
admit—was the most serious of the charges. Nothing in the record supports
the idea that the People would have agreed to a plea to one of the less serious
charges instead; the prosecutor at the motion hearing represented that due to
16 The record reflects that Rubio-Baez had become addicted to
methamphetamine in the approximately 18 months preceding his offense; the
probation report states he had applied to 20 treatment programs and, as of
the date the report was written, had been accepted at two; and the 2013
sentencing court made his jail sentence modifiable to residential treatment.
Rubio-Baez now argues the trial court disregarded his assertion that he
“entered the plea because he wanted to enter into [a] treatment program and
continue with his life,” but he did not mention this point in his declaration or
his testimony at the hearing on his motion to vacate.
29
office policy, because Rubio-Baez’s offense was robbery, it was “extremely
unlikely” her office would have offered a different plea.17
“A defendant without any viable defense . . . will rarely be able to show
prejudice from accepting a guilty plea that offers him a better resolution than
would be likely after trial” because the defendant “will be highly likely to lose
at trial” and therefore “highly likely” to accept a plea.” (Lee, supra, 137 S.Ct.
at p. 1966.) Such a defendant might rationally reject a plea offer if “the
respective consequences of a conviction after trial and by plea . . . are, from
the defendant’s perspective, similarly dire”; if avoiding deportation is the
critical factor and the plea will certainly lead to deportation, a trial that will
“[a]lmost certainly” have the same result may seem preferable. (Id. at
pp. 1966, 1968-1969.) The defendant in Lee, who pleaded guilty to an offense
subjecting him to mandatory deportation after his attorney erroneously
assured him he would not be deported if he entered the plea, demonstrated
prejudice through contemporaneous evidence substantiating his allegations
that deportation was “the determinative factor” for him and he “would have
rejected any plea leading to deportation—even if it shaved off prison time—in
favor of throwing a ‘Hail Mary’ at trial.” (Lee, supra, 137 S.Ct. at p. 1967.)18
17 The trial court suggested that because the other felonies Rubio-Baez
was charged with were “theft-related,” they would have left him “in the same
boat.” This appears to be true with respect to the charge of possessing stolen
property (§ 496), which the Ninth Circuit has held to be an aggravated felony
under 8 U.S.C. section 1101(a)(43)(G). (Verdugo-Gonzalez v. Holder
(9th Cir. 2009) 581 F.3d 1059, 1060.) Second degree burglary and grand theft
are not categorically federal generic theft or burglary offenses. (Descamps v.
U.S., supra, 570 U.S. at p. 277; Lopez-Valencia v. Lynch (9th Cir. 2015)
798 F.3d 863, 866 and fn. 1.)
18 The defendant in Lee sought to vacate his conviction on grounds of
ineffective assistance of counsel. (Lee, supra, 137 S.Ct. at pp. 1962-1963.)
His evidence showed he had been in the United States almost 30 years, had
30
Here, as trial court said, “the only thing . . . contrary to the plea form and the
transcript [is] his declaration from many, many years later.”
Rubio-Baez has not shown a reasonable probability that he would not
have entered his plea if he had understood it would make him subject to
mandatory deportation and permanent exclusion.19
DISPOSITION
The order denying Rubio-Baez’s section 1473.7 motion is affirmed.
established two businesses, and was the only family member in the United
States who could care for his elderly parents, who were naturalized citizens;
he had asked his attorney repeatedly whether there was a risk of deportation;
the attorney acknowledged he would have advised the defendant to go to trial
if he had known a guilty plea would lead to deportation; both the defendant
and the attorney testified that the defendant would have gone to trial if he
had known his plea would lead to deportation; and the plea colloquy reflected
the defendant’s concern with deportation. (Id. at pp. 1963, 1967-1969.)
19 Rubio-Baez’s opening brief includes an argument that his
unawareness of the immigration consequences of his plea supports vacating
the plea under section 1018. Under section 1018, “[a]t any time before
judgment, or within six months after an order granting probation if entry of
judgment is suspended, a trial court may permit a defendant to withdraw a
guilty plea for ‘good cause shown.’ (§ 1018.)” (Patterson, supra, 2 Cal.5th at
p. 894.)
Rubio-Baez does not explain how his claim of mistake and failure to
understand, insufficiently corroborated for purposes of section 1473.7, would
be sufficient for purposes of section 1018. His assertion that his ability to
meaningfully understand and accept the immigration consequences of his
plea “cannot be presumed based on a standard advisement that merely
described the possibility of removal as something that may happen as a
consequence of the plea” ignores the fact that he was advised the plea “will”
have these consequences.
In any event, Rubio-Baez made clear in the trial court that his motion
was not based on section 1018, telling the court, “this is not a [section] 1016.5
or a [section] 1018 motion.” We will not address this argument further.
31
STEWART, J.
We concur.
RICHMAN, Acting P.J.
VAN AKEN, J. *
People v. Rubio-Baez (A163056)
* Judge of the San Francisco Superior Court assigned by the Chief
Justice pursuant to article VI, section 6 of the California Constitution.
32 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488099/ | UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
NATIONAL ASSOCIATION OF :
MINORITY VETERANS, :
:
Plaintiff, : Civil Action No.: 21-1298 (RC)
:
v. : Re Document Nos.: 18, 21
:
UNITED STATES DEPARTMENT OF :
VETERANS AFFAIRS, :
:
Defendant. :
MEMORANDUM OPINION
DENYING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT; GRANTING IN PART AND
DENYING IN PART PLAINTIFF’S CROSS-MOTION FOR SUMMARY JUDGMENT; OVERRULING
PLAINTIFF’S EVIDENTIARY OBJECTIONS AS MOOT
I. INTRODUCTION
Plaintiff National Association of Minority Veterans (the “Association”) brings this action
under the Freedom of Information Act (“FOIA”), 5 U.S.C. § 552, against the United States
Department of Veterans Affairs (the “VA”). The Association, which represents the interests of
minority veterans, seeks to compel disclosure of records that it claims were unlawfully withheld
pertaining to the policies and practices of the VA Police Force (“VPD”) at Veterans Health
Administration (“VHA”) facilities. The VA’s motion for summary judgment and the
Association’s cross-motion for summary judgment are ripe for review. For the reasons stated
below, the Court denies the VA’s motion and grants in part and denies in part the Association’s
cross-motion. The Association also submitted a set of evidentiary objections to the affidavit
attached to the VA’s motion, which the Court overrules as moot.
II. FACTUAL BACKGROUND
The heart of the parties’ disagreement is over whether an email from the Association to
the VA specifying the particular records sought as part of discussions between the parties after
this suit was filed in fact constituted a second FOIA request, such that the VA’s production in
response to the email may not be challenged pursuant to the original FOIA request.
A. The Original Request
The Association filed the original FOIA request (the “Original Request”) on November
11, 2020. Compl. ¶ 7, ECF No. 1; Answer ¶ 7, ECF No. 7; Ex. A to Compl. (“Original
Request”). The Original Request had several subsections, each containing numerous separate
record requests. Original Request at 3. On December 23, 2020, the VA Office of Inspector
General (“OIG”) sent a letter to the Association stating that the VA received the Original
Request and assigned portions of it to OIG, which assigned it a tracking number. Ex. B to
Compl. at 1. The letter advised that “this project and all information gathered were legally
destroyed on 1/18/2019, since they have reached the end of their records retention period,” and
therefore that OIG “must provide a ‘no records’ found response.” Id.
On January 25, 2021, the Association appealed OIG’s response. Ex. C to Compl. The
appeal letter stated that the Association believed that OIG’s “‘no records’ found response was in
error,” and clarified the two parts of the Original Request to which it believed OIG would have
responsive records: (1) Part II.A.3, which sought
Any and all Records concerning the behavioral record flag policies and procedures
utilized by the VAPD and VHA staff including, but not limited to
...
VA and VHA definitions and applications of “disruptive behavior” . . . including but not
limited to definitions recommended by the Office of the Inspector General (OIG)
Management of Disruptive Patient Behavior at VA Medical Facilities (2013).6
2
6
See, e.g., Department of Veterans Affairs, Office of the Inspector General, Management
of Disruptive Patient Behavior at VA Medical Facilities (2013).;
and (2) Part II.D, which sought
Any and all Records concerning notice, discussion of, and compliance with Department
of Veterans Affairs Office of Inspector General guidelines and recommendations issued
between 2014 and 2020, including, but not limited to:
1. Implementation of recommended designated manager of the records management
systems for the VAPF;7 and
2. Findings of the working group established to evaluate whether the Report Exec system
meets the needs of VAPF, including strategies to implement this system or its
replacement;8 and
3. Development and implementation of a plan for resolving issues with the police
records management system.9
7
See, e.g., Department of Veterans Affairs, Office of the Inspector General, VA Police
Management System Needs Improvement (2020).
8
Id.
9
Id.
Id. at 1; Original Request at 3.
The appeal letter stated that, “[b]ased on [the VA’s] December 23 response, we
recognize that the information gathered for the 2013 report was legally destroyed” and therefore
that the Association “no longer seek[s] that data.” Ex. C to Compl. at 1. However, the appeal
letter continued, “[i]nstead, and consistent with our November 11 FOIA request, we would like
to see any data that examines behavioral record flag policies from relevant OIG reports
including” three specific reports—a January 30, 2018 report, a December 13, 2018 report, and a
June 17, 2020 report. 1 Id. The appeal letter explained that the Association’s “request in Part II
D was not limited to the 2013 report,” and accordingly that it believed that responsive “records
should exist.” Id. at 2.
1
The June 17, 2020 report is the same as that listed in footnote 7 of the original request.
3
Three days later, on January 28, 2021, OIG sent the Association a response letter denying
the appeal. Ex. D. to Compl. at 2. The response letter restated the Association’s request for
“Department of Veterans Affairs Office of Inspector General guidelines and recommendations
issued between 2014 and 2020,” and noted that the request specifically mentioned the 2013 and
2020 reports. Id. at 1. It repeated OIG’s finding that records related to the 2013 report were
legally destroyed, but made no mention of the other reports before concluding that “the search by
the FOIA staff was adequate and reasonable.” Id. at 2. The Association filed this action on May
11, 2021 asking the court to declare that the VA failed to comply with FOIA and order the VA to
produce responsive records. See Compl.
B. The Negotiated Request
It is the events that occurred after the Association initiated this suit that are centrally
relevant here. On August 8, 2021, the VA filed a status report with the Court stating that
“[s]ince the filing of the lawsuit, the parties have begun the process of negotiating over the scope
of Plaintiff’s FOIA Request” and that “[o]ver the next few weeks, Plaintiff and Defendant plan to
confer in good faith over the scope of Plaintiff’s FOIA Request and update the Court.”
Defendant’s Status Report at 2, ECF No. 8. On October 5, 2021, the parties filed a joint status
report explaining that, since the previous status report was filed, “the parties have continued the
process of negotiating over the scope of Plaintiff’s FOIA Request.” October 5, 2021 Joint Status
Report at 1, ECF No. 12. Most importantly for present purposes, it stated that
[o]n August 10, 2021, counsel for the parties had a lengthy meet and confer to discuss the
breadth of Plaintiff’s FOIA request and to ask Plaintiff to identify which OIG reports and
underlying data Plaintiff was interested in as a way of reaching an agreement regarding
the scope of Plaintiff’s FOIA request. Plaintiff provided Defendant, through counsel,
with guidance regarding three specific reports and the data from those three reports on
August 23, 2021.
Id. at 1–2.
4
It went on to explain that “[t]he responsive records identified within VA OIG have been
identified and reviewed and will be provided to Plaintiff’s counsel on October 6, 2021.” Id. at 2.
On December 6, 2021, the parties submitted another joint status report. It reiterated that “VA
OIG has identified responsive records within VA OIG” and updated the Court that “[o]n October
6, 2021, VA OIG completed the review and produced 95 redacted pages of records.” December
6, 2021 Joint Status Report at 1, ECF No. 13. It also stated that “[t]here are no other anticipated
productions of records from VA OIG,” but added that “the parties continue the process of
negotiating over the scope of Plaintiff’s FOIA Request” and “have scheduled a further meeting
for December 10, 2021 to discuss the scope of Plaintiff’s FOIA request and what potentially
responsive records are in the possession of VA OIG.” Id. at 2.
The parties’ next joint status report, on February 3, 2022, marked a breakdown in
cooperation between the parties and a shift in the VA’s position. The VA stated that “Defendant
takes the position” that the Association’s FOIA request does not reasonably describe the records
sought and, nonetheless, that OIG “conducted an adequate search for responsive records, which
is now complete and has turned up no responsive records.” February 3, 2022 Joint Status Report
at 1, ECF No. 15. Accordingly, it went on, “[t]he parties believe that dispositive motions
briefing is necessary.” Id. at 2.
III. LEGAL STANDARDS
FOIA “sets forth a policy of broad disclosure of Government documents in order ‘to
ensure an informed citizenry, vital to the functioning of a democratic society.’” FBI v.
Abramson, 456 U.S. 615, 621 (1982) (quoting NLRB v. Robbins Tire & Rubber Co., 437 U.S.
214, 242 (1978)). Accordingly, FOIA “mandates release of properly requested federal agency
records unless the materials fall squarely within one of nine statutory exemptions.” Property of
5
the People v. Office of Mgmt. and Budget, 330 F. Supp. 3d 373, 380 (D.D.C. 2018) (citing
Milner v. Dep’t of Navy, 562 U.S. 562, 565 (2011); Students Against Genocide v. Dep’t of State,
257 F.3d 828, 833 (D.C. Cir. 2001)). “Because disclosure rather than secrecy is the dominant
objective of the Act, the statutory exemptions are narrowly construed.” Elec. Privacy Info. Ctr.
v. U.S. Drug Enf’t Agency, 192 F. Supp. 3d 92, 101 (D.D.C. 2016) (cleaned up).
To prevail on a motion for summary judgment, a movant must show that “there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a matter of
law.” Fed. R. Civ. P. 56(a). “FOIA cases typically and appropriately are decided on motions for
summary judgment.” Def. of Wildlife v. U.S. Border Patrol, 623 F. Supp. 2d 83, 97 (D.D.C.
2009). “Unlike the review of other agency action that must be upheld if supported by
substantial evidence and not arbitrary or capricious, the FOIA expressly places the burden ‘on
the agency to sustain its action’ and directs the district courts to ‘determine the matter de novo.’”
U.S. Dep’t of Just. v. Reporters Comm. for Freedom of Press, 489 U.S. 749, 755 (1989) (citing 5
U.S.C. § 552(a)(4)(B)). To carry its burden, the agency must provide “a relatively detailed
justification, specifically identifying the reasons why a particular exemption is relevant and
correlating those claims with the particular part of the withheld document to which they apply.”
Elec. Privacy Info. Ctr., 192 F. Supp. 3d at 103 (citing Mead Data Central v. U.S. Dep’t of Air
Force, 566 F.2d 242, 251 (D.C. Cir. 1977)). “This burden does not shift even when the requester
files a cross-motion for summary judgment because the Government ultimately has the onus of
proving that the documents are exempt from disclosure, while the burden upon the requester is
merely to establish the absence of material factual issues before a summary disposition of the
case could permissibly occur.” Ctr. for Investigative Reporting v. U.S. Customs and Border
Protection, 436 F. Supp. 3d 90, 99 (D.D.C. 2019) (citing Pub. Citizen Health Research Grp. v.
6
FDA, 185 F.3d 898, 904–05 (D.C. Cir. 1999) (cleaned up)). “At all times courts must bear in
mind that FOIA mandates a ‘strong presumption in favor of disclosure.’” Nat’l Ass’n of Home
Builders v. Norton, 309 F.3d 26, 32 (D.C. Cir. 2002) (quoting U.S. Dep’t of State v. Ray, 502
U.S. 164, 173 (1991)).
IV. ANALYSIS
Recall that the parties’ October 5, 2021 joint status report stated that, on August 10, 2021,
the parties engaged in a “lengthy meet and confer to discuss the breadth of Plaintiff’s FOIA
request and to ask Plaintiff to identify which OIG reports and underlying data Plaintiff was
interested in as a way of reaching an agreement regarding the scope of Plaintiff’s FOIA request.”
October 5, 2021 Joint Status Report at 1. Afterward, “Plaintiff provided Defendant, through
counsel, with guidance regarding three specific reports and the data from those three reports on
August 23, 2021.” Id. at 1–2. The VA’s motion now characterizes the Association’s August 23
communication (the “August 23 Email”) as a “new FOIA request,” and accordingly addresses its
arguments solely to the Original Request. Def.’s Mot. for Summary Judgment (“Def.’s Mot.”) at
5, ECF No. 18-1. Specifically, the VA claims that it is entitled to summary judgment on the
Original Request based on overlapping arguments that the Association failed to reasonably
describe the records sought, that a search would be futile, and/or that the search conducted was
adequate. See App’x. to Def.’s Mot.
The Association’s cross-motion argues that the August 23 Email was not a new FOIA
request, but rather an attempt, invited by the VA and common in FOIA litigation, to narrow the
scope of the Original Request. Pl.’s Cross-Motion for Summary Judgment and Opposition to
Def.’s Mot. (“Pl.’s Mot.”) at 7, 9–10, ECF No. 21-1. Accordingly, the Association argues that
the VA’s focus on the Original Request is misplaced, and that it is entitled to summary judgment
7
because the VA has not met its burden to justify the withholdings and redactions applied to the
VA’s October 6, 2021 production in response to the August 23 Email. Id. at 11, 15.
A. The August 23 Email Was Not a New FOIA Request
The record makes unmistakably clear that the August 23 Email was part of an ongoing
negotiation about the scope of Original Request, not a new request. This is plain from a simple
rendition of the sequence of events:
May 11, 2021: The Association filed the complaint. See Compl.
August 4, 2021: Counsel for the VA emailed counsel for the Association asking “if you
have some time next week to discuss the FOIA request at issue.” Ex. B to Pl.’s Mot.,
ECF No. 21–4. It continued, “VA OIG had some concerns about the scope of the FOIA
request, and wanted to ask some questions and provide you and your client with some
information about what records it does and does not have to hopefully focus on agreed-
upon search.” Id.
August 10, 2021: The parties engaged in a “lengthy meet and confer to discuss the
breadth of Plaintiff’s FOIA request and to ask Plaintiff to identify which OIG reports and
underlying data Plaintiff was interested in as a way of reaching agreement on the scope of
Plaintiff’s FOIA request.” October 5, 2021 Joint Status Report at 1.
August 23, 2021: In response to the VA’s request during the August 10, 2021 meet and
confer, counsel for the Association emailed counsel for the VA “guidance regarding three
specific reports and the data from those three reports” that it sought. Id. at 1–2; see Ex. C
to Pl.’s Mot. (“August 23 Email”), ECF No. 21–4; Ex. A to Def.’s Reply in Support of
Def.’s Mot. and Opp’n to Pl’s Mot. (“Def.’s Reply and Opp’n”), ECF No. 23–2.
October 6, 2021: OIG produced documents responsive to the Association’s request as
modified by the August 23 Email. See October 5, 2021 Joint Status Report at 2 (“The
responsive records identified within VA OIG have been identified and reviewed and will
be provided to Plaintiff’s counsel on October 6, 2021”); December 6, 2021 Joint Status
Report at 1–2 (“As previously reported in the previous Joint Status Report, in light of the
parties’ continued efforts to negotiate over the scope of Plaintiff’s FOIA request and
based on guidance provided by Plaintiff’s counsel on August 23, 2021, VA OIG has
identified responsive records within VA OIG. On October 6, 2021, VA OIG completed
the review and produced 95 redacted records, consisting of redacted surveys of VHA
Chiefs of Police and VHA Medical Directors.”).
The VA’s conclusory assertion that the August 23 Email represented a new FOIA request is
overwhelmingly contradicted by the evidence that both parties understood, and twice submitted
8
to the Court, that the August 23 Email was solicited by the VA as part of an ongoing negotiation
to narrow the scope of the Original Request.
This is reinforced by the substance and form of the August 23 Email itself. With respect
to its substance, the August 23 Email from counsel for the Association to counsel for the VA
contains repeated references to the August 10 call and to the Original Request. It contains the
subject line “NAMVETS v. VA;” 2 it begins by saying “[t]hank you again for talking to me about
this case” and referring to colleagues who “recently entered appearances in this case;” it provides
background that “[y]ou asked, with regard to the OIG’s production, if my client could specify
which OIG reports it was interested in and which of the underlying data referenced in this [sic]
reports my client is interested in;” and it refers to “our call” before listing three reports and the
information sought regarding each. August 23 Email at 1. Notably, these are the same three
reports specified in the Association’s administrative appeal from the VA’s “no records” response
to the Original Request, one of which was also explicitly included in the Original Request itself.
See Ex. C to Compl. at 1; Original Request at 3, Part II.D & n.7.
With respect to its form, the August 23 Email did not conform to the requirements for
new requests under FOIA or the VA’s implementing regulations. Under FOIA, agencies must
publish procedures for submitting new FOIA requests, 5 U.S.C. § 552(a)(1)(C), and must
respond to requests “made in accordance with published rules,” id. § 552(a)(3)(A). The VA’s
regulations provide that “email FOIA requests must be sent to official VA FOIA mailboxes
established for the purpose of receiving FOIA requests” and that “[a]n email FOIA request that is
sent to an individual VA employee’s mailbox, or to any other entity, will not be considered a
perfected FOIA request.” 38 C.F.R. § 1.554(b). The regulations state that the agency must
2
“NAMVETS” is the Association’s chosen shorthand name.
9
respond to “a perfected request,” id. § 1.557(b), and that “[t]he requester must meet all of the
requirements of this section in order for the request to be perfected,” id. § 1.554(f). The
regulations also incorporate by reference an additional requirement, listed on the agency’s FOIA
website, that requesters must “[s]tate [their] willingness to pay applicable FOIA processing
fees.” Id. §§ 1.550(a), 1.552(a); see https://www.va.gov/FOIA/Requests.asp.
The August 23 Email did not conform to these requirements. It was directed only to the
Assistant United States Attorney assigned to this case at the time, not an “official VA FOIA
mailbox,” and contained no reference to the Association’s willingness to pay applicable fees.
See August 23 Email. The August 23 Email also stands in marked contrast to the Original
Request, which, among other formalities, was addressed to the FOIA Office for the Department
of Veterans Affairs and contained the subject line, “Request Under Freedom of Information
Act.” Original Request at 1. Courts routinely credit agencies’ defensive arguments that
imperfect requests are unenforceable for failure to exhaust administrative remedies. See, e.g.,
Calhoun v. Dep’t of Just., 693 F. Supp. 2d 89, 91 (D.D.C. 2010) (“Where a FOIA request is not
made in accordance with the published regulations, the FOIA claim is subject to dismissal for
failure to exhaust administrative remedies, as the failure to comply with an agency’s FOIA
regulations for filing a proper FOIA request is the equivalent of a failure to exhaust.” (cleaned
up)). It would equally disrespect administrative exhaustion’s function as a “core component of
orderly procedure and good administration” to effectuate an agency’s self-serving waiver of its
perfection requirements in order to label an email sent during ongoing negotiations as a new
FOIA request, and then turn around and claim that the requester failed to exhaust administrative
remedies by not appealing the agency’s response to the new request before coming to court.
Eddington v. USPS, 2020 WL 1079070 at *2 (D.D.C. March 6, 2020) (internal quotation marks
10
and citation omitted). The Court will not sanction the VA’s attempt to do as much here. See
Def.’s Reply and Opp’n at 5–6 n.2 (arguing that “the email did not modify the original FOIA
request, but was a new request entirely,” and therefore that granting the relief sought would
“enabl[e] plaintiffs to circumvent FOIA’s exhaustion of remedies requirement”).
The only sliver of evidence to suggest that the August 23 Email represented a new FOIA
request is the fact that the VA assigned it a separate tracking number. See 2d Gowins-Bellamy
Decl. ¶ 12, ECF No. 25–1. However, a tracking number is properly understood merely as an
internal mechanism to ensure orderly processing of the FOIA request. See 5 U.S.C. §
552(a)(7)(A) (providing simply that an “individualized tracking number” be assigned to “each
request that will take longer than ten days to process”). The VA claims that permitting a
requester to enforce an “alter[ed] and broaden[ed]” request that was assigned a new tracking
number “would create bad policy and incentives, enabling the plaintiffs to circumvent FOIA’s
exhaustion of remedies requirement.” Def.’s Reply and Opp’n at 5. In fact, as suggested above,
the inverse is true: to permit an agency to extinguish a requester’s ability to enforce a negotiated
request in court simply by assigning it a new tracking number would allow agencies to trap
requesters in a Sisyphean loop of inexhaustible administrative appeals. This would do nothing to
serve administrative exhaustion’s “primary purpose” to avoid the “premature interruption of the
administrative process,” nor ensure that the agency is not “hindered by the failure of the litigant
to allow [it] to make a factual record, or to exercise its discretion or apply its expertise.” McKart
v. United States, 395 U.S. 185, 193–94 (1969). It also would be inconsistent with FOIA’s
“strong presumption in favor of disclosure,” Dep’t of State v. Ray, 502 U.S. 164, 173 (1991), and
with “the balance between statutory duties and judicial enforcement” Congress struck by
providing for judicial review to enforce FOIA requests, Citizens for Resp. and Ethics in Wash. v.
11
U.S. Dep’t of Just. (“CREW”), 846 F.3d 1235, 1245 (D.C. Cir. 2017); see also Oglesby v. U.S.
Dep’t of Army, 920 F.2d 57, 61 (D.C. Cir. 1990) (“[C]ourts usually look at the purposes of
exhaustion and the particular administrative scheme in deciding whether they will hear a case or
return it to the agency for further processing.”).
Finally, it bears emphasis that the VA itself represented to the Court that the August 23
Email was a negotiated version of the Original Request both before and after the VA issued the
new tracking number. The parties’ October 5, 2021 joint status report described the “lengthy
meet and confer” on August 10, 2021 during which the VA “ask[ed] Plaintiff to identify which
OIG reports and underlying data [it] was interested in” and after which “Plaintiff provided
Defendant, through counsel, with guidance regarding three specific reports and the data from
those three reports on August 23, 2021.” October 5, 2021 Joint Status Report at 1–2. The next
day, on October 6, 2021, OIG issued the new tracking number. 2d Gowins-Bellamy Decl. ¶ 12.
Two months later, on December 6, 2021, the parties again submitted to the Court that “in light of
the parties’ continued efforts to negotiate over the scope of Plaintiff’s FOIA request and based
on guidance provided by Plaintiff’s counsel on August 23, 2021, VA OIG has identified
responsive records within VA OIG.” 3 December 6, 2021 Joint Status Report at 1.
Accordingly, the Court disagrees with the VA’s new position that the August 23 Email,
which the VA itself invited, represents a new FOIA request that “is not properly before this
3
It is perhaps no coincidence that the two declarations submitted by the VA from Ruthlee
Gowins-Bellamy, a Supervisory Government Information Specialist at OIG, contradict each
other. Compare 1st Gowins-Bellamy Decl. ¶ 35, ECF No. 18–3 (“On December 10, 2021, an
attorney from my office spoke with Plaintiff’s attorney . . . . Plaintiff’s attorney asserted that the
new FOIA request is not actually a separate request from the original request, but rather, ‘there is
only one FOIA.’”) with 2d Ruthlee Gowins-Bellamy Decl. ¶ 16 (“Our office never received
communication from any of Plaintiff’s counsel indicating an objection to our handling and
processing of [the August 23 Email] as a new and separate FOIA request . . . .”).
12
Court,” and agrees with its former position, shared at the time and still by the Association, that it
represents a negotiated version of the Original Request. Def.’s Reply and Opp’n at 6. Because
the VA’s position is “blatantly contradicted by the record,” this is not a “genuine” dispute for
purposes of summary judgment. See Scott v. Harris, 550 U.S. 372, 380 (2007).
B. The Negotiated Request Controls
The Association argues that the request as modified by the August 23 Email (the
“Negotiated Request”), not the Original Request, controls. See Pl.’s Mot. at 10–11. The VA
counters that a FOIA plaintiff may only enforce a modified request when it is narrower than the
original or when it is agreed to by the agency, and neither is the case here. Def.’s Reply and
Opp’n at 3.
The Association cites several cases decided by courts in this district for the proposition
that a FOIA request narrowed through negotiation controls for purposes of summary judgment.
See, e.g., Leopold v. ICE, 560 F. Supp. 3d 189 (D.D.C. 2021) (“Several decisions in this district
have recognized that ‘when a plaintiff narrows his FOIA request in a joint status report, it
supersedes any broader request set forth in the plaintiff’s complaint.’” (quoting Am. Ctr. for Law
& Justice v. DOJ, 325 F. Supp. 3d 162, 168 (D.D.C. 2018) and citing DeFraia v. CIA, 311 F.
Supp. 3d 42, 47 (D.D.C. 2018); Gilman v. DHS, 32 F. Supp. 3d 1, 22 (D.D.C. 2014); People for
the Am. Way Found. v. DOJ, 451 F. Supp. 2d 6, 12 (D.D.C. 2006)). Indeed, the text of FOIA
itself contemplates that requests will be modified. See 5 U.S.C. § 552(a)(6)(B)(ii) (requiring the
agency to give certain requesters the opportunity “to limit the scope of the request” and referring
to possible negative consequences if a requester refuses to “reasonably modify the request”);
DeFraia, 311 F. Supp. 3d at 47 (citing 5 U.S.C. §§ 522(a)(4)(A)(viii)(II)(bb), (a)(6)(B)(ii) for the
proposition that “it is the Joint Status Report, not [plaintiff’s] original request that controls”).
13
The VA argues that this caselaw does not apply because “the August 23, 2021 email was
not narrower than the original FOIA request.” Def.’s Reply and Opp’n at 3. The Court
disagrees. The relevant section of the Original Request sought “[a]ny and all Records
concerning notice, discussion of, and compliance with the Department of Veterans Affairs Office
of the Inspector General guidelines and recommendations issued between 2014 and 2020
including, but not limited to” three subcategories. Original Request at 3, Part II.D. As the VA
emphasized in its motion, it also defined Records broadly to include
all documentation or communications preserved in electronic or written form, including
but not limited to correspondence, documents, data, transcripts, video and audio
recordings, emails, faxes, files, guidance, guidelines, directives, evaluations, instructions,
analyses, memoranda, agreements, notes, orders, policies, procedures, protocols, reports,
rules, technical manuals, technical specifications, training manuals, studies, and other
similar information, dating back to the year 2012.
Id. at 2, Part I.A. The Negotiated Request clearly narrowed the universe of requested material by
confining it to subcategories of information related to three particular OIG reports. See August
23 Email. Moreover, the parties repeatedly expressed an understanding that the whole point of
the negotiation leading to the August 23 Email was to narrow the scope of the Original Request.
See, e,g., Ex. B to Strugar Decl., ECF No. 21–4 (showing the VA kicking off negotiations with
an email to the Association saying, “I would like to know if you have some time next week to
discuss the FOIA request at issue. VA OIG had some concerns about the scope of the FOIA
request, and wanted to ask some questions . . . to hopefully focus an agreed-upon search.”).
The VA also contends that a modified request only controls where it was mutually agreed
upon. The obvious weakness in this argument is that the VA did agree to the Negotiated
Request; indeed, it solicited it and produced documents responsive to it. See Ex. D to Strugar
Decl. (“Production Letter”), ECF No. 21–4. More broadly, while the VA cites three cases in
which the court held that a plaintiff could not escape an agreement with the agency to narrow its
14
request, Def.’s Reply and Opp’n at 4, it cites no cases for the proposition that an agency’s assent
is required where a plaintiff seeks to enforce a voluntarily narrowed request, likely because the
authority cuts the other way. See, e.g., People for the Am. Way Found., 451 F. Supp. 2d at 12
(“There is no authority . . . for the government’s suggestion that its consent is required in order to
effectuate a requester’s reduction of its own FOIA request.”).
Because the Court finds that the Negotiated Request controls, it denies the VA’s motion
for summary judgment based on alleged infirmities with the Original Request, and proceeds to
consider the Association’s challenge to the propriety of the VA’s redactions and withholdings
applied to its production in response to the Negotiated Request.
C. The VA Has Not Met Its Burden to Justify Any Nondisclosures
On October 6, 2021, the VA notified the Association that it identified 1,869 pages of
records and two Excel spreadsheets responsive to the Negotiated Request. See Production
Letter. The VA referred certain records to other VA components, “withheld the spreadsheets in
full,” and “released 95 pages of records with redactions” pursuant to FOIA Exemptions 3, 5, 6,
and 7(E). 4 1st Gowins-Bellamy Decl. ¶ 33; Pl.’s Counter-Statement of Material Facts ¶ 45, ECF
No. 21–2; Production Letter at 1–2.
4
FOIA Exemption 3 permits agencies to withhold information that is exempt from
disclosure by another statute. 5 U.S.C. § 552(b)(3). Here, the VA claimed Exemption 3 by
reference to 38 U.S.C. §§ 5701, 5705, and 7332, which exempt from disclosure patient medical
records and other VA medical records. Production Letter at 1. FOIA Exemption 5 exempts from
disclosure “inter-agency or intra-agency memorandums or letters that would not be available by
law to a party . . . in litigation with the agency.” 5 U.S.C. § 552(b)(5). FOIA Exemption 6
exempts from disclosure “files the disclosure of which would constitute a clearly unwarranted
invasion of personal privacy.” Id. § 552(b)(6). Finally, FOIA Exemption 7(E) exempts from
disclosure law enforcement records that “would disclose techniques and procedures for law
enforcement investigations or prosecutions, or would disclose guidelines for law enforcement
investigations or prosecutions if such disclosure could reasonably be expected to risk
circumvention of the law.” Id. § 552(b)(7)(E).
15
“The government bears the burden of justifying nondisclosure, either through
declarations or an index of information withheld,” commonly referred to as a Vaughn index.
