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https://www.courtlistener.com/api/rest/v3/opinions/8488302/ | Filed 11/21/22 P. v. Banuelos CA3
NOT TO BE PUBLISHED
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 This opinion has not been certified for publication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
THIRD APPELLATE DISTRICT
(Sacramento)
----
THE PEOPLE, C094509
Plaintiff and Respondent, (Super. Ct. No. 97F05444)
v.
RUBEN ANTONIO BANUELOS,
Defendant and Appellant.
Defendant Ruben Antonio Banuelos was sentenced to 51 years to life for shooting
and killing S.P. After defendant had served about 20 years of his sentence, the California
Department of Corrections and Rehabilitation (CDCR) recommended the trial court recall
and resentence defendant “based upon his exceptional conduct while incarcerated.” The
trial court denied the CDCR’s recommendation and this appeal followed.
While defendant’s appeal was pending, the Governor signed into law Assembly
Bill No. 1540 (2021-2022 Reg. Sess.) (Stats. 2021, ch. 719) (Assem. Bill 1540), which
1
clarified the required procedures the trial court must implement when the CDCR
recommends a defendant is suitable for recall and resentencing. Defendant now argues
that the benefits of Assem. Bill 1540 and other recent legislation apply to him
retroactively and entitle him to resentencing. The People concede defendant is entitled to
reconsideration of the CDCR’s recommendation, but do not concede defendant is entitled
to resentencing. We accept the People’s concession and reverse to allow the trial court to
reconsider the CDCR’s recommendation, but we decline to reach defendant’s request for
resentencing.
FACTS AND HISTORY OF THE PROCEEDINGS
In 1997, defendant shot and killed S.P. outside of a billiards room because he
thought S.P. was “hitting on” his girlfriend. In 1998, a jury found defendant guilty of
second degree murder with a firearm (Pen. Code, §§ 187, 667, subd. (e)(1))
(undesignated statutory references are to the Penal Code) and being a felon in possession
of a firearm (§ 12021, subd. (a)). The trial court sustained a firearm enhancement
(§ 12022, subd. (a)) and a prior felony conviction enhancement (§ 667, subd. (a)), and
sentenced defendant to 30 years to life for the murder conviction, 15 years for the prior
felony conviction and firearm enhancements, and six years for being a felon in possession
of a firearm.
The CDCR filed a letter with the trial court on September 8, 2020, which
recommended the court recall defendant’s 1998 sentence and resentence him under
former section 1170, subdivision (d)(1). In its recommendation, the CDCR recounted
defendant’s positive participation in rehabilitative programming; lack of serious
disciplinary history in the preceding six years; 45 laudatory achievements and
programming accomplishments, noteworthy educational performance; and positive
impact with youth offenders.
2
In response to the CDCR’s recommendation, the court gave notice to defendant,
appointed counsel, permitted briefing from the parties, and heard argument. The trial
court considered defendant’s criminal history, which included convictions pursuant to a
guilty plea to being a felon in possession of a firearm (§ 12021, subd. (a)) and driving
under the influence causing injury/death (Veh. Code, § 23153, subd. (a)). Defendant had
committed both of these offenses while on probation.
In rejecting the CDCR’s recommendation, the court explained that though
defendant demonstrated extensive growth while in custody, he exhibited a “bad” criminal
history that did “not tip the scales enough under [the] totality of [the] circumstances.”
Consequently, the trial court decided that recalling defendant’s sentence would not be in
the interest of justice.
DISCUSSION
Defendant contends we should remand for reconsideration of the CDCR’s request
because he is entitled to recall and resentencing pursuant to the recently enacted
provisions of Assem. Bill 1540 codified within new section 1170.03 (Stats. 2021, ch.
719, §§ 1-7). The parties dispute whether this legislation applies retroactively, but in the
interest of judicial economy, the People ultimately concede defendant is entitled to
reconsideration of the CDCR’s recommendation because either we will find error and
remand to the trial court, or the CDCR will issue a second recommendation. Defendant
also argues that our court should remand with directions to grant the CDCR’s
recommendation to recall his sentence, and upon resentencing, have the trial court also
consider newly-enacted Senate Bill No. 81 (2021-2022 Reg. Sess.) pursuant to People v.
Padilla (2022) 13 Cal.5th 152 (Padilla). The People dispute whether Padilla applies to
Assem. Bill 1540 and assert defendant “is not automatically entitled to resentencing.”
We decline to reach this argument as ruling on it would be premature in light of the
posture of the case. Thus, reaching only defendant’s argument regarding the new
3
requirements within section 1170.03, we reverse and remand to allow the trial court to
reconsider CDCR’s recommendation.
Former section 1170, subdivision (d)(1) permitted a trial court, at any time upon
the recommendation of the CDCR, to “recall the sentence and commitment previously
ordered and resentence the defendant in the same manner as if they had not previously
been sentenced, . . . provided the new sentence, if any, is no greater than the initial
sentence.” (§ 1172.1, subd. (a)(1).) Following the trial court’s decision, former section
1170, subdivision (d) was recodified as section 1170.03, subdivision (a)(1). (Stats 2021,
ch. 719, §§ 1-7.) Pursuant to section 1170.03, which as of June 30, 2022, section 1170.03
was recodified without substantive change as section 1172.1 (Stats. 2022, ch. 58, § 9), a
trial court may reduce a defendant’s term of imprisonment by modifying the sentence in
the interest of justice, and must provide notice, appointment of counsel, a hearing, and a
statement of reasons for the ruling on the record. (§ 1172.1, subds. (a)(6) & (b)(1), added
by Stats. 2021, ch. 719, § 3.1.) Additionally, and as relevant here, where the recall and
resentencing recommendation is made by the CDCR, “[t]here shall be a presumption
favoring recall and resentencing of the defendant, which may only be overcome if a court
finds the defendant is an unreasonable risk of danger to public safety, as defined in
subdivision (c) of Section 1170.18.” (§ 1172.1, subd. (b)(2), added by Stats. 2021, ch.
719, § 3.1, subd. (b)(2).)
Assem. Bill 1540 was intended to “make clarifying changes” to former section
1170, subdivision (d)(1), and to specify the required procedures for when the CDCR
recommends recall and resentencing. (People v. McMurray (2022) 76 Cal.App.5th 1035,
1041 (McMurray).) And, because Assem. Bill 1540 was passed in part to clarify
legislative intent, it is properly considered in interpreting former section 1170,
subdivision (d). (Carter v. California Dept. of Veterans Affairs (2006) 38 Cal.4th 914,
922.) Thus, because the trial court’s denial of the CDCR’s recommendation predated
enactment of Assem. Bill 1540, the clarification of the law applies here.
4
Although the trial court here complied with many of the new requirements in the
recall and resentencing process, we cannot determine whether the court applied the
presumption in favor of granting the recommendation of the CDCR to recall defendant’s
sentence, nor can we conclude whether the trial court determined defendant presented an
unreasonable risk of danger to public safety as defined in subdivision (c) of section
1170.18. (§ 1172.1, subd. (b)(2).) Above, we noted that the parties agree remand for
reconsideration of the CDCR’s recommendation is the appropriate remedy. We reach the
same conclusion. Additionally, as the People suggest, judicial economy warrants reversal
and remand because the CDCR could submit a second recommendation which would be
subject to review under new law and would render any decision made here under the old
law wasteful.
While the parties disagree on retroactivity pursuant to In re Estrada (1965)
63 Cal.2d 740, we need not decide that dispute since the parties agreed to remand.
Similarly, we need not determine whether our Supreme Court’s rationale in Padilla
applies because we do not resolve retroactivity here, nor are we inclined to rule on the
Padilla issue prematurely as the trial court may still conclude defendant is a danger to
public safety on remand and deny recall.
Because we consider Assem. Bill 1540 a clarification in the law, we reverse and
remand the trial court’s order declining the recommendation of the CDCR to recall
defendant’s sentence. (McMurray, supra, 76 Cal.App.5th at pp. 1041-1042.)
5
DISPOSITION
The order declining to recall and resentence defendant is reversed. The matter is
remanded for reconsideration of CDCR’s recommendation to recall and resentence
defendant in accordance with section 1172.1 as added by Assem. Bill 1540.
HULL, Acting P. J.
We concur:
RENNER, J.
EARL, J.
6 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488292/ | USCA11 Case: 22-10588 Date Filed: 11/21/2022 Page: 1 of 2
[DO NOT PUBLISH]
In the
United States Court of Appeals
For the Eleventh Circuit
____________________
No. 22-10588
Non-Argument Calendar
____________________
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
versus
EDWIN JEROME OWENS,
a.k.a.
EJ,
Defendant-Appellant.
____________________
Appeal from the United States District Court
for the Southern District of Alabama
USCA11 Case: 22-10588 Date Filed: 11/21/2022 Page: 2 of 2
2 Opinion of the Court 22-10588
D.C. Docket No. 1:20-cr-00122-TFM-30
____________________
Before ROSENBAUM, JILL PRYOR, and BRASHER, Circuit
Judges.
PER CURIAM:
The Government’s motion to dismiss this appeal pursuant
to the appeal waiver in Appellant’s plea agreement is GRANTED.
See United States v. Bushert, 997 F.2d 1343, 1350–51 (11th Cir.
1993) (sentence appeal waiver will be enforced if it was made
knowingly and voluntarily); United States v. Boyd, 975 F.3d 1185,
1192 (11th Cir. 2020) (appeal waiver is enforceable when district
court “clearly conveyed to the defendant that he was giving up his
right to appeal under most circumstances”); United States v. Bas-
comb, 451 F.3d 1292, 1297 (11th Cir. 2006) (appeal waiver “cannot
be vitiated or altered by comments the court makes during sen-
tencing”); United States v. Grinard-Henry, 399 F.3d 1294, 1296
(11th Cir. 2005) (waiver of the right to appeal includes waiver of
the right to appeal difficult or debatable legal issues or even blatant
error). | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488316/ | [Cite as State v. Lemaster, 2022-Ohio-4157.]
IN THE COURT OF APPEALS OF OHIO
FOURTH APPELLATE DISTRICT
MEIGS COUNTY
STATE OF OHIO, :
:
Plaintiff-Appellee, : Case No. 22CA1
:
v. :
: DECISION AND JUDGMENT
1
WILLIAM D. LEMASTER , : ENTRY
:
Defendant-Appellant. :
_____________________________________________________________
APPEARANCES:
William D. Lemaster, Lima, Ohio, Appellant, Pro Se.
James K. Stanley, Meigs County Prosecuting Attorney, Pomeroy, Ohio, for
Appellee.