Elec. Privacy Info. Ctr., 192 F. Supp. 3d at 101; see Vaughn v. Rosen, 484 F.2d 820, 827–28
(D.C. Cir. 1973); 5 U.S.C. § 552(a)(4)(B). The Court “may award summary judgment solely on
the basis of information provided by the department or agency in affidavits or declarations that
describe ‘the documents and justifications for nondisclosure with reasonably specific detail,
demonstrate that the information withheld logically falls within the claimed exemption, and are
not controverted by either contrary evidence in the record nor by evidence of agency bad faith.’”
Cause of Action v. FTC, 961 F. Supp. 2d 142, 153 (D.D.C. 2013) (quoting Military Audit Project
v. Casey, 656 F.2d 724, 738 (D.C. Cir. 1981)).
In its futile but single-minded effort to convince the Court that the August 23 Email was a
new FOIA request, the VA has declined to present any argument in the alternative as to why the
redactions and withholdings applied to the October 6, 2021 production were proper. Indeed, this
decision appears to be the product of some deliberation: with its opposition, the VA initially did
file a draft Vaughn index containing explanations for its redactions and withholdings—but then
retracted it. In its notice of errata, the VA explained that it “had intended to attach to these
filings” the Second Declaration of Ruthlee Gowins-Bellamy, but “mistakenly mislabeled the
Vaughn Index” and therefore “[i]nadvertently . . . instead attached a Vaughn Index that it had
prepared to submit with these filings, but ultimately decided not to use.” Def.’s Notice of Errata
at 1, ECF No. 25. And while the declarations of Ms. Gowins-Bellamy mention that the agency
redacted and withheld certain materials, they do not provide any justification for those actions,
16
let alone a justification supported with “reasonably specific detail.” 5 Cause of Action, 961 F.
Supp. 2d at 153.
The VA argues that it “is not required to raise the exemptions at this time,” citing Fed. R.
Civ. P. 56(a) for the proposition that a “party may move for summary judgment on a ‘defense’ or
‘part of a defense’ without seeking summary judgment as to all defenses.” Def.’s Reply and
Opp’n at 6 (cleaned up). Similarly, the VA cites LaCedra v. Executive Office for U.S. Attorneys,
317 F.3d 345 (D.C. Cir. 2003), for the proposition that “an agency’s choice not to raise an
exemption in its initial summary judgment motion does not preclude it from raising that
exemption later if it believes in good faith that the plaintiff did not request the redacted or
withheld records in the FOIA request at issue.” Def.’s Reply and Opp’n at 7. This misses the
point. The Court need not evaluate the dubious claim 6 that agencies have no obligation to
defend exemptions in initial summary judgment motions because, here, the VA clearly did have
an obligation to do so in response to the Association’s cross-motion challenging those
exemptions. 7
5
The exemptions claimed by the VA with respect to the October 6, 2021 production are
only known to the Court because the Association, not the VA, attached to its motion the
production letter that the VA sent the Association with the October 6, 2021 production. See
Production Letter. While that letter stated which exemptions the VA claimed, it did not attempt
to justify those exemptions or include any explanation as to why or to which specific redactions
they applied. Id. at 2.
6
It suffices to note that courts in this district have applied the D.C. Circuit’s “general
rule” that claims to exemption may not be raised for the first time on appeal absent a showing of
good cause to claims to exemption raised belatedly during the pendency of proceedings in the
district court. See, e.g., Shapiro v. U.S. Dep’t of Just., 177 F. Supp. 3d 467, 469–73 (D.D.C.
2016).
7
LaCedra is distinguishable along similar lines. In LaCedra, the D.C. Circuit reversed
the district court’s entry of summary judgment for the defendant agency but declined to adopt
petitioner’s request that the agency be barred from raising new exemptions on remand. LaCedra,
317 F.3d at 348. The VA says that this supports its contention that it need not justify its
withholding and redactions. Def.’s Reply and Opp’n at 7. But the only motion before the
district court in LaCedra was the agency’s motion for summary judgment, see Mem. Op.,
17
This misunderstanding is likely a product of the VA’s failure to recognize the applicable
standard of review. The VA argues that the Association’s cross-motion should be denied
because it “does not identify any facts showing—or even attempt to construct an argument
[sic]—the absence of a genuine issue of material fact as to whether VA properly invoked the
exemptions.” Def.’s Reply and Opp’n at 7. But under FOIA, the Court must determine de novo
whether nondisclosure was justified, and the burden is “on the agency to sustain its action.” 5
U.S.C. § 552(a)(4)(B). The explanation offered by the agency “should reveal as much detail as
possible as to the nature of the document, without actually disclosing information that deserves
protection.” Oglesby v. U.S. Dep’t of Army, 79 F.3d 1172, 1176 (D.C. Cir. 1996). Importantly,
as mentioned above, “[t]his burden does not shift even when the requester files a cross-motion
for summary judgment because the Government ultimately has the onus of proving that the
documents are exempt from disclosure, while the burden upon the requester is merely to
establish the absence of material factual issues before a summary disposition of the case could
permissibly occur.” Ctr. for Investigative Reporting, 436 F. Supp. 3d at 99 (citing Pub. Citizen
Health Research Group v. FDA, 185 F.3d 898, 904–05 (D.C. Cir. 1999) (cleaned up)). The VA
had the burden to justify its redactions and withholdings, and it failed to carry it.
D. Remedy
In passing FOIA, Congress struck a “carefully balanced scheme” evident in “[t]he
creation of both agency obligations and a mechanism for judicial enforcement in the same
legislation.” CREW, 846 F.3d at 1245 (citation omitted). Specifically, as relevant here, the same
paragraph in FOIA obligates the agency to justify nondisclosures and the court to review those
LaCedra v. Exec. Off. for U.S. Att’ys, No. 99-cv-0273 (D.D.C. Aug. 20, 2001), ECF No. 57,
unlike here where the Association has submitted a cross-motion for summary judgment that
explicitly challenges the agency’s withholdings and redactions.
18
nondisclosures de novo. 5 U.S.C. § 552(a)(4)(B). The Court’s ability to perform its duty thus
depends on the VA providing some basis for its review. See King v. Dep’t of Just., 830 F.2d
210, 218–219 (D.C. Cir. 1987) (explaining that a Vaughn index is intended to “permit adequate
adversary testing of the agency’s claimed right to an exemption, and enable the District Court to
make a rational decision whether the withheld material must be produced . . . as well as to
produce a record that will render [its] decision capable of meaningful review on appeal” (cleaned
up)); Tokar v. U.S. Dep’t of Just., 304 F. Supp. 3d 81, 89 (D.D.C. 2018) (“When an agency
invokes an exemption, it must submit affidavits that provide the kind of detailed, scrupulous
description of the withheld documents that enables a District Court judge to perform a de novo
review.” (cleaned up)). For this reason, “where an agency fails to meet its burden, FOIA
provides courts ‘a host of procedures’ to determine whether records should be turned over,
including discovery, further agency affidavits, and in camera review of the records in question.”
DBW Partners v. USPS, 2019 WL 5549623 at *10 (D.D.C. Oct. 28, 2019) (citing Allen v. CIA,
636 F.2d 1287, 1298 (D.C. Cir. 1980), abrogated on other grounds by Founding Church of
Scientology of Wash., D.C., Inc. v. Smith, 721 F.2d 828, 830–31 (D.C. Cir. 1983)).
Out of respect for FOIA’s “carefully balanced scheme,” and mindful of the important
third-party privacy interests protected by FOIA exemptions, see supra note 4, the Court will
deny the Association’s request to order the redacted and withheld records produced and instead
will afford the VA another opportunity to justify its nondisclosures. This is consistent with the
approach taken by other courts in this district. See, e.g., Shapiro v. United States Dep’t of Justice
(“Shapiro II”), 177 F. Supp. 3d 467, 469–73 (D.D.C. 2016) (exercising discretion to “permit the
FBI to assert untimely exemptions” as to certain records that “would cause harm cognizable
under a FOIA exemption or exclusion”); Cole v. Olthoff, 2021 WL 2555505 at *3 (D.D.C. June
19
22, 2021) (declining to deem forfeited “late assertion of FOIA exemptions during the pendency
of district court proceedings” (citation omitted)). However, lest this decision be interpreted as
anything approaching approval of the VA’s disingenuous strategy to single-mindedly focus on
the Original Request and refuse to engage substantively with the Association’s cross-motion, the
Court hastens to add that, while it will scrupulously adhere to its duty to accord agency affidavits
or declarations submitted to support claims to exemption “a presumption of good faith,”
Safecard Servs. v. SEC, 926 F.2d 1197, 1200 (D.C. Cir. 1991), it will evaluate any evidence to
overcome that presumption in light of the full record.
Along similar lines, and mindful of the D.C. Circuit’s preference against “serial summary
judgment motions after the government’s first loss,” Evans v. Fed. Bureau of Prisons, 951 F.3d
578, 587 (D.C. Cir. 2020), the Court emphasizes the VA’s obligation to submit comprehensive
explanations that satisfy its burden to “describe the justifications for nondisclosure with
reasonably specific detail, demonstrate that the information withheld logically falls within the
claimed exemption, and are not controverted by either contrary evidence in the record nor by
evidence of agency bad faith.” Larson v. Dep’t of State, 565 F.3d 857, 862 (D.C. Cir. 2009)
(quoting Miller v. Casey, 730 F.2d 773, 776 (D.C. Cir. 1984)). In addition, even where
exemptions apply, the VA must “take reasonable steps necessary to segregate and release
nonexempt information,” 5 U.S.C. § 552(a)(8)(A)(ii)(II), as the Court is required to “make
specific findings of segregability regarding the documents to be withheld,” Sussman v. U.S.
Marshals Serv., 494 F.3d 1106, 1116 (D.C. Cir. 2007) (citations omitted).
V. CONCLUSION
For the foregoing reasons, the VA’s motion for summary judgment is DENIED and the
Association’s cross-motion for summary judgment is GRANTED in part and DENIED in part.
20
The Association’s evidentiary objections are OVERRULED as moot. It is hereby ORDERED
that the VA shall file a Vaughn index or other adequate submission to justify the redactions and
withholdings applied to the October 6, 2021 production. It is FURTHER ORDERED that the
parties shall submit a proposed schedule for further proceedings within two weeks of the
issuance of this Opinion. An order consistent with this Memorandum Opinion is separately and
contemporaneously issued.
Dated: November 18, 2022 RUDOLPH CONTRERAS
United States District Judge
21 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488100/ | Filed 11/18/22
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FOUR
JPMORGAN CHASE BANK, N.A.,
Petitioner,
A164519
v.
THE SUPERIOR COURT OF THE (City & County of San Francisco
CITY AND COUNTY OF SAN Super. Ct. No. CGC1957914)
FRANCISCO,
Respondent;
STATE OF CALIFORNIA ex rel.
KEN ELDER,
Real Party in Interest.
U.S. BANK N.A.,
Petitioner, A164521
v.
(City & County of San Francisco
THE SUPERIOR COURT OF THE
Super. Ct. No. CGC19581373)
CITY AND COUNTY OF SAN
FRANCISCO,
Respondent;
STATE OF CALIFORNIA ex rel.
KEN ELDER,
Real Party in Interest.
A qui tam plaintiff alleges that two banks violated the California False
Claims Act (CFCA) by failing to report and deliver millions of dollars owing
on unclaimed cashier’s checks to the State of California as escheated
1
property. The two banks seek writ relief from the trial court’s order
overruling their demurrers to the plaintiff ’s complaints. We reject the banks’
argument that a qui tam plaintiff may not pursue a CFCA action predicated
on a failure to report and deliver escheated property unless the California
State Controller (Controller) first provides appropriate notice to the banks
under Code of Civil Procedure section 1576. We also conclude the plaintiff has
adequately alleged that the banks were obligated to report and deliver to
California the money owed on unredeemed cashier’s checks, and reject the
banks’ argument that allowing this action to proceed violates their due
process rights. We therefore will deny the banks’ writ petitions.
BACKGROUND
1. California’s Unclaimed Property Law
“Escheat” is the “vesting in the state of title to property the
whereabouts of whose owner is unknown or whose owner is unknown or
which a known owner has refused to accept, whether by judicial
determination or by operation of law, subject to the right of claimants to
appear and claim the escheated property or any portion thereof.” (Code Civ.
Proc., § 1300, subd. (c).)1 California’s Unclaimed Property Law (UPL)
regulates the escheatment of abandoned property to the State of California.
(§ 1500 et seq.) The general rule in California, codified in section 1510, is that
unclaimed intangible property escheats to California when the “last known
address” of the “apparent owner” is in California. (§ 1510, subds. (a), (b)(1).)
This rule is a codification of the federal priority rule for escheatment. (See
§ 1510, Legislative Committee com. (1968) [“Section 1510 describe[s] types of
All undesignated statutory references are to the Code of Civil
1
Procedure.
2
abandoned intangible property that this state may claim under the rules
stated in Texas v. New Jersey [(1965)] 379 U.S. 674.”].)
Section 1511 adds an additional requirement to this general rule,
stating: “Any sum payable on a money order, travelers check, or other similar
written instrument (other than a third-party bank check) on which a
business association is directly liable escheats to this state under this chapter
if the conditions for escheat stated in Section 1513 exist and if: [¶] (1) The
books and records of such business association show that such money order,
travelers check, or similar written instrument was purchased in this state.”
(§ 1511, subd. (a)(1).) “Section 1511 adopts the rules provided in federal
legislation which determines which state is entitled to escheat sums payable
on money orders, travelers checks, and similar written instruments.” (Law
Revision Com. com. (1975) § 1511.)
The UPL requires “[e]very person holding funds or other property
escheated to this state” to file an annual report with the Controller with “the
name, if known, and last known address, if any, of each person appearing
from the records of the holder to be the owner of any property of value of at
least twenty-five dollars ($25)” subject to escheatment in California. (§ 1530,
subds. (a), (b)(2), & (d).) The law also requires holders of escheated property
to deliver to the Controller all unclaimed funds listed in the reports, usually
in June of the following year. (§ 1532, subd. (a).)
The UPL vests the Controller with authority to examine the records of
a person “if the Controller has reason to believe that the person is a holder
who has failed to report property that should have been reported.” (§ 1571,
subd. (a).) The Controller may also bring an action “in a court of appropriate
jurisdiction” to “enforce the duty of any person under this chapter to permit
the examination of the records of such person,” to obtain “a judicial
3
determination that particular property is subject to escheat by this state,”
and to “enforce the delivery of any property to the State Controller as
required” under the UPL. (§ 1572, subd. (a).)
The UPL also contains a penalty provision stating that “[a]ny person
who willfully fails to render any report or perform other duties, including use
of the report format described in Section 1530, required under this chapter,
shall be punished by a fine of one hundred dollars ($100) for each day such
report is withheld or such duty is not performed, but not more than ten
thousand dollars ($10,000).” (§ 1576, subd. (a).) A person must also be fined
not less than $5,000 nor more than $50,000 for “willfully” refusing to pay or
deliver escheated property to the Controller. (§ 1576, subd. (b).) Under section
1576, “[n]o person shall be considered to have willfully failed to report, pay,
or deliver escheated property, or perform other duties unless he or she has
failed to respond within a reasonable time after notification by certified mail
by the Controller’s office of his or her failure to act.” (§ 1576, subd. (c).)
2. Elder’s CFCA action
The qui tam plaintiff in this action, Ken Elder, sued JPMorgan Chase
Bank, N.A. (JP Morgan) and U.S. Bank, N.A. (U.S. Bank) in two separate
actions under the CFCA. In both actions, the complaints allege that the
banks failed to deliver to the State of California millions of dollars owing on
unclaimed cashier’s checks that were purchased in California and subject to
escheatment in California as required by the UPL. The complaints further
allege that both banks submitted “knowingly false annual abandoned
property reports to the State of California . . . to conceal and perpetuate its
violations of the UPL.” The pleadings allege that the banks have, incorrectly,
taken the position that the unclaimed cashier’s checks were escheated by
Ohio, the banks’ state of domicile, which has escheat provisions that are more
4
bank-friendly than California.2 The complaints allege against both banks
three violations of the CFCA: (1) wrongful conversion of money used or to be
used by the State of California (Gov. Code, § 12651, subd. (a)(4)); (2) a
“reverse” false claim for knowingly concealing and avoiding their obligation to
deliver the money owed on the cashier’s checks to the State of California
(Gov. Code, § 12651, subd. (a)(7)); and (3) a second reverse false claim for
submitting false reports to the State of California relating to their obligation
to deliver the money owed on the cashier’s checks to California (ibid.).
JP Morgan and U.S. Bank each demurred, raising several (and in some
cases different) grounds for dismissal. Insofar as possible, we address their
arguments collectively. First, the banks argue that the complaints do not
allege that the Controller provided them notice under section 1576 advising
they were in violation of the UPL, which the banks contend is a prerequisite
for liability under both the UPL and the CFCA. The banks also argue that
the complaints do not allege they were obligated to report and deliver the
money owed on the cashier’s checks to California, so that there is no basis for
liability under the CFCA. Finally, the banks argue that enforcing California’s
UPL with regard to property that has been delivered to another state (Ohio)
as escheated property would deprive them of due process of law.
The trial court initially issued tentative rulings sustaining the banks’
demurrers. Citing State of California ex rel. Bowen v. Bank of America Corp.
(2005) 126 Cal.App.4th 225 (Bowen), the court explained that the complaints
2 According to Elder, Ohio does not require holders of unclaimed
property to deliver the full amounts owing on unclaimed property, but allows
the holders to pay 10 percent of the aggregate value of the unclaimed funds
they report owing. Ohio also exempts business-to-business transactions from
escheatment. And, with respect to cashier’s checks, Ohio has a five-year
waiting period before an uncashed cashier’s check is deemed abandoned, two
years longer than California’s waiting period.
5
fail because they do not allege the Controller provided notice of a potential
UPL violation, as required by section 1576, subdivision (c).
After the court issued its tentative ruling, the California Attorney
General requested the opportunity to appear at the demurrer hearing to
contest the ruling. At the hearing, the Attorney General argued that the
court’s ruling would have a “negative impact on cases beyond this.” The court
allowed the Attorney General to file a supplemental brief, and allowed the
banks to file responses.
After receiving the briefing, the trial court issued an order overruling
the banks’ demurrers. The court explained that Bowen’s reference to section
1576, subdivision (c), in a decision addressing the obligation to report
“reconveyance” fees as escheated property, was “nonbinding dictum” and
could be disregarded, as could the references made to Bowen in subsequent
appellate court cases. After analyzing the statutory schemes of the UPL and
CFCA, the court concluded that notice from the Controller is not a
prerequisite to the prosecution of an action under the CFCA. The court also
rejected the banks’ remaining arguments and overruled the demurrers in
their entirety.
JP Morgan and U.S. Bank each filed a petition for writ of mandate in
this court challenging the trial court’s order. We consolidated the two
petitions for briefing and oral argument and issued an order to show cause.
Elder filed a formal return, to which the banks each filed a reply. We also
requested and received an amicus curiae brief from the Attorney General,
and both banks filed a response to the amicus brief. We have also received an
amicus brief submitted jointly by the Chamber of Commerce of the United
States of America, the California Chamber of Commerce, and the California
Bankers Association.
6
DISCUSSION
3. Standard of Review and CFCA Actions
Appellate courts have “extreme reluctance” to review demurrer rulings
in writ proceedings (Babb v. Superior Court (1971) 3 Cal.3d 841, 851).
Nonetheless we do so in this matter because the petitions present
unaddressed issues of “significant legal impact” involving the interplay
between the CFCA and UPL. (Ibid.) In a writ proceeding, “ ‘ “the ordinary
standards of demurrer review still apply,” ’ under which we review de novo
an order overruling a demurrer.” (Sirott v. Superior Court (2022)
78 Cal.App.5th 371, 380.) We “accept[] as true all facts properly pleaded in
the complaint in order to determine whether the demurrer should be
overruled.” (Guardian North Bay, Inc. v. Superior Court (2001)
94 Cal.App.4th 963, 971.)
The CFCA is intended “to supplement governmental efforts to identify
and prosecute fraudulent claims made against state and local governmental
entities.” (Rothschild v. Tyco Internat. (US), Inc. (2000) 83 Cal.App.4th 488,
494.) The CFCA “permits the recovery of civil penalties and treble damages
from any person who ‘[k]nowingly presents or causes to be presented [to the
state or any political subdivision] . . . a false claim for payment or approval.’”
(Ibid., quoting Gov. Code, § 12651, subd. (a)(1).) False claims include
“possession, custody, or control of public property or money used or to be used
by the state or by any political subdivision and knowingly deliver[ing] or
caus[ing] to be delivered less than all of that property” (Gov. Code, § 12651,
subd. (a)(4)) and “knowingly and improperly avoid[ing], or decreas[ing] an
obligation to pay or transmit money or property to the state or to any political
subdivision.” (Gov. Code, § 12651, subd. (a)(7).) The CFCA also contains qui
tam provisions authorizing private relators to bring actions on behalf of the
7
State of California to seek redress for a CFCA violation. (Gov. Code, § 12652.)
“ ‘The driving force behind the false claims concept is the providing of
incentives for individual citizens to come forward with information uniquely
in their possession and to thus aid the Government in [ferreting] out fraud.’ ”
(State ex rel. Harris v. PricewaterhouseCoopers, LLP (2006) 39 Cal.4th 1220,
1231.) The CFCA “ ‘should be given the broadest possible construction’ ”
consistent with its purpose. (City of Pomona v. Superior Court (2001)
89 Cal.App.4th 793, 801.)
4. Controller Notice
The banks contend that their demurrers must be sustained because the
complaints do not allege that the Controller provided them with prior notice
that they were holding funds subject to escheat. They assert there can be no
liability under the CFCA for a failure to report or deliver escheated property
under the UPL unless the failure is punishable under section 1576 of the
UPL. As noted above, section 1576 imposes a penalty for “willfully” failing to
deliver or report escheated property to California, and a person acts
“willfully” only if “he or she has failed to respond within a reasonable time
after notification by certified mail by the Controller’s office of his or her
failure to act.” (§ 1576, subd. (c).)
The banks argue that the court in Bowen held that a plaintiff may not
allege a CFCA violation predicated on the failure to report or deliver
escheated property absent notice from the Controller under section 1576.
Alternatively, they contend that even if Bowen did not hold that Controller
notice is a prerequisite to a CFCA action, the same conclusion should be
reached independently. We disagree with both contentions.
In Bowen a qui tam plaintiff sued a group of banks under the CFCA
alleging that the banks failed to report as escheated property unearned and
8
unreturned reconveyance fees they were holding. The court there held only
that the reconveyance fees in question “were not subject to escheat” because,
during the time period in question, there was no “certain and liquidated”
obligation to report those fees as escheated property. (Bowen, supra, 126
Cal.App.4th at pp. 230, 239, 240–242.) The statutory provision requiring the
refund of unwarranted reconveyance fees (Civ. Code, § 2941, subd. (j)) had
not yet been enacted at the time the banks allegedly failed to report (Bowen,
supra, at p. 241), and the plaintiff did not allege “that any of the contracts
provided for the specific remedy of disgorgement of the reconveyance fees, or
that any judgment was entered to that effect.” (Id. at p. 230.)
The court in Bowen referenced the Controller notice requirement of
section 1576 at two points in its opinion. In the background section of the
opinion laying out the overall structure and mechanics of the statutory
scheme, the court quoted section 1576 when describing penalties for willful
failure to report under the UPL. (Bowen, supra, 126 Cal.App.4th at p. 235.)
The court also referred to section 1576 in the conclusion section of the opinion
when it observed: “In this case, plaintiff not only lacked standing to pursue a
breach of contract claim or a class action to recover the disputed
reconveyance fees, he sought to use the UPL as the hook for imposing reverse
false claims liability for violations that are not even punishable under the
UPL unless the violator is given notice and an opportunity to correct the
alleged violations. Despite the lack of any allegation that defendants received
such notice from the Controller, plaintiff contends defendants’ obligation to
refund the reconveyance fees was both liquidated and certain because
plaintiff is seeking only the disgorgement of the reconveyance fees. Plaintiff’s
waiver of other damages, however, fails to establish that an enforceable
9
obligation to refund the fees existed when the allegedly false reports were
filed.” (Id. at pp. 245–246, italics added.)
Focusing on the italicized language, the banks contend that Bowen
established that Controller notice is a prerequisite for alleging a CFCA cause
of action premised on a UPL violation. We disagree. The court’s reference to
violations that are “not even punishable under the UPL” absent notice and an
opportunity to correct was to penalties that are not at issue in this case, those
mentioned in the background section of the opinion. “An appellate decision is
not authority for everything said in the court’s opinion but only ‘for the points
actually involved and actually decided.’ ” (Santisas v. Goodin (1998) 17
Cal.4th 599, 620.) The court considered and decided only that the plaintiff
failed to allege an obligation for the banks to report reconveyance fees to the
Controller. It did not hold that there can be no such obligation without prior
notice from the Controller.
Bowen was cited in two subsequent appellate court cases, but neither of
those cases held that notice from the Controller is a prerequisite to a CFCA
action. In State of California ex rel. Grayson v. Pacific Bell Telephone Co.
(2006) 142 Cal.App.4th 741, the court held that the CFCA’s jurisdictional
“public disclosure bar” justified dismissal of a complaint alleging
telecommunication companies failed to deliver to California balances on
prepaid telephone cards. (Id. at pp. 744–754, 757.) While noting that Bowen
had referenced the Controller-notice provision of section 1576, the court
explained its decision did not depend on Controller notice: “We need not
consider the potential implications of a collision between the notice provisions
of the UPL and a reverse false claim action under the FCA because, in this
case, the jurisdictional bar contained in the FCA precludes plaintiff’s qui tam
complaint.” (Id. at p. 746.) In State of California ex rel. McCann v. Bank of
10
America, N.A. (2011) 191 Cal.App.4th 897, 914, the court affirmed dismissal
of a CFCA complaint alleging that “unidentified credits” accumulated from a
bank’s check clearing process were subject to escheat as unclaimed property.
(Id. at pp. 902–903.) As with Grayson, the court in McCann explicitly stated
its decision did not turn on section 1576: “The parties have not raised here,
and did not raise in the trial court, the significance, if any, of the failure of
the Controller to make any demand upon [Bank of America] under . . . section
1576, subdivision (c) for either reporting or delivery of the sums Appellants
contend are subject to escheat.” (Id. at p. 914, fn. 18.)
Prior notice from the Controller is not a prerequisite of liability under
the CFCA. Imposition of the penalties imposed by section 1576 for willful
violations do require prior notice, but the present complaints do not seek to
impose those penalties. The CFCA provisions allegedly violated by the banks
proscribe certain acts without reference to whether the banks’ conduct was
willful or punishable under section 1576. The complaints allege violations of
subdivision (a)(4) of section 12651 of the Government Code, which proscribes
the possession of property used or to be used by the government and
knowingly delivering less than all that property to the government. The
complaints also allege violations of subdivision (a)(7) of section 12651—the
“reverse false claim” provision—which prohibits false statements,
concealment, or improper avoidance of obligations to the state. None of these
provisions are dependent on prior notice from the Controller or on the
proscribed conduct being punishable under another predicate statute, such as
the UPL.
Likewise, the UPL contains no provision stating that the Controller
must provide notice that a person has failed to report or deliver escheated
property to the State before liability can be imposed for submitting a false
11
claim in violation of the CFCA. Contrary to the banks’ argument, notice is not
an “element” that “must be pled and proven in the CFCA case.” The notice
requirement of section 1576 is a prerequisite only for imposition of the
penalties provided in that statute for willful violations of the UPL.
The UPL itself contains numerous other remedial provisions
addressing the failure to comply with its reporting and delivery
requirements, none of which are conditioned on prior notice. The Controller
may without prior notice institute a civil action for an order to examine a
person’s records and compel delivery of property to the Controller. (§ 1572,
subds. (a)(1), (a)(3).) Violators of the reporting or delivery deadlines must pay
interest on the escheated property at 12 percent per annum, without having
received prior notice from the Controller of a violation. (§ 1577, subd. (a).)
And any business association that sells travelers checks, money orders, or
other similar written instruments and willfully fails to maintain a record of
those purchases is liable for a $500 civil penalty. (§ 1581, subd. (c).)
Moreover, the Attorney General is authorized to bring an action “for the
purpose of having it adjudged that title to real or personal property, to which
the State has become entitled by escheat, is vested in the State.” (Gov. Code,
§ 12541.) The Controller and Attorney General need not provide any advance
notice before bringing such actions. (Ibid.)
The Legislature previously made clear that liability under the CFCA
operates independently of the UPL’s enforcement provisions. In 1999, the
Legislature enacted a temporary amnesty program for delinquent holders
who did not deliver escheated property to the state by waiving the mandatory
interest owed on undelivered funds. (See § 1577.5, subd. (a).) The amnesty
statute contained a provision stating that “[n]othing in this section shall
preclude liability” under the CFCA. (§ 1577.5, subd. (f).) Although the
12
amnesty program expired in 2002, the provision addressing CFCA liability
indicates that the Legislature believed liability under the CFCA was not tied
to liability under the UPL, and that CFCA liability could attach when a
person failed to report or deliver unclaimed funds to the state.
The provisions of the CFCA that the present complaints allege the
banks violated require the false claims to have been made “knowingly.” (Gov.
Code, § 12651, subds. (a)(4), (a)(7).) Under the CFCA, “knowingly” means
that one “[h]as actual knowledge of the information,” “[a]cts in deliberate
ignorance of the truth or falsity of the information,” or “[a]cts in reckless
disregard of the truth or falsity of the information.” (Gov. Code, § 12650,
subd. (b)(3).) “The definition of ‘knowingly’ in the federal FCA is the same as
the definition in the CFCA, and, in adopting the federal FCA definition, ‘. . .
Congress attempted “to reach what has become known as the ‘ostrich’ type
situation where an individual has ‘buried his head in the sand’ and failed to
make simple inquiries which would alert him that false claims are being
submitted.” [Citation.] Congress adopted “the concept that individuals and
contractors receiving public funds have some duty to make a limited inquiry
so as to be reasonably certain they are entitled to the money they seek.” ’ ”
(San Francisco Unified School Dist. ex rel. Contreras v. First Student, Inc.
(2014) 224 Cal.App.4th 627, 646.) Under the more stringent willful standard
applicable to section 1576, which the banks seek to incorporate into the
CFCA provisions applicable here, a person would be immune from CFCA
liability even if knowingly misreporting or failing to deliver escheated
property to the state, so long as the Controller had not notified them of the
violation.
The banks seek support for their position in federal False Claims Act
cases that are predicated on a violation of the Anti-Kickback Statute (AKS).
13
As one district court explained, “To state an FCA claim based on an AKS
violation, a plaintiff must allege that the defendant acted with the requisite
scienter under the AKS: a ‘knowing[] and willful[]’ violation.” (United States
ex rel. Suarez v. AbbVie, Inc. (N.D. Ill. Sept. 30, 2019, No. 15 C 8928) 2019
U.S. Dist. Lexis 169090, at p. *42, citing 42 U.S.C. § 1320a–7b(b)(1), (2).)3 The
comparison to AKS cases hardly supports the inference that a willfulness
requirement should be read into the UPL provisions applicable here. Rather,
the comparison underscores the difference between statutory provisions that
do and do not add willfulness to the “knowingly” standard. Unlike the AKS,
willfulness is not an element of the CFCA provisions the banks are alleged to
have violated here.
Indeed, incorporating such an additional requirement would defeat the
very purpose of the CFCA provisions in question. As the trial court observed,
requiring Controller notice as a prerequisite to a CFCA action “would have
the perverse effect of rewarding defendants who deliberately defraud the
State. If a defendant knowingly submits false reports, and the Controller is
not otherwise made aware that it has understated or concealed its obligation
to deliver funds to the State, by definition the Controller could not provide
written notification to the defendant of its failure to comply. Such a result
would severely undermine the [C]FCA, the core purpose of which, like the
3
See also Gonzalez v. Fresenius Medical Care North America (5th Cir.
2012) 689 F.3d 470, 476 [relator did not demonstrate defendants violated
FCA by falsely certifying compliance with AKS because relator “did not
provide legally sufficient evidence that [defendants] knowingly and willfully
entered into an illegal kickback scheme”]; United States ex rel. Osheroff v.
Tenet Healthcare Corp. (S.D. Fla. July 12, 2012, No. 09-22253-CIV) 2012 U.S.
Dist. Lexis 96434, at p. *36 [“To the extent Relator can properly plead
violations of AKS . . . in its amended complaint together with Defendants’
certifications of compliance with AKS . . . , such allegations would suggest
knowledge of a false certification under the FCA.”].
14
federal FCA on which it was based, is ‘to encourage suits by individuals with
valuable knowledge of fraud unknown to the government.’ ”
The banks assert that “if the Controller is unaware of the potential
violation and learns of the conduct through a qui tam filing, the Controller
can make the necessary assessment and issue notice after the filing if she
agrees that a punishable UPL violation has occurred.” But if Controller notice
were a prerequisite to a CFCA cause of action, there would never be an
incentive for an individual to file a CFCA complaint. Should the plaintiff file
the action under seal before notice is given to the defendant, the defendant
could immediately cure the underpayment and avoid liability under both the
UPL and CFCA. If a plaintiff waited to file suit until after the Controller
provided notice, such an action would be subject to the jurisdictional bar of
actions based upon allegations or transactions that are the “subject of a civil
suit or an administrative civil money penalty proceeding in which the state or
political subdivision is already a party.” (Gov. Code, § 12652, subd. (d)(2); see
also Gately v. City of Port Hueneme (C.D.Cal. Oct. 2, 2017, No. CV 16-4096-
GW(JEMX)) 2017 U.S. Dist. Lexis 222662, at p. *28, fn. 10 [false claims
action barred because administrative civil money penalty proceeding began
with agency’s demand for repayment, “which came two months before
Plaintiffs first filed his complaint”].)
We therefore consider it very clear that prior notice of the violation
from the Controller is not a prerequisite of a CFCA action predicated on a
violation of the UPL.