_____________________________________________________________
Smith, P.J.
{¶1} William D. Lemaster appeals the December 20, 2021 entry of
the Meigs County Common Pleas Court which dismissed as untimely his
petition for postconviction relief. In his petition and upon appeal, Mr.
Lemaster, “Appellant,” asserts that the trial court lacked subject matter
jurisdiction over the criminal proceedings and personal jurisdiction over
1
The Supreme Court of Ohio noted that Appellant’s last name has appeared in court opinions and
documents with several different spellings. See State ex rel. Lemaster v. Meigs County Court of Common
Pleas, 161 Ohio St. 3d 14, 2020-Ohio-3776, 160 N.E.3d 713, at fn.1. “Lemaster” is how it appears in his
current appellate brief and herein.
Meigs App. No. 22CA1 2
himself. However, upon review, we find no merit to Appellant’s assignment
of error. Accordingly, we affirm the judgment of the trial court.
FACTUAL AND PROCEDURAL BACKGROUND
{¶2} In May 1993, a Meigs County jury found Appellant guilty of
multiple counts of aggravated murder with death penalty specifications, two
counts of aggravated kidnapping, one count of aggravated robbery, and
multiple firearm specifications. The victims were Jeff Halley and his 12-
year-old son, Jeffrey Halley. The common pleas court entered its judgment
entry on May 25, 1993 and sentenced Appellant to two terms of life
imprisonment on the aggravated murder convictions and imposed additional
consecutive sentencing on the other convictions. The underlying factual
background is not necessary to resolution of this appeal, but is set forth fully
in State v. LeMasters, 4th Dist. Meigs No. 512, 1994 WL 534883, (Sept. 27,
1994), at *1 and *2.
{¶3} On direct appeal, the Fourth District vacated one of Appellant’s
firearm specification sentences as duplicative, but otherwise affirmed his
convictions and sentence. See State v. Lemasters, supra. Appellant
unsuccessfully sought postconviction relief. See e.g., State v. Lemasters, 4th
Dist. Meigs No. 95CA15, 1996 WL 734665 (Dec. 6, 1996) (affirming denial
of delayed motion for new trial); State v. LeMasters, 4th Dist. Meigs No.
Meigs App. No. 22CA1 3
97CA15, 1998 WL 668093 (Aug. 26, 1998) (affirming dismissal of
Appellant’s R.C. 2953.21 petition for postconviction relief); State ex rel.
Lemaster v. Meigs County Court of Common Pleas, 161 OhioSt.3d 14,
2020-Ohio-3776, 160 N.E.3d 713, at ¶ 4. In Lemaster v. Meigs County,
supra, Appellant sought a writ of mandamus ordering the Meigs County
Court of Common Pleas to enter a final appealable order of conviction. The
Supreme Court of Ohio held that Appellant’s judgment of conviction
constituted a final appealable order at the time it was entered. See Id., at ¶
11.
{¶4} On July 29, 2021, Appellant filed a motion captioned “Motion to
Challenge the Trial Judge Jurisdiction Over the Subject Matter and
Jurisdiction over the Defendant for Failure to Adhere to Sup.R. 4 and Sup.R.
36, Making the Accused Conviction and Sentence Void Ab-Inito.” On
December 20, 2021, the trial court determined the motion to be an untimely
petition for postconviction relief pursuant to R.C. 2953.21 and dismissed the
matter.2 This timely appeal followed.
ASSIGNMENT OF ERROR
I. THE TRIAL COURT JUDGE LACKED
JURISDICTION OVER THE SUBJECT-
MATTER AND PERSONAL JURISDICTION
OVER THE DEFENDANT, FOR FAILURE TO
2
Appellant’s motion was ruled on by Judge D. Dean Evans, sitting by assignment.
Meigs App. No. 22CA1 4
ADHERE TO SUP.4.01[sic], SUP.R. 36.011 AND
36.013 MAKING THE ACCUSED CONVICTION
AND SENTENCE VOID AB-INITIO.
STANDARD OF REVIEW
{¶5} R.C. 2953.21(A)(1)(a), petition for postconviction relief,
provides in pertinent part that:
Any person in any of the following categories may file a
petition in the court that imposed sentence, stating the
grounds for relief relied upon, and asking the court to
vacate or set aside the judgment or sentence or to grant
other appropriate relief: (i) Any person who has been
convicted of a criminal offense * * * and who claims that
there was such a denial or infringement of the person's
rights as to render the judgment void or voidable under the
Ohio Constitution or the Constitution of the United States
* * *.
{¶6} The postconviction relief process is a collateral civil attack on a
criminal judgment rather than an appeal of the judgment. See State v. Betts,
4th Dist. Vinton No. 18CA710, 2018-Ohio-2720, at ¶ 11; State v. Calhoun,
86 Ohio St.3d 279, 281, 714 N.E.2d 905 (1999). Postconviction relief is not
a constitutional right; instead, it is a narrow remedy that gives the petitioner
no more rights than those granted by statute. Id. It is a means to resolve
constitutional claims that cannot be addressed on direct appeal because the
evidence supporting the claims is not contained in the record. See State v.
McDougald, 4th Dist. Scioto No. 16CA3736, 2016-Ohio-5080, ¶ 19-20,
citing State v. Knauff, 4th Dist. Adams No. 13CA976, 2014-Ohio-308, ¶ 18.
Meigs App. No. 22CA1 5
{¶7} “ ‘[A] trial court's decision granting or denying a postconviction
relief petition filed pursuant to R.C. 2953.21 should be upheld absent an
abuse of discretion; a reviewing court should not overrule the trial court's
finding on a petition for postconviction relief that is supported by competent
and credible evidence.’ ” Betts, supra, at ¶ 12, quoting State v. Gondor, 112
Ohio St.3d 377, 2006-Ohio-6679, 860 N.E.2d 77, ¶ 58. A trial court abuses
its discretion when its decision is unreasonable, arbitrary, or unconscionable.
See In re H.V., 138 Ohio St.3d 408, 2014-Ohio-812, 7 N.E.3d 1173, ¶ 8.
{¶8} A petitioner seeking postconviction relief is not automatically
entitled to an evidentiary hearing. See Betts, supra, at ¶ 13, citing State v.
Black, 4th Dist. Ross No. 15CA3509, 2016-Ohio-3104, ¶ 9, citing State v.
Calhoun, 86 Ohio St.3d 279, 282, 714 N.E.2d 905 (1999); State v. Slagle,
4th Dist. Highland No. 11CA22, 2012-Ohio-1936, ¶ 13. Rather, before
granting a hearing on a petition, the trial court must first determine that
substantive grounds for relief exist. R.C. 2953.21(C). “Substantive grounds
for relief exist and a hearing is warranted if the petitioner produces sufficient
credible evidence that demonstrates the petitioner suffered a violation of the
petitioner's constitutional rights.” In re B.C.S., 4th Dist. Washington No.
07CA60, 2008-Ohio-5771, ¶ 11. Furthermore, in order to merit a hearing,
Meigs App. No. 22CA1 6
“the petitioner must demonstrate that the claimed ‘errors resulted in
prejudice.’ ” Id., quoting Calhoun at 283.
LEGAL ANALYSIS
{¶9} Postconviction petitions are subject to timeliness requirements.
See State v. Mitchell, 2021-Ohio-4386, 181 N.E. 3d 550, at ¶ 18 (4th Dist.).
Pursuant to R.C. 2953.21(2)(a), a petition under R.C. 2953.21(A)(1)(a) must
be filed no later than 365 days after the date on which the trial transcript is
filed in the court of appeals in the direct appeal of the judgment of
conviction or adjudication. In this case, Appellant's direct appeal was filed
in 1993. Appellant’s motion is obviously untimely.3
{¶10} However, Appellant challenges both the exercise of subject
matter jurisdiction and personal jurisdiction in his case. Issues relating to a
court's subject matter jurisdiction may be raised at any time and can never be
waived. In re R. M., 2013-Ohio-3588, 947 N.E.2d 169, at ¶ 77 (4th Dist.).
“ ‘Jurisdiction’ means ‘the court’s statutory or constitutional
power to adjudicate the case.’ (Emphasis omitted). Steel Co. v.
Citizens for a Better Environment (1998), 523 U.S. 83, 89, 118
S.Ct. 1003, 140 L.Ed.2d 210; Morrison v. Steiner (1972), 32
3
An exception to the time requirement is contained in R.C. 2953.23. See State v. Sowards, 4th Dist. Gallia
No. 18CA2, 2018-Ohio-4173, at ¶ 23. A trial court may not entertain a postconviction relief petition unless
the petitioner first demonstrates one of the following: (1) the petitioner was unavoidably prevented from
discovering the facts necessary for the claim for relief; or (2) the United States Supreme Court recognized a
new federal or state right that applies retroactively to persons in the petitioner's situation. R.C.
2953.23(A)(1)(a). If the petitioner demonstrates one of the foregoing threshold findings, the petitioner then
must establish that but for the constitutional error at trial no reasonable finder of fact would have found him
guilty. R.C. 2953.23(A)(1)(b); accord State v. Rinehart, 4th Dist. Ross No. 17CA3606, 2018-Ohio-1261,
at ¶ 14. Appellant has not argued either of these exceptions.
Meigs App. No. 22CA1 7
Ohio St.2d 86, 87, 61 O.O.2d 335, 290 N.E.2d 841, paragraph
one of the syllabus. The term encompasses jurisdiction over the
subject matter and over the person. State v. Parker, 95 Ohio
St.3d 524, 2002-Ohio-2833, 769 N.E.2d 846, ¶ 22 (Cook, J.,
dissenting). Because subject-matter jurisdiction goes to the
power of the court to adjudicate the merits of a case, it can
never be waived and may be challenged at any time. United
States v. Cotton (2002), 535 U.S. 625, 630, 122 S.Ct. 1781, 152
L.Ed.2d 860; State ex rel. Tubbs Jones v. Suster (1998), 84
Ohio St.3d 70, 75, 701 N.E.2d 1002.” Pratts v. Hurley, 102
Ohio St.3d 81, 2004-Ohio-1980, 806 N.E.2d 992, ¶ 11. “ ‘The
existence of the trial court's subject-matter jurisdiction is a
question of law that we review de novo.’ ” Barber v.
Williamson, 4th Dist. No. 11CA3265, 2012-Ohio-4925, 2012
WL 5289381, ¶ 12, quoting Yazdani–Isfehani v. Yazdani–
Isfehani, 170 Ohio App.3d 1, 2006-Ohio-7105, 865 N.E.2d 924,
¶ 20; accord In re E.G., 8th Dist. No. 98652, 2013-Ohio-495,
2013 WL 588756, ¶ 9.
{¶11} Here, Appellant challenges both the subject matter jurisdiction
and personal jurisdiction of the trial court judge, Fred W. Crow, III.
Appellant points to a lack of indication in the record that Judge Crow was
assigned to his case. Appellant directs us to Sup.R. 4.01, Sup.R.
36.011(B)(4), Sup.R. 36.013, and to a letter Appellant attached as Exhibit C.
The Exhibit C letter is from the Meigs County Clerk of Courts, indicating
that upon a diligent search of the records, the clerk was unable to find either
“a journalized order from the administrative judge assigning Judge Fred W.
Crow, III” nor an “Assignment Request Form,” documents previously
requested by Appellant.
Meigs App. No. 22CA1 8
{¶12} Appellant believes this letter from the Meigs County Clerk of
Courts establishes that Judge Crow did not make an entrance into the record
to establish that he accepted subject matter jurisdiction over the criminal
proceedings or personal jurisdiction over Appellant. Thus, Appellant argues
that the trial court did not have authority in the matter and was unable to
render a valid judgment.
{¶13} While Appellant characterizes his arguments as jurisdictional,
he is misguided. While case assignments must be free from the appearance
of impropriety, See Brickman & Sons, Inc. v. Natl. City Bank, 106 Ohio St.
3d 30, 2005-Ohio-3559, 830 N.E.2d 1151, at ¶ 21, the lack of a formal entry
or order demonstrating that Judge Crow transferred the case to himself and
accepted jurisdiction may be more properly characterized in the nature of a
procedural irregularity. Meigs County Common Pleas Court is a single-
judge court. Judge Crow was the duly elected common pleas court judge in
Meigs County at the time Appellant was indicted, arraigned, and tried on the
criminal charges.
{¶14} Sup.R. 3(A) provides that “[i]n a single-judge court of common
pleas * * *, the judge shall serve as the presiding judge of the court.”
Pursuant to Sup.R. 3(A), Judge Crow was the presiding judge of the Meigs
County Court of Common Pleas. Sup.R. 4(A) provides that a judge of a
Meigs App. No. 22CA1 9
single-judge court of common pleas “shall serve as the administrative judge
of that court.” Pursuant to Sup.R. 4(A), Judge Crow was the administrative
judge as well. At that time, and to the present day, Meigs County had only
one general division common pleas judge. As such, Judge Crow had
jurisdiction over all criminal cases filed in Meigs County.
{¶15} Appellant relies on Sup.R. 4.01(C), which provides that an
administrative judge shall “[p]ursuant to Sup.R. 36, assign cases to
individual judges of the court.” However, Sup.R. 36.011, individual
assignment system, relates to multi-judge common pleas courts. Since
Meigs County does not have a multi-judge court of common pleas,
Appellant’s case could not be heard by any judge other than Judge Crow,
absent the appointment of a special judge due to a conflict.
{¶16} Sup.R. 36.013, also cited by Appellant, provides that
“[c]riminal cases in which an indictment or a count in an indictment charges
the defendant with aggravated murder and contains one or more
specifications of aggravating circumstances listed in R.C. 2929.04(A) shall
be assigned to a judge of the court or division who is qualified to hear the
cases * * *.” The rule further provides the method of assignment. This rule
is also inapplicable to Appellant’s case. Simply put, none of the rules
pertaining to multi-judge common pleas courts is relevant here since Judge
Meigs App. No. 22CA1 10
Crow was the only common pleas judge in Meigs County, and there was no
other judge that could be assigned the matter.
{¶17} While the lack of an entry indicating Judge Crow’s assignment
is a procedural irregularity, the longstanding common knowledge when
Appellant was convicted in 1993 was that Judge Crow was the only common
pleas judge in a single-judge county. Judge Crow clearly was the only judge
presiding over the criminal proceedings in Meigs County. In this case, the
pleadings and docket reflect Judge Crow’s initial and continued involvement
in Appellant’s case.
{¶18} Appellant’s arraignment entry dated December 23, 1992 was
signed by Judge Fred W. Crow, III. The pleadings demonstrate Judge Crow
scheduled hearings and ruled on motions throughout the criminal
proceedings. The trial transcript volumes beginning with a date of May 4,
1993 and continuing to May 20, 1993, all indicate as follows:
Proceedings before the Honorable Fred W. Crow, III,
taken before me, Laurel A. McDaid, Registered
Professional reporter and Notary Public in and for the
State of Ohio, at the Meigs County Courthouse.
{¶19} In the volume at the conclusion of trial, dated May 20,
1993, the court reporter certified as follows:
CERTIFICATE
I, Laurel McDaid, Notary Public in and For the State of Ohio,
Meigs App. No. 22CA1 11
Do Hereby Certify that the Foregoing is a True and Correct
Transcript of the Proceedings Taken by Me in this Matter and
Transcribed by Me. In Witness Whereof, I have
Hereunto set my hand and affixed my seal of office at
Columbus, Ohio on this 27th day of August 1993.
{¶20} In Appellant’s case, the Judgment/Sentencing Entry and
Warrant to Convey, dated May 25, 1993, is signed by Judge Fred W. Crow,
III.
{¶21} Even if the lack of an entry detailing Judge Crow’s self-
assignment over the matter can somehow be considered an irregularity, the
proper assignment of a judge can be waived and, therefore, does not raise an
issue of subject matter jurisdiction. It is more akin to a matter of personal
jurisdiction. “Personal jurisdiction is established by ‘the presence of the
person or thing involved in the litigation within the forum's territorial
boundaries or the consent [express or implied] of the party.’ ” State v.
Smith, 5th Dist. Muskingum No. CT2017-0066, 2018-Ohio-5121, quoting
State v. Haddix, 5th Dist. No. 2018CA00035, 2018-Ohio-2833 ¶ 6, citing
McBride v. Coble Express, Inc., 92 Ohio App.3d 505, 509, 636 N.E.2d 356,
359 (3rd Dist. 1993), and Nehls v. Quad-K. Advertising, Inc., 106 Ohio
App.3d 489, 495, 666 N.E.2d 579, 582 (8th Dist.1995).
{¶22} “Personal jurisdiction can be waived expressly or by failure to
object.” Id. The Smith court found because Smith never objected, he
Meigs App. No. 22CA1 12
waived the matter of personal jurisdiction. See Safranek v. Safranek, 8th
Dist. Cuyahoga No.80413, 2002-Ohio-5066, at ¶ 11 (party must object at the
earliest possible moment to matter of personal jurisdiction). Similarly, the
Supreme Court of Ohio has held that procedural irregularities involving the
transfer of a case to a visiting judge rendered the judgment voidable, not
void. See In re J.J., 111 Ohio St. 3d 205, 2006-Ohio-5484, 855 N.E. 2d 851,
at the syllabus (party’s failure to object to the transfer waived issue for
appeal). See also State v. Sizemore, 12th Dist. Butler No.2005-CA-03-081,
2006-Ohio-1434 (where appellant never objected to transfer at any point in
the proceedings held in the trial court, issue was waived for purposes of
review); and see generally Berger v. Berger, 3 Ohio App.3d 125, 130, 443
N.E. 2d 1375 (8th Dist. 1981) (any party objecting to the reassignment of a
case must raise the objection at the earliest opportunity or the issue is
deemed waived), overruled on other grounds by Brickman & Sons, Inc. v.
Natl. City Bank, 106 Ohio St. 3d 30, 2005-Ohio-3559, 830 N.E.2d 1151
(when administrative judge’s entry of reassignment under authority of the
Rules of Superintendence does not state the reason for the transfer but the
reason is clear from the record, the transfer is proper).4
4
But see White v. Summit County, 138 Ohio App.3d 116, 117, 740 N.E. 2d 688 (“Absent an entry
indicating proper transfer, ‘the judge assuming to act has no authority and his rulings are voidable
on timely objection by any party.’ ” Id., quoting Berger v. Berger, supra.) See also Lungaro v.
Lungaro, 9th Dist. Medina No.09CA0024-M, 2009-Ohio-6372 (because party could not have
Meigs App. No. 22CA1 13
{¶23} Appellant is arguing a perceived irregularity or technicality.
The correctness and propriety of Judge Crow’s exercise of subject matter
jurisdiction and personal jurisdiction is not affected by the lack of an entry
setting forth Judge Crow’s assignment of the case to himself. The lack of
such an entry does not raise a jurisdictional issue. Thus, Appellant’s motion
is rightly construed as an untimely motion for postconviction relief for
which consideration is barred. Appellant’s assignment is without merit and
is hereby overruled.
JUDGMENT AFFIRMED.
objected prior to receiving the final judgment entry, issue was preserved for review where court
had no evidence explaining how a subsequent judge came to author the final judgment entry).
Meigs App. No. 22CA1 14
JUDGMENT ENTRY
It is ordered that the JUDGMENT BE AFFIRMED and costs be
assessed to Appellant.
The Court finds there were reasonable grounds for this appeal.
It is ordered that a special mandate issue out of this Court directing
the Meigs County Common Pleas Court to carry this judgment into
execution.
IF A STAY OF EXECUTION OF SENTENCE AND RELEASE
UPON BAIL HAS BEEN PREVIOUSLY GRANTED BY THE TRIAL
COURT OR THIS COURT, it is temporarily continued for a period not to
exceed 60 days upon the bail previously posted. The purpose of a continued
stay is to allow Appellant to file with the Supreme Court of Ohio an
application for a stay during the pendency of proceedings in that court. If a
stay is continued by this entry, it will terminate at the earlier of the
expiration of the 60-day period, or the failure of the Appellant to file a notice
of appeal with the Supreme Court of Ohio in the 45-day appeal period
pursuant to Rule II, Sec. 2 of the Rules of Practice of the Supreme Court of
Ohio. Additionally, if the Supreme Court of Ohio dismisses the appeal prior
to expiration of 60 days, the stay will terminate as of the date of such
dismissal.
A certified copy of this entry shall constitute the mandate pursuant to
Rule 27 of the Rules of Appellate Procedure.
Hess, J. and Wilkin, J. concur in Judgment and Opinion.
For the Court,
__________________________________
Jason P. Smith
Presiding Judge
NOTICE TO COUNSEL
Meigs App. No. 22CA1 15
Pursuant to Local Rule No. 14, this document constitutes a final
judgment entry and the time period for further appeal commences from
the date of filing with the clerk. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488315/ | [Cite as O'Dell v. Vrable III, Inc., 2022-Ohio-4156.]