5. Established Obligation
The banks argue that the complaints fail for a separate reason: failure
to allege that they were obligated to report and deliver to California money
15
owed on uncashed cashier’s checks. We disagree and conclude the complaints
adequately allege the banks were under such an obligation.
To state a false claim, the pleading must allege the violation of an
“obligation.” (Gov. Code, § 12651, subd. (a)(7) [a person makes a false claim if
he “[k]nowingly makes, uses, or causes to be made or used a false record or
statement material to an obligation to pay or transmit money or property to
the state or to any political subdivision, or knowingly conceals or knowingly
and improperly avoids, or decreases an obligation to pay or transmit money
or property to the state or to any political subdivision”], italics added.) The
CFCA defines an obligation as “an established duty, whether or not fixed,
arising from an express or implied contractual, grantor-grantee, or licensor-
licensee relationship, from a fee-based or similar relationship, from statute or
regulation, or from the retention of any overpayment.” (Gov. Code, § 12650,
subd. (b)(5).)
We must assess the sufficiency of the allegations in the two complaints
under the pleading requirements for a CFCA cause of action. “ ‘As in any
action sounding in fraud, the allegations of a [CFCA] complaint must be
pleaded with particularity.’ ” (State of California ex rel. McCann v. Bank of
America, N.A., supra, 191 Cal.App.4th at p. 906.) “Allegations of the
defendant’s knowledge and intent to deceive may use conclusive language,
however.” (City of Pomona v. Superior Court (2001) 89 Cal.App.4th 793, 803.)
“The specificity requirement serves two purposes. The first is notice to the
defendant, to ‘furnish the defendant with certain definite charges which can
be intelligently met.’ [Citations.] The pleading of fraud, however, is also the
last remaining habitat of the common law notion that a complaint should be
sufficiently specific that the court can weed out nonmeritorious actions on the
basis of the pleadings. Thus, the pleading should be sufficient ‘ “to enable the
16
court to determine whether, on the facts pleaded, there is any foundation,
prima facie at least, for the charge of fraud.” ’ ” (Committee on Children’s
Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216-217.)
The complaints allege the source of the banks’ obligation is
section 1511, the provision of the UPL stating that “[a]ny sum payable on a
money order, travelers check, or other similar written instrument (other than
a third-party bank check)” escheats to California if the instrument was
purchased in California. (§ 1511, subd. (a)(1).) Elder contends that the
cashier’s checks at issue are “similar written instrument[s]” to money orders
and travelers checks and, because they were purchased in California, the
uncashed checks escheated to California. The banks respond that there is no
established obligation for them to transmit unclaimed money owed on
cashier’s checks as escheated property in their place of purchase, as there is
no explicit statutory requirement or other authority stating that cashier’s
checks are similar to money orders and travelers checks.
The complaints allege that at least some of the cashier’s checks were
subject to escheat in California under the last-known-address rule in section
1510. The complaints allege that the banks “regularly issue[] cashier’s checks
to its account holders, many of whom purchase the cashier’s checks for
themselves,” and that “[a]s to such checks, including such checks purchased
in California, [the banks’] records contain the last known address of every
purchaser/payee owner.” The complaints also identify some cashier’s checks
with payees that certainly have their address in California, such as the State
Bar of California, the California Department of Motor Vehicles, and the
Medical Board of California. At least two federal district courts, including the
district court that presided over this matter before it was remanded to the
superior court, credited the same allegations in concluding the complaints do
17
not present federal questions. (See California ex rel. Elder v. J.P. Morgan
Chase Bank, N.A. (N.D.Cal. Mar. 31, 2021, No. 21-CV-00419-CRB) 2021 U.S.
Dist. Lexis 64374, at pp. *15–*16 [“[Elder] claims that Defendants have failed
to escheat cashier’s checks to the State of California even when the check’s
payee is also the purchaser and Defendants’ records show the
payee/purchaser to reside in California. . . . For this subset of checks, no
federal preemption defense is available.”]; Illinois ex rel. Elder v. U.S. Bank
N.A. (N.D. Ill. Oct. 22, 2021, No. 21 C 926) 2021U.S. Dist. Lexis 204052, at
p. *9 [citing allegation that U.S. Bank’s records “ ‘contain the last known
address of every purchaser/payee owner’ ” in deciding that a similar
complaint under Illinois law did not present a substantial federal question].)
We likewise credit the complaints’ allegations in concluding they adequately
allege a failure to report and deliver property based on the owner’s last
known address.
Moreover, cashier’s checks are sufficiently similar to money orders and
travelers checks to be considered, at least at the pleading stage, “similar
written instrument[s]” within the meaning of section 1511. Subdivision (a) of
section 1511 applies to other similar written instruments “on which a
business association is directly liable.” Under federal law, a cashier’s check is
an instrument on which a business association is directly liable. (See 12
U.S.C. § 4001(5) [cashier’s check is “a direct obligation” of a “depository
institution”].) And, while it may be, as the banks argue, that no case has
expressly held cashier’s checks are similar to money orders and travelers
checks, cashier’s checks share the same fundamental characteristics as
money orders and travelers checks. Like money orders and travelers checks,
cashier’s checks are issued upon receipt of payment with the obligation to
deliver that payment to the bearer upon presentation of the instrument; if
18
the instrument is never presented, the issuer retains funds that rightfully
belong to another. The California Uniform Commercial Code defines a
cashier’s check as “a draft with respect to which the drawer and drawee are
the same bank or branches of the same bank.” (Cal. U. Com. Code, § 3104,
subd. (g).) And a money order can be considered a type of check. (Cal. U. Com.
Code, § 3104, subd. (f) [“An instrument may be a check even though it is
described on its face by another term, such as ‘money order.’ ”].) The
comments in the Commercial Code confirm that money orders can be sold by
banks, and that the bank is the drawee of such a money order, just as they
are for cashier’s checks. (Cal. U. Com. Code, § 3104, coms., § 4.) Indeed, one
treatise on the Commercial Code, citing a case from Ohio, has observed
“ ‘Bank money orders . . . are essentially the same as cashier’s checks.’ ” (5A
Lawrence’s Anderson on the U. Com. Code (3d ed. 2021) § 3-104:36, p. 141.)
As above, Bowen does not support the banks’ arguments. The court in
Bowen concluded that the plaintiff had not alleged a definitive obligation to
report reconveyance fees as escheated property because he did not allege
“that any of the contracts provided for the specific remedy of disgorgement of
the reconveyance fees, or that any judgment was entered to that effect.”
(Bowen, supra, 126 Cal.App.4th at p. 230.) The Civil Code section requiring a
lender to refund a reconveyance fee if a release of obligation was previously
recorded was not enacted until after the time period in which the banks
allegedly failed to refund the reconveyance fees. (Id. at p. 243.) In contrast,
the present complaints identify a source of the obligation to report and
deliver the cashier’s checks—sections 1510 and 1511—under extant law when
the banks allegedly held the unclaimed funds. McCann is distinguishable for
the same reason. The plaintiff in McCann only identified an allegedly
fraudulent practice—the “failure to investigate unidentified credits and to
19
then credit them to presenting banks”—but did not allege the “existence of
any legal obligation for [the bank] to do otherwise, or to directly identify an
amount or account—a liquidated and certain obligation—due to any specified
presenting bank (in California or elsewhere) that would be subject to escheat
under the UPL.” (State of California ex rel. McCann v. Bank of America, N.A.,
supra, 191 Cal.App.4th at pp. 909–910.)
The banks argue that representations made on behalf of the State of
California in the so-called “Moneygram” case pending before the United
States Supreme Court4 demonstrate that it is unclear whether cashier’s
checks are similar to money orders and travelers checks, negating any
possibility of a knowing violation under the UPL. This argument was not
raised until the banks’ reply briefs, so may be disregarded. (See American
Indian Model Schools v. Oakland Unified School Dist. (2014) 227 Cal.App.4th
258, 275 [“We will not ordinarily consider issues raised for the first time in a
reply brief.”].) Even if considered, the argument does not necessarily negate
the allegation that the banks knew they were engaging in conduct proscribed
by the statute. At issue in the Moneygram case is whether “Moneygram
Official Checks” are “similar written instrument[s]” to money orders and
travelers checks under the Federal Disposition Act, 12 United States Code
section 2503. The banks cite a brief submitted on behalf of California and
approximately 30 other states, which asserts that whether the Federal
Disposition Act applies to numerous pre-paid instruments, including cashier’s
checks, is not at issue in the case “and need not be decided. Such a decision
would require a detailed analysis based on the specific characteristics of
those products and how they function in the marketplace.” This statement
4
(Delaware v. Arkansas (Nos. 22O145 & 22O146) motion for leave
granted Oct. 3, 2016, __ U.S. __ [__ S.Ct. __, __ L.Ed.2d 643 __].)
20
hardly acknowledges that cashier’s checks are not similar to money orders
and travelers checks; at most it underscores the inappropriateness of
resolving the issue at the pleading stage. In a “detailed analysis” following
discovery and the consideration of expert testimony, the banks may attempt
to prove that the cashier’s checks in question are not sufficiently similar to
money orders and travelers checks to fall within section 1511. But for
pleading purposes, the complaints adequately allege the existence of an
obligation as required under the CFCA.5
6. Due Process
The banks also argue that awarding the relief prayed for in these
complaints would violate their due process rights by subjecting them to a
“double escheat” because they would be obligated to report and deliver the
same unclaimed property in two states, California and Ohio. The banks rely
on Western Union Tel. Co. v. Pennsylvania (1961) 368 U.S. 71, in which the
Supreme Court held that Western Union was denied due process of law by an
escheat judgment in Pennsylvania because the judgment did not protect
5 We decline JP Morgan’s request for judicial notice of two briefs and a
special master’s report filed in the Moneygram case. We do, however, take
note of a recent interlocutory ruling in Illinois ex rel. Elder v. JPMorgan
Chase Bank, N.A. (N.D. Ill. Aug. 30, 2022, No. 21 C 85) ___ F.Supp. 3d ___
[2022 U.S. Dist. Lexis 155979], but consider its significance limited. There
the federal district court, relying on filings from the Moneygram case, granted
a motion to dismiss with leave to amend after concluding that the phrase
“other similar instrument” is ambiguous and that the complaint did not
adequately allege scienter in the absence of “allegations that authoritative
guidance cautioned defendant away from its interpretation that cashier’s
checks are not ‘similar instruments’ within the meaning of [the federal
statute].” (Id. at p.*19.) We do not agree that any such allegation is necessary
under California pleading requirements or that such “authoritative guidance”
is indispensable to prove that defendants knew that the uncashed cashier’s
checks were subject to escheatment in California.
21
Western Union from competing claims by other states to the same money.
(Id. at p. 76.) There was an “active controversy” because New York was
making a “particularly aggressive” claim to the same money subject to the
Pennsylvania escheat judgment. (Ibid.) Here, neither the complaints nor any
other judicially noticeable facts brought to our attention disclose that Ohio or
any other state has laid claim to, or obtained a judgment for, the money owed
on the cashier’s checks at issue here.6 Nor does Ohio’s unclaimed property
law, at least on its face, conflict with California’s UPL such that there is a
risk the two states are competing for the same funds. (See Ohio Rev. Code
Ann., § 169.02(F) [when no address of record for owner of cashier’s check,
address is presumed to be “where the instrument was certified or issued”];
Ohio Rev. Code Ann., § 169.04(A) [funds owing to owner whose last known
address is in another state are not unclaimed funds under Ohio unclaimed
property law].) Moreover, the complaints seek penalties under the CFCA,
which are not the same as the funds owed on those cashier’s checks.
Whatever facts may be disclosed at trial, the pleadings disclose no potential
due process violation.
DISPOSITION
The petitions for writ of mandate are denied. Elder shall recover his
costs in this proceeding. (Cal. Rules of Court, rule 8.493(a).)
6 We decline JP Morgan’s request for judicial notice of three complaints
Elder filed in other cases in Indiana, New Jersey, and Illinois, as those
complaints are not relevant to whether the banks are facing competing
claims from California and Ohio to the cashier’s checks at issue here. (See
Meridian Financial Services, Inc. v. Phan (2021) 67 Cal.App.5th 657, 700,
fn. 10 [“An appellate court ‘may decline to take judicial notice of matters not
relevant to dispositive issues on appeal.’ ”].)
22
POLLAK, P. J.
WE CONCUR:
STREETER, J.
BROWN, J.
23
Trial court: San Francisco County Superior Court
Trial judge: Honorable Ethan P. Schulman
Counsel for Petitioner JPMorgan MORGAN, LEWIS & BOCKIUS LLP
Chasebank, N.A.: Douglas W. Baruch
Jennifer M. Wollenberg
Neaha P. Raol
Thomas M. Peterson
Joseph E. Floren
Counsel for Petitioner U.S. Bank BUCKLEY LLP
National Association: James R. McGuire
Sarah N. Davis
Andrew W. Schilling (Pro Hac Vice)
Jackson Hagen (Pro Hac Vice)
Counsel for Respondent: No appearance
Counsel for Amicus Curiae, Attorney Rob Bonta
General, the State of California Attorney General Of California
Matthew Rodriquez
Chief Assistant Attorney General
Martin H. Goyette
Senior Assistant Attorney General
Jacqueline Dale
Supervising Deputy Attorney General
Brendan Ruddy
Deputy Attorney General
Counsel for Real Party in Interest SILVER GOLUB & TEITELL LLP
Ken Elder: David S. Golub
DENVER LAW GROUP
Michael P. Denver
GOLENBOCK EISEMAN ASSOR BELL &
PESKOE LLP
Michael S. Devorkin
24 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494385/ | PER CURIAM.
David W. Ostrander, Chapter 7 Trustee (the “Trustee”), appeals from a bankruptcy court order (the “Order”) denying his motion for summary judgment on his complaint seeking to avoid a lien on the residence of Daniel and Annelee Motta (the “Debtors”) held by Antonio and Phyllis Andre (the “Andres”), and granting summary judgment, sua sponte, in favor of the Andres. The bankruptcy court’s decision turned on its conclusion that a prior mortgage remained effective against a new note that was related to the prior debt. For the reasons set forth below, we AFFIRM.
JURISDICTION
A bankruptcy appellate panel may hear appeals from “final judgments, orders and decrees [pursuant to 28 U.S.C. § 158(a)(1) ] or with leave of the court, from interlocutory orders and decrees [pursuant to 28 U.S.C. § 158(a)(3) ].” Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998). An order granting summary judgment is a final order where no counts against any defendants remain. Bartel v. Walsh (In re Bartel), 404 B.R. 584, 589 (1st Cir. BAP 2009). Here, the Order is final because it resolved the one remaining count of the complaint.1 See id.
STANDARD OF REVIEW
We review the bankruptcy court’s findings of fact for clear error and conclusions of law de novo. See Lessard v. Wilton-*196Lyndeborough Coop. School Dist., 592 F.3d 267, 269 (1st Cir.2010). The Panel reviews a bankruptcy court’s grant of summary judgment de novo. Backlund v. Stanley-Snow (In re Stanley-Snow), 405 B.R. 11, 17 (1st Cir. BAP 2009).
DISCUSSION
1. The Pertinent Statutes
A. Rule 56(c)(2)2
Rule 56(c)(2) provides:
[Summary judgment] should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.
Fed.R.Civ.P. 56(c)(2).
B. The Massachusetts Obsolete Mortgages Statute
The Massachusetts Obsolete Mortgages Statute provides in relevant part:
A power of sale in any mortgage of real estate shall not be exercised and an entry shall not be made nor possession taken nor proceeding begun for foreclosure of any such mortgage after the expiration of, [ ... ] in the case of a mortgage in which the term or maturity date of the mortgage is stated, 5 years from the expiration of the term or from the maturity date, unless an extension of the mortgage, or an acknowledgment or affidavit that the mortgage is not satisfied, is recorded before the expiration of such period [...].
Mass. Gen. Laws ch. 260, § 33.
C. Bankruptcy Code § 544(a)(3)
Section 544(a)(3) provides:
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by — ...
(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
11 U.S.C. § 544(a)(3).
D. Bankruptcy Code § 551
Section 551 provides:
Any transfer avoided under section ... 544 ... of this title ... is preserved for the benefit of the estate but only with respect to property of the estate.
11 U.S.C. § 551.
II. Background
On October 30, 1997, the Debtors executed a note (the “1997 Note”) in favor of the Andres, and also granted the Andres a mortgage (the “1997 Mortgage”) on their residence. Among other things, the 1997 Note provided for a balloon payment in the *197amount of $28,881.33 due on October 30, 2007, as the final payment. The 1997 Mortgage recited the terms of the 1997 Note, including the ten-year term. The Andres duly recorded the 1997 Mortgage.
The Debtors were unable to make the balloon payment when it came due. On December 10, 2007, they executed a second note (the “2007 Note”) in the amount of $29,364.503 in favor of the Andres, and granted the Andres a mortgage (the “2007 Mortgage”). The 2007 Note reamortized the amount owing under the 1997 Note (i.e., the balloon payment) by extending the repayment period to just under three years, and also set a higher interest rate. The 2007 Mortgage recited the terms contained in the 2007 Note. The Andres did not record a discharge of the 1997 Mortgage or record the 2007 Mortgage, although the Trustee alleges that the Andres’ attorney instructed them to do so, and that Mr. Andre told the Debtors he would.
The Debtors filed a chapter 7 petition in 2008. Appending the 2007 Mortgage, the Andres filed a proof of claim asserting a secured claim in the amount of $20,754.60. The Trustee sought to avoid the 2007 Mortgage and preserve it for the benefit of the estate pursuant to §§ 544(a)(3) and 551. He also moved for summary judgment and the Andres objected. In denying the motion, the bankruptcy court concluded that the 2007 Mortgage could be avoided because it was unperfected, but that the Andres’ claim remained secured by the 1997 Mortgage. The bankruptcy court rejected the Trustee’s theory of no-vation, concluding that the Trustee had failed to prove that the Andres had intended to discharge the 1997 Mortgage.
In granting, sua sponte, summary judgment for the Andres, the bankruptcy court concluded that the Andres’ claim remained secured by the 1997 Mortgage. The court concluded that the Trustee’s status as a bona fide purchaser under § 544(a)(3) did not change the result, because the 1997 Mortgage was properly recorded and remained on record when the Debtors filed their petition, thus providing notice that the Property was encumbered. This appeal followed.
III. Analysis
A. Summary Judgment, Sua Sponte
Although such rulings are disfavored, there are circumstances in which a trial court may enter summary judgment, sua sponte. See Puerto Rico Elec. Power Authority v. Action Refund, 515 F.3d 57, 64 (1st Cir.2008); Rijos v. Banco Bilbao Vizcaya (In re Rijos), 263 B.R. 382, 391-92 (1st Cir. BAP 2001). Two conditions must be satisfied for entry of summary judgment sua sponte: (1) discovery “ ‘must be sufficiently advanced that the parties have enjoyed a reasonable opportunity to glean the material facts,’ ” and (2) the court must provide “‘the targeted party appropriate notice and a chance to present its evidence on the essential elements of the claim or defense.’ ” Puerto Rico Elec., 515 F.3d at 64-65 (quoting Sánchez v. Triple-S Mgmt. Corp., 492 F.3d 1, 7 (1st Cir.2007)); see also In re Rijos, 263 B.R. at 391-92.
Discovery is “sufficiently advanced” where the parties have completed discovery and filed pretrial memoranda. Puerto Rico Elec., 515 F.3d at 65. Discovery may even be sufficiently advanced before discovery has closed, depending on *198the circumstances of the case and the nature of the issue decided on summary judgment. Sánchez, 492 F.3d at 7-8; see also Aetna Cas. Sur. Co. v. P & B Autobody, 43 F.3d 1546, 1568 (1st Cir.1994) (noting that discovery that has been completed is more than “sufficiently advanced”). Here, the Trustee does not dispute the fact that discovery was sufficiently advanced.4
Notice is adequate when the target of the judgment has reason to believe the court might reach the issue, and has had “a fair opportunity to put its best foot forward” by presenting evidence on the essential elements of the claim. Vives v. Fajardo, 472 F.3d 19, 22 (1st Cir.2007); Jardines Bacata, Ltd. v. Diaz-Marquez, 878 F.2d 1555, 1561 (1st Cir.1989) (super-ceded by rule on other grounds). Any question on this point should be resolved in favor of the losing party. Jardines Bacata, 878 F.2d at 1561. Appellate courts take great care to ensure that the losing party had a fair opportunity to oppose entry of judgment against it. Id. (citing 10A C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure, § 2720 at 34 (1983)).
The Trustee argues that he was not provided the opportunity to introduce testimony by the Debtors and the Andres’ attorney in support of his position that the Debtors and the Andres intended to discharge the 1997 Mortgage. The Trustee, however, had adequate notice that the bankruptcy court could enter summary judgment against him on this issue. Because intent is one of the elements of novation, the Trustee had put the issue of intent squarely before the court when he moved for summary judgment. The bankruptcy court granted summary judgment in favor of the Andres under the very case law the Andres presented in their objection to the Trustee’s motion. Thus, the Trustee had every reason to believe that the bankruptcy court could-indeed, would-reach the issue of whether the Debtors and the Andres had intended to discharge the 1997 Mortgage, and he had a fair opportunity to put his best foot forward on that issue. See Vives, 472 F.3d at 22; Jardines Bacata, 878 F.2d at 1561.
B. The Andres’ Claim
A reviewing court should affirm a grant of summary judgment if it concludes that there is no genuine issue of material fact and the prevailing party is entitled to judgment as a matter of law. Braga v. Hodgson, 605 F.3d 58, 60 (1st Cir.2010). An issue is “genuine” if the evidence of record permits a rational fact finder to resolve it in favor of either party. Borges ex rel. S.M.B.W. v. Serrano-Isern, 605 F.3d 1, 4-5 (1st Cir.2010). A fact is “material” if it has the potential to change the outcome. Id. Although it is “unusual” to grant summary judgment on issues of intent, S.E.C. v. Ficken, 546 F.3d 45, 51 (1st Cir.2008), even in those cases, summary judgment may be appropriate if the non-moving party rests merely upon concluso-ry allegations, improbable inferences, and unsupported speculation. Meuser v. Federal Express Corp., 564 F.3d 507, 515 (1st Cir.2009).
Section 544(a)(3) vests the trustee with the powers of a bona fide purchaser of real property for value, and allows the trustee to invalidate unperfected security interests. 11 U.S.C. § 544(a)(3); Riley v. Sullivan (In re Sullivan), 387 B.R. 353, 357-58 (1st Cir. BAP 2008). Under § 551, *199an avoided lien, with respect to property of the estate, is preserved for the benefit of the estate. 11 U.S.C. § 551. Here, the status of the 2007 Mortgage is not at issue; it is unperfected, and therefore avoidable. See In re Sullivan, 387 B.R. at 357-58. The question is whether the Andres’ claim remained secured by the 1997 Mortgage at the time the Debtors filed their bankruptcy petition. At the bankruptcy court, the Trustee argued that it was not, because the 2007 Note and Mortgage created a novation, thus extinguishing the 1997 Mortgage.
As the bankruptcy court stated, novation exists where “ ‘there was an existing valid original obligation, [ ... ] an agreement of all parties to the new contract, the extinguishment of the old contract, and a valid new contract.’ ” Ostrander v. Andre (In re Motta), 423 B.R. 393, 400 (Bankr.D.Mass.2010) (quoting Larson v. Jeffrey-Nichols Motor Co., 279 Mass. 362, 181 N.E. 213, 214 (1932)). As the bankruptcy court noted, the only factor in dispute was whether the 1997 Note and Mortgage were extinguished. Id. The court explained that to determine this issue it had to consider whether the Debtors and the Andres had agreed and intended to discharge the obligations under the 1997 Note and Mortgage when they executed the 2007 Note and Mortgage. Id. The Trustee argued that they did so intend, as evidenced by: (1) Mr. Andres’ alleged testimony at the § 341 meeting; (2) the fact that the Debtors granted the Andres the 2007 Mortgage; and (3) the fact that the Andres attached the 2007 Note and Mortgage to their proof of claim. The bankruptcy court considered the Trustee’s position, analyzed the summary judgment record and Massachusetts state law, and correctly determined that the Trustee could not prevail as a matter of law. The bankruptcy court’s well-reasoned opinion amply supports its conclusion.
In denying the Trustee’s motion for summary judgment, the bankruptcy court concluded that:
The Trustee has not presented any direct evidence or testimony to contradict the Andres’ assertion that they did not intend the [2007 Note and Mortgage] to discharge the [1997 Mortgage] or the Debtors’ obligation to pay the amounts remaining unpaid on the [1997 Note], Although the Trustee alleges in the Complaint that the Debtors testified at the 341 Meeting that the Andres had indicated they would release the [1997 Mortgage] and record the [2007 Mortgage], the Trustee should have attached a transcript of that testimony to his Summary Judgment Motion or provided an affidavit from the Debtors to that effect. As further explained below, however, that omission is harmless, as the facts of this case otherwise establish that the [1997 Mortgage] was not discharged and was left unchanged by the execution of the [2007 Note].
The Trustee’s reliance on circumstantial evidence and the Andres’ conduct to impute an intended novation fares no better. First, the Trustee says that the Andres’ very execution of the [2007 Note and Mortgage] evidenced their intent to discharge the prior obligations and security interest represented by the [1997 Mortgage]. Although an intended novation may be found from circumstantial evidence and the conduct of parties to an agreement, see Johnston v. Holiday Inns, Inc., 565 F.2d 790, 796-97 (1st Cir.1977), “a finding of an intent to discharge the preexisting indebtedness should rest on a ‘clear and definite indication’ of such intent,” [Pagounis v. Pendleton, 52 Mass.App.Ct. 270, 753 N.E.2d 808, 811 (Mass.App.Ct.2001) *200(quoting Lipson v. Adelson, 17 Mass.App.Ct. 90, 456 N.E.2d 470, 472 (Mass.App.Ct.1983)) ]. The mere execution of the [2007 Note and Mortgage], even with the revised principal balance and increased interest rate, may have constituted a “clear and definite indication” of an intent to agree to different repayment terms than those contained in the [1997 Note], but not necessarily an intent to discharge the [1997 Mortgage]. [...]
Similarly, the Andres’ attachment of the [2007 Note and Mortgage] to the Proof of Claim does not necessarily support an inference that the Andres’ [sic] intended to discharge the [1997 Mortgage]. In his uncontroverted deposition testimony, Antonio stated that the Andres never intended the [2007 Note and Mortgage] to discharge or release the [1997 Mortgage]. And the Andres’ failure to record the [2007 Mortgage] supports Antonio’s deposition testimony that the Andres believed the [1997 Mortgage] remained a source of security for the debt (thus obviating the need to record the [2007 Mortgage]).
See id. at 400-401 (footnote omitted). The bankruptcy court concluded that the Trustee was not entitled to summary judgment, because he had not demonstrated “the Andres’ ‘clear and definite indication’ to discharge the [1997 Mortgage] required to support a finding of novation.” Id. at 401 (citation omitted).
After the bankruptcy court disposed of the Trustee’s argument, it went on to grant summary judgment in favor of the Andres. In doing so, the bankruptcy court explained that the Massachusetts Supreme Judicial Court has long ruled in favor of secured lenders under similar facts presented here. Id. More specifically, the court explained that:
Although, under Massachusetts law, the execution of a new note related to a debt is presumed to discharge the obligations under the original note, this presumption is rebutted where it is shown that the parties did not intend to discharge the original debt — usually a question of fact. But where the lender holds security for payment of the debt, the presumption of discharge is rebutted by the existence of that security interest, and only evidence of a contrary intent will result in a finding that the original security was discharged.
In 1862, the SJC articulated the legal principles underlying this line of cases:
The courts regard the interests of mortgagees with great liberality, for the purpose of effectually securing to them the performance of the contract which the mortgage was originally designed to secure; and they allow no change of form of the indebtedness to discharge the mortgage, where there has been no actual payment or release.... Such cases are based upon the fact that at no period of time has there been an actual extin-guishment of the indebtedness secured by the mortgage.
Joslyn v. Wyman, 87 Mass. 62, 62, 5 Allen 62 (1862); see also [Pomroy v. Rice, 33 Mass. 22, 24 (1834) ] (“[W]here a mortgage and note are given to secure the payment of a sum of money, the renewal of the note does not operate as a discharge of the mortgage.... Nothing but payment of the debt will discharge the mortgage.”); [Fin. Acceptance Corp. v. Garvey, 6 Mass.App.Ct. 610, 380 N.E.2d 1332, 1335 (Mass.App.Ct.1978) ] (citing Pomroy, 33 Mass, at 24).
These legal principles remain unchanged by subsequent Massachusetts case law, as noted in the relatively more recent cases cited by the Andres, Piea Realty *201Co. v. Papuzynski, 172 N.E.2d 841, 342 Mass. 240 (1961), and Financial Acceptance Corp. v. Garvey, 380 N.E.2d 1332, 6 Mass.App.Ct. 610 (1978). The Trustee argues that both cases are distinguishable. He is correct insofar as the factual circumstances are distinguishable, but the factual differences are ultimately immaterial to the relevant points of law articulated in those cases.
[•••]
Both cases [ ... ] reaffirm the central principles applicable to the case at hand. Since the Trustee has not presented the Court with evidence of an affirmative intent to release the Debtors’ obligations under the [1997 Mortgage], and since the original debt has not yet been paid, the [1997 Mortgage] remains as security for the Debtors’ continued obligation to the Andres.
Id. at 401-404 (footnotes omitted).
The Trustee argues that the 1997 Mortgage does not secure the 2007 Note, because the terms of the 1997 Mortgage did not include “dragnet” language establishing a security interest in future debt. We reject this argument. As discussed above, the 2007 Note merely reamortized the balloon payment owing under the 1997 Note. Indeed, the Trustee conceded at oral argument that there was no “new money,” and that the 2007 Note merely reamortized the 1997 Note. Thus, the 2007 Note was not “future debt,” but rather the very same obligation represented by the 1997 Note.
Moreover, the bankruptcy court correctly concluded that the Trustee’s status as a bona fide purchaser under § 544(a)(3) was of no significant consequence. The 1997 Mortgage had been duly recorded and remained on record when the Debtors filed their petition. See id. at 404. The bankruptcy court noted that the 1997 Mortgage provided adequate notice that the Andres held a mortgage on the Debtors’ property, because the 2007 Note:
included only the amount outstanding on the Debtors’ obligations under the [1997 Note], and the higher interest rate did not increase the secured debt to an amount greater than that stated in the [1997 Note]. Thus, no bona fide purchaser or junior lienholder would have been prejudiced by the parties’ execution of the [2007 Note] in order to allow an extension of time for the repayment of the outstanding debt.
Id. at 405.
The Trustee asserts that the 1997 Mortgage was not effective at the time the Debtors filed their bankruptcy petition, because it states that the final payment under the 1997 Mortgage was due on October 30, 2007, eleven months prior to the bankruptcy filing. Thus, according to the Trustee, the property appeared to be unencumbered on the petition date and there was no duty to investigate further. We reject this argument as well.
Although the 1997 Mortgage reflects a maturation date prior to the Debtors’ bankruptcy, it remains effective. Under the Massachusetts Obsolete Mortgages Statute, a mortgage that provides a maturity date remains in effect for five years after that date, unless a discharge is recorded. Mass. Gen. Laws ch. 260, § 33 (2010); see also LBM Fin., LLC v. 201 Forest Street, LLC (In re 201 Forest Street, LLC), 422 B.R. 888, 892 (1st Cir. BAP 2010). The plain meaning of the statute is clear. Shamus Holdings, LLC v. LBM Fin., LLC (In re Shamus Holdings, LLC), 409 B.R. 598, 603-604 (Bankr.D.Mass.2009). The 1997 Mortgage’s maturity date was October 30, 2007. The Andres did not discharge it. Therefore, the 1997 Mortgage remained effective on the *202date of bankruptcy. See Mass. Gen. Laws ch. 260, § 33.
CONCLUSION
In sum, the bankruptcy court correctly analyzed and applied the law. The 2007 Note merely reamortized the amount owing under the 1997 Note. The 1997 Mortgage was of record. Mr. Andre testified that the Andres and the Debtors did not intend to discharge it. The Trustee presented no evidence to the contrary. Thus, the Trustee failed to create a genuine issue of material fact. The bankruptcy court, therefore, did not err in granting summary judgment in favor of the Andres. We AFFIRM.
. The Trustee had also sought a determination that the Debtors' homestead exemption was subordinate to the Andres' mortgage. Because the Debtors defaulted, the bankruptcy court entered a default judgment against them. Thus, the Order disposed of the only remaining count.
. Rule 56 is made applicable to bankruptcy proceedings through Bankruptcy Rule 7056. Unless otherwise indicated, the terms “Bankruptcy Code," "section" and "§ " refer to Title 11 of the United States Code, 11 U.S.C. §§ 101, ef seq., as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 37. All references to "Rule” are to the Federal Rules of Civil Procedure, and all references to “Bankruptcy Rule” are to the Federal Rules of Bankruptcy Procedure.
. This amount represents the amount of the balloon payment due under the 1997 Note plus interest accrued through January 2008.
. The Trustee's motion for summary judgment reflects that the parties had filed a joint statement of facts, and that the Andres had responded to the Trustee’s request for admissions and had been deposed. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494386/ | Memorandum
KEITH M. LUNDIN, Bankruptcy Judge.
On cross-motions for summary judgment, the issue is whether a Deed of Trust on tenancy by the entirety property that was initialed on each page and signed by both spouses as “Borrower” encumbers the entirety estate when one spouse is defined as a “Borrower” who signed the Note and the other spouse is a “Borrower ... ‘co-signer’ ” who did not sign the Note. The Deed of Trust encumbers the entirety estate. Defendant’s motion for summary judgment is granted; Plaintiffs motion for summary judgment is denied. The following are findings of fact and conclusions of law. Fed. R. Bankr.P. 7052.