IN THE COURT OF APPEALS OF OHIO
FOURTH APPELLATE DISTRICT
GALLIA COUNTY
Mark O’Dell, Individually and as : Case No. 20CA18
Administrator of the Estate of
Bebea Joyce O’Dell, :
Plaintiff-Appellant, :
DECISION AND
v. : JUDGMENT ENTRY
VRABLE III, Inc., et al., :
RELEASED 11/15/2022
Defendants-Appellees. :
APPEARANCES:
Michael J. Fuller Jr., John R. Cummings, and D. Bryant Cummings, Hattiesburg,
Mississippi, for appellant.
Acacia B. Perko and Kenton H. Steele, Columbus, Ohio, for appellees.
Hess, J.
{¶1} Mark O’Dell, (“O’Dell”) individually and as administrator of the Estate of
Bebea Joyce O’Dell (“Bebea”) appeals the trial court’s judgment granting partial summary
judgment to Vrable III, Inc., Vrable Healthcare, Inc., and Jeremy Long. O’Dell raises the
following three assignment of errors: (1) the trial court erred when it dismissed all of his
claims except for a medical claim against Vrable III; (2) the trial court erred when it
dismissed all claims against Vrable Healthcare; and (3) the trial court erred when it
dismissed all claims against Jeremy Long.
{¶2} On O’Dell’s first assignment of error, we find that the trial court correctly
determined that only one claim survived the Defendants’ summary judgment motion.
Gallia App. No. 20CA18 2
However, the trial court incorrectly defined that claim as a “medical claim.” We find that
the single remaining claim is properly characterized as a general negligence claim.
Otherwise, we find that the trial court properly dismissed all the remaining claims (i.e.,
Counts Four/Five, Eight through Eleven, nursing home negligence, punitive damages,
fraud, breach of fiduciary duty, premises liability). The trial court incorrectly allowed the
case to proceed on Counts Six/Seven, the medical claim, and dismissed Counts
One/Two, the general negligence claim. We dismiss Counts Six/Seven and allow the case
to proceed on Counts One/Two. On O’Dell’s second and third assignments of error, the
trial court properly dismissed Vrable Healthcare and Jeremy Long because O’Dell failed
to establish a genuine issue of material fact concerning their negligence.
{¶3} We sustain in part and overrule in part, O’Dell’s first assignment of error.
We overrule O’Dell’s second and third assignments of error.
I. FACTS AND PROCEDURAL BACKGROUND
{¶4} Bebea O’Dell was a resident of Abbyshire Place Skilled Nursing & Rehab
Center (“Abbyshire”). Bebea’s son, Mark O’Dell, is the estate administrator and plaintiff.
Vrable III is the state-licensed operator of Abbyshire; Abbyshire and Vrable III are the
same entity. The personnel who work at Abbyshire are either employees of Vrable III or
Vrable Healthcare. Some Abbyshire personnel, such as the floor nurses and aides, are
employees of Vrable III, while certain management level staff, such as Long, the licensed
nursing home administrator of Abbyshire, are employees of Vrable Healthcare. Thus both
Vrable III and Vrable Healthcare employ persons who work at Abbyshire. In addition to
employing Long and other management level staff at Abbyshire, Vrable Healthcare is the
sole shareholder of Vrable III.
Gallia App. No. 20CA18 3
{¶5} Bebea O’Dell was an 84-year-old woman with dementia when she was
admitted to Abbyshire on August 21, 2018. Prior to that, Bebea lived with her son, Mark
O’Dell. According to O’Dell, for several years while Bebea lived with him she used a
wheeled walker to get around without problems. On August 2, 2018, Bebea had an
episode in which she became upset, violent, and threw a flowerpot at O’Dell, hitting him
in the head. Bebea was treated in the geriatric psychiatric unit at Holzer Medical Center.
It was that episode that triggered Bebea’s family to place Bebea in a nursing home for
her safety. According to O’Dell, they chose Abbyshire because it was the only one in the
area with a dementia ward. On September 6, 2018, approximately two weeks after she
was admitted to Abbyshire, Bebea suffered an unwitnessed fall in her room at about 1:30
a.m. She was taken to Pleasant Valley Hospital and then transferred to Charleston Area
Medical Center where she had surgery to repair a fractured right hip. She was transferred
to Holzer Senior Care and passed away on October 16, 2018.
{¶6} Mark O’Dell, individually and as administrator of Bebea’s estate, filed a
complaint against Vrable III, Vrable Healthcare, and Long (and other entities that were
subsequently dismissed and are not relevant to this appeal). Vrable III, Vrable Healthcare,
and Long were defined in the complaint as both “Defendants” and “Nursing Home
Defendants” and Long was additionally identified as “Administrator Defendant.” Vrable
III, Vrable Healthcare, and Long will be collectively referred to as “Defendants.”
Gallia App. No. 20CA18 4
{¶7} O’Dell’s complaint contained 11 counts, including two “Medical Malpractice”
claims even though none of the defendants were physicians.1 Though the correct term
here is “medical claim,” the parties and the trial court used the term “medical malpractice
claim” and “medical claim” interchangeably. We will use the term “medical claim.” The
complaint is summarized here:
Count One: Corporate Negligence for Non-Lethal Injuries against Vrable III, Vrable
Healthcare, and Long. Defendants owed a duty of care to provide oversight and
management for Abbyshire for (a) staffing, (b) implementing adequate guidelines,
policies and procedures governing licensure violations; (c) adopting adequate
guidelines, policies and procedures governing the numbers of nursing personnel;
(d) adopting adequate guidelines, policies and procedures for responding to
compliance complaints; (e) budgeting and resource allocation; (f) corporate
compliance and reporting.
Count Two: Same as Count One but for Lethal Injuries.
Count Three: Negligence against Long – Long owed a duty to prevent reasonably
foreseeable injuries via the departments he manages, such as nursing,
housekeeping, social services, and maintenance. Long failed this duty in areas of
staffing to assist with activities of daily living; staffing for medical care; hygiene and
sanitary care; safety measures; screening; budgeting and resource allocation;
compliance and reporting.
Count Four: Nursing Home Violations for Non-Lethal Injuries against Vrable III,
Vrable Healthcare, and Long. Defendants owed a duty to provide for the well-being
of residents by contract or law and they breached this duty in the areas of (a)
staffing; (b) implementing adequate guidelines, policies and procedures governing
licensure violations; (c) adopting adequate guidelines, policies and procedures
governing the numbers of nursing personnel; (d) adopting adequate guidelines,
policies and procedures for responding to compliance complaints; (e) compliance
with contracts and laws; (f) ensuring residents achieve highest level of well-being;
(g) budgeting and resource allocation; (h) corporate compliance and reporting.
1 A medical malpractice claim can only be brought against a physician. Natl. Union Fire Ins. Co. of Pittsburgh
v. Wuerth, 22 Ohio St.3d 594, 2009-Ohio-3601, 913 N.E.2d 939, ¶ 15 (“ ‘[I]t is well-established common
law of Ohio that malpractice is limited to the negligence of physicians and attorneys.’ ”); Bartley v. Hearth
& Care of Greenfield, L.L.C., 4th Dist. Highland No. 12CA13, 2013-Ohio-279, ¶ 8 (“medical employees,
such as, nurses and laboratory technicians, are not subject to malpractice claims, but are subject to medical
claims”); Tisdale v. Toledo Hosp., 197 Ohio App.3d 316, 2012–Ohio–1110, 967 N.E.2d 280, ¶ 40 (6th Dist.).
Gallia App. No. 20CA18 5
Count Five: Same as Count Four but for Lethal Injuries.
Count Six: Medical Malpractice for Non-Lethal Injuries against Vrable III, Vrable
Healthcare, and Long. Defendants and their employees owed a duty to render care
and services as a reasonably prudent nursing home would render, but failed to do
so by (a) failure to notify doctor of significant changes in condition; (b) failure to
respond the changes; (c) failure to develop, implement and update adequate
resident care plan; (d) failure to maintain records; (e)-(j) failure to provide sufficient
supervision for and number of nursing and medication aide personnel to provide
various medical care; (k)-(m) failures with respect to the nursing care plan; (n)-(o)
failure to adopt guidelines, policies, and procedures for responding to complaints
and address deficiencies and problems; (p)-(r) failures with respect to infection
management; (s) failure to follow physician orders; (t)-(v) failures with respect to
fluid and nutritional needs; (w)-(y) failure to maintain medical records for diagnosis,
treatment, and establishment of plan of care; failure to adequately monitor health
status; and prevent the development of pneumonia.
Count Seven: Medical Malpractice for Lethal Injuries against Vrable III, Vrable
Healthcare, and Long. Same as Count Six except instead of alleging failure to
prevent the development of pneumonia, Count Seven specifically alleges a failure
to prevent and address the development of pressure sores and infection.
Count Eight: Malice and/or Gross Negligence/Willful, Wanton or Reckless
Disregard for Safety against Vrable III, Vrable Healthcare, and Long.
Count Nine: Fraud against Vrable III, Vrable Healthcare, and Long.
Count Ten (misnumbered “Eight” in the Complaint): Breach of Fiduciary Duty
against Vrable III, Vrable Healthcare, and Long.
Count Eleven: Premises Liability Claim against Vrable III, Vrable Healthcare, and
Long.
In each count, O’Dell described Bebea’s injuries as including falls, fractures, urinary tract
infections, lice infestations, extreme pain, suffering, mental anguish, embarrassment,
fright, and, in the counts for lethal injuries, death. The 60-page, 11-count complaint initially
Gallia App. No. 20CA18 6
named four Vrable corporate entities, Long, 10 unidentified John Does, and 10
unidentified “entities.”2
{¶8} After the parties engaged in extensive discovery, the Defendants filed a
motion for partial summary judgment. Vrable Healthcare and Long sought dismissal from
the case entirely on all counts, and Vrable III sought the dismissal of all claims except a
medical claim based on allegations that Abbyshire’s staff was negligent in their care and
treatment of Bebea. The Defendants argued that O’Dell’s complaint could be distilled into
a single medical claim: Bebea suffered pain and passed away as a result of a hip fracture
and Abbyshire negligently caused or failed to prevent that fracture. They argued that the
single medical claim, which is set forth in Counts Six and Seven, could not be transformed
into “multiple unrelated causes of action such as fraud, breach of fiduciary duty, premises
liability, when Ohio’s ‘medical claim’ statute plainly encompasses all of Plaintiff’s claims.”