I. Facts
Tarun N. Surti and Lata T. Surti are husband and wife, and Chapter 11 debtors. By warranty deed recorded June 22, 1993, the Surtís acquired real property at 899 South Curtiswood Lane, Nashville, TN (the “Property”). (J. Stip. Ex. 1.) The Surtís have continuously owned the Property as tenants by the entirety.
On December 12, 2003, Lata Surti, identified as “a married person” and defined as “Borrower,” executed a Deed of Trust against the Property in favor of First Horizon Home Loan Corporation to secure a loan of $1.2 million.1 (J. Stip. Ex. 3.) This *517Deed of Trust was initialed on each page by both Lata and Tarun Surtí,2 and executed by each on preprinted lines labeled “Borrower.” Lata Surti’s name was typewritten below the “Borrower” line on which she signed. Tarun Surti’s name was printed by hand below the “Borrower” line on which he signed. Immediately before the lines on which the Surtís signed, the document states: “BY SIGNING BELOW, Borrower accepts and agrees to the terms and covenants contained in this Security Instrument[.]” (J- Stip. Ex. 3, at 11.)
The acknowledgment only named “Lata N. Surtí, a married person.”3 The legal description identifies the Property as “the same property conveyed to Tarun N. Surtí and wife, Lata T. Surtí, by Deed from, the Saar Foundation, Inc. dated 6/18/93[.]” (J. Stip. Ex. 3, at 2 & Ex. A.) Through a series of recorded assignments (J. Stip. Exs. 4-6) this Deed of Trust found its way to Defendant, Aurora Loan Services LLC (the “Aurora Deed of Trust”).
On page 1, in a section labeled “DEFINITIONS,” the Aurora Deed of Trust states: “Borrower is LATA N4 SURTI, A MARRIED PERSON. Borrower is the trustor under this Security Instrument.” (J. Stip. Ex. 3, at 1.) Just below, in that same section, “ ‘Note’ ” is defined as: “the promissory note signed by Borrower.... The Note states that Borrower owes Lender ... $1,200,000.00 ... plus interest.” (J. Stip. Ex. 3, at 1.)
On page 2, the Aurora Deed of Trust provides for the “TRANSFER OF RIGHTS IN THE PROPERTY,” including: “Borrower irrevocably grants and conveys to Trustee, in trust, with power of sale, the following described property located in the county of Davidson[.]” (J. Stip. Ex. 3, at 2.) A legal description of the South Curtiswood Lane property is attached, including a Derivation Clause that identifies the Property as owned by “Tarun N. Surtí and wife, Lata T. Surtí.” (J. Stip. Ex. 3, at 2 & Ex. A.) On page 3, “BORROWER COVENANTS that Borrower is lawfully seised of the estate hereby conveyed and has the right to grant and convey the Property and that the Property is unencumbered, except for encumbrances of record.” (J. Stip. Ex. 3, at 3.)
Paragraph 13 on page 8 of the Aurora Deed of Trust provides:
13. Joint and Several Liability; Cosigners; Successors and Assigns Bound. Borrower covenants and agrees that Borrower’s obligations and liability shall be joint and several. However, any Borrower who co-signs this Security Instrument but does not execute the Note (a “co-signer”): (a) is cosigning this Security Instrument only to mortgage, grant and convey the co-signer’s interest in the Property under the terms of this Security Instrument; (b) is not personally obligated to pay the sums secured by this Security Instrument; and (c) agrees that Lender and any other Borrower can agree to extend, modi*518fy, forbear or make any accommodations with regard to the terms of this Security Instrument or the Note without the cosigner’s consent.
(J. Stip. Ex. 3, at 8.)
On January 16, 2004, “TURAN N. SUR-TI” 5 and “LATA N. SURTI”6 executed a Deed of Trust against the Property to secure a $250,000 home equity line of credit in favor of First Tennessee Bank. (J. Stip. Ex. 7.) The acknowledgment reads “Turan N. Surti and wife Lata T. Surti.” (J. Stip. Ex. 7, at 4.) This Deed of Trust was recorded on February 26, 2004.
On August 30, 2007, “Tarun N. Surti and wife, Lata T. Surti” executed a Deed of Trust, Assignment of Leases and Security Agreement against the Property to secure a loan of $1,000,000 to Tarun N. Surti from Plaintiff, HHP-Brentwood, L.L.C. (the “HHP Deed of Trust”). (J. Stip. Ex. 8.) In the HHP Deed of Trust, an exhibit listed “PERMITTED ENCUMBRANCES” including:
6. Deed of Trust dated December 12, 2003, executed by Lata N. Surti, a married person, in favor of First Horizon Home Loan Corporation, in the sum of $1,200,000 of record as instrument No. 20031218-0180613, said Register’s Office, as assigned to Mortgage Electronic Registration Systems, Inc., of record as Instrument No. 20040702-00779003, said Register’s Office. Appointment of Successor Trustee of record as Instrument No. 20060615-0071289.
7. Deed of Trust dated January 16, 2004, executed by Turan N. Surti and Lata T. Surti, in favor of First Tennessee Bank National Association, in the sum of $250,000.00 of record as Instrument No. 20040226-0021881, said Register’s Office.
(J. Stip. Ex. 8, at 16.) The HHP Deed of Trust was recorded August 31, 2007.
Tarun and Lata Surti filed Chapter 13 on February 5, 2009. Their case was converted to Chapter 11 on June 12, 2009.
Four Deeds of Trust on the Property were scheduled by the Debtors.7 (J. Stip. Ex. 9, at 6-7.) Aurora filed a secured proof of claim for $1,153,937.93. (J. Stip. Ex. 10.) HHP filed a secured proof of claim for $1,015,000. (J. Stip. Ex. 11.)
Debtors’ proposed Chapter 11 plan treats Aurora as fully-secured with a first lien on the Property. In second position, the plan provides for First Tennessee bank with a fully-secured claim of $304,043. In third position, the plan lists Regions Bank with a claim of $242,359, and in fourth position, Plaintiff HHP. Regions Bank and HHP are treated as unsecured creditors based on the absence of value in the Property to secure these claims.
HHP filed this adversary proceeding challenging the validity and extent of Aurora’s lien. HHP argues that since Tarun Surti is not identified as a “Borrower” on the first page of the Aurora Deed of Trust, his interest in the Property was not conveyed as security for the Aurora note. *519Because the Property is owned by the Debtors as tenants by the entirety, HHP continues, the only interest that secures Aurora’s note is Lata Surti’s survivorship right in the Property. HHP cites Ethridge v. TierOne Bank, 226 S.W.3d 127 (Mo.2007), and Sullivan v. Mortgage Electronic Registration Systems, Inc. (In re Wirth), 355 B.R. 60 (N.D.Ill.2005), in support of this outcome.
Citing Kelton v. Brown, 39 S.W. 541, 543 (Tenn.Ch.App.1897), Aurora responds that Tennessee law does not require the harsh result HHP seeks. Aurora argues that Mr. Surti signed the Aurora Deed of Trust as a “Borrower” and was identified elsewhere as a “Co-signer” for the explicit purpose of conveying his interest to secure his wife’s debt. Aurora cites Rouse v. Wells Fargo Bank, N.A. (In re Suhrheinrich), Adv. No. 08-3048, 2009 WL 3335027 (Bankr.W.D.Mo. Oct.14, 2009), in which the bankruptcy court distinguished Ethridge on facts Aurora claims apply here.
II. Discussion
A. Summary Judgment Standard
Summary judgment is appropriate when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Booker v. Brown & Williamson Tobacco Co., 879 F.2d 1304, 1310 (6th Cir.1989). The court is not to “‘weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.’ ” Browning v. Levy, 283 F.3d 761, 769 (6th Cir.2002) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). “A genuine issue for trial exists only when there is sufficient ‘evidence on which the jury could reasonably find for the plaintiff.’” Id. (quoting Liberty Lobby, 477 U.S. at 252, 106 S.Ct. 2505).
The moving party bears the initial burden of showing that there is an absence of evidence to support the nonmoving party’s case. Celotex Corp. v. Catrett, 477 U.S. at 325, 106 S.Ct. 2548. The burden then shifts to the nonmoving party to produce evidence that would support a finding in its favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. at 250-52. All inferences are drawn in the light most favorable to the nonmoving party. Spradlin v. Jarvis (In re Tri-City Turf Club, Inc.), 323 F.3d 439, 442 (6th Cir.2003) (citations omitted). The party opposing a motion for summary judgment, however, “ ‘may not rest upon mere allegations or denials of his pleading, but ... must set forth specific facts showing that there is a genuine issue for trial.’ The party opposing the motion must ‘do more than simply show that there is some metaphysical doubt as to the material facts.’ ” In re Tri-City Turf Club, Inc., 323 F.3d at 442-43 (internal citations and quotations omitted). See also Liberty Lobby, Inc., 477 U.S. at 248, 106 S.Ct. 2505; Mat-sushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). “ ‘If after reviewing the record as a whole a rational factfinder could not find for the nonmoving party, summary judgment is appropriate.’ ” Braithwaite v. Timken Co., 258 F.3d 488, 493 (6th Cir.2001) (quoting Ercegovich v. Goodyear Tire & Rubber Co., 154 F.3d 344, 349 (6th Cir.1998)).
B. Scope of the Aurora Deed of Trust
1. Tarun Surti is a “Borrower” and a “Co-signer”
HHP’s argument boils down to this: Tarun Surti is not a “Borrower” be*520cause only his wife, Lata Surti, is identified on page 1 as a “Borrower” in the “DEFINITIONS” section of the Aurora Deed of Trust. The “TRANSFER OF RIGHTS IN THE PROPERTY” on page 2 recites that “Borrower irrevocably grants and conveys” (emphasis added) the Property in trust. Because Tarun Surti is not a “Borrower” on page 1, the Deed of Trust only conveyed Lata Surti’s survivorship interest into trust.8 This argument does not account for all provisions of the Aurora Deed of Trust and makes a nonsense of the document as a whole.
Paragraph 13 on page 8 of the Aurora Deed of Trust explicitly recognizes that there may be a “Borrower” who co-signs this security instrument but does not execute the Note (a “Co-signer”). This is exactly what Tarun Surti did. Paragraph 13 states clearly that a Borrower who is not obligated on the Note is “co-signing this Security Instrument only to mortgage, grant and convey the co-signer’s interest in the property under the terms of this Security Instrument.” (J. Stip. Ex. 2, at 8) (emphasis added). This is plain language of conveyance that HHP would ignore. It is part of the Deed of Trust — -just as operative and effective as the “TRANSFER OF RIGHTS IN THE PROPERTY” on page 2 of the document. Tennessee law requires that the conveyance in Paragraph 13 be given its ordinary meaning: Tarun Surti is a Co-signer who signed as Borrower on page 11 to convey his interest in the Property in trust to secure his wife’s Note.
HHP would avoid this straight-forward reading of Paragraph 13 by creating a nonsense. Paragraph 13 refers to a “Borrower who co-signs.... ” HHP refers back to page 1 to claim that only Lata Surti is identified as a “Borrower” in the definition section of the Deed of Trust. HHP then concludes that Tarun Surti is not a Borrower and therefore cannot be a Co-signer for purposes of Paragraph 13.
This is not how the Aurora Deed of Trust is constructed. On page 1 — in the same “DEFINITIONS” section cited by HHP — “Note” is defined as, “the promissory note signed by Borrower.” (J. Stip. Ex. 2, at 1) (emphasis added). In Paragraph 13 there is a Borrower that explicitly does not execute the Note but does sign the Deed of Trust to convey an interest in property to secure the Note. Paragraph 13 re-designates the second kind of Borrower as a “Co-signer.” Then, Paragraph 13 states that “any other Borrower” — a Borrower who is not a Co-signer because they have signed the Note — can modify the terms of the debt without the Cosigner’s consent. These words make complete sense if Borrower can, depending on context, include someone who signs the Deed of Trust to convey their interest in property without also being obligated on the Note. HHP’s tortured reading creates an impossibility: all Co-signers have to be Borrowers; all Borrowers have signed the Note; only Borrowers who have not signed the Note can be Co-signers.
More reasonably, “Borrower” is used in two different senses in the Aurora Deed of *521Trust. The document contemplates a Borrower who has signed the Note and a Borrower who has not signed the Note. A Borrower who has not signed the Note is renamed a “Cosigner” by Paragraph 13 for purposes of conveying his interest in trust to secure the debt of a Borrower who has signed the Note.
2. All Borrowers convey their interests in the Property
The issue then becomes whether dual use of the word Borrower renders the document a conveyance into trust of only Lata Surti’s interest in the Property. To answer that question, Tennessee law requires consideration of the whole document.9 There are two clauses of conveyance in the Aurora Deed of Trust — one on page 1 and one on page 8. The first conveys the interest of Lata Surtí as a Borrower who also signed the Note. The other conveys Tarun Surti’s interest as a Borrower who Co-signed the Deed of Trust but did not sign the Note. Both clauses contain language fully effective under Tennessee law to convey their respective interests in the Property. Together the two clauses gave Aurora a security interest in the whole of the tenancy by the entirety.
There is no ambiguity in the use of Borrower in two different senses with respect to the validity of the conveyances into trust. All Borrowers — whether signers of the Note or not — have explicitly conveyed their interests into trust to secure the Note. Ambiguity arises when the words of a document create uncertainty of meaning.10 There is no uncertainty that the words of this document require anyone who signs as a Borrower or as a Co-signer to convey their interest in the property to secure the Note. If there is any ambiguity, it is that there can be Borrowers who convey their interests to secure the Note who are not also the kind of Borrowers who have signed the Note itself. In a contest with respect to liability on the Note, this dual use of the word Borrower could be material. Here, the different senses of the word Borrower do not threaten the effectiveness of the Aurora Deed of Trust to convey the interests of both kinds of Borrowers to secure the Note.
3. Tennessee law recognizes exceptions to the traditional rule
Case law from Tennessee and other jurisdictions supports this construction of the Aurora Deed of Trust, though not perfectly. Born during a time when many technical rules of conveyancing prevailed and when women faced disabilities with respect to the ownership and transfer of real property,11 the traditional rule “is that a deed is void as to any party signing it who is not named therein as grantor. If the deed is signed by two persons, only one of whom is named in the body thereof, it is the deed of that one only.” 2 Patton & Palomak on Land Titles § 335 (3d. ed.). See Berrigan v. Fleming, 70 Tenn. 271 (1879) (“The weight of authority undoubtedly is that an estate in land can not be conveyed except by an instrument which designates the grantor by name or otherwise, and purports to convey his property. Grantor must be a party to the efficient and operative parts of the instrument on conveyance.”); Daly v. Willis, 73 Tenn. (5 Lea) 100 (1880) (“A mortgage of land, purporting on its face to be by the husband alone, will not bind the wife who merely signs it.”). See also Ethridge v. TierOne *522Bank, 226 S.W.3d 127 (Mo.2007) (“ ‘Signing, sealing, and acknowledging a deed by the wife in which her husband is the only grantor, ... will not convey her estate.’ ”); Manning v. Wingo, 577 So.2d 865 (Ala.1991) (“ ‘When a conveyance is subscribed by more than one person and one of the signers’ names is not shown in the granting clause or body of the instrument, such conveying instrument is void as to that person.” ’); Whitaker v. Langdon, 302 Ky. 666, 195 S.W.2d 285 (1946) (“It is fundamentally necessary that a conveyance shall use the specific names of its grantors in the body of the instrument in order to pass valid title out of such grantors.”).
As later Tennessee decisions recognize, many of the cases just referenced “were dealing with an attempt by a married woman to convey her interest in land by merely signing the instrument following the name of her grantor husband.” Polston v. Scandlyn, 21 Tenn.App. 252, 108 S.W.2d 1104, 1108 (1937). During the early history of Tennessee, a married woman’s ability to own or convey property was highly circumscribed. “The power of married women to convey their general estate in lands by deed is vested in them by ... statute only when their husbands join in the execution of the deed, or, in other words, their incapacity to convey real estate so held by them is removed, so as to enable them to convey by joint deed of the husband and wife, with proper privy examination of the latter, ... in order to effect a valid conveyance of the title of a married woman to her general estate the statute must be strictly pursued.” Insurance Co. of Tenn. v. Waller, 116 Tenn. 1, 95 S.W. 811, 814 (1906).
Also, the traditional rule grew up at a time when technical words and phrases in conveyances (and wills) were strictly observed and enforced by the courts. In a battle between the “premises” and the “ha-bendum” clauses in a deed in 1931 in Pryor v. Richardson, 37 S.W.2d 114 (1931), the Supreme Court of Tennessee had this to say about the passing of these technical rules and the new focus on ascertaining intent from the whole of an instrument:
Technical rules in the construction of conveyances in this state have been abandoned, and, where possible, the intention of the grantor, as ascertained from a consideration of the entire instrument, is given effect.
“The true rule is to look to the whole instrument, without reference to formal divisions, in order to ascertain the intention of the parties, and not to permit antique technicalities to override such intentions.”
... “A deed must be so interpreted as to make it operative and effective in all its provisions.”
... The intention of the grantor is to be ascertained and given effect by examination of the entire instrument, “regardless of the mere formal divisions of the instrument”; and in this search for intent, no preference is to be given to premises over habendum because of position or form.
... [I]t is clearly the duty of the court to ... reconcile the apparently conflicting terms when consistent with well recognized rules of construction.
Pryor, 37 S.W.2d at 114-16 (internal citations omitted). See also Ballard v. Farley, 143 Tenn. 161, 226 S.W. 544 (1920) (“[I]f clauses or parts are conflicting or repugnant the intention is gathered from the whole instrument instead of from particular clauses, and if it is the clear intent of the grantor that apparently inconsistent *523provisions shall all stand, it will be given that effect if possible. According to the trend of modern decisions, the technical rules of the common law as to the division of deeds into formal parts will not prevail as against the manifest intention of the parties as shown by the whole deed”).
Often the traditional rule produced harsh outcomes and was almost as often modified by the courts based on fine factual distinctions. In Kelton v. Brown, 39 S.W. 541 (Tenn.Ch.App.1897), the Tennessee Court of Chancery Appeals rejected an attempt to defeat a mortgage deed based on the absence of the wife’s name in the conveyance portion of the deed when the wife had signed the deed. In Kelton, the only name to appear in the deed was that of the grantee. The deed used the pronouns “I” and “We” when referring to the grantor(s) but did not name the wife. The court concluded that “[n]o particular form of words is essential. It is sufficient if the deed, however short and inartificial it may be, contains words showing the intention of the maker.” Id. at 543. The repetitive use of the plural “we” in the deed was “sufficient to show the purpose and intention of the parties, and to show that the wife intended to and did join the husband in the execution of the deed[.]” Id. Even as early as 1897, the Kelton court distinguished earlier Tennessee cases — Berrigan v. Fleming, 70 Tenn. 271 (1879), and Daly v. Willis, 73 Tenn. 100 (1880) — in which a wife’s signature was challenged as insufficient to convey an interest in property absent operative words of conveyance. See also Conyers v. Frye, 58 S.W. 1126, 1128 (Tenn.Ch.App.1900) (“[l]f a married woman signs a deed with her husband, ..., she is bound by it, although her name does not appear in the body of the instrument. It is immaterial whether the binding force of such deed results technically by way of estoppel, or in some other form, she cannot attack it.”).
Admittedly on different facts, the Tennessee Court of Appeals recently rejected an argument analogous to that made here by HHP. In Thornton v. Countrywide Home Loans, Inc., No. W1999-02086/02087-COA-R3-CV, 2000 WL 33191366 (Tenn.Ct.App. Oct.23, 2000), Ms. Thornton sought to avoid the effect of her signature at the end of a deed of trust by arguing that she was not identified as a grantor elsewhere in the document. The Tennessee Court of Appeals rejected this argument based on two findings: (1) Ms. Thornton was identified elsewhere in the deed of trust as a “party of the first part” which the court found was a substitute for “grantor”; and (2) Ms. Thornton “signed the deed of trust at the bottom, under her husband’s signature, in order to convey her interest in the home.” Thornton v. Countrywide Home Loans, Inc., 2000 WL 33191366, at *5. The Court of Appeals said:
While we agree with [Ms. Thornton] that she is not termed a “grantor” on the Countrywide deed, we do not find this fact dispositive. The Countrywide deed of trust secured the loan which the couple used to purchase their home. Ms. Thornton signed the deed of trust at the bottom, under her husband’s signature, in order to convey her interest in the home. We do not believe that Countrywide’s failure to list Ms. Thornton as a grantor has any effect upon her conveyance. It is simply unbelievable that a bank would consent to secure the entire amount of the purchase price of a home with something less than a complete interest in the property.
Thornton, 2000 WL 33191366, at *5.
The two cases most nearly on point cited by the parties are ironically both from Missouri but reach opposite conclusions on slightly different facts.
*524HHP relies most heavily on the opinion of the Missouri Supreme Court in Eth-ridge. In Ethridge, husband and wife refinanced the home they owned as tenants by the entireties. The loan documents identified the husband as a married man, and stated incorrectly that the home was his sole and separate property. The deed of trust defined “Borrower” as “David Eth-ridge.” The deed of trust contained only one signature line with the husband’s name typed beneath it. The wife signed the deed of trust below her husband’s signature. They both initialed each page. Ethridge, 226 S.W.3d at 129-30. The husband died, and the wife sought to retain the home free of the refinanced debt.
The Missouri Supreme Court found 19th Century case law controlled its decision in favor of the wife: “The party in whom the title is vested, [sic] must use appropriate words to convey the estate. Signing, sealing, and acknowledging a deed by the wife in which her husband is the only grantor, [sic] will not convey her estate.’ ” Ethridge, 226 S.W.3d at 132 (quoting Bradley v. Missouri Pac. Ry. Co., 91 Mo. 493, 4 S.W. 427, 428 (1887)) (alteration in original).
Aurora relies on a more recent Missouri bankruptcy court decision that distinguished Ethridge: Rouse v. Wells Fargo Bank, N.A. (In re Suhrheinrich), 2009 WL 3335027. Michael Suhrheinrich borrowed $208,000 to purchase real property. To secure repayment, Michael and his wife, Barbara Suhrheinrich, executed a deed of trust. The deed of trust referred to the grantor as “Borrower” and in the definitions section “Borrower” was defined as “Michael J. Suhrheinrich, A Married Man.” In re Suhrheinrich, 2009 WL 3335027, at *1. However, on the signature page at the end of the deed of trust and on a cover page, both Michael and Barbara Suhrheinrich were referred to as “Borrowers.” On the signature page Barbara Suh-rheinrich’s name was typed along side the preprinted word “Borrower.”
The Suhrheinriches filed bankruptcy and their Chapter 7 trustee challenged the validity of the deed of trust on the basis of Ethridge. The trustee argued that the real property was owned by the Suhrhein-riches as tenants by the entirety but only Michael was a grantor under the deed of trust — a defect that rendered the deed of trust invalid under Missouri law. The bankruptcy court analyzed Ethridge and found “slight” but important distinctions that warranted a different outcome:
[T]he Court finds it significant that Barbara Suhrheinrich’s name was typed below the line where her signature appears, alongside the preprinted word “Borrower.” The presence of these notations on the DOT takes Barbara Suh-rheinrieh’s signature beyond the mere “signing, sealing, and acknowledging a deed by the wife in which her husband is the only grantor will not convey her estate” described in Ethridge — it is an indication that the DOT was drafted, and Barbara Suhrheinrich signed it, with the intention that she be a grantor (“Borrower”) under the DOT.
Second, the Court accepts [the bank’s] contention that the cover page constitutes part of a deed of trust and should be considered in determining whether Barbara Suhrheinrich is a grantor under the DOT.
Finally, Barbara Suhrheinrich’s testimony bolsters the Court’s conclusion that she is a grantor/borrower under the DOT. Barbara Suhrheinrich testified that she intended to convey an interest in her home to [lender] ... and understood that she had to sign the DOT in order for it to be valid. In contrast to the wife in Ethridge who signed the deed of trust because her husband “was *525the ‘head of household’ and made all the couple’s financial decisions,” Barbara Suhrheinrich previously worked as a bookkeeper for a mortgage company and testified that she understood the necessity for both spouses to sign a deed of trust intended to encumber jointly owned property.
... [T]he Court finds that the DOT’S failure to list Barbara Suhrheinrich as a Borrower on the second ... page of the DOT does not invalidate the DOT. When the DOT is considered in its entirety, it unambiguously names both owners of the property subject to the DOT and is therefore valid under Missouri law.... [T]o the extent there is ambiguity in the DOT, the evidence shows that Barbara Suhrheinrich fully intended to convey to [lender] a mortgage lien interest in her home.
Id. at *3 (internal citations and footnote omitted).
4. The Aurora Deed of Trust places this case among the exceptions
This case is more like Suhrheinrich than Ethridge, however the facts here are more compelling than either case that Tarun Surti conveyed his interest to Aurora. Unlike Ethridge, there is no claim anywhere in the Aurora Deed of Trust that Lata Surti was the only owner of the Property. Just the opposite appears everywhere in the Aurora Deed of Trust — Lata Surti is identified as “a married person” and the incorporated derivation clause shows that the Property was conveyed to “Tarun N. Surti and wife, Lata T. Surti.”
The Aurora Deed of Trust identifies a “Co-signer” who signs as a “Borrower” to “mortgage, grant and convey the co-signer’s interest in the property” to secure the debt of another. “Co-signer” is a grantor on page 8 of the Aurora Deed of Trust as much as any other “Borrower” is a grantor on page 2. As in Suhrheinrich, Tarun Surti signed the Aurora Deed of Trust on page 11, on a line with “Borrower” preprinted, and in this case after a sentence stating that the Borrower(s) signing below accept and agree to the terms above — including the conveyance in Paragraph 13. This is all consistent with the conclusion that Tarun Surti intended to be a Borrower and clearly identifying him as the same person identified in the derivation clause as an owner of the Property.
There is no cover page here but the Aurora Deed of Trust contains the important Paragraph 13 that makes complete sense of Tarun Surti’s initials on each page and of his signature on a “Borrower” line by explaining that he is a “Co-signer” who conveyed his interest in the Property to secure the Note signed by his wife. No separate clause of conveyance anything like Paragraph 13 appears in Ethridge. There is no separate grantor clause or reference to the possibility of a co-signer who is also a grantor in either Ethridge or Suhrheinrich. The second grantor clause in Paragraph 13 firmly cements the Aurora Deed of Trust as effective to convey Tarun Surti’s interest in the Property.12
Other cases cited by the parties are distinguishable for many of the same reasons just addressed. In Sullivan v. Mortgage Electronic Registration Systems, Inc. (In re Wirth), 355 B.R. 60, 61 (N.D.Ill.2005), the deed of trust defined “Borrower” as “Marilyn Marsha Williams, a single person.” Similar to Ethridge, this definition was inaccurate. Williams was married to Wirth at the time though that relationship does not appear anywhere in *526the deed of trust or in any derivation clause.
Wirth signed the deed of trust on a “Borrower” line. The deed of trust in Wirth had a Paragraph 13 similar to Paragraph 13 in the Aurora Deed of Trust.13 The bankruptcy court in Wirth accepted the argument made here by HHP that Wirth could not be a “Co-signer” because Williams was the only “Borrower” defined in the deed of trust.
The district court in Wirth acknowledged that Wirth’s signature on a line designated for a “Borrower” could not be easily reconciled with the fact that only Williams was defined as a Borrower elsewhere in the document. As in Ethridge, the district court in Wirth cited early 19th Century Illinois case law to support its conclusion that Wirth was “not a party” to the deed of trust and “his interest in signing the agreement is irrelevant.” Wirth, 355 B.R. at 61.
The district court in Wirth did not address the possibility that “Borrower” was used in more than one sense in the deed of trust or the possibility that “Borrower” was ambiguous in light of Paragraph 13 if it meant only a Borrower who had not signed the note. There is no mention of the definition of “Note” in the Wirth deed of trust — a provision of the Aurora Deed of Trust that challenges the logic in Wirth. There is no mention in Wirth of a derivation clause. The derivation clause is incorporated into the Aurora Deed of Trust reveals that Taran Surtí is not a stranger to the document but was married to the other “Borrower” at the time the “married person” took title to the Property. Perhaps more importantly, Wirth too lightly dismisses all inquiry into the intent of the parties.
In Kindt v. ABN AMRO Mortgage Group, Inc. (In re Wallace), No. 06-1322, 2007 WL 6510864, at *1-*2 (Bankr.S.D.Ohio Nov.15, 2007) (unpublished), an Ohio bankruptcy court relying in part on Tennessee decisions, concluded that a mortgage which “contains no reference whatsoever” to Mrs. Wallace did not encumber Mrs. Wallace’s one-half interest in the property mortgaged — notwithstanding that Mrs. Wallace signed and acknowledged the mortgage. Wallace is distinguishable because there is no Paragraph 13 or similar clause that would explain the presence of Mrs. Wallace’s signature at the end of the deed of trust. Unlike Ta-ran Surtí in the Aurora Deed of Trust, Mrs. Wallace was not identified as a “Borrower” by a preprinted line — her handwritten addition at the end of the Wallace deed of trust was without explanation.
Finally, Schlarman v. Chase Home Finance, LLC (In re Padgitt), No. 07-2063, 2008 WL 4191517, at *2 (Bankr.E.D.Ky. Sept.11, 2008) (unpublished), stands for the proposition that under Kentucky law a spouse not identified as a grantor in a deed of trust does not convey their interest in mortgaged property unless “they were named or otherwise sufficiently identified in the body of the instrument to make it clear that they were grantors.” There is no mention in Padgitt of anything like Paragraph 13 of the Aurora Deed of Trust. In Padgitt, only a “bare” signature appears — there is no indication that the signer was a “Borrower” of any sort under the deed of trust. There was no separate granting or conveyancing clause in Padgitt *527for a co-signer to explain the extra signature.
5. Contractual ambiguity would not change the result
The outcome here respects rules of construction recognized by the Tennessee courts. If the language of a contract is not ambiguous, the court determines the intention of the parties from the four corners of the contract as written. See, e.g., Petty v. Sloan, 197 Tenn. 630, 277 S.W.2d 355, 361 (1955). Carolyn B. Beasley Cotton Co. v. Ralph, 59 S.W.3d 110, 113-14 (Tenn.Ct.App.2000). “[W]here the intention is uncertain, resort may be had to subordinate rules of construction.” Hicks v. Sprankle, 149 Tenn. 310, 257 S.W. 1044, 1045 (1924) (citations omitted). A contract is ambiguous if “it is of uncertain meaning and may fairly be understood in more ways than one.” Empress Health & Beauty Spa, Inc. v. Turner, 503 S.W.2d 188, 190-91 (Tenn.1973).
Here, an argument could be made that the Aurora Deed of Trust is ambiguous insofar as “Borrower” is defined both as one who signed the Note and as a “Cosigner” who did not sign the Note but signed the Deed of Trust to convey an interest in the Property to secure the Note. As explained above, this dual use of the word “Borrower” does not create uncertainty with respect to the outcome determinative issue here: all Borrowers— those that have and those that have not signed the Note — conveyed their interests in the Property by signing the Aurora Deed of Trust. But if this dual use of Borrower can be construed to be a material ambiguity, the further analysis then permitted by Tennessee law does not change the outcome for HHP.
“If the language of the contract is not free of ambiguity, extrinsic evidence, such as evidence of the interpretation the parties themselves have given the contract, may be received to determine the intention of the parties.” Beaty v. Brock & Blevins Co., 319 F.2d 43, 46 (6th Cir.1963) (citing Fidelity-Phenix Fire Ins. Co. of New York v. Jackson, 181 Tenn. 453, 181 S.W.2d 625 (1944)). Uncontested affidavits of Lata Surtí and Tarun Surtí confirm the couple’s understanding and intention to encumber their combined interests in the Property to secure repayment of the Aurora debt. The Surti’s bankruptcy schedules list the Aurora mortgage as secured by both debtors’ interests in the Property. There is no contrary evidence.
6. HHP’s notice of the Aurora Deed of Trust
Even if HHP could prevail as a matter of contract construction, HHP’s position fails to account for the effect of inquiry notice under Tennessee case law. The Tennessee Supreme Court exhaustively set forth the relevant forms of notice in Blevins v. Johnson County, 746 S.W.2d 678, 682-83 (Tenn.1988):
Notice is generally said to take two forms, actual or constructive. Constructive notice is notice implied or imputed by operation of law and arises as a result of the legal act of recording an instrument under a statute by which recordation has the effect of constructive notice. “It has been well said that ‘constructive notice is the law’s substitute for actual notice, intended to protect innocent persons who are about to engage in lawful transactions....’” Nevertheless, “[ajctual notice must be given in the absence of a statute providing some means for constructive notice.” Constructive notice encourages diligence in protecting one’s rights and prevents fraud. If either no statute requires re-cordation to create constructive notice or a recordable instrument has not been *528property recorded, then actual notice is required to estop a person.
While “[i]t is true that recordation creates constructive notice as distinguished from actual notice, in that ordinarily actual notice is when one sees with his eyes that something is done,” another kind of notice occupying what amounts to a middle ground between constructive notice and actual notice is recognized as inquiry notice.... [I]n Tennessee, [inquiry notice] has come to be considered as a variant of actual notice. “The words ‘actual notice’ do not always mean in law what in metaphysical strictness they import; they more often mean knowledge of facts and circumstances sufficiently pertinent in character to enable reasonably cautious and prudent persons to investigate and ascertain as to the ultimate facts.’ ” Even a good faith failure to undertake the inquiry is no defense. Thus, “ ‘[w]hatever is sufficient to put a person upon inquiry, is notice of all the facts to which that inquiry will lead, when prosecuted with reasonable diligence and good faith.’ ”
... [A] recital in a deed may give rise to the necessity to make an inquiry to determine the facts recited or be es-topped from asserting a state of affairs different from those that would have been revealed by diligent investigation. This rule controlling inquiry notice is well-established in Tennessee.