{¶9} The Defendants argued: (1) all the claims alleged by O’Dell are “medical
claims” under R.C. 2305.113(E)(3); (2) Abbyshire is a “home” as defined in R.C.
2405.113(E)(3); (3) Vrable III is the owner/operator of Abbyshire; (4) Vrable III employed
the personnel at Abbyshire that provided direct care to Bebea; (5) Vrable Healthcare also
2Though we refrain from commenting on counsel’s pleading strategies, one court has harshly criticized
what it describes as the “kitchen sink” complaint:
This Court has repeatedly criticized the filing of “kitchen-sink” or “shotgun” complaints—
complaints in which a plaintiff brings every conceivable claim against every conceivable
defendant. Such complaints are pernicious for many reasons. For one thing, complaints
like the one in this case unfairly burden defendants and courts. The plaintiff who files
a kitchen-sink complaint shifts onto the defendant and the court the burden of identifying
the plaintiff's genuine claims and determining which of those claims might have legal
support. In this case, for example, plaintiffs have essentially coughed up an unsightly
hairball of factual and legal allegations, stepped to the side, and invited the defendants and
the Court to pick through the mess and determine if plaintiffs may have pleaded a viable
claim or two. (Citations omitted.)
Gurman v. Metro Hous. & Redevelopment Auth., 842 F.Supp.2d 1151, 1153 (D.Minn 2011); see also
McCain v. Jenkins, No. 2:15-cv-1262, 2020 WL 1904712, * 1, fn. 2 (S.D.Ohio Apr. 17, 2020).
Gallia App. No. 20CA18 7
employed personnel at Abbyshire, but none of those personnel, including Long, provided
any care to Bebea; (6) Vrable Healthcare is not a proper party because it did not employ
personnel for Abbyshire who provided direct care to Bebea; (7) Vrable Healthcare is
entitled to summary judgment in its favor because O’Dell has no evidence supporting any
claims against Vrable Healthcare; (8) Long was the licensed nursing home administrator
of Abbyshire but he was responsible for oversight and management, not direct, hands-on
care to Bebea; and (9) Long is entitled to summary judgment in his favor because O’Dell
has no evidence supporting his claims against Long.
{¶10} Defendants argued that Counts One/Two, Corporate Negligence (or
ordinary negligence claims) is a medical claim that arose out of the medical care and
treatment of Bebea. And, even if they were ordinary negligence claims, O’Dell has failed
to provide evidence that the standard of care applicable to the Defendants was breached
or that any breach caused Bebea’s injuries and death. On Count Three, Long’s
Negligence, the Defendants argued that O’Dell’s experts did not know who Long was and
did not offer any opinion critical of Long. Thus, that claim should be dismissed for lack of
evidence. Defendants argued that Counts Four/Five, Nursing Home Violations, alleged a
claim based on contract terms, state rules, and federal regulations. Defendants argued
that federal nursing home regulations do not create a private cause of action and any
claim of breach of contract is subsumed by the medical claim. They also argued that
O’Dell failed to produce any evidence to support a nursing home violation claim against
Vrable Healthcare. As a result, they argued Claims Four/Five should be dismissed. On
Counts Six/Seven, Medical Malpractice, the Defendants argued that this was the single
medical claim that could be brought against Vrable III as operator of Abbyshire, based on
Gallia App. No. 20CA18 8
allegations that staff hired by Vrable III were negligent in providing care to Bebea. But
they contended it could not be brought against Long, the administrator of Abbyshire, or
his employer, Vrable Healthcare, due to lack of evidence. For Count Eight, Malice, the
Defendants argued that it was in essence a count for punitive damages, which could not
be brought on its own. And, O’Dell has provided no evidence that any of the Defendants
acted with actual malice or conscious disregard for Bebea’s well-being. On Count Nine,
Fraud, and Count Ten, Breach of Fiduciary Duty, the Defendants argued that these are
both medical claims disguised as fraud and fiduciary duty claims, there has been no
evidence regarding fraud, and no fiduciary relationship exists between nursing home
residents and the home or its administrator. Therefore, the Defendants were entitled to
summary judgment on these causes of action. Last, on Count Eleven, Premises Liability,
Defendants argued that this was another disguised medical negligence claim.
{¶11} To support their motion, Defendants included references to O’Dell’s
complaint, Abbyshire’s progress notes that described the incident in which Bebea fell,
medical documents from the hospital that performed surgery on Bebea’s hip, references
to deposition and deposition exhibits of: (1) O’Dell’s expert witnesses, Dr. Fannin and
Nurse Hill-O’Neill; (2) Civ.R. 30(B) witness James Merrill; and (3) Jeremy Long.
{¶12} O’Dell opposed the motion and argued that Defendants failed to meet their
burden under Civ.R. 56 by making conclusory assertions that the nonmoving party has
no evidence to prove their case. O’Dell argued that the Defendants must affirmatively
demonstrate that, with respect to every essential issue of each count in the complaint,
there is no genuine issue of material fact and the Defendants’ motion failed to do so.
Gallia App. No. 20CA18 9
{¶13} O’Dell argued that Vrable Healthcare was a proper party to the lawsuit
because, like Vrable III, it provided personnel for Abbyshire including the nursing home
administrator, Long, and the director of nursing. Vrable Healthcare, through its
management level employees, owed a duty to Bebea but breached that duty, which
resulted in injuries and death. O’Dell argued that his expert, Dr. William Fannin, testified
that all persons or entities responsible for the care of Bebea failed to adequately assess
her fall risk, did not provide adequate preventative measures and protective equipment
concerning falls, and did not create or modify an appropriate care plan concerning her
safety with respect to falls. O’Dell’s expert nurse, Kathleen Hill-O’Neill, testified that
Vrable Healthcare was involved in oversight of Abbyshire because the administrator of
Abbyshire reports to Vrable Healthcare and Vrable Healthcare provided policies and
procedures for Abbyshire.
{¶14} O’Dell also argued that Long, as the administrator of Abbyshire, was
responsible for oversight and management of Abbyshire, including supervision of staff.
Nurse Hill-O’Neill testified that the caregivers at Abbyshire fell below the standard of care
regarding fall risk and prevention. O’Dell contended that Long, as the administrator of
Abbyshire, had non-delegable duties, such as oversight of the daily operations of the
home and ensuring that the employees are competent to perform their job. He failed to
perform these duties, resulting in harm and death to Bebea.
{¶15} O’Dell argued that his claims were not just a single medical negligence
claim, because: (1) Vrable Healthcare is not a medical provider under R.C. 205.113(E)(3)
and, thus cannot have a medical claim asserted against it, and (2) not all claims arise
from medical diagnosis, care, or treatment. He argued that the Defendants’ negligence
Gallia App. No. 20CA18 10
related to the ordinary care provided to Bebea related to the provision of activities of daily
living. He explained that his use of the term “corporate negligence” meant “general
negligence” as distinct from “medical negligence.” The breach of duty concerning matters
related to staffing were general negligence claims and Nurse Hill-O’Neill testified that all
Defendants failed in this regard.
{¶16} O’Dell argued that his general negligence claims (Counts One, Two, and
Three), his two nursing home violations claims (Counts Four and Five) and his medical
negligence claims (Counts Six and Seven) all should survive summary judgment based
upon the deposition testimony provided by Dr. Fannin and Nurse Hill-O’Neill. He also
argued his malice claim (Count Eight), which asserted an entitlement to punitive damages
should also survive summary judgment because no enhanced interventions were put in
place to prevent Bebea’s fall even though Defendants knew that they should have done
so. Thus, he contends a jury could conclude that they acted with conscious disregard.
O’Dell also contended he had sufficient evidence of fraud (Count Nine) because the
admissions agreement for Abbyshire stated that Abbyshire would exercise reasonable
care and provide appropriate care and services, but it knew that it had issues providing
sufficient staffing and concealed this from Bebea and her family. Similarly, O’Dell argues
that there was sufficient evidence that Defendants breached a fiduciary duty (Count Ten)
and were liable under premises liability (Count Eleven).
{¶17} The trial court determined that all the claims asserted by O’Dell were
medical claims under R.C. 2305.113(E)(3)(d):
To clarify, the Court finds, as it relates to claims against Vrable Healthcare,
Inc., Vrable III, Inc, and Jeremy Long, Administrator of Abbyshire Place
Skilled Nursing and Rehab Center, they are “medical claims.” They all arise
out of the skilled nursing care or personal care services provided by
Gallia App. No. 20CA18 11
Abbyshire Place pursuant to the plan of care, medical diagnosis, or
treatment of Plaintiff’s decedent, Bebea Joyce O’Dell.
The trial court found that all the claims set forth in the complaint were either subsumed
by the medical claim or had no basis in law.
{¶18} The trial court interpreted the Defendants’ argument that Vrable Healthcare
should be dismissed from the case as a corporate veil-piercing argument: “Here,
Defendants appear to be arguing that Plaintiff, by bringing claims against Vrable
Healthcare, Inc., the parent, is attempting to pierce the corporate veil.” The trial court
dismissed Vrable Healthcare on the ground that O’Dell failed to bring sufficient evidence
regarding piercing the corporate veil. However, later in its decision, the trial court gave an
alternative ground for dismissing Vrable Healthcare. The court determined that O’Dell’s
witnesses failed to provide any evidence that Vrable Healthcare violated any standard of
care or caused injury to Bebea. Thus, the trial court determined that O’Dell failed to show
any genuine issue of material fact as to Vrable Healthcare’s liability.
{¶19} After extensive review of the deposition testimony of Dr. Fannin and Nurse
Hill-O’Neill, the trial court dismissed Jeremy Long from the case on the ground that
O’Dell’s witnesses did not know who he was, what he did, or why he was in the case.
They had no opinions that he violated any standard of care as administrator of Abbyshire.
{¶20} The trial court dismissed all the claims against the Defendants except for
the medical claim against Vrable III (Counts Six/Seven). The judgment included language
under Civ.R. 54(B) that there is no just reason for delay.
{¶21} O’Dell appealed. Vrable III filed a motion to dismiss the appeal on the
ground that the entry was not a final, appealable order. We denied the motion and found
that an interlocutory appeal is consistent with sound judicial administration and allowed
Gallia App. No. 20CA18 12
the appeal to proceed. O’Dell v. Vrable III, 4th Dist. Gallia No. 20CA18, Judgment Entry,
Mar. 22, 2021.
II. ASSIGNMENTS OF ERROR
{¶22} O’Dell identifies three assignments of error for review:
I. The Trial Court Erroneously Granted the Defendants’ Motion Partial Summary
Judgment as to all of Plaintiff’s Claims except for Medical Malpractice.