Blevins v. Johnson County, 746 S.W.2d at 682-83 (internal citations omitted). Facts sufficient to put a party upon inquiry will not allow the party to “ ‘protect himself upon the ground that he intentionally omitted to make inquiry in order to avoid knowledge[.]’ ” Id. at 684 (quoting Haywood v. Ensley & Haywood, 27 Tenn. 460, 467 (1847)). See also Fitzpatrick v. Fredenberg (In re Wilson), Adv. No. 09-3162, 2010 WL 56080 (Bankr.E.D.Tenn. Jan. 5.2010).
HHP does not contest that the Aurora Deed of Trust is in the chain of title of the Property. Nor does HHP assert that it was unaware of the Aurora Deed of Trust when it extended its loan and took its mortgage. HHP does not claim that Debtors in anyway led HHP to believe that the Aurora Deed of Trust was limited to Lata Surti’s survivorship interest. HHP has not offered any evidence that it believed the Aurora Deed of Trust encumbered only Lata Surti’s survivorship interest at the time it extended its loan. Indeed, the Aurora Deed of Trust is listed as a “permitted encumbrance” in Exhibit B of HHP’s Deed of Trust. (J. Stip. Ex. 8, at Ex. B.)
To paraphrase the Tennessee Court of Appeals in Thornton v. Countrywide Home Loans, Inc., 2000 WL 33191366, at *5, it is “simply unbelievable” that Aurora’s predecessor would loan Lata Surti $1.2 Million on the strength of her surviv-orship interest alone. HHP does not claim by affidavit or otherwise that it made any inquiry with respect to Tarun Surti’s signature on the Aurora Deed of Trust. If HHP had any question regarding the scope of the Aurora Deed of Trust, “[e]ven a good faith failure to undertake inquiry is no defense.” Blevins v. Johnson County, 746 S.W.2d at 683.
III. Conclusion
The Aurora Deed of Trust encumbers the interests of both Lata Surti and Tarun Surti in the property located at 899 South Curtiswood Lane, Nashville, Tennessee. A separate order will be entered granting Aurora’s motion for summary judgment.
Order
For the reasons stated in the Memorandum filed contemporaneously herewith, IT *529IS ORDERED that Defendant’s Motion for Summary Judgment is granted; Plaintiffs Motion for Summary Judgment is denied.
IT IS SO ORDERED.
. This loan paid off a prior loan and Deed of Trust to America’s Wholesale Lender. (Che*517ryl Marchant Aff. at 2.)
. Immaterially, Lata Surtí signed on page 11 but did not also initial page 11.
. Plaintiff initially challenged defendant’s lien on the ground of deficient acknowledgment. There is no acknowledgment for Mr. Surtí, and Mrs. Surti’s name is written as Lata N. Surtí, rather than Lata T. Surtí. Plain tiff abandoned this argument and conceded for summary judgment purposes that the technically deficient acknowledgment was rendered effective by recent statutory changes found at Tenn.Code Ann. § 66-24-101(e).
.On page 1 of the Aurora Deed of Trust, the middle initial "N.” for Lata Surtí was marked out by hand and a "T” overwritten and initialed by “L.T.S.”
. "Turan N. Surti” and "Tarun N. Surti” are apparently the same person.
. The "N." is again marked out by hand and a "T.” inserted and initialed by "L.T.S.”
. In addition to the first lien of Aurora and the second lien of First Tennessee Bank, the Debtors scheduled Regions Bank with a $250,000 claim secured by the Property. In the proposed plan and disclosure statement, Regions Bank is listed as third lienholder, ahead of HHP’s fourth position. Regions Bank is not listed as a "PERMITTED ENCUMBRANCE” in the HHP Deed of Trust. The third lien of Regions Bank is identified in the proposed plan and disclosure statement but not addressed by the parties on summary judgment. No party has suggested that Regions Bank's lien affects the outcome of this litigation between Aurora and HHP.
. In Tennessee, when a married couple takes title to real property, the presumption is that the property is held as a tenancy by the entirety. See, e.g., Bennett v. Hutchens, 133 Tenn. 65, 179 S.W. 629, 630 (1915); Thornton v. Countrywide Home Loans, Inc., Nos. W1999-02086/02087-COA-R3-CV, 2000 WL 33191366 (Tenn.Ct.App. Oct.23, 2000); Arango v. Third Nat'l Bank in Nashville (In re Arango), 992 F.2d 611, 613 (6th Cir.1993). When entireties property is used as collateral, a lender's failure to secure the interest of both spouses will result in the lender holding an interest in only the survivorship interest of one spouse. See, e.g., In re Arango, 992 F.2d at 613 (citing Robinson v. Trousdale County, TN, 516 S.W.2d 626, 632 (Tenn.1974)).
. See below.
. See below.
. See below for further discussion.
. As in Suhrheinrich, this conclusion is confirmed by the unchallenged affidavits of Lata Surti and Tarun Surti. This extrinsic evidence of intent becomes relevant only if the document is ambiguous. More about this below.
. The coincidence of a Paragraph 13 in Wirth nearly identical to the Paragraph 13 in Aurora’s Deed of Trust is not discussed by the parties but may be explained by the notation on the Aurora Deed of Trust, "Fannie Mae/Freddie Mac Uniform Instrument Form 3043.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494387/ | OPINION1
BRENDAN LINEHAN SHANNON, Bankruptcy Judge.
Before the Court is a substantive claims objection (the “Objection”) filed by debtors SemGroup, L.P. (“SemGroup”) and Sem-*319Group Holdings, L.P. (“SemGroup Holdings” and collectively with SemGroup, the “Debtors”). The Debtors object to four proofs of claim (the “Claims”) filed by Harvest Fund Advisors (“Harvest”), and argue that Harvest’s claims should be subordinated pursuant to Bankruptcy Code section 510(b). Because section 510(b), by its plain terms, does not apply to the Claims, the Court will overrule the Debtors’ Objection.
I. BACKGROUND
The Debtors, together with certain related entities, filed voluntary petitions for Chapter 11 relief on July 22, 2008. At or around that time, Harvest and other parties filed putative class action lawsuits in federal district courts in New York and Oklahoma alleging damages arising from the purchase of shares of SemGroup Energy Partners, L.P. (“SGLP”), a non-debtor limited partnership in SemGroup’s corporate family. Those lawsuits were consolidated for pre-trial purposes, and Harvest was appointed lead plaintiff in the consolidated action (the “Securities Action”).2
On its own behalf and on behalf of a class of purchasers of SGLP securities, Harvest timely filed proofs of claim in the Debtors’ bankruptcy case. Harvest asserts claims of at least $400 million against each of SemGroup and SemGroup Holdings on behalf of the putative class, and approximately $7.3 million against the same entities on Harvest’s own behalf.
On April 30, 2010, the United States District Court for the Northern District of Oklahoma denied motions to dismiss filed by SGLP and certain other defendants.3 On May 7, 2010, the Debtors filed the Objection.
Bankruptcy Code section 510(b) is the Objection’s primary stated basis for relief.4 Under that section, claims for damages arising from the purchase or sale of a security of the Debtor or its affiliates are subordinated to general unsecured claims. The Debtors argue that Harvest’s claims fall squarely within 510(b)’s purview. Harvest argues that section 510(b) is inapplicable because its claim does not arise from the purchase or sale of the securities of a Debtor or one of its affiliates, and that though the claim indisputably arises from the purchase or sale of a security, SGLP is not an affiliate of the Debtors under the Code’s definition of “affiliate.”
II. JURISDICTION AND VENUE
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a) and (b)(1). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Consideration of this matter constitutes a “core proceeding” under 28 U.S.C. § 157(b)(2)(B).
III. DISCUSSION
A properly filed claim is deemed allowed unless a party in interest objects, at which point the court must determine the amount of the claim to be allowed. See *32011 U.S.C. § 502(a), (b). “A proof of claim executed and filed in accordance with [the Federal Rules of Bankruptcy Procedure] shall constitute prima facie evidence of the validity and amount of the claim,” and the burden is thereafter upon the objector to refute that evidence. Fed. R. Bankr.P. 3001(f).
The basis of the Debtors’ objection is section 510(b), which provides, in relevant part, as follows:
For the purpose of distribution under this title, a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, [or] for damages arising from the purchase or sale of such a security ... shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such a security.
11 U.S.C. § 510(b).
If applied to Harvest’s claims, section 510 would operate to subordinate the claims to those of general unsecured creditors, placing Harvest at the end of the distribution line with other equity holders. Harvest argues, however, that section 510 does not apply because Harvest’s claims for damages do not arise from “the purchase or sale of a security of the debtor or of an affiliate of the debtor,” because SGLP is not a debtor, and is not an “affiliate” as defined by the Code.
Whether an entity is an “affiliate,” depends, of course, upon the structure of the relevant entity’s corporate family. SGLP is a limited partnership. Its general partner and 2% owner is SemGroup Energy Partners G.P., L.L.C. (“SemGroup GP”), which is not a debtor. SemGroup GP is wholly owned by SemGroup Holdings, which is, in turn, wholly owned by Sem-Group. SemGroup Holdings and Sem-Group are both debtors in these Chapter 11 proceedings.
“Affiliate” is defined in section 101(2) to include four types of entities. Two of the four are not alleged to have any application here. Subsection (A) includes entities that own large portions of a debtor. SGLP does not, so that subsection plainly does not apply. Subsection (D) is likewise inapplicable: the Debtors have introduced no evidence that SGLP “operates the business or substantially all of the property of the debtor under a lease or operating agreement,” as is required of an affiliate under that section.
Subsection (B), in relevant part, defines “affiliate” to include the following: “corporation 20 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by the debtor....” This is the subsection upon which Sem-Group’s objection is based. SGLP is not a corporation, however, and section 101(2)(B) is limited to corporations. The Bankruptcy Code’s definition of “corporation” explicitly excludes limited partnerships: “The term corporation ... does not include limited partnership.” 11 U.S.C. § 101(9)(B). Subsection (B) does not apply-
The final definition of “affiliate,” found in subsection (C), includes a “person whose business is operated under a lease or operating agreement by a debtor, or person substantially all of whose property is operated under an operating agreement with the debtor.” 11 U.S.C. § 101(2)(C). In their reply brief, the Debtors argue for the application of this subsection, noting that “[t]he Bankruptcy Code provides that ‘person’ includes ‘partnerships,’ which courts have recognized includes limited partnerships.” (Reply ¶ l)[Docket No. 260]. The Debtors have failed to demonstrate, however, that SGLP’s business or substantially all of SGLP’s property is operated under a lease or operating agreement by a debtor. *321No lease or operating agreement was introduced into evidence in connection with the Objection. The only agreement mentioned — in hearings before the Court, and obliquely in the briefs — is a partnership agreement that purportedly exists between SGLP and SemGroup GP. Even if this agreement were introduced into evidence, it likely would not satisfy section 101(2)(C)’s definition of “affiliate,” because even if the Debtors could show that the partnership agreement is a lease or operating agreement, the agreement is between two non-debtors.
The Debtors argue that SGLP is an affiliate because Harvest’s “own allegations in [the Claims] and [Securities Actions] ... operate as binding admissions that SGLP’s business ‘is operated under a lease or operating agreement by a debtor, or substantially all of its property is operated under an operating agreement with the debtor.’ ” (Reply ¶ 11). The proofs of claim refer to SGLP as “a non-debtor affiliate of the Debtors,” and allege that “the Debtor created and controlled SGLP.” See, e.g., Proof of Claim 4868, p. 2 ¶ 3; Proof of Claim 5971, p. 2 ¶ 3. In addition, Harvest has alleged in the Securities Action that “SemGroup Holdings controls SGLP through its 100% ownership interest in SGLP’s General Partner.” Consolidated Compl. ¶ 57, Case No. 08-MD-1989-GKF-FHM (N.D.Okla.).
The Debtors cite In re Basin Resources Corporation, 190 B.R. 824 (Bankr.N.D.Tex.1996), as an instance where a court found that a party’s allegations and admissions in a pending securities action may be binding for purposes of subordination under section 510(b). In that case, the claimant entered into a joint venture with a debtor. The joint venture was operated under a joint venture agreement, which provided that the debtor was the joint venture manager and would have “full, exclusive and complete charge of all affairs” of the joint venture. Id. at 825. Like the present case, the claimant also filed a federal securities lawsuit in which he alleged that the debtor was manager and operator of the joint venture. Id. at 826. The bankruptcy court found, based on the joint venture agreement and the claimant’s own admissions in the securities action, that the joint venture was an “affiliate” of the debtor which controlled it for purposes of subordination under section 510.
Notably, the claimant’s judicial admissions were not the sole basis upon which the court’s holding rested. There was a contract between the debtor and the alleged affiliate which provided an independent and sufficient basis to find that the joint venture was an affiliate of the debtor. Here no such basis exists: there is no operating agreement or lease between the alleged affiliate and a debtor, as required by section 101(2)(C).
Further, concerning the admissions made in the Securities Actions, there is support in this Circuit suggesting that admissions made in separate proceedings are non-binding and nonconclusive. See In re Woskob, 2001 U.S. Dist. LEXIS 13749, *10-11 (M.D.Pa.2001)(“Even if the [statement in a prior bankruptcy petition] was a judicial admission, it was neither binding nor conclusive because it was a part of ... a completely separate legal proceeding.”), vacated on other grounds, 305 F.3d 177, 188 (3d. Cir.2002). Concerning Harvest’s use of the word “affiliate” in its proofs of claim, a party may use a word in one context without necessarily intending its precise legal meaning in another context. SGLP may indeed be an “affiliate” as the term is used in common speech, or for purposes of state corporate law, and yet not be an affiliate for purposes of section 510(b).
*322There is also support in this Circuit for the principle that “judicial admissions are restricted in scope to matters of fact.... A legal conclusion — e.g., that a party was negligent or caused an injury — does not qualify [as] a judicial admission.” In re Pittsburgh Sports Assocs. Holding Co., 239 B.R. 75, 81 (Bankr.W.D.Pa.1999), vacated on other grounds, 1999 Bankr.LEXIS 1872 (Bankr.W.D.Pa.1999).
Other courts have found entities not to be affiliates of debtors on facts similar to those before the Court. For example, in In re Maruki USA Co., 97 B.R. 166, 169 (Bankr.S.D.N.Y.1988), as here, there was an intervening general partner between the debtor and the alleged affiliate entity. The court rejected the argument that an entity is rendered an affiliate of a debtor where it is 50% owned by its general partner, which is wholly owned and controlled by a debtor. Id. The court was not persuaded to ignore section 101(2)’s plain meaning despite legislative history suggesting “Congress’ intent to include within the definition of affiliate an entity that has control over and has a close relationship with the debtor.” Id.
The Debtors argue that their Objection is also supported by the policy underlying section 510, which is to ensure that a debt- or’s creditors are repaid before its equity holders. (Reply ¶ 23). The Third Circuit confirms that “Section 510(b) thus represents a Congressional judgment that, as between shareholders and general unsecured creditors, it is shareholders who should bear the risk of illegality in the issuance of stock in the event the issuer enters bankruptcy.” In re Telegroup, Inc., 281 F.3d 133, 141 (3d Cir.2002). See also In re VF Brands, Inc., 275 B.R. 725, 728 (Bankr.D.Del.2002)(explaining that Congress intended section 510 to prevent equity holders from getting “the best of both worlds” — equity’s upside potential and creditors’ downside protection).
Despite Congress’s obvious intent, the Court is constrained by the plain meaning of the statute where that meaning is unambiguous. See Robinson v. Shell Oil Co., 519 U.S. 337, 340, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997)(“[The] first step in interpreting a statute is to determine whether the language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case.”). “[Wjhen the statute’s language is plain, the sole function of the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its terms.” Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000). The Debtors have not identified any relevant ambiguity in the text of sections 510(b) or 101(2) which would allow the Court to look beyond the terms of the relevant statutes.
IV. CONCLUSION
SGLP is not an affiliate as defined by section 101(2). The Debtors have not carried their burden of demonstrating that Harvest’s claims should be subordinated pursuant to section 510(b). Accordingly, the Debtors’ Objection will be overruled.
An appropriate order follows.
. This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to Federal Bankruptcy Rule 7052.
. See In re Semgroup Energy Partners, L.P., Securities Litigation, Case No. 08-MD-1989-GKF-FHM, - F.Supp.2d - (N.D.Okla.2010).
. See Opinion and Order, Case No. 08-MD-198 9-GKF-FHM (N.D.Okla. Apr. 30, 2010)[Docket No. 253].
. The Reply brief also argues that equitable subordination under section 510(c) would be appropriate, but Third Circuit law holds, and Debtors’ counsel acknowledged at argument, that equitable subordination requires a showing of a claimant’s inequitable conduct. See Citicorp Venture Capital, Ltd. v. Comm. of Creditors Holding Claims, 160 F.3d 982, 986-87 (3d Cir.1998). No such showing was made here. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488114/ | 11/18/2022
IN THE COURT OF CRIMINAL APPEALS OF TENNESSEE
AT JACKSON
Assigned on Briefs October 4, 2022
BRANDON NATHANIEL MERRITT v. STATE OF TENNESSEE
Appeal from the Criminal Court for Shelby County
Nos. C1704303, 17 02688 Lee V. Coffee, Judge
___________________________________
No. W2021-01448-CCA-R3-PC
___________________________________
The Petitioner, Brandon Nathaniel Merritt, pled guilty to attempted rape and sexual battery
and agreed to an effective sentence of six years. Pursuant to the plea agreement, the trial
court was to determine how the sentence would be served. After the trial court imposed a
sentence of full confinement, the Petitioner timely filed a petition for post-conviction relief
asserting that he received the ineffective assistance of counsel regarding his guilty pleas
and at his sentencing hearing. He also asserted that his guilty pleas were not knowingly
and voluntarily entered. After an evidentiary hearing, the post-conviction court denied the
petition for post-conviction relief. On appeal, we affirm the judgment of the post-
conviction court.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Criminal Court Affirmed
TOM GREENHOLTZ, J., delivered the opinion of the Court, in which ROBERT H.
MONTGOMERY, JR., and J. ROSS DYER, JJ., joined.
Shae Atkinson, Memphis, Tennessee, for the appellant, Brandon Nathaniel Merritt.
Herbert H. Slatery III, Attorney General and Reporter; Katherine C. Redding, Senior
Assistant Attorney General; Amy P. Weirich, District Attorney General; and Leslie
Fouche, Assistant District Attorney General, for the appellee, State of Tennessee.
OPINION
FACTUAL BACKGROUND
A. GUILTY PLEAS
In May 2017, the Shelby County Grand Jury indicted the Petitioner for two counts
of sexual battery and one count of attempted rape. On March 2, 2018, the Petitioner pled
guilty to the offenses of sexual battery and attempted rape, with the other charge being
dismissed pursuant to a plea agreement.
At the guilty plea hearing, the State discussed the basic terms of the proposed
agreement. First, the State recommended that the Petitioner be sentenced as a Range I,
standard offender and receive concurrent sentences of two years for the sexual battery
conviction and six years for the attempted rape conviction. Next, the State noted that the
parties asked for a separate sentencing hearing for the trial court to decide the manner in
which the sentence would be served. Finally, the State affirmed that the Petitioner would
be required to register as a violent sex offender and would be subject to community
supervision for life.
Upon questioning by the trial court, the Petitioner agreed that he had graduated from
college and that he could read and write. He also agreed he had signed the written plea
agreement. The Petitioner said that he had no complaints about plea counsel and that plea
counsel reviewed discovery with him and went “over those things that the State would try
to prove” if the case went to trial.
As relevant to this appeal, the trial court informed the Petitioner that the offense of
attempted rape was a violent sexual offense and that he would be required to register as a
violent sex offender due to that conviction. The trial court also informed the Petitioner that
he would be placed on community supervision for life after serving his sentences. The
Petitioner acknowledged he understood the terms of the plea agreement and the rights he
was waiving by entering his guilty pleas.
B. SENTENCING HEARING
The trial court held a sentencing hearing on June 1, 2018, to determine the manner
in which the six-year sentence would be served. At the hearing, the State called the victim
of the attempted rape. She testified that on the morning of January 6, 2017, she returned
home from driving her son to work. While getting out of her car, she noticed a white truck
stopped in the middle of the street in front of her house. After she went inside the house
-2-
with her dog, she saw the Petitioner get out of the truck and start “messing . . . under the
hood.” The Petitioner then walked up her driveway.
The victim opened her door to ask if she could help, and the Petitioner asked her for
booster cables. She could not find booster cables, and the Petitioner thanked her for trying
to help. He started walking back down her driveway.
However, upon nearly reaching the sidewalk, the Petitioner turned around and
walked back to the house. Because her dog was trying to get outside, the victim stepped
onto the front porch and asked if she could do something else to help. The Petitioner
offered to pay her a couple of dollars for gas if she agreed to drive him to the store, saying
that he did not know what was wrong with his truck. She “started feeling a little weird”
and said she would call her neighbor to help. The Petitioner agreed, and she made the call.
The Petitioner repeatedly thanked her for her help and said he would wait in his
truck so she could go inside. As she turned to go inside the house, he grabbed her around
the throat and pulled her behind her car, “trying to get [her] to the passenger side of [her]
car.” Additionally, he was “pulling [her] pants down, and grabbing at [her].”
Eventually, the victim managed to escape and ran inside her house. She called her
neighbor and told him to follow the Petitioner. She opened her door and yelled to the
Petitioner that he was going to jail. The Petitioner responded either, “‘You white b***h,’
or ‘You crazy b***h.’” He then walked down the driveway as if nothing had happened,
started his truck, and left. The victim said that she had been “scared to death” ever since
the offense, noting that “[h]e had no remorse, no anything.” She asked the court to “please
lock him up.”
On the Petitioner’s behalf, plea counsel submitted letters from Samantha
Hammonds and Amanda Young, counselors with Professional Care Services of West
Tennessee who had been working with the Petitioner; Caleb Hollingsworth, who had
worked with the Petitioner in the insurance business and vouched for the Petitioner’s
character; and a letter from David Leavell, a senior pastor at Millington First Baptist
Church, who stated that the Petitioner had been assigned to power wash exterior walkways
and entrances at the church and that he “provided exceptional services” to the church.
Brad Merritt, the Petitioner’s father, testified that the charges against the Petitioner
shocked him. Mr. Merritt said that the Petitioner was “driven and disciplined,” that he had
been “raised in church,” and that he had “a heart for service.” Despite having a “small
-3-
frame,” the Petitioner had excelled in sports in school. The Petitioner was deeply affected
when his parents divorced in his late teenage years.
The Petitioner also testified at the sentencing hearing. He stated that he was twenty-
nine years old. Although he had been married for six years, the Petitioner noted that his
wife was in Puerto Rico because of a “career opportunity.” He testified that he was self-
employed in a concrete business and that he worked to “resurface pool decks, stain
concrete, epoxy coating, [and] things of that nature.”
To seek help for his “psychological issues,” the Petitioner stated that he met
periodically with his pastor, Mr. Leavell and that he received treatment at Professional Care
Services. He said that the treatment was helping and that he was also attending “sex and
love addiction” meetings.
The Petitioner apologized to the victim of the attempted rape, believing that she and
her family felt anger and fear. He also apologized to the court “for adding to the problems.”
On cross-examination, the Petitioner acknowledged that “[t]his isn’t the first time
[he had] done this” and mentioned “another instance” of “[j]ust flirting with a female.” He
explained that due to his “heavy pornography addiction,” he “got into this habit of flirting
with random women at gas stations or stores” and convincing them to take a “selfie” with
him. As he was “flirting,” he would touch the woman’s “rear end” without her permission.
During his psychosexual evaluation, he said that he had performed the “selfie routine” with
women at least ten times. He admitted that he pled guilty to a simple assault after
purposefully bumping into a woman “with [his] groin area” in a Kroger grocery store.
The Petitioner acknowledged that he had been arrested previously for marijuana
possession, public intoxication, disorderly conduct, and driving under the influence. The
Petitioner conceded that it would be difficult for him to continue being in his “decorative
concrete” business once he was on the sex offender registry and that he would probably
have to find a new job.
The Petitioner conceded that on the same day of the attempted rape, “[t]here was a
woman walking down the street that I stopped and talked to and was flirting with.” The
woman who was the victim of the sexual battery conviction screamed and ran away.
Thereafter, the Petitioner “started to head home,” but he saw the victim of the attempted
rape leaving Walgreens, and he followed her home. He agreed with her version of events,
saying that he had “no desire to go against anything that she said[.]”
Upon questioning by the trial court, the Petitioner acknowledged that his prior
assault conviction was originally charged as sexual battery and that he was placed on
-4-
probation for that conviction. The Petitioner said that he successfully completed the
probationary sentence.
In sentencing the Petitioner, the trial court found that the Petitioner had committed
the two offenses on the same day while on probation for similar conduct, namely the sexual
battery charge that was reduced to an assault conviction. The trial court noted that the
Petitioner testified at the sentencing hearing “that there [was] only one other instance in
which he has engaged in molesting women[.]” However, the Petitioner acknowledged
during his psychosexual evaluation that “he’s basically a serial molester of women.” The
trial court found the inconsistency to be indicative of the Petitioner’s lack of truthfulness.
While the trial court acknowledged that the Petitioner was considered a suitable
candidate for probation, the court found that the suitability was outweighed by the
Petitioner’s committing the two offenses while on probation for a similar offense, his
history of misdemeanor convictions, and his history of criminal behavior by molesting
women. The court also found a need to deter the Petitioner from continuing to commit
similar offenses. The court noted that the Petitioner failed to report to Pretrial Services
several times and that he tested positive for alcohol on at least two occasions, indicating he
would be unable to abide by the terms of release. Accordingly, the trial court ordered the
Petitioner to serve the balance of his six-year sentence in confinement. The Petitioner did
not appeal his sentence.
C. POST-CONVICTION PROCEEDINGS
On March 31, 2019, the Petitioner timely filed a pro se petition for post-conviction
relief. After counsel was appointed, the Petitioner filed an amended petition alleging, in
relevant part,1 that his plea counsel was ineffective by (1) failing to explain the difference
between community supervision for life, the sex offender registry, and the violent sex
offender registry, including that he could not be “removed from community supervision”;
(2) failing to explain the elements of the offenses that the State was required to prove at
trial to obtain a conviction such that, consequently, he was unable to make an informed
decision as to whether to plead guilty or proceed to trial; and (3) by misrepresenting the
maximum possible sentence of confinement that he would receive as a result of his plea.
The Petitioner also asserted that plea counsel was ineffective during the sentencing hearing
by (1) failing to introduce a character reference letter from his pastor and (2) failing to
clarify to the trial court that he had attended all required drug screens. Finally, the
1
Because any additional issues originally raised in the petitions have not been raised on
appeal, we do not address those additional issues further. See Lewis v. State, No. W2020-00653-CCA-R3-
PC, 2021 WL 3140352, at *5 (Tenn. Crim. App. July 26, 2021).
-5-
Petitioner contended that due to the ineffectiveness of counsel, his guilty pleas were not
knowingly and voluntarily entered.
1. Plea Counsel’s Testimony
At the post-conviction hearing, plea counsel testified that he had practiced law for
thirty-eight years and that he had a “general practice with the emphasis on criminal
defense.” Plea counsel began representing the Petitioner in general sessions court and
continued to represent him after the case was bound over to the criminal court. Counsel
noted that the Petitioner was originally charged with aggravated kidnapping, attempted
rape, and sexual battery, and he was later also charged with a second count of sexual
battery.
According to plea counsel, the Petitioner initially denied any involvement in the
offenses. However, after plea counsel obtained information from the State that was
inconsistent with the Petitioner’s version of events, the Petitioner admitted to plea counsel
that he had committed the offenses. The Petitioner also explained that he had lied to
prevent his family from learning about his guilt.
While the case was pending in the general sessions court, plea counsel and the State
discussed possible resolutions to the case. According to plea counsel, the Petitioner wanted
to avoid incarceration because he was self-employed and needed to provide for his wife.
The State proposed that the Petitioner accept a plea of guilty to the offenses of attempted
rape and sexual battery. The State further proposed that the Petitioner receive concurrent
sentences of six years for the attempted rape conviction and two years for the sexual battery
conviction. As plea counsel noted, if the Petitioner accepted this plea, then the State would
not seek a separate indictment for the offense of aggravated kidnapping, which would have
exposed the Petitioner to a minimum sentence of eight years’ incarceration without the
possibility of parole.
Plea counsel told the Petitioner that the State’s offer would permit the Petitioner to
“petition the Court for extraordinary relief, probation, whatever the case may be.” Plea
counsel explained to the Petitioner the factors the trial court would consider when deciding
whether to grant an alternative sentence to incarceration, such as the nature of the offense,
the prior history of similar conduct, whether steps had been taken to address the issues that
led to the charges, employment history, criminal history, and truthfulness.
Plea counsel further advised the Petitioner that it was “very difficult” to get
probation “any time you’ve got multiple victims and you’ve got some history.” Plea
counsel thought it was more likely the Petitioner would get split confinement than full
probation. Plea counsel cautioned the Petitioner, “[E]ven with that, if the Judge doesn’t
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believe you’re sincere, if the Judge doesn’t believe your testimony, if you’re not credible,
then you’re not going to get the relief. And my recollection of the hearing, [the Petitioner]
did not present himself particularly credible.” Plea counsel explained to the Petitioner that
he was not guaranteed to receive probation or split confinement.
Plea counsel testified that he also explained the elements of attempted rape and
sexual battery to the Petitioner. Plea counsel also explained to the Petitioner that the State
had evidence to support the charges against him, including the aggravated kidnapping
charge. Plea counsel never thought the Petitioner misunderstood his options or what he
was facing.
Plea counsel also advised the Petitioner that attempted rape was “categorized as a
violent sexual offense because rape is a violent sexual offense . . . , [and that it] requires
lifetime registry if convicted.” He explained that sexual battery was a sexual offense that
required the Petitioner to register as a sexual offender but that the Petitioner could “get off
after 10 years.” Plea counsel advised the Petitioner what the sexual offender “registry
required and what offenses were required to be registered” and “told him that upon
conviction of a rape or an attempted rape, that he would be supervised for life under current
Tennessee law.”
Plea counsel further advised the Petitioner that, if he were convicted of a violent
sexual offense, then his community supervision was “going to be for life” and that he would
not be able to “get off of it after some period of time.” Plea counsel said that it was never
an option to remove the requirement of community supervision for life from the guilty
pleas.
Plea counsel acknowledged that he had received two letters from David Leavell, the
pastor at Millington First Baptist Church: one dated July 12, 2017, and the other dated July
18, 2017. Plea counsel submitted the July 12 letter at the Petitioner’s sentencing hearing
because it reflected Mr. Leavell had known the Petitioner for eight years and had
“counseled him in the Challenging Seasons of Life.” Although the second letter referred
to the Petitioner’s having volunteered to perform community service work at church, plea
counsel did not submit this letter because he thought it was “superfluous.” Plea counsel
did not recall anything regarding the Petitioner’s failure to report for drug screens or failing
drug screens being used against him at the sentencing hearing.
2. Petitioner’s Testimony
The Petitioner also testified at his post-conviction hearing. As to the issues arising
from his original plea, the Petitioner testified that he told plea counsel that he was
“struggling” with pleading guilty to attempted rape because he did not try to rape anyone.
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The Petitioner also said that plea counsel never discussed the elements that the State needed
to prove in order to convict the Petitioner of the charges at trial. The Petitioner did not
recall meeting with plea counsel on multiple occasions. The Petitioner said that the only
time he and plea counsel spoke “was on the phone right before court or out in the hallway
right before court, other than the two times when I met in his office with my wife.”
The Petitioner also denied that plea counsel explained the possible charge of
aggravated kidnapping to him. He agreed, though, that plea counsel informed him that the
aggravated kidnapping would be dismissed if he pled guilty to the other charges and that
probation could be considered.
According to the Petitioner, plea counsel advised the Petitioner that a trial would
not end in the Petitioner’s favor. Plea counsel said, “[I]f you do go to trial, you have two
victims in your case, it’s not going to go in your favor, this is the deal.”
The Petitioner testified that when his case was in the general sessions court, plea
counsel told him about the terms of the plea proposed by the State, including that he would
receive a six-year sentence and be permitted to argue for probation. According to the
Petitioner, plea counsel “initially told [him] that worst case, you’ll get six months split
confinement[.]” After several court dates, however, plea counsel began to say that “six
months split confinement would be a best-case scenario.”
The Petitioner confirmed that the trial court told him at the guilty plea hearing that
there was no guarantee the Petitioner would receive probation. The Petitioner also agreed
that he understood he was not guaranteed to receive probation.
The Petitioner also testified that plea counsel told him that “certain charges classify
as the . . . non-violent sex offender, and that this criminal attempt rape charge is a violent
sex offense.” After the Petitioner asked plea counsel to explain the difference, plea counsel
said, “[T]hey’re the same thing. The only thing is you have to wait 15 years to get off
instead of 10. . . . [I]t’s called for life, but you can petition to get off in 15 years[.]”
According to the Petitioner, plea counsel explained the difference between the types
of sex offender registries and said that the Petitioner could petition to be removed from the
violent sex offender registry and community supervision for life after fifteen years. As a
result, the Petitioner believed that supervision on the sex offender registry was the “same
thing” as community supervision for life.
However, the Petitioner testified that, after he was sent to the Penal Farm, he learned
that the sex offender registry and community supervision for life were “two separate
things” with their own agencies, fees, and rules. He also learned for the first time that he
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could not be removed from the violent sex offender registry. The Petitioner testified that
had he known this information before pleading guilty, he would not have chosen “to sign
up for the rest of my life[.]”
The Petitioner acknowledged that the trial court informed him at the guilty plea
hearing of the differences between community supervision for life and the sex offender
registry, that the Petitioner had to register as a violent sex offender, and that it never told
the Petitioner that supervision could be ended at any point. However, the Petitioner
testified that “[a]t that time, all I had was [plea counsel’s] voice in my head saying, it’s
called for life but you can petition to get off in 15 years, you know.”