II. The Trial Court Erroneously Granted the Defendants’ Motion Partial Summary
Judgment as to Plaintiff’s claims against Defendant Vrable Healthcare, Inc.
III. The Trial Court Erroneously Granted the Defendants’ Motion Partial Summary
Judgment as to all of Plaintiff’s Claims against Defendant Jeremy Long,
Administrator.
III. Review of Summary Judgment
A. Standard of Review
{¶23} We review the trial court's decision on a motion for summary judgment de
novo. Smith v. McBride, 130 Ohio St.3d 51, 2011-Ohio-4674, 955 N.E.2d 954, ¶ 12.
Accordingly, we afford no deference to the trial court's decision and independently review
the record and the inferences that can be drawn from it to determine whether summary
judgment is appropriate. Harter v. Chillicothe Long–Term Care, Inc., 4th Dist. Ross No.
11CA3277, 2012-Ohio-2464, ¶ 12; Grimes v. Grimes, 4th Dist. Washington No. 08CA35,
2009-Ohio-3126, ¶ 16.
{¶24} Summary judgment is appropriate only when the following have been
established: (1) that there is no genuine issue as to any material fact; (2) that the moving
party is entitled to judgment as a matter of law; and (3) that reasonable minds can come
to only one conclusion, and that conclusion is adverse to the nonmoving party. Civ.R.
56(C); DIRECTV, Inc. v. Levin, 128 Ohio St.3d 68, 2010-Ohio-6279, 941 N.E.2d 1187, ¶
15. In ruling on a motion for summary judgment, the court must construe the record and
Gallia App. No. 20CA18 13
all inferences therefrom in the nonmoving party's favor. Civ.R. 56(C). The party moving
for summary judgment bears the initial burden to demonstrate that no genuine issues of
material fact exist and that they are entitled to judgment in their favor as a matter of law.
Dresher v. Burt, 75 Ohio St.3d 280, 292–293, 662 N.E.2d 264 (1996). To meet its burden,
the moving party must specifically refer to “the pleadings, depositions, answers to
interrogatories, written admissions, affidavits, transcripts of evidence, and written
stipulations of fact, if any, timely filed in the action,” that affirmatively demonstrate that the
nonmoving party has no evidence to support the nonmoving party's claims. Civ.R. 56(C);
Dresher at 293, 662 N.E.2d 264. Moreover, the trial court may consider evidence not
expressly mentioned in Civ.R. 56(C) if such evidence is incorporated by reference in a
properly framed affidavit pursuant to Civ.R. 56(E). Discover Bank v. Combs, 4th Dist.
Pickaway No. 11CA25, 2012-Ohio-3150, ¶ 17; Wagner v. Young, 4th Dist. Athens No.
CA1435, 1990 WL 119247, *4 (Aug. 8, 1990). Once that burden is met, the nonmoving
party then has a reciprocal burden to set forth specific facts to show that there is a genuine
issue for trial. Dresher at 293, 662 N.E.2d 264; Civ.R. 56(E). Am. Express Bank, FSB v.
Olsman, 2018-Ohio-481, 105 N.E.3d 369, ¶ 10-11 (4th Dist.).
B. Dismissal of All Claims Except Single Medical Claim
{¶25} For his first assignment of error, O’Dell contends that the trial court erred in
determining that all his claims were a single medical claim and in dismissing all his
remaining claims except the medical claim alleged in Counts Six/Seven.
1. Medical Claim
{¶26} O’Dell contends that the trial court erred in determining that all his claims
are medical claims. He argues that Vrable Healthcare and Long are not identified in R.C.
Gallia App. No. 20CA18 14
2305.113(E)(3) as persons or entities against which a medical claim may be filed. Thus,
the claims against them cannot be medical claims. He also argues that the trial court
incorrectly applied the definition of “medical claim” in R.C. 2305.113(E) too expansively
to include acts of ordinary negligence. He cited numerous cases, including one from our
district, in which a “fall” is not a medical claim. E.g., McDill v. Sunbridge Care Ents., Inc.,
4th Dist. Pickaway No. 12CA8, 2013-Ohio-1618.
{¶27} “Medical claim” is defined in R.C. 2305.113(E)(3). The version effective for
this case is set forth here:
(3) “Medical claim” means any claim that is asserted in any civil action
against a physician, podiatrist, hospital, home, or residential facility, against
any employee or agent of a physician, podiatrist, hospital, home, or
residential facility, or against a licensed practical nurse, registered nurse,
advanced practice registered nurse, physical therapist, physician assistant,
emergency medical technician-basic, emergency medical technician-
intermediate, or emergency medical technician-paramedic, and that arises
out of the medical diagnosis, care, or treatment of any person. “Medical
claim” includes the following:
(a) Derivative claims for relief that arise from the plan of care, medical
diagnosis, or treatment of a person;
(b) Claims that arise out of the plan of care, medical diagnosis, or treatment
of any person and to which either of the following applies:
(i) The claim results from acts or omissions in providing medical care.
(ii) The claim results from the hiring, training, supervision, retention,
or termination of caregivers providing medical diagnosis, care, or
treatment.
(c) Claims that arise out of the plan of care, medical diagnosis, or treatment
of any person and that are brought under section 3721.17 of the Revised
Code;
(d) Claims that arise out of skilled nursing care or personal care services
provided in a home pursuant to the plan of care, medical diagnosis, or
treatment.
Gallia App. No. 20CA18 15
{¶28} “The term ‘medical claim’ as defined in R.C. 2305.113(E)(3) has two
components that the statute states in the conjunctive: (1) the claim is asserted against
one or more of the specifically enumerated medical providers and (2) the claim arises out
of medical diagnosis, care, or treatment.” Estate of Stevic v. Bio-Med. Application of Ohio,
Inc., 121 Ohio St.3d 488, 2009-Ohio-1525, 905 N.E.2d 635, ¶ 18. Under R.C.
2305.113(E)(3)(d), claims that “arise out of skilled nursing care or personal care services
* * * pursuant to the plan of care, medical diagnosis and treatment” must still nevertheless
arise “out of the medical diagnosis, care, or treatment” as required by R.C.
2305.113(E)(3).
a. Vrable Healthcare and Long Are Persons or Entities
Against Whom a Medical Claim May be Brought
{¶29} O’Dell contends his claims against Vrable Healthcare and Long are not
medical claims, because those two defendants are not medical providers against whom
a medical claim may be asserted. The first component of the statute governs who are
“specifically enumerated medical providers.” Here, a medical claim can be asserted
against Vrable III as a “home” and against “any employee or agent of a * * * home.” Vrable
Healthcare provided management level services and employees to the home and direct
services to the home’s residents via its therapists. Thus, Vrable Healthcare could have
medical claims asserted against it if, through the services it provides the home’s
residents, it is acting as an “agent” of the home. And Vrable Healthcare, as the employer
of Long and certain other employees at Abbyshire, could have respondeat superior
liability for medical claims asserted against any employees it hires to provide medical care
to the home’s residents. See Weiler v. Knox Community Hosp., 5th Dist. Knox. No.
20CA18, 2021-Ohio-2098, ¶ 20 (“ ‘[g]enerally, an employer or principal is vicariously liable
Gallia App. No. 20CA18 16
for the torts of its employees or agents under the doctrine of respondeat superior.’ ” Clark
v. Southview Hosp. & Family Health Ctr., 68 Ohio St.3d 435, 438, 628 N.E.2d 46 (1994));
Henik v. Robinson Mem. Hosp., 9th Dist. Summit No. 25701, 2012-Ohio-1169, ¶ 18-19
(medical claim against a nurse could be asserted against nurse’s employer under theory
of respondeat superior). Long was the administrator of the home. As a result, Long could
have medical claims asserted against him as an agent of the home. Howard v. HCR
ManorCare, Inc., 2018-Ohio-1053, 99 N.E.3d 429, ¶ 162 (2d Dist.) (an administrator of
the home could be considered an “agent,” and would, therefore fall within the statutorily
enumerated medical providers in R.C. 2305.113(E)(3)).
{¶30} We reject O’Dell’s argument that medical claims could not be brought
against Vrable Healthcare and Long. They, particularly Long, could be considered
“agents” of the home under R.C. 2305.113(E)(3). And, Vrable Healthcare, as the
employer of Long and other management level personnel at the home, could have
respondeat superior liability for medical claims brought against its employees. The trial
court correctly noted that Long was the administrator and could have medical claims
asserted against him as “the provider home’s employee or agent as administrator.” The
trial court also correctly recognized that Vrable Healthcare could have “vicarious liability”
for the acts of agents and employees. Ultimately, because the trial court determined that
O’Dell failed to present evidence that Vrable Healthcare or Long violated any standard of
care, it dismissed the claims against these two defendants – it dismissed them not
because they were not “medical providers” under the statute, but because there was
insufficient evidence to survive the summary judgment motion. O’Dell challenges the trial
Gallia App. No. 20CA18 17
court’s decision to dismiss Vrable Healthcare and Long on evidentiary grounds in his
second and third assignment of error and we will address those arguments then.
b. The Claim Must Arise Out of the Medical Diagnosis,
Care, or Treatment of Any Person
{¶31} The second prong of the statutory definition of “medical claim” is that the
claim must arise out of medical diagnosis, care, or treatment, where “care” is “the
prevention or alleviation of a physical or mental defect or illness.” Browning v. Burt, 66
Ohio St.3d 544, 557, 613 N.E.2d 993, 1003 (1993). “Care” does not have a broad, general
meaning, but refers to medical care – care to treat illnesses.
{¶32} As we explained in McDill,
The term “ ‘care’ * * * should not be broadly interpreted.” Browning v.
Burt, 66 Ohio St.3d 544, 557, 613 N.E.2d 993 (1993). Rather, it must be
considered in its particular context to determine its specific legal
meaning. Id. As used in R.C. 2305.113(E)(3), the term “care” means “the
prevention or alleviation of a physical or mental defect or
illness.” Id., paragraph one of the syllabus. The terms “ ‘medical diagnosis'
and ‘treatment’ are terms of art having a specific and particular meaning
relating to the identification and alleviation of a physical or mental illness,
disease, or defect.” Id. at 557, 613 N.E.2d 993.
McDill, 2013-Ohio-1618, at ¶ 16. “[N]ot all care that transpires in a hospital or nursing
home involves ‘medical care’ within the meaning of R.C. 2305.113(E)(3) * * * it is possible
to assert a claim for ordinary negligence against a nursing home or facility.” McFarren v.
Canton, 2016-Ohio-484, 59 N.E.3d 652, ¶ 44 (5th Dist.); Carte v. The Manor at Whitehall,
10th Dist. Franklin No. 14AP-568, 2014-Ohio-5670, ¶ 29.
{¶33} “To identify medical care, as opposed to general care, courts look at
whether the conduct was part of a medical test, procedure, or treatment, was ordered by
a medical professional, or required medical expertise or professional skill.” Wagers v.
Kettering Affiliated Health Servs., 2d Dist. Montgomery No. 28192, 2020-Ohio-11, ¶
Gallia App. No. 20CA18 18
11, appeal not allowed, 158 Ohio St.3d 1489, 2020-Ohio-1634, 143 N.E.3d 535. “Medical
claim” includes “a claim for a hospital employee's negligent use of hospital equipment
while caring for a patient which allegedly results in an injury to the patient.” Rome v.
Flower Mem. Hosp., 70 Ohio St.3d 14, 635 N.E.2d 1239 (1994), syllabus.
{¶34} The trial court determined that all the claims asserted by O’Dell were
medical claims. The trial court noted that Dr. Fannin was asked “Your opinions involved
the care provided to the patient, correct?” and he answered, “That’s correct. Yes.”
Similarly, the trial court noted that Nurse Hill-O’Neill was asked, “Would you agree with
me that your opinions in this case relates to the care and treatment that was provided to
Miss O’Dell at Abbyshire Place?” and she answered, “Yes.” The trial court then concluded
that all of O’Dell’s claims were medical claims, “They all arise out of the skilled nursing
care or personal care services provided by Abbyshire Place pursuant to the plan of care,
medical diagnosis, or treatment of Plaintiff’s decedent, Beabe [sic] Joyce O’Dell.”
{¶35} However, while we find that both experts discussed the “care” that Bebea
had at Abbyshire, their testimony was focused on fall prevention care. Here, the facts
involve an unwitnessed fall at approximately 1:30 a.m. in Bebea’s room. The Abbyshire
nursing note described the incident at 1:29 a.m. on September 6, 2018:
Standing at duty station and heard yelling from residents’ room. Went in to
assess and she [Bebea] was on the floor. Moderate size hematoma to back
of head and a dent in the bathroom door. Small skin tear to right lower arm
and slight discoloration to her right lower leg. She was complaining that her
right leg was hurting and attempting to get up off of the floor. She would not
lay still because she wanted to get up and call her son. AlsWheelchair was
placed behind her and she was placed sitting. She was unable to move her
right leg at that time as every time I touched it she screamed. Slight swelling
noted to right lower leg as well. Ice placed to back of head, neuro checks
started per policy and skin tear cleansed and dressing applied. VS initially
132/65, 98.4, 93, 16. Doctor Toothman notified and received order to send
to PVH for treatment and evaluation. DON notified as well as her sons which
Gallia App. No. 20CA18 19
will be meeting her at the hospital. Also once the EMTs got her on stretcher,
her right foot was turned outward.
{¶36} Both Dr. Fannin and Nurse Hill-O’Neill testified that Bebea was at an
increased risk for falling and Abbyshire did not place enough fall prevention measures in
place to prevent her fall. Dr. Fannin summed up his understanding of the case,
“[B]asically, the fact that [Bebea] was a high fall risk. That adequate measures weren’t
taken to prevent the fall. That adequate initial assessments to help prevent that and
reassessments and changes in regards to [Bebea] were not performed to prevent the fall.
[Bebea] had [a] fall-significant injury, subsequently had a marked decline because of that,
and ultimately died with some substantial contribution from that injury.” He stated that
Abbyshire did not “dignify the fall risk that she had” when Bebea was initially placed there.
“And then, as time went by, they did not provide adequate preventative measures to help
her not have falls and to hopefully lessen the injury if she did have one.” Dr. Fannin
opined that Abbyshire “considered her as a fall risk, but they didn’t dignify it with the
protective measures that I feel were appropriate.”
{¶37} Dr. Fannin testified that some safety measures were in place, such as “a
rolling walker as a safety measure,” but that there were not “adequate changes made in
her – in her care plan and approach to providing a safe environment.” Dr. Fannin testified
that “observant” and “experienced” people would have “put in some more protective
measures for [Bebea].” Dr. Fannin testified that the standard of care requires “that you
have to protect [Bebea] from harm and injury. You have to provide a safe environment.
That’s what it says.” Dr. Fannin testified that a bed alarm would have prevented Bebea’s
fall. He also believed that pads on the floor and a lower bed height would have helped
prevent the fall or minimize fall injuries but there was “nothing about changing any of the
Gallia App. No. 20CA18 20
safety features that would help [Bebea] in preventing the fall or help to lessen the injury if
it happened.” Dr. Fannin criticisms of Abbyshire’s fall intervention included the failure to
use blue fall mats next to the bed, failure to use a low bed, failure to use a defined
perimeter mattress or “scoop mattress,” failure to use an alarm on the bed and the
wheelchair, failure to use a motion sensor device, failure to put nonskid strips on the floor
of Bebea’s room, and the failure to use a bed bolster to keep Bebea in place.
{¶38} Similarly, Nurse Hill-O’Neill testified that Abbyshire “fell below the standard
of care in regard to fall risk and fall prevention as far as assessment and then care and
treatment to maintain [Bebea’s] safety and well-being.” She testified that the standard of
care required homes “to do everything we could to prevent [sic] resident safety.” Nurse
Hill-O’Neill was critical of Abbyshire for failing to use “tab alarms, sensor alarms, perimeter
mattresses, blue fall mats, low beds and many other interventions. We don’t see them
being responsive to that and doing that in her case, in Miss O’Dell’s case.”
{¶39} Nurse Hill-O’Neill testified that every area in which Abbyshire failed to
provide the standard of care was related to its fall prevention efforts with Bebea. She
testified Abbyshire was “not doing everything you’re supposed to do to promote a safe
environment and the resident’s safety and well-being. You’re not addressing fall risk
adequately and coming up with proper interventions as we have been talking about, and
timely interventions.” She also testified that in her opinion Abbyshire’s lack of fall
prevention placed it out of compliance with state and federal regulations: “In regards to,
again, fall risk, accident prevention, maintaining a safe environment” and all assessment
and care planning related to fall prevention. Nurse Hill-O’Neill testified that Abbyshire
failed to protect Bebea from harm “by way of not adequately responding to her fall risk.”
Gallia App. No. 20CA18 21
Nurse Hill-O’Neill believed that an alarm coupled with other fall prevention measures
would have prevented Bebea’s fall: “I believe that it could have prevented the fall if they
would have put these interventions in place that we’re talking about that they had as part
of their policies. It could have prevented the fall. These measures could have prevented
the fall. * * * Low beds, mats and all the other things that they had available.”
{¶40} Falls can either be medical claims or general negligence claims, depending
upon the factual circumstances. When a person falls because of the negligent use of
medical equipment during a medical procedure, it is a medical claim. In Rome v. Flower
Mem. Hosp. 70 Ohio St.3d 14, 635 N.E.2d 1239 (1994), the Supreme Court of Ohio held
that the fall was a “medical claim” where a radiological intern failed to fasten the footboard
to the base of radiology table causing the patient to fall when table was tilted for the X-
ray procedure.
[W]e find that the process of securing Barbara Rome to a radiology table is
ancillary to and an inherently necessary part of the administration of the X-
ray procedure which was ordered to identify and alleviate her medical
complaints. Furthermore, at the time of her injury, Mrs. Rome was a patient
at Flower and was being assisted by an employee of Flower, which
employee was required to exercise a certain amount of professional
expertise in preparing the patient for X-ray. Accordingly, we conclude that
Rome's claim arises out of “medical diagnosis, care, or treatment” relating
to the identification and alleviation of a physical or mental illness, disease,
or defect. (Emphasis added.)
Id. at 16.
{¶41} Where a patient fell from a wheelchair during transport to physician-ordered
physical therapy, the Supreme of Ohio held that the fall was a medical claim.
This therapy was ordered by his physician as part of his rehabilitation from
knee surgery. Following standard practice, a hospital employee took Eager
to and from the physical therapy department in a wheelchair. Thus, we find
that the transport of Eager from physical therapy was ancillary to and an
inherently necessary part of his physical therapy treatment. Furthermore,
Gallia App. No. 20CA18 22
Eager was a patient of St. Vincent Medical Center and was assisted by an
employee of St. Vincent who was required to use a certain amount of
professional skill in transporting the patient in the wheelchair. Clearly, this
transport arose out of Eager's physical therapy treatment. Accordingly, we
conclude that Eager's injury resulted from his “care, or treatment” while at
St. Vincent Medical Center
Id. at 16-17; Long v. Warrant Gen. Hosp., 121 Ohio App.3d 489, 700 N.E.2d 364 (11th
Dist. 1997) (patient who fell after orderly directed him to walk from bed to gurney for
transport to doctor-ordered colonoscopy had a “medical claim” for the injuries sustained
in the fall because he was obtaining physician-ordered medical diagnostic testing and the
need to transport arose out of the diagnostic testing).
{¶42} However, where the fall does not arise out of medical diagnosis, care, or
treatment, the fall gives rise to a general negligence claim, not a medical claim. In McDill,
we found that a patient who fell while washing her hands in the bathroom of a skilled
nursing facility had a general negligence claim, not a medical claim. The patient had called
for assistance to use the bathroom at 2:00 a.m. Two aides assisted her, but when she
began to wash her hands, “the two aides ‘inattentively and negligently allowed [appellant]
to fall backwards, landing on her buttocks.’ ” (Brackets sic.) McDill, 2013-Ohio-1618, at ¶
3. We found that she did not have a medical claim because she was not being transported
to or from a medical treatment, nor did her fall arise out of the negligent use of medical
equipment during a medical procedure:
In the case sub judice, we agree with appellant that her injury did not arise
out of medical diagnosis, care, or treatment. Unlike Burt and Rome,
appellant's injury did not occur at a time when she was being transported to
or from a medical procedure. It also did not occur due to an employee's
alleged negligent use of hospital equipment. Instead, according to the
complaint, appellant's injury occurred as she washed her hands after a
bathroom visit. Escorting appellant from the bathroom to the sink to wash
her hands did not involve “the prevention or alleviation of a physical or
mental defect or illness.” Browning, paragraph one of the syllabus. It also
Gallia App. No. 20CA18 23
did not relate to the “identification and alleviation of a physical or mental
illness, disease, or defect.” Id. at 557, 613 N.E.2d 993.
McDill at ¶ 23.