Finally, the Petitioner acknowledged that he told the trial court that he did not have
any problems with plea counsel but explained that his dissatisfaction with plea counsel
developed “[w]hen I was incarcerated and I started doing some reading.” The Petitioner
also confirmed that plea counsel told him that it was the Petitioner’s decision whether to
plead guilty, and plea counsel did not force him to plead guilty.
As to the issues arising from the sentencing hearing, the Petitioner identified two
letters from his pastor, David Leavell. According to the Petitioner, plea counsel submitted
the letter “about pressure-washing [at the sentencing hearing], but not the one about getting
treatment.” When the Petitioner asked why he did not submit the second letter, plea
counsel responded that “it wouldn’t have mattered.”
The Petitioner also testified that the State argued at the sentencing hearing that the
Petitioner did not report for drug screening as he should have done. The Petitioner
explained that he was required to take a random screening once a month and that he was
supposed to call in every day. On two occasions, though, he was randomly selected to have
two drug screens in the same month. According to the Petitioner, he called “Pre-trial
Services” and asked if he needed to take the second test, and he was told, “[N]o, as long as
you’ve been once that month, you don’t have to go a second time.”
The Petitioner further testified that he “had all the receipts” showing that he
appeared for the drug screens, but that plea counsel told him “that wouldn’t have made a
difference.” According to the Petitioner, however, he believed that the trial court “weighed
heavily” its belief that it could not “trust [the Petitioner] to follow the rules of probation.”
3. Post-Conviction Court’s Denial of the Petition
Following the hearing, the post-conviction court denied the petition for post-
conviction relief. The post-conviction court found that the Petitioner “is not a truthful
person,” and the court specifically credited the testimony of plea counsel and resolved “all
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credibility issues against the petitioner.” The post-conviction court also noted that the
Petitioner “had not been truthful[ and] that he had not told the [trial court] the truth” at the
sentencing hearing.
The post-conviction court recognized that plea counsel “represented [the Petitioner],
not only well, but [that] he did an exceptional job . . . .” The court did not believe that the
Petitioner met with plea counsel “only a handful of times.” Instead, the court noted that
plea counsel convinced the State not to indict the Petitioner for aggravated kidnapping,
which permitted the Petitioner an opportunity to argue for probation with a lesser sentence.
Specifically with respect to issues of punishment, the post-conviction court
discredited the Petitioner’s statement that plea counsel promised “a six month split
confinement at wors[t].” Instead, the post-conviction court noted that the Petitioner had
been advised by the trial court that he would be required to register as a violent sex offender
and that he would be subject to lifetime supervision as a result of the plea. The court also
observed that the Petitioner was told by the trial court that “there were no guarantees” that
the Petitioner “would receive a sentence of probation or split confinement.” The court also
identified the reasons for the sentence of confinement as including that the offenses
involved multiple victims, that the Petitioner was then on probation, and that he had a
history of sexually assaulting women.
Finally, with respect to the Petitioner’s claim that his plea was unknowing and
involuntary, the post-conviction found that the Petitioner failed to prove his claim by clear
and convincing evidence. The court observed that, during the original plea hearing, the
Petitioner affirmed that he read the plea agreement and that plea counsel explained both
the nature of the charges and the ranges of punishment. The post-conviction court also
recognized that the Petitioner was advised by the trial court of the constitutional rights he
was waiving by entering into a plea, including the right to a trial by jury, the right to
confront witnesses, and the privilege against self-incrimination. The court found that the
Petitioner “repeatedly assured the trial court that he understood his rights and the
consequences of the plea.”
The post-conviction court also found that the Petitioner “repeatedly answered that
he understood his rights and the proceedings, acknowledged that he wanted to go forward,
and confirmed that his pleas were knowingly and voluntarily entered.” The post-conviction
court found that the Petitioner “admitted that he chose to enter a guilty plea” and that he
“indicated that he answered truthfully at the guilty plea submission hearing.” The
Petitioner told the trial court “that the decision to enter this guilty plea was made without
any threats, force, promises, or coercion.”
For those reasons, the post-conviction court denied the post-conviction petition,
finding that plea counsel was not deficient and that the Petitioner was not prejudiced by
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any alleged deficiency. After a written order was entered on November 9, 2021, the
Petitioner filed a timely notice of appeal on December 8, 2021. We affirm the judgment
of the post-conviction court.
ANALYSIS
The Tennessee Post-Conviction Procedure Act provides an avenue for relief “when
the conviction or sentence is void or voidable because of the abridgment of any right
guaranteed by the Constitution of Tennessee or the Constitution of the United States.”
Tenn. Code Ann. § 40-30-103. A post-conviction petitioner has the burden of proving his
or her allegations of fact by clear and convincing evidence. Tenn. Code Ann. § 40-30-
110(f). For evidence to be clear and convincing, “it must eliminate any ‘serious or
substantial doubt about the correctness of the conclusions drawn from the evidence.’”
Arroyo v. State, 434 S.W.3d 555, 559 (Tenn. 2014) (quoting State v. Sexton, 368 S.W.3d
371, 404 (Tenn. 2012)).
A. INEFFECTIVE ASSISTANCE OF COUNSEL
Our supreme court has recognized that “the first question for a reviewing court on
any issue is ‘what is the appropriate standard of review?’” State v. Enix, 653 S.W.3d 692,
698 (Tenn. 2022). As our supreme court has made clear,
Appellate review of an ineffective assistance of counsel claim is a mixed
question of law and fact that this Court reviews de novo. Witness credibility,
the weight and value of witness testimony, and the resolution of other factual
issues brought about by the evidence are entitled to a presumption of
correctness, which is overcome only when the preponderance of the evidence
is otherwise. On the other hand, we accord no presumption of correctness to
the post-conviction court’s conclusions of law, which are subject to purely
de novo review.
Phillips v. State, 647 S.W.3d 389, 400 (Tenn. 2022) (citations omitted).
Article I, section 9 of the Tennessee Constitution establishes that every criminal
defendant has “the right to be heard by himself and his counsel.” Similarly, the Sixth
Amendment to the United States Constitution, made applicable to the states by the
Fourteenth Amendment, guarantees that all criminal defendants “shall enjoy the right . . .
to have the [a]ssistance of [c]ounsel.” “These constitutional provisions guarantee not
simply the assistance of counsel, but rather the reasonably effective assistance of counsel.”
Nesbit v. State, 452 S.W.3d 779, 786 (Tenn. 2014). A petitioner’s claim that he or she has
been deprived “of effective assistance of counsel is a constitutional claim cognizable under
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the Post-Conviction Procedure Act.” Moore v. State, 485 S.W.3d 411, 418 (Tenn. 2016);
see Howard v. State, 604 S.W.3d 53, 57 (Tenn. 2020).
“To prevail on a claim of ineffective assistance of counsel, a petitioner must
establish both that counsel’s performance was deficient and that counsel’s deficiency
prejudiced the defense.” Moore, 485 S.W.3d at 418-19 (citing Strickland v. Washington,
466 U.S. 668, 687 (1984); Goad v. State, 938 S.W.2d 363, 369 (Tenn. 1996)). A petitioner
may establish that counsel’s performance was deficient by showing that “‘counsel’s
representation fell below an objective standard of reasonableness.’” Garcia v. State, 425
S.W.3d 248, 256 (Tenn. 2013) (quoting Strickland, 466 U.S. at 688). As our supreme court
has also recognized, this Court must look to “‘all the circumstances’” to determine whether
counsel’s performance was reasonable and then objectively measure this performance
against “the professional norms prevailing at the time of the representation.” Kendrick v.
State, 454 S.W.3d 450, 458 (Tenn. 2015) (quoting Strickland, 466 U.S. at 688).
“If the advice given or services rendered by counsel are ‘within the range of
competence demanded of attorneys in criminal cases,’ counsel’s performance is not
deficient.” Phillips, 647 S.W.3d at 407 (quoting Baxter v. Rose, 523 S.W.2d 930, 936
(Tenn. 1975)). Notably, because this inquiry is highly dependent on the facts of the
individual case, “[c]onduct that is unreasonable under the facts of one case may be perfectly
reasonable under the facts of another.” State v. Burns, 6 S.W.3d 453, 462 (Tenn. 1999).
In addition, a petitioner must establish that he or she has been prejudiced by
counsel’s deficient performance such that counsel’s performance “‘render[ed] the result of
the trial unreliable or the proceeding fundamentally unfair.’” Kendrick, 454 S.W.3d at 458
(quoting Lockhart v. Fretwell, 506 U.S. 364, 372 (1993)). In other words, the petitioner
“must establish ‘a reasonable probability that, but for counsel’s unprofessional errors, the
result of the proceeding would have been different.’” Davidson v. State, 453 S.W.3d 386,
393-94 (Tenn. 2014) (quoting Strickland, 466 U.S. at 694). “‘A reasonable probability is
a probability sufficient to undermine confidence in the outcome.’” Howard, 604 S.W.3d
at 58 (quoting Strickland, 466 U.S. at 694). “In order to establish prejudice in the context
of a guilty plea, a petitioner must show by a reasonable probability that, but for counsel’s
errors, he or she would not have pled guilty and would have insisted upon going to trial.”
Taylor v. State, 443 S.W.3d 80, 84-85 (Tenn. 2014) (citing Hill v. Lockhart, 474 U.S. 52,
59 (1985)).
Because a post-conviction petitioner bears the burden of establishing both deficient
performance and resulting prejudice, “a court need not address both concepts if the
petitioner fails to demonstrate either one of them.” Garcia, 425 S.W.3d at 257. Indeed,
“[a] court need not first determine whether counsel’s performance was deficient before
examining the prejudice suffered by the defendant as a result of the alleged deficiencies.
If it is easier to dispose of an ineffectiveness claim on the ground of lack of sufficient
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prejudice, that course should be followed.” Strickland, 466 U.S. at 697; see Phillips, 647
S.W.3d at 401 (“The petitioner must prove sufficient facts to support both the deficiency
and prejudice prongs of the Strickland inquiry—or, stated another way, the post-conviction
court need only determine the petitioner’s proof is insufficient to support one of the two
prongs to deny the claim.”).
Importantly, when considering a claim of ineffective assistance of counsel, this
Court begins with “the strong presumption that counsel provided adequate assistance and
used reasonable professional judgment to make all strategic and tactical significant
decisions,” Davidson, 453 S.W.3d at 393, and “[t]he petitioner bears the burden of
overcoming this presumption,” Kendrick, 454 S.W.3d at 458. This Court will “not grant
the petitioner the benefit of hindsight, second-guess a reasonably based trial strategy, or
provide relief on the basis of a sound, but unsuccessful, tactical decision made during the
course of the proceedings.” Berry v. State, 366 S.W.3d 160, 172 (Tenn. Crim. App. 2011)
(citation omitted). Of course, “the fact that a particular strategy or tactic failed or hurt the
defense, does not, standing alone, establish unreasonable representation.” Goad, 938
S.W.2d at 369. However, this Court will give deference to the tactical decisions of counsel
only if counsel’s choices were made after adequate preparation of the case. Moore, 485
S.W.3d at 419.
As we have noted, the Petitioner alleges that his plea counsel was ineffective by (1)
failing to explain the difference between community supervision for life, the sex offender
registry, and the violent sex offender registry, including that he could not be “removed
from community supervision”; (2) failing to explain the elements of the offenses that the
State was required to prove at trial to obtain a conviction such that, consequently, he was
unable to make an informed decision as to whether to plead guilty or proceed to trial; (3)
misrepresenting the maximum possible sentence of confinement that he would receive as
a result of his plea; (4) failing to introduce a character reference letter from his pastor at
his sentencing hearing; and (5) failing to clarify to the sentencing court that he had attended
all required drug screens. The State argues that the Petitioner has failed to show that he
received the ineffective assistance of counsel. For the reasons given below, we agree with
the State.
1. Plea Counsel’s Advice as to Lifetime Supervision
The Petitioner first argues that plea counsel rendered ineffective assistance by
failing to give accurate advice as to the sex offender registry and community supervision
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for life requirements of his guilty plea. He maintains that if he had known the details about
the registry and community supervision for life, he would not have pled guilty.
“The Tennessee sexual offender registration act requires persons convicted of a
sexual offense or violent sexual offense to provide to law enforcement officials certain
regularly updated information, including the offender’s residence, employment, electronic
mail or other internet identification, and other personal information.” Ward v. State, 315
S.W.3d 461, 468 (Tenn. 2010) (footnote omitted). Our supreme court has held that the
plain language of the statute “expresses a nonpunitive intent to protect the public” and that,
according to “the General Assembly, the registration requirement does not inflict additional
punishment . . . nor does it alter the range of punishment.” Id. at 470.
Importantly, the registration requirements are a collateral consequence of a guilty
plea. Id. at 472. As such, a trial court’s failure to advise regarding the sex offender
registration requirement does not render a guilty plea constitutionally invalid, although,
clearly, the better practice is for a trial court to advise a defendant “that a consequence of
pleading guilty to an offense requiring sex offender registration is that the defendant must
register as a sex offender[.]” Id. However, “an additional sentence of lifetime community
supervision is a direct and punitive consequence of which a defendant must be informed in
order to enter a knowing and voluntary guilty plea.” Id. at 475.
The Petitioner specifically argues that, if his post-conviction testimony were taken
as true, then it would establish that he misunderstood the requirements of the sex offender
registry and community supervision for life. He states that he thought he could be removed
from the sex offender registry after ten years and the violent sex offender registry after
fifteen years. He further states that he did not know community supervision for life was a
separate requirement because he thought it was “the same thing” as the sex offender
registry until after he was “incarcerated at the [P]enal [F]arm.” However, the post-
conviction court explicitly discredited the testimony of the Petitioner and accredited the
testimony of plea counsel. Plea counsel testified that he advised the Petitioner of the
requirements of the sex offender registry and community supervision for life.
Additionally, the post-conviction court observed that the trial court ensured that the
Petitioner was aware of the requirements of the sex offender registry and community
supervision for life prior to the entry of the guilty plea. We are bound by the post-
conviction court’s determinations of credibility unless the preponderance of the evidence
is to the contrary. We may neither “re-weigh or re-evaluate the evidence,” nor “substitute
[our] own inferences for those drawn by the post-conviction court.” Whitehead v. State,
402 S.W.3d 615, 621 (Tenn. 2013). Upon our review of the record, the evidence does not
preponderate against the credibility findings made by the post-conviction court.
Accordingly, the Petitioner has failed to establish either that plea counsel was deficient or
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that he was prejudiced by any alleged deficiency. The Petitioner has failed to prove
ineffective assistance of counsel in this regard.
2. Plea Counsel’s Advice as to Offense Elements
The Petitioner next argues that his plea counsel was ineffective by failing to advise
him of what the State must prove at trial to obtain a conviction. According to the Petitioner,
he “struggle[ed]” with pleading guilty to the offense of attempted rape because he “didn’t
try to rape anybody.” The Petitioner argues that, without information about what the State
would be required to prove at a trial, he did not understand what options were available to
him.
The post-conviction court discredited the Petitioner’s testimony that plea counsel
did not explain the elements of the offenses to him, finding that plea counsel adequately
explained the elements of the offenses and the proof the State had against the Petitioner.
The post-conviction court observed that the Petitioner’s main concern was the possibility
of probation and the avoidance of a sentence of incarceration and that had the Petitioner
proceeded to trial, he would have faced an additional charge of aggravated kidnapping, a
conviction of which would have foreclosed any opportunity for probation. Plea counsel
testified that the Petitioner understood the charges he was facing and his options. The
evidence does not preponderate against the post-conviction court’s findings that plea
counsel was not deficient and that the Petitioner was not prejudiced by any alleged
deficiency. The Petitioner is not entitled to relief in this regard.
3. Plea Counsel’s Advice as to the Sentence
The Petitioner next argues that plea counsel was ineffective by advising him that, in
a “wors[t] case scenario,” he would have to serve a maximum of six months in confinement
as a result of his guilty pleas. He argues that if his post-conviction testimony were taken
as true, then the difference between a six-year sentence and a six-month, split confinement
sentence would itself show he would not have pled guilty had he “been aware of what he
was realistically looking at in his case with sentencing[.]”
However, three issues exist with the Petitioner’s argument. First, the Petitioner
himself acknowledged at the post-conviction hearing that he knew he was accepting a
sentence of six years and that, while he would be able to petition the trial court for
probation, an alternative sentence was not guaranteed. Second, plea counsel’s credited
testimony showed that he did not guarantee that the Petitioner would be granted probation,
especially given the Petitioner’s credibility issues. Finally, the transcript from the plea
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hearing shows that the trial court specifically warned the Petitioner prior to the plea that
probation was not guaranteed.
The evidence does not preponderate against the post-conviction court’s findings that
plea counsel did not perform deficiently and that the Petitioner was not prejudiced by plea
counsel’s performance. The record also supports the post-conviction court’s determination
that the Petitioner failed to prove that counsel was ineffective in his advice about the
sentence. The Petitioner is not entitled to relief in this regard.
4. Character Reference Letter
The Petitioner also contends that plea counsel was ineffective at his sentencing
hearing by failing to introduce a character reference letter written by his pastor. We
acknowledge that the letter is in the record; however, the Petitioner’s brief contains no
argument on this issue. He does not argue, for example, how he believes that the letter was
relevant to sentencing, nor does he identify how the outcome of his sentencing hearing
would have been different had this letter been introduced as an exhibit. Under these
circumstances, we conclude that this issue is waived. See Tenn. Ct. Crim. App. R. 10(b)
(“Issues unsupported by argument . . . or appropriate references to the record will be treated
as waived in this court.”).
5. Petitioner’s Reporting for Pretrial Supervision
Finally, the Petitioner argues that plea counsel was ineffective by failing to clarify
for the trial court that he had reported for all required drug screens. The Petitioner argues
that the trial court found that while under the supervision of Pretrial Services, the Petitioner
failed to report several times and that this finding influenced the trial court’s decision to
deny alternative sentencing.
However, the post-conviction court found that the Petitioner was “not a truthful
person” either at the post-conviction hearing or at the sentencing hearing. Specifically, the
post-conviction court observed that the Petitioner told conflicting stories to the trial court
and to the person conducting the psychosexual evaluation regarding how many women he
had previously molested.
The post-conviction court also noted that the Petitioner had violated his pretrial
release by testing positive for alcohol. Plea counsel had cautioned the Petitioner that his
truthfulness with the trial court was a crucial factor in the court’s deciding whether to grant
the Petitioner probation. The post-conviction court found that even if the Petitioner had
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offered this “clarifying information,” it would not have caused the trial court to look more
favorably on the Petitioner.
To bolster his argument, the Petitioner argues on appeal that he had “receipts”
showing that he reported for all drug screens. However, the Petitioner did not offer these
receipts as an exhibit for the post-conviction court’s consideration. This Court has
specifically cautioned that
[i]f a petitioner argues that trial counsel rendered ineffective assistance of
counsel by failing to argue a legal issue or present certain evidence, either
testimony or exhibits, a repeat of such failure at the post-conviction hearing
will most likely result in the failure to succeed on a claim of ineffective
assistance of counsel.
Grimes v. State, No. W2018-01665-CCA-R3-PC, 2020 WL 249228, at *13 (Tenn. Crim.
App. Jan. 16, 2020), perm. app. denied (Tenn. Aug. 5, 2020); see Pilate v. State, No.
W2017-02060-CCA-R3-PC, 2018 WL 3868484, at *5 (Tenn. Crim. App. Aug. 14, 2018)
(“Failure to present the documents at the post-conviction hearing makes it nearly
impossible for Petitioner to show that trial counsel’s deficient performance in failing to
obtain or introduce the document at trial prejudiced the defense.”). The post-conviction
court found that the Petitioner failed to prove that plea counsel performed deficiently and
that he failed to prove prejudice from any alleged deficiency. The evidence does not
preponderate against the post-conviction court’s findings. The post-conviction court did
not err in denying the Petitioner’s ineffective assistance of counsel claim based upon plea
counsel’s failure to clarify to the trial court that the Petitioner reported for drug screens.
B. KNOWING AND VOLUNTARY GUILTY PLEA
The Petitioner next argues that he did not plead guilty knowingly and voluntarily.
Our supreme court has recognized that “[t]he validity of a guilty plea is a mixed question
of law and fact.” Lane v. State, 316 S.W.3d 555, 562 (Tenn. 2010). As such, our review
of whether the Petitioner entered valid guilty pleas in this case is also de novo, applying a
presumption of correctness only to the post-conviction court’s findings of fact. Holland v.
State, 610 S.W.3d 450, 455 (Tenn. 2020).
When a defendant enters a guilty plea, he or she “waives several constitutional
rights, including the privilege against self-incrimination, the right to a trial by jury, and the
right to confront his accusers.” State v. Mellon, 118 S.W.3d 340, 345 (Tenn. 2003). As
such, the Due Process Clause of the Fourteenth Amendment requires that “a guilty plea
must be entered knowingly, voluntarily, and intelligently.” Ward, 315 S.W.3d at 465; see
Frazier v. State, 495 S.W.3d 246, 253 (Tenn. 2016). Where a defendant’s guilty plea “‘is
not equally voluntary and knowing, it has been obtained in violation of due process’ and
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must be set aside.” State v. Nagele, 353 S.W.3d 112, 118 (Tenn. 2011) (quoting
Blankenship v. State, 858 S.W.2d 897, 905 (Tenn. 1993)). Thus, a post-conviction
petitioner’s claim “which asserts that a plea was not voluntarily and knowingly entered,
implicates his due process rights and therefore falls squarely within the ambit of issues
appropriately addressed in a post-conviction petition.” State v. Wilson, 31 S.W.3d 189,
194 (Tenn. 2000).
To determine whether a guilty plea was knowingly, voluntarily, and intelligently
entered, a court must look to “‘whether the plea represents a voluntary and intelligent
choice among the alternative courses of action open to the defendant.’” Jaco v. State, 120
S.W.3d 828, 831 (Tenn. 2003) (quoting North Carolina v. Alford, 400 U.S. 25, 31 (1970)).
A defendant cannot make this voluntary and intelligent choice if the decision “results from,
among other things, ignorance or misunderstanding.” Nagele, 353 S.W.3d at 118. Thus,
before a trial court may accept a guilty plea, it must canvass “‘the matter with the accused
to make sure he has a full understanding of what the plea connotes and of its consequence.’”
Garcia, 425 S.W.3d at 262 (quoting Brady v. United States, 397 U.S. 742, 755 (1970)).
Ultimately, the issue of “whether an accused’s plea of guilty was voluntarily,
understandingly, and knowingly entered is to be determined based upon the totality of the
circumstances.” State v. Turner, 919 S.W.2d 346, 353 (Tenn. Crim. App. 1995); see Rigger
v. State, 341 S.W.3d 299, 308-09 (Tenn. Crim. App. 2010). Our supreme court has
recognized several factors that may inform this analysis, including the following:
(1) the defendant’s relative intelligence; (2) the defendant’s familiarity with
criminal proceedings; (3) the competency of counsel and the defendant’s
opportunity to confer with counsel about alternatives; (4) the advice of
counsel and the trial court about the charges and the penalty to be imposed;
and (5) the defendant’s reasons for pleading guilty, including the desire to
avoid a greater penalty in a jury trial.
Howell v. State, 185 S.W.3d 319, 330-31 (Tenn. 2006).
The Petitioner argues that because of the ineffective assistance of counsel, he did
not understand the differences between the sex offender registry and community
supervision for life; that he did not know what elements the State would have needed to
prove to sustain convictions of the charged offenses at trial; and that he thought he would
have to serve six months in confinement at most if he pled guilty. The Petitioner maintains
that, absent the ineffective assistance of counsel, he would not have pled guilty.
“[D]uring the plea bargain process, as at all critical stages of the criminal process,
counsel has the responsibility to render effective assistance as required by the Sixth
Amendment.” Nesbit, 452 S.W.3d 787. Thus, plea counsel’s “effectiveness may implicate
- 18 -
the requirement that a plea must be entered knowingly and voluntarily, i.e., that the
petitioner made the choice to plead guilty after being made aware of the significant
consequences of such a plea.” Johnson v. State, No. W2015-02498-CCA-R3-PC, 2017
WL 192710, at *4 (Tenn. Crim. App. Jan. 17, 2017).
Earlier in this opinion, we held that the Petitioner failed to establish that he received
the ineffective assistance of counsel. Accordingly, we conclude that the record does not
preponderate against the post-conviction court’s findings that the Petitioner’s guilty pleas
were not rendered unknowing or involuntary due to any alleged ineffective assistance by
counsel. Payne v. State, No. E2021-01017-CCA-R3-PC, 2022 WL 3683793, at *8 (Tenn.
Crim. App. Aug. 25, 2022).
The Petitioner does not allege that any other factor impeded the knowing and
voluntary nature of his guilty plea. The post-conviction court found that during the guilty
plea, the trial court thoroughly questioned the Petitioner to ensure he understood his rights
and that he was waiving those rights by pleading guilty. The post-conviction court also
found that the trial court and plea counsel advised the Petitioner of his options and that the
Petitioner assured the trial court that he had not been forced or coerced and had chosen to
plead guilty. This court has noted that “[a] petitioner’s solemn declaration in open court
that his plea is knowing and voluntary creates a formidable barrier in any subsequent
collateral proceeding because these declarations ‘carry a strong presumption of verity.’”
Wilbanks v. State, No. E2014-00229-CCA-R3-PC, 2015 WL 354773, at *10 (Tenn. Crim.
App. Jan. 28, 2015) (quoting Blackledge v. Allison, 431 U.S. 63, 74 (1977)). Based upon
the foregoing, the post-conviction court found that the Petitioner’s guilty pleas were
knowingly and voluntarily entered. The record does not preponderate against this finding.
CONCLUSION
In summary, the Petitioner has failed to show that the post-conviction court erred in
determining that he did not receive the ineffective assistance of counsel or that his guilty
pleas were knowingly and voluntarily entered. Accordingly, we affirm the denial of post-
conviction relief.
____________________________________
TOM GREENHOLTZ, JUDGE
- 19 - | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488101/ | Filed 11/18/22 Saint Ignatius Neighborhood Assn. v. City and County of S.F. CA1/4
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or
ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FOUR
SAINT IGNATIUS
NEIGHBORHOOD ASSOCIATION,
Plaintiff and Appellant, A164629
v. (City & County of San Francisco
CITY AND COUNTY OF SAN Super. Ct. No. CPF-20-517320)
FRANCISCO,
Defendant and Respondent.
Plaintiff Saint Ignatius Neighborhood Association (the neighborhood
association) appeals a judgment denying its petition for writ of mandate
challenging the approval by the City and County of San Francisco (the city) of
an application submitted by Saint Ignatius College Preparatory High School
(the school) seeking authorization to install four 90-foot light standards in the
school’s athletic stadium. The neighborhood association contends the city
erred by finding that the proposed lighting project was exempt from review
under the California Environmental Quality Act (CEQA) (Pub. Resources
Code,1 § 21000 et seq.). We agree and shall reverse the judgment.
1 All statutory references are to the Public Resources Code unless
otherwise noted.
1
Background
The school is located at 2001 37th Avenue in the city’s “Outer Sunset
District.” The school’s athletic stadium is located at the southwest corner of
the campus, with frontage on 39th Avenue and Rivera Street. The stadium
has a seating capacity of 2,008 persons. Surrounding the stadium, including
west across 39th Avenue and south across Rivera Street, are two-story,
mostly single-family homes.
In February 2018, the school submitted an application for approval of
the addition of four permanent 90-foot tall outdoor light standards to its
athletic field to enable nighttime use of the stadium.2
In June 2020, the city’s planning department determined that the
project is categorically exempt from review under CEQA. In July, the
planning commission approved a conditional use authorization for the project
with several conditions on use of the lights. The planning commission
required, among other things, that the lights be used no more than 150
nights per year, generally dimmed no later than 8:30 p.m. and turned off no
later than 9:00 p.m., used for larger events until 10:00 p.m. no more than 20
evenings per year, and not be used by groups unaffiliated with the school.
The planning commission also required close communication with neighbors
about events on the field, and required distribution of a large-event
management plan and a code of conduct for students and others attending
events.
The board of supervisors affirmed the planning department’s
determination that the project is categorically exempt from CEQA review and
approved the conditional-use authorization after imposing additional-use
2 The project also includes installation of telecommunications equipment
that is not at issue in the present appeal.
2
conditions. The board of supervisors further (1) restricted the hours that the
field lights could be used, requiring that they be dimmed no later than
8:00 p.m. and turned off no later than 8:30 p.m. except that on 15 nights a
year lights could remain on until 10:00 p.m.; (2) required the school to report
the dates and times the lights are turned on, dimmed, and turned off;
(3) required that for events with anticipated crowds of more than 500 people,
the school provide off-site parking to accommodate at least 200 vehicles; and
(4) required that trees be installed to better screen the field and lights from
neighboring homes.
Thereafter, the neighborhood association filed a petition for writ of
mandate alleging that the city erred in exempting the project from CEQA
review and that the city’s approval of the conditional use authorization was
inconsistent with the city’s planning code and its general plan.
The trial court denied the petition and the neighborhood association
timely filed a notice of appeal.
Discussion
“CEQA and its implementing regulations ‘embody California’s strong
public policy of protecting the environment.’ ” (Bottini v. City of San Diego
(2018) 27 Cal.App.5th 281, 291.) “CEQA establishes a three-tier
environmental review process. The first step is jurisdictional and requires a
public agency to determine whether a proposed activity is a ‘project.’ . . . If a
proposed activity is a project, the agency proceeds to the second step of the
CEQA process. [¶] At the second step, the agency must ‘decide whether the
project is exempt from the CEQA review process under either a statutory
exemption [citation] or a categorical exemption set forth in the CEQA
3
Guidelines.’ ”3 (Ibid.) “The Guidelines contain 33 classes of categorical
exemptions. (Guidelines, §§ 15301-15333.) Each class embodies a ‘finding by
the Resources Agency that the project will not have a significant
environmental impact.’ ” (San Lorenzo Valley Community Advocates for
Responsible Education v. San Lorenzo Valley Unified School Dist. (2006) 139
Cal.App.4th 1356, 1381; § 21083, subd. (b).) Categorical exemptions are
subject to exceptions. (See Guidelines, § 15300.2.) Among other things, a
“categorical exemption shall not be used for an activity where there is a
reasonable possibility that the activity will have a significant effect on the
environment due to unusual circumstances.” (Id., subd. (c).) “If a project is
categorically exempt and does not fall within an exception, ‘ “it is not subject
to CEQA requirements and ‘may be implemented without any CEQA
compliance whatsoever.’ ” ’ ” (Bottini v. City of San Diego, supra, 27
Cal.App.5th at pp. 291–292.) “[I]f a project is not exempt, the agency must
then ‘decide whether the project may have a significant environmental
effect.’ ” (Id. at p. 292.) Where the agency determines the project will not have
a significant environmental effect, the agency “ ‘must “adopt a negative
declaration to that effect.” ’ ” (California Building Industry Assn. v. Bay Area
Air Quality Management Dist. (2015) 62 Cal.4th 369, 382.) “[I]f the agency
finds the project ‘may have a significant effect on the environment,’ it must
prepare an [environmental impact report] before approving the project.”
(Ibid.)
Here, the city found that the lighting project is exempt from CEQA
review under the class 1 and class 3 categorical exemptions and that none of
3 The CEQA “Guidelines” are promulgated by the Secretary of the
Resources Agency pursuant to section 21083 are contained at California Code
of Regulations, title 14, section 15000 et seq. (hereinafter, Guidelines).
4
the exceptions to the exemptions apply. The city’s determination that the
project is exempt from compliance with CEQA requirements is subject to
judicial review under the abuse of discretion standard found in section
21168.5. (Save Our Carmel River v. Monterey Peninsula Water Management
Dist. (2006) 141 Cal.App.4th 677, 693.) “Abuse of discretion is established if
the agency has not proceeded in a manner required by law or if the
determination or decision is not supported by substantial evidence.”
(§ 21168.5.) Interpretation of the language of the Guidelines and the scope of
a categorial exemption is a legal question subject to our de novo review, while
the city’s determination that the project fits within an exemption is subject to
review for substantial evidence. (Save our Carmel River, supra, at pp. 693–
694.)
Class 1 Exemption
The class 1 exemption for “existing facilities” applies to “the operation,
repair, maintenance, permitting, leasing, licensing, or minor alteration of
existing public or private structures, facilities, mechanical equipment, or
topographical features, involving negligible or no expansion of the existing or
former use.” (Guidelines, § 15301.) The Guideline provides a non-exhaustive
list of examples of the types of projects that qualify for a class 1 exemption
including, among others, “[i]nterior or exterior alterations involving such
things as interior partitions, plumbing, and electrical conveyances” and
“[a]dditions to existing structures provided that the addition will not result in
an increase of more than . . . 50 percent of the floor area of the structures
before the addition, or 2,500 square feet, whichever is less.” (Id., subds. (a) &
(e).) Guideline section 15301 states, however, that the list is “not intended to
be all-inclusive of the types of projects which might fall within Class 1. The
5
key consideration is whether the project involves negligible or no expansion of
use.”
The city determined that the project qualifies for a class 1 exemption
because it involves negligible or no expansion of the existing use of the
facility. The planning department explained, “The proposed project does not
entail the construction of a new stadium or the expansion of the existing
playing surface. The project would not expand the existing bleachers or
increase the stadium’s capacity. The proposed lights would primarily shift the
school’s existing use of the field to later times in the day and/or days of the
week. The school would not be adding new athletic teams and would not rent
the facility to non-affiliated teams during the evening hours. . . . For
approximately 40-50 evenings a year, the school uses temporary (portable)
field lights at the existing stadium. The proposed installation of permanent
lights would support evening use at the stadium for up to 150 evenings a
year. . . . [T]he project would shift the timing of the field use, from early
mornings on weekdays to early evenings on weekdays, and would move
approximately 5 Saturday afternoon football games to Friday evenings. With
implementation of the project, evening games and practices are not intended
to intensify use of the stadium and the school does not anticipate an overall
increase in attendance at these events.”
Substantial evidence supports the city’s findings that the project will
not result in an increase in the capacity of the stadium or the overall
frequency of its use. Nonetheless, it is undisputed that the project will
significantly expand the nighttime use of the stadium. Without the project,
the field is quiet and dark most evenings during the fall and winter months.
With the project, the field will be lit and in use approximately 80 percent of
the fall and winter weeknights. The school suggests that the existing
6
nighttime use of the field is 40 to 50 evenings during the fall and winter with
the use of temporary lights. The neighborhood association suggests that there
should be no use because use of the temporary lights is not authorized. Either
way, increasing the use of the field to 150 nights a year is a significant
expansion of the facility’s existing use. (Save Our Carmel River v. Monterey
Peninsula Water Management Dist., supra, 141 Cal.App.4th at p. 697 [a
categorical exemption should be interpreted “to afford the fullest possible
protection to the environment within the reasonable scope of the statutory
language”]; County of Amador v. El Dorado County Water Agency (1999) 76
Cal.App.4th 931, 966 [“exemptions are construed narrowly and will not be
unreasonably expanded beyond their terms”].) As such, the city erred in
finding the class 1 categorical exemption applicable.
Class 3 Exemption
The class 3 exemption, entitled “New Construction or Conversion of
Small Structures” applies to “construction and location of limited numbers of
new, small facilities or structures; installation of small new equipment and
facilities in small structures; and the conversion of existing small structures
from one use to another where only minor modifications are made in the
exterior of the structure.” (Guidelines, § 15303.) “Examples of this exemption
include but are not limited to: [¶] (a) One single-family residence, or a second
dwelling unit in a residential zone. In urbanized areas, up to three single-
family residences may be constructed or converted under this exemption.
[¶] (b) A duplex or similar multi-family residential structure totaling no more
than four dwelling units. In urbanized areas, this exemption applies to
apartments, duplexes, and similar structures designed for not more than six
dwelling units. [¶] (c) A store, motel, office, restaurant or similar structure
not involving the use of significant amounts of hazardous substances, and not
7
exceeding 2500 square feet in floor area. In urbanized areas, the exemption
also applies to up to four such commercial buildings not exceeding 10,000
square feet in floor area on sites zoned for such use if not involving the use of
significant amounts of hazardous substances where all necessary public
services and facilities are available and the surrounding area is not
environmentally sensitive. [¶] (d) Water main, sewage, electrical, gas, and
other utility extensions, including street improvements, of reasonable length
to serve such construction. [¶] (e) Accessory (appurtenant) structures
including garages, carports, patios, swimming pools, and fences. . . .” (Ibid.)
In Berkeley Hillside Preservation v. City of Berkeley (2015) 60 Cal.4th
1086, 1097–1098 (Berkeley Hillside) our Supreme Court explained, “[i]n
listing a class of projects as exempt, the [Secretary of the Resources Agency]
has determined that the environmental changes typically associated with
projects in that class are not significant effects within the meaning of CEQA,
even though an argument might be made that they are potentially
significant.” As noted above, “[b]ecause the exemptions operate as exceptions
to CEQA, they are narrowly construed. [Citation.] ‘Exemption categories are
not to be expanded beyond the reasonable scope of their statutory language.’ ”
(San Lorenzo Valley Community Advocates for Responsible Education v. San
Lorenzo Valley Unified School Dist., supra, 139 Cal.App.4th at p. 1382.)
The city contends installation of the four light standards falls within
section 15303, as it applies to “limited numbers of new, small . . . structures.”
In determining what constitutes a “small” structure within the scope of the
exemption, we look to the examples provided by the state Resources Agency.
Although not an exclusive list, the examples do provide an indication of the
type of projects to which the exemption applies. The light standards are
fundamentally dissimilar from all of the examples. While reference to square
8
footage is meaningful when referring to commercial and residential buildings,
as the guideline does, whether a structure is “small” when referring to
detached light-emitting standards cannot be evaluated solely on the basis of
the square footage at their base. The residential and commercial structures
listed in the guideline are subject to applicable zoning requirements, which
ensure their height will be generally consistent with the surrounding
neighborhood. (See Guidelines, § 15303, subdivision (a) [“One single-family
residence, or a second dwelling unit in a residential zone.”]; id., subd. (c) [“In
urbanized areas, the exemption also applies to up to four such commercial
buildings not exceeding 10,000 square feet in floor area on sites zoned for
such use . . . .”].) While the state Resources Agency has determined that any
potential impacts associated with “small” new residential or commercial
structures are ordinarily not significant, this determination does not
reasonably apply to the light standards at issue here. The light standards, at
90 feet tall, are significantly taller than any other structure in the
neighborhood. In comparison, homes in the area are typically 20 to 25 feet
tall, the city’s zoning ordinance limits residential buildings in the area to
40 feet tall and typical streetlights are only 25 to 30 feet tall. (See S.F.
Planning Code, §§ 105, 106; Zoning Map HT05; S.F. Pub. Util. Com.,
Streetlight Guidelines (July 1, 2021) p. 4.) In short, a 90-foot tall light
standard does not qualify as “small” within the meaning of the exemption.
Don’t Cell Our Parks v. City of San Diego (2018) 21 Cal.App.5th 338,
359, relied upon by the city, is distinguishable. In that case, the court
recognized that “[t]here is a paucity of case law applying this exemption.”
Nonetheless, the court held that the project, which consisted of the
construction of a cell tower disguised as a 35-foot-high faux eucalyptus tree
and a 250-square-foot landscaped equipment structure, fell within the scope
9
of the class 3 categorical exemption. (Id. at pp. 346, 360.) The court noted
that the square footage of the proposed project was “much smaller than a
single-family residence, store, motel, office or restaurant.” (Id. at p. 360.)
However, the proposed cell tower was “installed in an existing stand of tall
trees, two of which [were] about 55 feet high.” (Id. at p. 346.) The cell tower
was small within its setting, unlike the light standards at issue here which
will be by far the tallest structure in the surrounding area. They are not
small within the environment but instead tower over it.
The city also cites several cases in which courts have upheld
application of the class 3 exemption to a wide variety of new
telecommunication projects. (See Aptos Residents Assn. v. County of Santa
Cruz (2018) 20 Cal.App.5th 1039 [10 microcell transmitter units on existing
utility poles]; Robinson v. City and County of San Francisco (2012) 208
Cal.App.4th 950 [40 wireless equipment cabinets on existing utility poles];
San Francisco Beautiful v. City and County of San Francisco (2014) 226
Cal.App.4th 1012 [726 new utility cabinets on public sidewalks].) The
installation of new 90-foot light standards, however, can hardly be considered
similar to the installation of utility boxes on existing utility poles.
Accordingly, the light standards cannot fairly be considered small
structures within the meaning of the class 3 exemption.
Conclusion
We therefore conclude that neither exemption from CEQA review relied
on by the city applies. In view of this conclusion, it is unnecessary to consider
the neighborhood association’s alternative argument that unusual
circumstances preclude application of the exemptions. (Guidelines, § 15300.2,
subd. (c) [A categorical exemption does not apply “where there is a reasonable
possibility that the activity will have a significant effect on the environment
10
due to unusual circumstances.”].) Nor do we reach the neighborhood
association’s additional argument that the city’s approval of a conditional-use
authorization for the project was inconsistent with the city’s planning code
and its general plan.
Finally, counsel’s observation at oral argument is worth noting. The
purpose here for enforcing the environmental analysis required by CEQA is
not necessarily to kill the project but to require careful consideration of
measures that will mitigate the environmental impacts of the project. There
is evidence that the proposed light standards may have light, noise and
traffic impacts on the neighborhood. Although the city has imposed
conditions designed to address these concerns, the neighborhood citizens are
entitled to have the sufficiency of these conditions scrutinized in accordance
with CEQA standards and, if deemed necessary, enforceable limitations
imposed.
Disposition
The judgment is reversed. The neighborhood association shall recover
its costs on appeal.
POLLAK, P. J.
WE CONCUR:
STREETER, J.
BROWN, J.
11 | 01-04-2023 | 11-18-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488117/ | USCA4 Appeal: 21-4038 Doc: 22 Filed: 11/18/2022 Pg: 1 of 7
UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 21-4038
UNITED STATES OF AMERICA,
Plaintiff - Appellee,
v.
ANTHONY FOY, a/k/a Duke,
Defendant - Appellant.
Appeal from the United States District Court for the Northern District of West Virginia, at
Clarksburg. Thomas S. Kleeh, Chief District Judge. (1:19-cr-00031-TSK-MJA-1)
Submitted: October 28, 2022 Decided: November 18, 2022
Before RICHARDSON, QUATTLEBAUM, and HEYTENS, Circuit Judges.
Affirmed by unpublished per curiam opinion.
ON BRIEF: Scott C. Brown, SCOTT C. BROWN LAW OFFICE, Wheeling, West
Virginia, for Appellant. Zelda Elizabeth Wesley, Assistant United States Attorney,
OFFICE OF THE UNITED STATES ATTORNEY, Clarksburg, West Virginia, for
Appellee.
Unpublished opinions are not binding precedent in this circuit.
USCA4 Appeal: 21-4038 Doc: 22 Filed: 11/18/2022 Pg: 2 of 7
PER CURIAM:
Anthony Foy appeals his below-Guidelines range sentence after pleading guilty to
aiding and abetting the distribution of heroin, in violation of 18 U.S.C. § 2; 21 U.S.C.
§ 841(a)(1), (b)(1)(C). On appeal, Foy’s attorney has filed a brief pursuant to Anders v.
California, 386 U.S. 738 (1967), asserting there are no meritorious grounds for appeal but
raising the issue of whether the district court erred in denying him a sentence reduction
under U.S. Sentencing Guidelines Manual § 3E1.1 for acceptance of responsibility. Foy
has filed a pro se supplemental brief raising the issues of whether the Government breached
the plea agreement by failing to recommend a reduction for acceptance of responsibility
and whether the district court erred in finding his drug quantity. We affirm.
We first consider whether the Government breached the parties’ plea agreement.
“Plea agreements are grounded in contract law, and as with any contract, each party is
entitled to receive the benefit of his bargain.” United States v. Edgell, 914 F.3d 281, 287
(4th Cir. 2019) (internal quotation marks omitted). “While we employ traditional
principles of contract law as a guide in enforcing plea agreements, we nonetheless give
plea agreements greater scrutiny than we would apply to a commercial contract because a
defendant’s fundamental and constitutional rights are implicated when he is induced to
plead guilty by reason of a plea agreement.” Id. (internal quotation marks omitted). “The
government breaches a plea agreement when a promise it made to induce the plea goes
unfulfilled.” United States v. Tate, 845 F.3d 571, 575 (4th Cir. 2017).
Where, as here, the defendant “did not challenge the government’s purported breach
of the plea agreement before the district court, we review his claim for plain error.” Edgell,
2
USCA4 Appeal: 21-4038 Doc: 22 Filed: 11/18/2022 Pg: 3 of 7
914 F.3d at 286. “Under that standard, [he] must show that the government plainly
breached its plea agreement with him and that the breach both affected his substantial rights
and called into question the fairness, integrity, or public reputation of judicial proceedings.”
Id. at 286-87. We have reviewed the record and conclude that Foy fails to show that the
Government plainly breached the parties’ plea agreement. The Government’s promise was
expressly conditioned on the probation officer’s recommendation. Because the probation
officer did not make the recommendation, the Government was not obligated to do so.
We next consider Foy’s sentencing claims. “We ‘review all sentences—whether
inside, just outside, or significantly outside the Guidelines range—under a deferential
abuse-of-discretion standard.’” United States v. Barronette, 46 F.4th 177, 208 (4th Cir.
2022) (quoting Gall v. United States, 552 U.S. 38, 41 (2007)). “First, we ‘ensure that the
district court committed no significant procedural error, such as failing to calculate (or
improperly calculating) the Guidelines range, treating the Guidelines as mandatory, failing
to consider the [18 U.S.C.] § 3553(a) factors, selecting a sentence based on clearly
erroneous facts, or failing to adequately explain the chosen sentence.’” United States v.
Fowler, 948 F.3d 663, 668 (4th Cir. 2020) (quoting Gall, 552 U.S. at 51). “If the Court
‘find[s] no significant procedural error, [it] then consider[s] the substantive reasonableness
of the sentence imposed.’” United States v. Arbaugh, 951 F.3d 167, 172 (4th Cir. 2020).
“As is well understood, to meet the procedural reasonableness standard, a district
court must conduct an individualized assessment of the facts and arguments presented and
impose an appropriate sentence, and it must explain the sentence chosen.” United States
v. Nance, 957 F.3d 204, 212 (4th Cir. 2020) (internal quotation marks omitted). “When
3
USCA4 Appeal: 21-4038 Doc: 22 Filed: 11/18/2022 Pg: 4 of 7
considering the substantive reasonableness of a prison term, we ‘examine[] the totality of
the circumstances to see whether the sentencing court abused its discretion in concluding
that the sentence it chose satisfied the standards set forth in § 3553(a).’” Arbaugh, 951
F.3d at 176. A sentence within or below a properly calculated Guidelines range is
presumed reasonable. United States v. Devine, 40 F.4th 139, 153 (4th Cir. 2022).
Anders counsel and Foy each assert a challenge to the district court’s calculation of
Foy’s Guidelines range. “On a challenge to a district court’s Guidelines calculations, we
review legal conclusions de novo, factual findings for clear error, unpreserved arguments
for plain error, and preserved arguments for harmless error.” United States v. Kobito, 994
F.3d 696, 701 (4th Cir. 2021). We first consider whether the district court erred in denying
Foy a reduction for accepting responsibility, which he preserved in the district court.
“Section 3E1.1(a) of the Guidelines provides for a two-level reduction ‘[i]f [a]
defendant clearly demonstrates acceptance of responsibility for [an] offense.’” United
States v. Bolton, 858 F.3d 905, 914 (4th Cir. 2017) (quoting USSG § 3E.1(a)). “To earn
the reduction, a defendant must prove to the court by a preponderance of the evidence that
he has clearly recognized and affirmatively accepted personal responsibility for his
criminal conduct.” Id. (internal quotation marks omitted). “If the defendant qualifies for
a decrease under subsection (a),” the offense level may be further decreased by one level
if additional conditions are met. USSG § 3E1.1(b).
“The commentary to the guidelines provides district courts with several factors to
consider when evaluating whether a defendant has clearly demonstrated acceptance of
responsibility.” United States v. Dugger, 485 F.3d 236, 239 (4th Cir. 2007). These factors
4
USCA4 Appeal: 21-4038 Doc: 22 Filed: 11/18/2022 Pg: 5 of 7
include not only whether a defendant has truthfully admitted the conduct comprising the
offense of conviction and any additional relevant conduct, but also whether he has
voluntarily withdrawn from criminal conduct. See USSG § 3E1.1 cmt. n.1. “Indeed,
[e]ven unrelated criminal conduct may make an acceptance of responsibility reduction
inappropriate.” United States v. Cooper, 998 F.3d 806, 811 (8th Cir. 2021) (internal
quotation marks omitted); cf. Dugger, 485 F.3d at 241-42 (denial of reduction for accepting
responsibility affirmed based on criminal conduct that was not relevant conduct).
“We must give great deference to the district court’s decision because [t]he
sentencing judge is in a unique position to evaluate a defendant’s acceptance of
responsibility.” Dugger, 485 F.3d at 239 (internal quotation marks omitted). We review
the district court’s decision concerning an acceptance-of-responsibility adjustment for
clear error. Id. “A finding is clearly erroneous when although there is evidence to support
it, the reviewing court on the entire evidence is left with the definite and firm conviction
that a mistake has been committed.” Id. (internal quotation marks omitted).
We have reviewed the record and conclude the district court did not clearly err in
denying Foy an acceptance-of-responsibility reduction. After pleading guilty to the offense
of conviction, Foy was released on bond. Despite being warned that any criminal conduct
could result in further punishment and loss of a reduction for acceptance of responsibility,
he drove a motorcycle without a valid license and while intoxicated; and his actions posed
a danger to the safety of others. He also had a history of similar criminal conduct. While
Foy admitted the offense, the district court reasonably concluded that his post-plea criminal
conduct did not clearly demonstrate acceptance of responsibility under the Guidelines.
5
USCA4 Appeal: 21-4038 Doc: 22 Filed: 11/18/2022 Pg: 6 of 7
Finally, we consider Foy’s pro se issue of whether the district court erred in finding
his drug quantity and base offense level. “Under the Guidelines, ‘[w]here there is no drug
seizure or the amount seized does not reflect the scale of the offense, the court shall
approximate the quantity of the controlled substance.’” United States v. Williamson, 953
F.3d 264, 273 (4th Cir. 2020) (quoting USSG § 2D1.1 cmt. n.5). “District courts enjoy
considerable leeway in crafting this estimate.” Id. “Indeed, the court may ‘give weight to
any relevant information before it, including uncorroborated hearsay, provided that the
information has sufficient indicia of reliability to support it.’” Id.
The Government bears the burden of proving drug quantity by a preponderance of
the evidence. United States v. Milam, 443 F.3d 382, 386 (4th Cir. 2006). This burden can
be met by a defendant’s admission of facts. Id. at 387. Because Foy did not object to the
drug quantity in the district court, we review for plain error only. United States v. Nelson,
37 F.4th 962, 966 (4th Cir. 2022). To establish plain error, Foy must show that (1) an error
was made, (2) the error was plain, and (3) the error affected his substantial rights. Id. Even
if he makes this showing, we will exercise our discretion to correct the error “only if
declining to do so ‘would result in a miscarriage of justice or would otherwise seriously
affect the fairness, integrity or public reputation of judicial proceedings.’” Id.
Foy agreed to a stipulated drug quantity in his plea agreement; and at his guilty plea
hearing, he confirmed his agreement to the stipulation. Moreover, he cited his admission
of relevant conduct to support his argument for an acceptance-of-responsibility reduction.
The Government provided a statement to the probation officer in support of the stipulation;
and while the probation officer’s independent calculation of drug quantity was higher, she
6
USCA4 Appeal: 21-4038 Doc: 22 Filed: 11/18/2022 Pg: 7 of 7
found the stipulation was a fair and accurate representation of the drug quantity due to the
inherent accuracies of historical information and absence of lab results for some of Foy’s
controlled buys. At sentencing, the district court noted the actual drug quantity was likely
higher, but it had accepted the parties’ stipulated drug quantity. In light of Foy’s admission
of the stipulated drug quantity, we conclude that he fails to show any plain error.
In accordance with Anders, we have reviewed the entire record and have found no
meritorious grounds for appeal. We therefore affirm the district court’s judgment. This
court requires that counsel inform his or her client, in writing, of his or her right to petition
the Supreme Court of the United States for further review. If the client requests that a
petition be filed, but counsel believes that such a petition would be frivolous, then counsel
may move in this court for leave to withdraw from representation. Counsel’s motion must
state that a copy thereof was served on the client. We dispense with oral argument because
the facts and legal contentions are adequately presented in the materials before the court
and argument would not aid the decisional process.
AFFIRMED
7 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494389/ | MEMORANDUM OPINION ON MOTION TO SET ASIDE DEFAULT JUDGMENT
JAMES S. STARZYNSKI, Bankruptcy Judge.
This matter is before the Court in a case removed from the Fourth Judicial District Court, San Miguel County, New Mexico (“State Court” or “Court”) on Plaintiffs Motion to Set Aside Default Judgment (doc 17) and the Objection thereto by Defendant High Desert Neurology, Inc. (“High Desert”). David Patrick McCra-ney (“Plaintiff’) appears through his attorney William F. Davis & Assoc., P.C. (William F. Davis and Anne D. Goodman). High Desert appears through its attorney Clifford C. Gramer. For the reasons stated below, the Court finds that Plaintiffs Motion is well taken and should be granted.
CORE OR NON-CORE PROCEEDING
Plaintiffs Notice of Removal states that this adversary proceeding is both a “related to” case, Doc 1 ¶ 8, and a “core proceeding”, Id. ¶ 10. Whichever the case, Plaintiff consents to entry of final orders or judgments by the Bankruptcy Judge. Id. ¶ 11. High Desert filed a Statement Pursuant to Bankruptcy Rule 9027(e) admitting that this action is a core proceeding. Doc 11.
Bankruptcy Court jurisdiction is established by 28 U.S.C. § 1334, which lists four types of matters over which the district court has bankruptcy jurisdiction: 1) cases “under” title 11 (which are the bankruptcy cases themselves, initiated by the filing of a Chapter 7, Chapter 11, etc. petition), 2) proceedings “arising under” title 11 (such as a preference recovery action under § 547), 3) proceedings “arising in” a case under title 11 (such as plan confirmation), and 4) proceedings “related to” a case under title 11 (such as a collection action *191against a third party for a pre-petition debt). Wood v. Wood (In re Wood), 825 F.2d 90, 92 (5th Cir.1987). In the District of New Mexico, all four types have been referred to the bankruptcy court. See 28 U.S.C. § 157(a); Administrative Order, Misc. No. 84-0324 (D. N.M. March 19, 1992).
Jurisdiction is then further broken down by 28 U.S.C. § 157, which grants full judicial power to bankruptcy courts not only over cases “under” title 11 but also over “core” proceedings, § 157(b)(1), but grants only limited judicial power over “related” or “non-core” proceedings, § 157(c)(1). Wood, 825 F.2d at 91; Personette v. Kennedy (In re Midgard Corporation), 204 B.R. 764, 771 (10th Cir. BAP 1997). This core/non-core distinction is important, because it defines the extent of the Bankruptcy Court’s jurisdiction and the standard by which the District Court (or Bankruptcy Appellate Panel) reviews the factual findings. Halper v. Halper, 164 F.3d 830, 836 (3rd Cir.1999).
Core proceedings
“Core” proceedings are matters “arising under” and “arising in” cases under title 11. Wood, 825 F.2d at 96; Midgard, 204 B.R. at 771. Matters “arise under” title 11 if they involve a cause of action created or determined by a statutory provision of title 11. Wood, 825 F.2d at 96; Midgard, 204 B.R. at 771. Matters “arise in” a bankruptcy if they concern the administration of the bankruptcy case and have no existence outside of the bankruptcy. Wood, 825 F.2d at 97; Midgard, 204 B.R. at 771. Bankruptcy judges may hear and determine core proceedings and enter final orders and judgments. 28 U.S.C. § 157(b)(1). 28 U.S.C. § 157(b)(2) contains a nonexclusive list of 16 types of core proceedings.
Non-core proceedings
“Non-core” proceedings are those that do not depend on the bankruptcy laws for their existence and that could proceed in another court even in the absence of bankruptcy. Wood, 825 F.2d at 96; Midgard, 204 B.R. at 771. “Proceedings ‘related to’ the bankruptcy include (1) causes of action owned by the debtor which become property of the estate pursuant to 11 U.S.C. § 541, and (2) suits between third parties which have an effect on the bankruptcy estate.” Celotex Corporation v. Edwards, 514 U.S. 300, 307 n. 5, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). The Tenth Circuit has adopted the widely used Pacor, Inc. v. Higgins1 test to determine if a proceeding is related: “the proceeding is related to the bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action in any way, thereby impacting on the handling and administration of the bankruptcy case.” Gardner v. United States (In re Gardner), 913 F.2d 1515, 1518 (10th Cir. 1990).
Bankruptcy courts have jurisdiction over non-core proceedings if they are at least “related to” a case under title 11. 28 U.S.C. § 157(c)(l)(“A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11.”) However, unless all parties consent otherwise, 28 U.S.C. § 157(c)(2), bankruptcy judges do not enter final orders or judgments in non-core proceedings. Rather, they submit proposed findings of fact and conclusions of law to the district court, which enters final orders and judgments after de novo review. 28 U.S.C. § 157(c)(1); Federal Bankruptcy Rule 9033. See also Orion Pictures Corporation v. Showtime Networks, Inc. (In re Orion Pictures Corpora*192tion), 4 F.3d 1095, 1100-01 (2nd Cir.1993)(discussing Section 157’s classification scheme).
28 U.S.C. § 157(b)(2) gives a nonexclusive list of 16 “core proceedings.” The fact that a matter is listed among the “core proceedings” of 28 U.S.C. § 157(b)(2) cannot end the inquiry, however. In Northern Pipeline Construction Co. v. Marathon Pipe Line Company, 458 U.S. 50, 76, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), the United States Supreme Court ruled that Article III of the Constitution “bars Congress from establishing legislative courts to exercise jurisdiction over all matters related to those arising under the bankruptcy laws.” In Marathon, the debtor sought damages for alleged breaches of contract and warranty, misrepresentation, coercion, and duress. Id. at 56, 102 S.Ct. 2858. The Supreme Court distinguished this adjudication of “state-created private rights” from the “restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power.” Id. at 71, 102 S.Ct. 2858. The Court found that the broad grant of jurisdiction to the bankruptcy courts found in 28 U.S.C. § 1471 (1976 ed., Supp. IV) was unconstitutional because it “impermissibly removed most, if not all, of the ‘essential attributes of the judicial power’ from the Art. Ill district court” and vested those attributes in the bankruptcy court. Id. at 87, 102 S.Ct. 2858. Congress responded with the current jurisdictional scheme which categorizes matters as either core or non-core. Any determination by the Bankruptcy Court of the core status of a matter should be done with the dictates of Marathon in mind. See Adams v. Grand Traverse Band of Ottawa and Chippewa Indians Economic Development Authority (In re Adams), 133 B.R. 191, 196 (Bankr.W.D.Mich.l991)(“[Section] 157(b)(2)(A) [matters concerning the administration of the estate] was not meant to confer core status on all proceedings having some effect on the estate. If that was the intent behind § 157(b)(2)(A), then there would be no distinction between ‘related to’ and ‘core’ proceedings.”)
This removed case is a non-core proceeding. It is an action based only on state law that was commenced prepetition. It is not a “case” under title 11. It does not “arise under” title 11 because it does not involve a cause of action created or determined by a statutory provision of title 11. It does not “arise in” a title 11 case because it does not concern the administration of the bankruptcy case and it has an existence outside of and predating the bankruptcy. It is, however, related to a title 11 case because it “could alter the debtor’s rights, liabilities, options, or freedom of action.” Therefore, the Bankruptcy Court has jurisdiction. 28 U.S.C. § 157(c)(1).
Bankruptcy Courts can enter final orders and judgments in non-core proceedings with the parties’ consent. 28 U.S.C. § 157(c)(2). In this case, the parties have consented. Therefore, this is a non-core proceeding in which the Bankruptcy Court may enter final orders and judgments.2
*193
HISTORY OF CASE
On August 7, 2007, Plaintiff filed a complaint for breach of contract and wrongful discharge (“Complaint”) in the Fourth Judicial District Court, San Miguel County, New Mexico against High Desert and Jerry Williams (“Defendants”). Doc 4-1, p 50. On September 11, 2007, Defendants answered. Doc 4-1, p 42. Also on September 11, 2007, Defendants served their First set of interrogatories and request for production of documents. Doc 4-1, p 40.
On September 25, 2007, Plaintiff served a Subpoena duces tecum requesting that Plaintiffs personnel file be produced by October 5. Doc 4-1, p 38. Defendants objected to production on October 1, 2007, citing an improperly short deadline under state rules. Defendants also sought attorney fees as a sanction for violating the state rule. Doc 4-1, p 33.
On October 3, 2007, Defendant filed a motion to dismiss for failure to state a claim and requested a hearing. Doc 4-1, pp 25 and 31.
On October 23, 2007, Defendants filed a Motion to Compel a response to their First set of discovery. Doc 4-1, p 19. Exhibit A to the Motion to Compel is the discovery set. Doc 4-1, p 22. On the same date they requested a hearing. Doc 4-1, p 17. The court set a hearing for December 11, 2007. Doc 4-1, p 16. On November 7, 2007 Plaintiff filed an Answer to the Motion to Compel. Doc 4-1, p 15. The Answer states:
1)Plaintiff received the interrogatories sent by the Defendant and is currently compiling the discovery requested.
2) Due to difficulty in gathering the requested discovery, Plaintiff was not able to produce the discovery.
3) Plaintiff anticipates that he can fulfill the requests by November 16, 2007.
WHEREFORE, Plaintiff prays the Court extend his time to reply to the Defendants’ interrogatories.
The State Court conducted the hearing on December 11, 2007. See FTR Reporter notes3, doc 4-1, p 12. Attorney Schwarz (Defendant’s counsel in the state case) announced that Attorney Silva (Plaintiffs counsel in the state case) had agreed to dismiss the wrongful discharge claim. The Court granted the portion of the Motion to Dismiss that concerned punitive damages, leaving only the breach of contract claim and directed Attorney Schwarz to prepare the order. Id., p. 13. The Court also granted the Motion to Compel, ordering production by December 17, 2007, as well as payment of $404.53 in attorney fees as a sanction. See Order dated December 19, 2007, doc 4-1, p 10. On December 17, 2007, the State Court entered a Stipulated Order that dismissed the wrongful termination and punitive damage claims. Doc 4-1, p 8.
On December 28, 2007, Defendants filed a Verified Motion for an Order to Show Cause (“OSC”) for a failure to comply with the Order dated December 19, 2007. Doc 4-1, p 1. Attorney Schwarz stated in the OSC that Defendants had not received the discovery or the attorney fees ordered. He requested:
WHEREFORE, Defendants pray that this Court issue an order to show cause upon the Plaintiff David McCraney, for:
*194A. Why he should not be held in contempt of court, fined, or imprisoned;
B. Payment of additional attorney fees for this entire matter to be paid within 10(ten) days;
C. A dismissal of all claims brought by Plaintiff with prejudice but allowing Defendant High Desert to pursue whatever claims it may have against Dr. McCra-ney in a separate action should it so decide to pursue; and
D. Such further relief the Court deems just and proper.
The State Court set the hearing on the OSC for February 7, 2008.
On January 16, 2008, Plaintiff filed an Objection to Defendant’s Second request for production of documents.4 Doc 5-2, p 38. It states, in full:
COMES NOW, Plaintiff, by and through his attorney, David Silva, of the Silva & Grano Law Finn and responds [to] Defendant’s Second Set of Interrogatories as follows:
1. Plaintiff will produce requested documents.
2. Plaintiff will produce requested documents with the exception of ‘Whom you charged” Plaintiff objects to answering due to HIPAA5 and confidentiality issues.
3. Plaintiff objects to requested information it is not relevant to the issues.
4. Plaintiff objects to requested information it is not relevant to the issues.
5. Plaintiff will produce requested documents.
On January 22, 2008 Defendants filed a Verified Amended Motion for an OSC for Plaintiffs failure to comply with the Order of December 19, 2007. Doc 5-2, p 18. As exhibits, it contains a letter to Attorney Silva from December 27, 2007 (Doc 5-2, p 24; stating nonreceipt and asking Attorney Silva to accept service of an OSC), a letter to Attorney Silva from January 10, 2008 (Doc 5-2, p 27; acknowledging receipt by fax of First discovery responses and noting missing documents and incomplete answers) and the faxed copies of the responses (Doc 5-2, p 32.) The court set the Amended OSC for hearing on March 11,2008. Doc 5-2, p 16.
On January 29, 2008, Defendants filed a Motion to file a compulsory counterclaim. Doc 5-1, p 30. Exhibit A is the proposed counterclaim. Doc 5-2, p 1. Exhibit 1 to the proposed counterclaim is the Employment Agreement6. Doc 5-2, p 4. On this same date Defendants requested a hearing. Doc 5-1, p 28.
On February 4, 2008, Defendants filed a Second Motion to Compel responses to the Second discovery request7. Doc 5-1, p 20. Exhibit A is the Second discovery request. Doc 5-1, p 24. Exhibit B is Plaintiffs *195objection. Doc 5-1, p 24 (same as Doc 5-2, p 38). Defendants sought a hearing. Doc 5-2, p 18.
The court set a hearing on the motion to file counterclaim and the second motion to compel for March 11, 2008. Doc 5-2, p 17.
On February 11, 2008, Defendant Williams filed a Motion for Summary Judgment and request for hearing. Doc 5-1, p 1 and Doc 6-1, p 61.
On February 18, 2008, Plaintiff answered the counterclaim. Doc 6-1, p 59.
On February 26, 2008, Defendants filed their Third Motion to Compel and request for hearing. Doc 6-1, pp 41 and 56. Exhibit A is the Second set of discovery. Doc 6-1, p 46 (same as Doc 5-1, p 24). Exhibit B is the Plaintiffs Objection to the Second set of discovery. Doc 6-1, p 50 (same as Doc 5-2, p 38). Exhibit C is a copy of the Plaintiffs responses to the second set of discovery. Doc 6-1 p. 51. In Exhibit C, Plaintiff responded to interrogatory 1. The responses to interrogatories 2 through 5 is set out:
2. If you performed any work or rendered any professional services during the period of 12 April 2007 through 11 July 2007, please state what you did, whether you charged tor it, how much you charged, whom you charged, and when you performed these services or work.
Answer: Taking into account our objection to privileged health information, this question has been asked and answered twice.
3. Plaintiff objects to answering this interrogatory.
4. Plaintiff objects to answering this interrogatory.
'5. A copy of the lease will be sent by mail. Also attached is a copy of an email showing that Dr. McCraney cre-dentialled himself with Comphealth.
The State Court conducted a hearing on March 11, 2008. Doc 6-1, p 39. From the FTR Reporter’s Notes it is clear that the Court admonished Plaintiffs attorney, telling him never to respond to a discovery request by stating it is not relevant; rather, the choice is either to produce or file a motion for protective order. The Court granted the Second motion to compel. Attorney Silva made no reference to the “Objection” he filed to the Second discovery. The Court warned that if the discovery were not produced, the lawsuit would go away. He also awarded $500 plus taxes as a sanction.
Also on March 1, 2008, the parties submitted a stipulated order dismissing Defendant Jerry Williams with prejudice. Doc 6-1, p 38.
On March 27, 2008, the Court issued two orders. First, an Order granting the Second motion to compel. Doc 6-1, p 36. Second, an Order granting the motion to allow counterclaim. Doc 6-1, p 35.
Defendant filed a counterclaim on March 27, 2008, and an amended counterclaim on April 3, 2008. Doc 6-1, pp 32 and 17.
On April 4, 2008, Defendant filed a Motion to Dismiss all of Plaintiffs remaining claims and to grant default on Defendant’s counterclaim. The reasons cited were Plaintiffs failure to produce anything, including the lease promised to be mailed. Doc 6-1, p 14. Defendant requested a hearing. Doc 6-1, p 12. No response was filed to the Motion to Dismiss, and the Court entered an Order Granting the Motion to Dismiss on May 13, 2008. Doc 6-1, p 10.
The state court file is then strangely silent until December 5, 2008, when Defendant filed a Response to the State Court’s letter regarding a settlement facilitator. Doc 6-1, p 7. That letter is not in the file. *196Defendant agreed that a settlement facilitator would be a good idea.
On January 21, 2009, the State Court issued a Notice of Status Conference for February 3, 2009. Doc 6-1, p 5. The Court conducted the status conference on February 3, 2009. See FTR Reporter’s Notes, Doc 6-1, p 3. Attorney Silva stated that although he had sent the Notice of Status Conference to his client, he had not heard back. The next day the Court issued a Notice of Bench Trial for April 23, 2009. Doc 6-1, p 1.
On April 23, 2009, the day of the scheduled bench trial, Plaintiff filed a motion to set aside the dismissal and default. Doc 7-1, p 56. This was also the day that Defendant filed its Requested Findings of Fact and Conclusions of Law. Doc 7-1, p 51. The FTR Reporter’s Notes for this hearing were filed May 14, 2009. Doc 7-1, p 48. The State Court did not conduct the bench trial on damages. Instead, the Notes indicate the Court heard and granted the Motion to set aside the default on the counterclaim, but denied the motion to set aside dismissal of the complaint. He also required Plaintiff to pay all Defendant’s costs and ordered production of all documents within 30 days. If the payments were not made or the discovery nor produced, the default would be reinstated. At this point, Attorney Silva argued that Plaintiff could not produce patient names because of HIPAA. The Court responded simply that he had to produce.
On April 30, 2009 Plaintiff filed an Application for Fees and Costs. Doc 7-1, p 37.
On May 1, 2009, Plaintiff filed both a Certificate of Compliance, Doc 7-1, p 31, and a Motion to Extend Time to Disclose Certain Documents, Doc 7-1, p 32.
On May 4, 2009 Plaintiff objected to the amounts of fees and costs requested. Doc 7-1, p 29. On the same date he also objected (for the second time) to Discovery Request 2 because of HIPAA regulations. Doc 7-1, p 27.
On May 11, 2009 Defendant replied to Plaintiffs objection to fees and costs. Doc 7-1, p 24.
On May 13, 2009, the Court entered its order granting in part and denying in part Plaintiffs Motion to Set Aside. Doc 7-1, p 22.
On May 15, 2009 Defendant filed a response to Plaintiffs Certificate of Compliance and Motion for an Extension, arguing that they were incompatible. Doc 7-1, p 20.
On June 19, 2009 Defendant filed its Motion to Reinstate Sanctions for Failure to Make Discovery. Doc 7-1, p 15. The grounds set forth in the Motion were that Plaintiff has failed to obey court orders regarding production, that answers were incomplete, the answers were handwritten, that Plaintiff had failed to disclose financial accounts8 and that “McCraney continues to assert HIPAA even though that claim was previously rejected by this Court on the Second Motion to Compel, and Third Motion to Compel and by this Court’s 13 May order.” Id., p. 7. Exhibit A to the Motion is a notarized statement from Plaintiff that he has not had sexual relations with any employee of High Desert nor has he induced any employee to leave that company.9 Doc 7-1, p 10. De*197fendant argued that this was not the question asked. Exhibit B is a copy of bank statements produced by Plaintiff. Doc 7-1, p 12. Defendant argued that the bank statements showed two transfers from undisclosed financial accounts. Defendant also asked for a hearing on both the attorney fee request and the Motion to Reinstate. Doc 7-1, p 1. Plaintiff did not respond to this Motion.
The Court set August 31, 2009 to hear both the attorney fee issue and the Motion to Reinstate. Doc 8-1, p 47. And it conducted the hearing on that date. See FTR Reporter’s Notes, Doc 8-1, p 43. It is not entirely clear from these Notes what exactly was said. Attorney Schwarz made references to transfers from undisclosed bank accounts. Attorney Silva stated that he was unaware of those accounts because he had not spoken to his client. Schwarz also referred to the failure to provide patient information and represented that the issue had been dealt with in previous orders. The Court then granted Defendant’s request for attorney fees and costs and reinstated the discovery sanctions (that is, struck Plaintiffs answer to the counterclaim).
On September 9, 2009 the Court entered two orders: one allowing interim attorney fees for Defendant, doc 8-1, p 41; and one Reinstating Sanctions and Judgment, Doc 8-1, p 39. Attorney Silva never asked for a reconsideration of either order.
On October 15, 2009, the Court then set a bench trial for February 10, 201010. Doc 8-1, p 34. Several pleadings follow in the state case, but are not of particular relevance. Plaintiff filed a case under Title 11 on December 10, 2009.
On January 13, 2010, Plaintiff removed the case to the United States Bankruptcy Court. The Miguel County Court Manager for the District Court certified the record of the state case and it was filed for record in this adversary proceeding on January 13, 2010. The Bankruptcy Court conducted a status conference on February 3, 2010. Plaintiff stated his intention to file a motion to set aside the default, and this Court set briefing deadlines. Plaintiff filed the Motion to Set Aside11 on March 10, 2010, and Defendant responded on April 9, 2010.
Plaintiffs argument is that the State Court reinstated the default based on incorrect allegations that he had failed to disclose bank accounts and other grounds that do not support the extreme remedy of default. Doc 17, p 2.
Attached to Plaintiffs motion to set aside is an Affidavit of David McCraney. He states under oath that he responded to discovery requests in reliance on his attorney’s advice and with the understanding that they were sufficient, including the handwritten responses to the first set, the answers to the second set, the bank statements, and other documents provided and the affidavit he signed. He further states that Attorney Silva did not provide him with copies of pleadings other than the original complaint and counterclaim. He received a copy of the notice of hearing on the Motion to Reinstate Sanctions which was set for August 31, but he never was given a copy of the Motion itself. McCra-ney called Attorney Silva after receiving *198the notice. Silva told him that the hearing was only to make him pay for High Desert’s expenses leading up to the April 23, 2009 damages trial. McCraney was already scheduled to be on vacation at the time of the August 31 hearing and Silva told him there was no point in his attending the hearing because there was no way to dispute the sanctions. Silva did not tell him that the Court would consider reinstating the default judgment.
After the hearing, Silva told McCraney that High Desert had informed the judge that he had undisclosed bank accounts. McCraney now understands that Defendant represented to the Court that he had made transfers of $28,795 and $11,678 from undisclosed accounts. These representations were false. First, the transfers were only for $8,032.53 and $3,000.00, neither from an undisclosed account. The first was a transfer from his business account which had been disclosed, and the second was a simple deposit of a distribution from a business venture. The higher amounts represented to the Court were the balances in the account after the transfers.
With regard to the patient information disclosures, McCraney thought that if he produced this information it would become part of the public record and its disclosure would violate federal HIPAA law and expose him to civil liability, actions against his license, and even criminal charges. If Attorney Silva had ever discussed this issue with Attorney Schwarz, that fact had never been communicated to him. Consequently, he was awaiting a ruling from the judge on the objection to disclosure that he knew his attorney filed, believing the judge would seal the record or allow appropriate redaction or declare that he could produce it without liability. McCraney has the patient information on hand and is prepared to release it as soon as he obtains a ruling. McCraney could and would have explained all of this to the judge on August 31, 2009, if he had been present.
OTHER FINDINGS
This Court has further observations about Attorney Silva’s representation of Plaintiff. His complaint alleged breach of contract and wrongful discharge and sought actual and punitive damages, attorney’s fees and costs. It named both High Desert and Jerry Williams the owner of High Desert. The Complaint does not distinguish between the Defendants and does not specify who the contract was with or which Defendant did what action. He failed to attach a copy of the contract at issue. He then filed a subpoena for Plaintiffs personnel file that did not allow sufficient time under the rule to respond. Defendant objected and did not produce. There is no indication he ever renewed his request, sought a ruling or obtained the file. Defendants’ Motion to Dismiss points out that under the American Rule, Plaintiff was not entitled to attorney fees. It also correctly argued that a plaintiff must allege and prove wilful, wanton, malicious, reckless, oppressive or fraudulent behavior to obtain punitive damages. The complaint alleged none. Defendant also argued that to state a claim for wrongful discharge a plaintiff must allege a protected activity and because of the employee’s participation in that activity his employment was terminated. The complaint alleged no protected activity. Silva never responded to the Motion to Dismiss.
Silva’s response to the Motion to Compel was that Plaintiff “is currently compiling” the discovery, it was difficult, and Plaintiff anticipated he could produce it. This is not a proper response. If his client could not timely respond to the discovery he should have alerted counsel, sought an agreed upon extension, or filed a motion *199for extension or protective order before the deadline to respond.
Before the first hearing, Silva agreed to withdraw the wrongful discharge claim. At the first hearing, the Court struck the punitive damage request almost without discussion, ordered compliance with discovery and assessed a fine.
The Defendants’ Motion to File Counterclaim alleges that Silva did not respond when asked for concurrence in the motion. Then Silva answered the counterclaim before any order was filed allowing it to be filed.
Silva never filed a response to the Motion for Summary Judgment.
Plaintiffs January 16, 2008 objection to Defendants’ Second set of discovery is simply a listing of what would and would not be produced. Some items would be, some would not because they were “irrelevant” and some because of HIPAA. There is no relief requested in the objection. Specifically, it does not ask for a protective order.
At the next hearing, the State Court pointed out that he could not determine if an interrogatory was relevant unless either it was answered or dealt with through a motion for a protective order. The Court ordered production, and Silva did not raise HIPAA restrictions.
In the March 20, 2008 order, the Court ordered: “Plaintiff is cautioned by this Court to his failure to comply fully and completely with discovery may result in dismissal of his lawsuit with prejudice.” So, not only was Plaintiff warned12, Silva was definitely warned that things had better shape up.
The sole remaining Defendant High Desert filed the motion to dismiss and for default on April 4, 2008. Silva never responded. In the Order granting this motion, the Court stated “The Court has reviewed the motion and there being no response in opposition thereto finds the motion well taken.”
Silva did not respond (in the record) to the Court’s letter regarding a settlement facilitator. When the Court then set a status conference, Silva stated that he has not had contact with his client. He did not state, however, that he made any attempt to reach his client.
Defendant filed its Motion to Reinstate Sanctions for Failure to Make Discovery on June 19, 2009. The matter came on for hearing on August 31, 2009. The allegations of hidden bank accounts should have been very troubling to Silva and sometime between June 19, 2009 and August 31, 2009, he should have made sure that he knew whether there were such accounts and why they had not been disclosed. Instead, at the hearing he only stated he was unaware of them.
Finally, after not filing a protective order based on HIPAA, Silva never again brought the issue squarely before the Court. It was only after the Court ruled that he made indirect comments about privacy laws.
This Court finds that Attorney Silva was the root of the problem in this case. Not only did he keep the client uninformed, he affirmatively lead him to believe that everything was going smoothly. There is nothing in the extensive state court record that suggests Plaintiff intentionally lied or misrepresented anything or failed to disclose anything purposely. This Court finds that Plaintiff did not default willfully. *200He has his attorney’s behavior as a valid excuse for the defaults.
The Court also finds that Defendant has not demonstrated any prejudice if the default judgment were set aside, other than attorney fees and a time delay. The Court can easily remedy that by conditioning any relief on the payment of Defendant’s fees.
THE LAW
Removal of a case to Bankruptcy Court is governed by Federal Rule of Bankruptcy Procedure 9027.
A notice of removal shall be filed with the clerk for the district and division within which is located the state or federal court where the civil action is pending. The notice shall be signed pursuant to Rule 9011 and contain a short and plain statement of the facts which entitle the party filing the notice to remove, contain a statement that upon removal of the claim or cause of action the proceeding is core or non-core and, if non-core, that the party filing the notice does or does not consent to entry of final orders or judgment by the bankruptcy judge, and be accompanied by a copy of all process and pleadings.
Fed.R.Bankr.P. 9027(a)(1). “Promptly after filing the notice of removal, the party filing the notice shall serve a copy of it on all parties to the removed claim or cause of action.” Id., § (b).
Promptly after filing the notice of removal, the party filing the notice shall file a copy of it with the clerk of the court from which the claim or cause of action is removed. Removal of the claim or cause of action is effected on such filing of a copy of the notice of removal. The parties shall proceed no further in that court unless and until the claim or cause of action is remanded.
Id., § (c). “All injunctions issued, orders entered and other proceedings had prior to removal shall remain in full force and effect until dissolved or modified by the court.” Id., § (i).
The Rooker-Feldman13 doctrine is not an issue in removal.
The Rooker-Feldman doctrine ... provides that only the [United States] Supreme Court has jurisdiction to hear appeals from final state court judgments. Bear v. Patton, 451 F.3d 639, 641 (10th Cir.2006). Proper removal does not constitute an appeal, de facto or otherwise, of the state court proceedings but a continuation of them. See Freeman v. Bee Mach. Co., 319 U.S. 448, 452, 63 S.Ct. 1146, 87 L.Ed. 1509 (1943) (“The jurisdiction exercised on removal is original not appellate.”). Thus, the Rooker-Feldman doctrine has no application to a properly removed case where, as here, there is no attack on a separate and final state-court judgment.
Jenkins v. MTGLQ Investors, 218 Fed. Appx. 719, 723-24 (10th Cir.2007) (Unpublished.)
The federal court takes a removed case “as it finds it on removal.” Butner v. Neustadter, 324 F.2d 783, 785 (9th Cir.1963). Therefore, if a default judgment is entered before removal, it is treated as a validly rendered default judgment in a federal proceeding. Id. at 785-86. After removal, federal law rather than state law governs the future course of the proceedings, notwithstanding any orders or judgments issued prior to removal. Granny Goose Foods, Inc. v. Brotherhood of Teamsters & Auto Truck Drivers Local *201No. 70 of Alameda County, 415 U.S. 423, 437, 94 S.Ct. 1113, 39 L.Ed.2d 435 (1974). Therefore, it is proper for a movant in a removed case to file a motion to set aside a default in the federal case under Fed. R.Civ.P. 60(b)14. Butner, 324 F.2d at 786. Indeed, the federal court can perform any act that it could have as if the case originated in federal court. See Maseda v. Honda Motor Co., Ltd., 861 F.2d 1248, 1252 (11th Cir.1988)(A federal court may dissolve or modify injunctions, orders, and all other proceedings which have taken place in state court prior to removal. A state court summary judgment did not foreclose modification of the judgment in federal court.); Preaseau v. Prudential Ins. Co. of America, 591 F.2d 74, 79 (9th Cir.1979) (Court compares removal to the situation where a case is reassigned to a successor judge after denial of a motion to dismiss or a motion for summary judgment. There would be no abuse of discretion in overruling the prior judge. The practice reflects the rule that interlocutory rulings are subject to reconsideration by the court at any time.) (Citations omitted.); Hawes v. Cart Products, Inc., 386 F.Supp.2d 681, 686 and 689 (D.S.C. 2005)(The weight of authority allows a defendant to remove a case to federal court after entry of a default judgment. It is well established that a federal district court has jurisdiction to consider a motion for relief from an order of default entered in state court.) (Citations omitted.); Laney v. Schneider Nat’l Carriers, Inc., 259 F.R.D. 562, 564 (N.D.Okla.2009)(A federal court is free to reconsider a state court order and to treat the order as it would any interlocutory order it might itself have entered.) (Citations omitted.)
This Court will therefore look to federal cases and their interpretations of the Federal Rules of Civil Procedure to determine whether Plaintiffs motion to set aside should be granted. Fed.R.Civ.P. 55(c) states “Setting Aside a Default or a Default Judgment. The court may set aside an entry of default for good cause, and it may set aside a default judgment under Rule 60(b).” Fed.R.Civ.P. 60(b) states:
(b) Grounds for Relief from a Final Judgment, Order, or Proceeding. On motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding for the following reasons:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
(3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
(4) the judgment is void;
(5) the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
(6) any other reason that justifies relief. The Tenth Circuit has stated that Rule 60(b) should be liberally construed when substantial justice will be served. Jennings v. Rivers, 394 F.3d 850, 856 (10th Cir.2005).
Rule 60(b)(1) provides that “[o]n motion and upon such terms as are just, the court may relieve a party or a party’s legal representative from a final judgment. ... for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect....” It “is an extraordinary procedure” which “ ‘seeks to strike a delicate balance between two *202countervailing impulses: the desire to preserve the finality of judgments and the incessant command of the court’s conscience that justice be done in light of all the facts.’ ” Cessna Fin. Corp. [v. Bielenberg Masonry Contracting, Inc.], 715 F.2d [1442] at 1444 [(10th Cir.1983) ] (quoting Seven Elves, Inc. v. Eskenazi, 635 F.2d 396, 401 (5th Cir.1981) (additional internal quotation marks omitted)).
Id.
The Tenth Circuit set out some rules for dealing with Rule 60(b) motions:
Under Rule 60(b), which standards Rule 55(c) invokes when a party is seeking relief from a default judgment, a court may set aside a final judgment “[o]n motion and upon such terms as are just.” Fed.R.Civ.P. 60(b). The several reasons listed in the Rule include setting aside for: “mistake, inadvertence, surprise, or excusable neglect,” id. at (b)(1), or for: “fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party.” Id. at (b)(3). It is also established that a movant must have a meritorious defense as well as a good reason to set aside the default. Greenwood Explorations, Ltd., 837 F.2d at 427; Cessna Fin. Corp. v. Bielenberg Masonry Contracting, Inc., 715 F.2d 1442, 1445 (10th Cir.1983); In re Stone, 588 F.2d 1316, 1319 (10th Cir.1978).
United States v. Timbers Preserve, Routt County, Colorado, 999 F.2d 452, 454 (10th Cir.1993) (Footnote omitted).
Courts have established three requirements which must be met when setting aside a default judgment under Rule 60(b): (1) the moving party’s culpable conduct did not cause the default; (2) the moving party has a meritorious defense; and (3) the non-moving party will not be prejudiced by setting aside the judgment. See Meadows, 817 F.2d at 521; INVST Fin. Group, Inc. v. Chem-Nuclear Systems, Inc., 815 F.2d 391, 398 (6th Cir.), cert. denied, 484 U.S. 927, 108 S.Ct. 291, 98 L.Ed.2d 251 (1987); 6 Moore, supra, ¶ 55.10[ 1]. The Second Circuit considers the first factor in terms of whether the default was willful. Wagstaff-El v. Carlton Press Co., 913 F.2d 56, 57 (2d Cir.1990), cert. denied, 499 U.S. 929, 111 S.Ct. 1332, 113 L.Ed.2d 263 (1991); Davis, 713 F.2d at 915. Generally a party’s conduct will be considered culpable only if the party defaulted willfully or has no excuse for the default. 6 Moore, supra, ¶ 55.10[1]; see also Meadows, 817 F.2d at 521 (receiving actual notice and failing to respond is culpable conduct).
Id.
The determination of whether neglect is excusable “is at bottom an equitable one, taking account of all relevant circumstances surrounding the party’s omission.” Pioneer Inv. Servs. Co., 507 U.S. at 395, 113 S.Ct. 1489, 123 L.Ed.2d 74 (discussing application of the excusable neglect standard of Fed. R. Bankr.P. 9006(b)(1)). Relevant factors include “the danger of prejudice to the [opposing party], the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith.” Id. “ ‘[F]ault in the delay remains a very important factor-perhaps the most important single factor-in determining whether neglect is excusable.’ ” United States v. Torres, 372 F.3d 1159, 1163 (10th Cir.2004) (quoting City of Chanute v. Williams Natural Gas Co., 31 F.3d 1041, 1046 (10th Cir.1994)).
*203Jennings, 394 F.3d at 856-57. The plain language of the rule allows relief for attorney negligence. Id. at 856 n. 5. Finally, the Tenth Circuit has ruled that default judgments are “a harsh sanction” and that there is a strong policy favoring resolution of disputes on their merits. Ruplinger v. Rains (In re Rains), 946 F.2d 731, 732 (10th Cir.1991). Because it is such a harsh sanction, due process requires that the default be the result of willfulness, bad faith, or fault. Id. at 733. Default judgments deprive a litigant his or her day in court and are appropriate only where a lesser sanction would not serve the interest of justice. Id. (Citation omitted.) Accord Sun v. Board of Trustees of the University of Illinois, 473 F.3d 799, 811-12 (7th Cir.), cert. denied, 551 U.S. 1114, 127 S.Ct. 2941, 168 L.Ed.2d 262 (2007)(A default judgment is a “weapon of last resort” that is appropriate only when a party willfully disregards pending litigation. Default gives the other party a windfall; if there is a problem with discovery caused by an attorney the preferred course is to assess increasing penalties on the attorney before defaulting the client.)
DISCUSSION
Under Timbers Preserve, Routt County, 999 F.2d at 454, the Plaintiff must establish three conditions to set aside the default judgment: (1) his culpable conduct did not cause the default; (2) he has a meritorious defense; and (3) High Desert will not be prejudiced by setting aside the judgment.
As to the first condition (culpability), this Court found above that Plaintiff was not culpable. The default was actually caused by both 1) attorney negligence or misconduct or failures, and 2) misrepresentations made to the State Court that impacted its decision. The Court finds that, fundamentally, Defendant’s attorney, in his zealousness, overstated the facts and Plaintiff’s attorney underzealously did not bring to light certain facts to either the State Court or his client. Specifically, Defendant stated for a certainty that Plaintiff had undisclosed accounts from which he transferred $28,705 and $11,678. Silva did not defend his client by disagreeing; instead he merely stated he knew nothing about them, which is very different from an affirmative statement that there were no other accounts. In fact, according to Plaintiffs affidavit, those were the ending balances in the account after a transfer of $8,032.53 from a disclosed account and a deposit (not transfer) from a Florida business (not Plaintiffs business) of $3,000. This Court is not finding that the misrepresentations were intentional (it has insufficient information to make that determination), but the misrepresentations did influence the State Court.
Second, this Court finds that the State Court was mislead by statements that suggested it had previously ruled on the merits of a motion regarding HIPAA disclosure. “MeCraney continues to assert HIPPA even though that claim was previously rejected by this Court on the Second Motion to Compel, and Third Motion to Compel and by this Court’s 13 May order.” Doc 7-1, p 7. First, this Court finds that Attorney Silva never properly brought the HIPAA motion before the State Court. This Court has reviewed the state file and finds no notice of a hearing on the motion. Second, as no party has provided transcripts, the Court does not know the content of the exact arguments made to the State Court, but can assume certain things from the orders that resulted from the hearings. There were few references to HIPAA in the FTR Reporter’s Notes. Third, the Order regarding the Second Motion to Compel, March 20, 2008, has no specific reference to HIPAA. Doc 6-1, p *20436. There is only a blanket order to answer each and every interrogatory fully and completely in a non-evasive manner and to produce all documents requested. Id. Fourth, “the May 13 order”, Doc 7-1, p 22, has no specific reference to HIPAA. The order states: “Plaintiff shall answer all discovery requests within thirty (30) days of this order and the failure to comply is grounds to reinstate the discovery sanction and enter a default against Plaintiff and in favour of Defendant.” And, finally, the state court record does not contain an order dealing with HIPAA issues 15. “There are three ways in which *205Defendant may comply with 45 C.F.R. § 164.512(e)(1): ‘[Obtaining a court order,’ ‘sending a subpoena or discovery request where plaintiff has been given notice of the request,’ or ‘sending a subpoena or discovery request where reasonable effort has been made to obtain a qualified protective order.’ ” Croskey v. BMW of North America, 2005 WL 4704767 at *2 (E.D.Mich.2005). None of these three methods was used in this case. Plaintiff therefore properly worried about disclosing the information. HIPAA calls for potentially severe penalties for its violation. See 42 U.S.C. § 1320d-5.
The two factors listed above easily implicate either Rule 60(b)(1) (mistake, inadvertence, surprise, or excusable neglect) or Rule 60(b)(3) (misrepresentation). Alternatively, the quality of the attorney’s representation may implicate Rule 60(b)(6)16 (any other reason that justifies relief.) Therefore, condition 1 is satisfied. Compare Cashner v. Freedom Stores, Inc., 98 F.3d 572, 578 (10th Cir.1996)(Rule 60(b) relief is not available when a party takes deliberate action upon advice of counsel and misapprehends the consequences of the action.) (Citations omitted.)
Condition 2 requires a meritorious defense. At the stage of ruling on a Rule 60(b) motion, the movant is not required to show that he will actually prevail on the merits if the judgment is set aside. Brendle’s Inc. v. Dazey Corp. (In re Brendle’s Inc.), 222 B.R. 770, 772 (Bankr.M.D.N.C. 1997). Rather, there must be allegations under which, if true, the movant could prevail on some or all of his claims. Id. at 773.
The counterclaim in this case appears at Doc 6-1, p 32. It is a bare bones complaint that alleges the existence of a contract; a breach of the contract for four reasons: 1) failure to act in good faith, 2) failure to carry out duties, 3) Plaintiffs spending the night with an employee and 4) the employment of a High Desert employee; resulting loss; and a non-competition agreement. The contract is the same contract that Plaintiff sued on. Under Plaintiffs version Defendant breached the contract. Plaintiff claims that he gave written notice of his intent to leave employment as allowed by paragraph 9(b), and that Defendant fired him the next day in violation of paragraph 9(b) causing loss. The facts are not intensely complex or *206disputed. The judgment will probably be based in major part on a construction of the contract. The Court finds that Plaintiffs complaint itself shows a sufficient meritorious defense to the counterclaim in this case. Condition 2 is met.
Condition 3 requires that High Desert not be prejudiced by setting aside the judgment. As noted above, any financial prejudice for attorney fees can be remedied by requiring Plaintiff to pay Defendant’s fees and costs for dealing with the Motion to Set Aside. There was some delay from Plaintiffs and Plaintiffs attorney’s conduct. Delay alone, however, is not prejudice. SLC Turnberry, Ltd. v. The American Golfer, 240 F.R.D. 50, 55 (D.Ct.2007).
CONCLUSION
For the reasons set forth above, the Court will issue an Order Granting Plaintiffs Motion to Set Aside Default Judgment (Doc 17) and set a pretrial conference.
. 743 F.2d 984, 994 (3rd Cir. 1984).
. Mandatory abstention does not apply. Mandatory abstention is set out in 28 U.S.C. § 1334(c)(2). Mandatory abstention requires a timely motion to abstain. Street v. The End of the Road Trust, 386 B.R. 539, 547 (D.Del.2008)(citing Stoe v. Flaherty, 436 F.3d 209, 213 (3rd Cir.2006)). See also Owens-Illinois, Inc. v. Rapid American Corp. (In re Celotex Corp.), 124 F.3d 619, 627 (4th Cir. 1997)(A party waives mandatory abstention by failing to file an appropriate motion.); Mourad v. Farrell (In re V & M Management, Inc.), 321 F.3d 6, 8 (1st Cir.2003)(Same.); Personette v. Kennedy (In re Midgard Corp.), 204 B.R. 764, 776 (10th Cir. BAP 1997)(Same.) Mandatory abstention is also not jurisdictional. Lawrence P. King, Jurisdiction and Procedure under the Bankruptcy *193Amendments of 1984, 38 Vand, L. Rev. 675, 700 (1985).
. These notes are not a verbatim transcript of the proceedings, but rather the notes of the person managing the FTR (digital court recording) system summarizing the proceedings.
. Apparently no Certificate of Service of this discovery request was filed by the Defendants. Later in the file the Court finds a reference date of December 31, 2007.
. The Health Insurance Portability and Accountability Act (HIPAA) imposes procedures on health care workers concerning the disclosure of medical information. See, e.g., 42 U.S.C. § 1320d-2(d)(2)(The Secretary of Health and Human Services (HHS) shall adopt security standards and safeguards to insure confidentiality and protect against unauthorized disclosures). Consistent with this statutory mandate, HHS promulgated rules and regulations governing the release and transmittal of "individually identifiable health information” by health care providers. See 45 C.F.R. 160.101 et seq.
Harris v. Whittington, 2007 WL 164031 at *2 (D.Kan.2007).
. This copy includes page 8. Subsequent copies in the record omit page 8.
. The Second set was mailed December 31, 2007.
. "In reviewing his bank account statements, they show very large cash transfers of $28,795 and $11,678 from an undisclosed account. This undisclosed account must be revealed in accordance with Discovery Request 2(b) of the First Set of Interrogatories and Requests fer Production of Documents ... Here, there is obviously another account which McCraney has the ability to withdraw funds [sic] and he failed to provide it.” Doc 7-1, p 8.
. High Desert claimed in its counterclaim that these alleged behaviors constitute viola*197tions of the employment contract between the parties.
. The counterclaim asked for damages to be proved at trial.
. Plaintiff is only seeking to set aside the September 9, 2009 order that, among .other things, declared that Defendant was entitled to a default judgment on its counterclaim against Plaintiff. It does not seek to disturb the May 13, 2008 order that dismissed all of Plaintiff's claims with prejudice.
. Perhaps, based on McCraney’s affidavit this should say “Plaintiff should have been warned.''
. The doctrine takes its name from two Supreme Court cases, Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923), and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983).
. This rule is made applicable to bankruptcy by Fed.R.Bankr.P. 9024.
. 45 C.F.R. § 164.512 sets out standards for disclosures of individually identifiable health information. Subsection (e) states:
(e) Standard: Disclosures for judicial and administrative proceedings.
(1) Permitted disclosures. A covered entity may disclose protected health information in the course of any judicial or administrative proceeding:
(i) In response to an order of a court or administrative tribunal, provided that the covered entity discloses only the protected health information expressly authorized by such order; or
(ii) In response to a subpoena, discovery request, or other lawful process, that is not accompanied by an order of a court or administrative tribunal, if:
(A) The covered entity receives satisfactory assurance, as described in paragraph (e)(l)(iii) of this section, from the party seeking the information that reasonable efforts have been made by such party to ensure that the individual who is the subject of the protected health information that has been requested has been given notice of the request; or
(B) The covered entity receives satisfactory assurance, as described in paragraph (e)(l)(iv) of this section, from the party seeking the information that reasonable efforts have been made by such party to secure a qualified protective order that meets the requirements of paragraph (e)(l)(v) of this section.
(iii) For the purposes of paragraph (e)(l)(ii)(A) of this section, a covered entity receives satisfactory assurances from a party seeking protecting health information if the covered entity receives from such party a written statement and accompanying documentation demonstrating that:
(A) The party requesting such information has made a good faith attempt to provide written notice to the individual (or, if the individual’s location is unknown, to mail a notice to the individual's last known address);
(B) The notice included sufficient information about the litigation or proceeding in which the protected health information is requested to permit the individual to raise an objection to the court or administrative tribunal; and
(C) The time for the individual to raise objections to the court or administrative tribunal has elapsed, and:
(1) No objections were filed; or
(2) All objections filed by the individual have been resolved by the court or the administrative tribunal and the disclosures being sought are consistent with such resolution.
(iv) For the purposes of paragraph (e)(l)(ii)(B) of this section, a covered entity receives satisfactory assurances from a party seeking protected health information, if the covered entity receives from such party a written statement and accompanying documentation demonstrating that:
(A) The parties to the dispute giving rise to the request for information have agreed to a qualified protective order and have presented it to the court or administrative tribunal with jurisdiction over the dispute; or
(B) The party seeking the protected health information has requested a qualified protective order from such court or administrative tribunal.
(v) For purposes of paragraph (e)(1) of this section, a qualified protective order means, with respect to protected health information requested under paragraph (e)(1)(h) of this section, an order of a court or of an administrative tribunal or a stipulation by the parties to the litigation or administrative proceeding that:
(A) Prohibits the parties from using or disclosing the protected health information for any purpose other than the litigation or proceeding for which such information was requested; and
(B) Requires the return to the covered entity or destruction of the protected health information (including all copies made) at the end of the litigation or proceeding.
(vi) Nothwithstanding paragraph (e)(1)(h) of this section, a covered entity may disclose *205protected health information in response to lawful process described in paragraph (e)(l)(ii) of this section without receiving satisfactory assurance under paragraph (e)(l)(ii)(A) or (B) of this section, if the covered entity makes reasonable efforts to provide notice to the individual sufficient to meet the requirements of paragraph (e)(l)(iii) of this section or to seek a qualified protective order sufficient to meet the requirements of paragraph (e)(l)(iv) of this section.
(2) Other uses and disclosures under this section. The provisions of this paragraph do not supersede other provisions of this section that otherwise permit or restrict uses or disclosures of protected health information. (Emphasis added.)
. Generally, clients are held responsible and accountable for the acts and omissions of their attorneys. Pioneer Inv. Services Co. v. Brunswick Assoc. Ltd., 507 U.S. 380, 396, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). However, at least four circuit courts of appeals have adopted the rule that a client is not responsible for an attorney’s gross negligence. Community Dental Services v. Tani, 282 F.3d 1164, 1169 (9th Cir.2002)(Ninth circuit joins the Third, Sixth and Federal Circuits allow Rule 60(b) relief for an attorney’s gross negligence.) See also D’Angelo v. State Farm Fire & Cas. Co., 32 Fed.Appx. 604, 605 (2nd Cir. 2002)(Gross negligence of attorney may be grounds for Rule 60(b)(6) relief if exceptional circumstances are shown such as mental disorder or misconduct such that there was a “constructive disappearance” or inability to provide adequate representation.) | 01-04-2023 | 11-22-2022 |
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