{¶43} In reaching our conclusion in McDill, we analyzed a similar case from the
First District Court of Appeals, Conkin v. CHS-Ohio Valley, Inc., 1st Dist. Hamilton No. C-
110660, 2012-Ohio-2816. In Conkin, a nursing home resident fell when an employee
failed to properly transfer her to a “Hoyer lift” so that she could shower. The resident filed
a negligence complaint against the facility and the employee. The appellate court
determined that the resident’s claim was a general negligence claim, not a medical claim.
In McDill, we reviewed the four factors the First District Court of Appeals considered in
deciding whether the claim was a medical claim:
In reaching its decision, the court examined four factors: (1) whether the
equipment “was used for ‘the prevention or alleviation of a physical or
mental defect or illness;’ “ (2) “whether the equipment was ‘an inherently
necessary part of a medical procedure;’ “ (3) whether “use of the equipment
‘arose out of’ a physician ordered treatment;” and (4) whether “use of the
equipment required a ‘certain amount’ of professional expertise or
professional skill.” Id. at ¶ 9, quoting Browning, 66 Ohio St.3d at 557, 613
N.E.2d 993, and Rome, 70 Ohio St.3d at 16–17, 635 N.E.2d 1239
After considering the above factors, the court determined that the patient's
claims did not constitute “medical claims.” Id. at ¶ 11, 635 N.E.2d 1239. The
court explained:
“Even if the Hoyer lift was used for the alleviation of problems
associated with [the patient]'s range of motion, there is no
indication at this point in the proceedings that the use of the
Hoyer lift was an inherent part of a medical procedure or that
it arose out of physician ordered treatment. And it is also
unclear whether a ‘certain amount’ of professional expertise
or professional skill may have been required to transfer [the
patient] into the lift.”
Id.
McDill at ¶ 21-22.
Gallia App. No. 20CA18 24
{¶44} In Christian v. Kettering Med. Ctr., 85 N.E.3d 804, 2017-Ohio-7928 (2d
Dist.), a woman arrived in a private vehicle to the emergency department of a hospital.
She fell to the ground when she was dropped by a nurse who was attempting to transfer
her from the car to a wheelchair for transport into the hospital. The court determined that
the transfer from the car to the wheelchair was not an inherent part of a medical procedure
or physician-ordered treatment and did not give rise to a “medical claim.” The nurse’s act
of transferring the woman from the car to the wheelchair, “was simply for the purpose of
allowing [the woman] to enter the hospital, where she could then seek medical attention.”
Id. at ¶ 31.
{¶45} Christian included a summary of cases from other appellate districts which
found falls give rise to general negligence claims, not medical claims:
[C]ourts have held that the plaintiff did not assert a “medical claim” when
the injury allegedly arose from (1) falling out of a wheelchair while on the
way to lunch at an assisted living facility, Eichenberger v. Woodlands
Assisted Living Residence, L.L.C., 2014-Ohio-5354, 25 N.E.3d 355 (10th
Dist.); (2) falling while attempting to stand from a wheelchair outside the
hospital upon discharge, Hill v. Wadsworth–Rittman Area Hosp., 185 Ohio
App.3d 788, 2009-Ohio-5421, 925 N.E.2d 1012 (9th Dist.); (3) falling while
going from a hospital bed to the bathroom, Balascoe v. St. Elizabeth Hosp.
Med. Ctr., 110 Ohio App.3d 83, 673 N.E.2d 651 (7th Dist.1996); and (4)
falling backwards while washing hands in a bathroom while receiving
rehabilitative care following surgery, McDill v. Sunbridge Care Ents., Inc.,
4th Dist. Pickaway No. 12CA8, 2013-Ohio-1618 [2013 WL 1716748]. In
each of these cases, the injury did not arise out of medical diagnosis, care,
or treatment. (Brackets sic.)
Christian at ¶ 21.
{¶46} In Carte v. The Manor at Whitehall, 10th Dist. Franklin No. 14AP-568, 2014-
Ohio-5670, a 76-year-old man who was a resident at a nursing home fell while a staff
member was assisting him as he moved from the toilet to a bed. He allegedly had a
medical condition that placed him at an increased risk for falling. No medical equipment
Gallia App. No. 20CA18 25
was used to transfer Carte to and from the bathroom so the issue central to the court’s
analysis was whether the staff at the nursing home were “providing medical care within
the meaning of the statute when assisting Carte to and from the bathroom.” Id. at ¶ 19.
The Tenth District Court of Appeals reviewed several fall cases, including several
discussed by the Second District Court of Appeals in Christian, such as Rome, Conkin,
Eichenberger, Balasco, and McDill, supra, and determined that the fall gave rise to a
general negligence claim, not a medical claim:
Here, we agree with the reasoning of the court in McDill, that Carte's injury
arose because he had to use the bathroom not because he was in the
process of receiving medical diagnosis, care or treatment. We fail to see
how staff assistance to and from the bathroom involved “the prevention or
alleviation of a physical or mental defect or illness.” Browning at 557, 613
N.E.2d 993.
Carte at ¶ 25. The court also found that the alleged existence of a physician order for a
two-person transfer was not determinative to the analysis and did not convert the claim
to a medical claim. Id. at ¶28.
{¶47} In McFarren v. Canton, 2016-Ohio-484, 59 N.E.3d 652 (5th Dist.), a case
factually like the one here, a 91-year-old woman was a resident at a residential care
facility operated by Emeritus of Canton, which provided assisted living, memory care, and
respite/short term care. She suffered confusion and forgetfulness, required assistance
with mobility issues, required safety checks for fall prevention, had an unsteady gait, and
required assistance with transfers. One evening at approximately 6:40 p.m. an aide found
the woman lying beside her bed on the floor of her room. She fractured her left hip and
passed away five days later. Her estate brought a lawsuit and Emeritus of Canton moved
for summary judgment to dismiss the suit as a “medical claim” that was brought outside
the one-year statute of limitations.
Gallia App. No. 20CA18 26
{¶48} In analyzing the issue of whether the claim involved “medical care” under
R.C. 2305.113(E)(3), the appellate court reviewed many of the cases we discussed
above. It determined that the claim was a general negligence claim, not a medical claim,
because there was no evidence that she was undergoing medical care or treatment at
the time of her fall:
In this case, [plaintiff] claims that Mrs. Rinker fell and broke her hip because
Emeritus and its staff deviated from the standard of care. Based on the line
of cases examining injuries within residential facilities, nursing homes, and
hospitals, the issue to analyze is whether the injury occurred as part of some
type of medical test or procedure, was ordered by a doctor, or that it required
any medical expertise or professional skill. We review the facts in a light
most favorable to the non-moving party. The Emeritus staff found Mrs.
Rinker laying prostrate on the floor of her room. There is no Civ.R. 56
evidence that she was receiving medical care at the time of her fall. Simply
because Mrs. Rinker was a resident of Emeritus at the time of the fall does
not render her claim for negligence a medical claim. In this case, [plaintiff’s]
claim for negligence states a claim for common law negligence, not a
medical claim. [Plaintiff’s] claim for negligence was filed within the statute
of limitations.
McFarren at ¶ 47.
{¶49} Similarly, we find that Bebea’s claim was not a medical claim. Bebea was
found on the floor of her room at 1:30 a.m. No one witnessed her fall. She was not being
transported to or from a medical procedure. There was not any evidence that she was
being assisted with any medical equipment for the purpose of receiving medical
diagnosis, care, or treatment, nor was she using medical equipment that was ancillary to
and an inherently necessary part of a medical procedure. If we infer that she was
attempting to use the bathroom, her use of the bathroom did not involve the prevention
or alleviation of a physical or mental defect or illness. Her injury did not arise out of
medical diagnosis, care, or treatment and, therefore, did not give rise to a medial claim.
Her claim states a common law general negligence claim, not a medical claim.
Gallia App. No. 20CA18 27
{¶50} Bebea’s complaint initially included medical claims in Counts Six and Seven
which alleged that the Defendants failed to prevent, monitor, and treat the development
of pneumonia, bedsores, and urinary tract and lice infections. The failure to treat physical
illness or properly treat infections is a claim based on the omission of medical treatment
and care and satisfies the definition of medical claim under R.C. 2305.113(E). Wagers v.
Kettering Affiliated Health Servs., 2d Dist. Montgomery No. 28192, 2020-Ohio-11, ¶ 12-
13; Lerner v. Broadview NH, LLC, 2017-Ohio-8001, 98 N.E.3d 1014 ¶ 16 (10th Dist.)
(failure to treat bed sores, failure to insure nasal cannula stayed in place, and failure to
deliver medications were medical claims.)
{¶51} However, O’Dell failed to present any evidence in response to the summary
judgment motion to support these medical claims. There was no evidence that Bebea
suffered bed sores or any infections other than a urinary tract infection and a lice
infestation. Dr. Fannin testified that Abbyshire’s treatment of Bebea’s urinary tract
infection was appropriate. Dr. Fannin testified, “She had a urinary tract infection which
was addressed appropriately and treated appropriately.” When asked for her opinions
related to Bebea’s urinary tract infection, Nurse Hill-O’Neill had no criticism of Abbyshire’s
diagnosis and treatment of it. Instead, she testified that it was another fall indicator. The
only other potential medical issue Dr. Fannin addressed was Bebea’s head lice, but he
admitted that he did not know enough to render an opinion, “I don’t know the time frame
of it. It could’ve been that she had them before she got there. I don’t know.” He offered
no opinion that Abbyshire had been negligent in any manner in the treatment and care of
Bebea’s head lice.
Gallia App. No. 20CA18 28
{¶52} Concerning the allegation that Abbyshire failed to prevent the development
of pneumonia, Dr. Fannin and Nurse Hill-O’Neill acknowledged that Bebea developed
pneumonia after she left Abbyshire and it was a consequence of immobility from the fall.
Dr. Fannin testified, “It’s more likely than not, in all medical probability, that the reason
she continued to decline and ultimately develop pneumonia and ultimately died was
substantially contributed to by that injury at Abbyshire.” Nurse Hill-O’Neill testified, “she
suffered a very common complication following that hip fracture that relates to the overall
associated decline in mobility to hip fractures and the elderly. That would be pneumonia.”
Therefore, the pneumonia was allegedly additional damages she suffered because of the
fall and did not give rise to a separate medical claim. In other words, there was no
evidence that Abbyshire failed to properly prevent, diagnosis, or treat Bebea’s
pneumonia; it was part of Bebea’s injuries resulting from Abbyshire’s alleged negligence.
{¶53} For these reasons we find that the trial court erred when it found the only
surviving claim was a medical claim. We find that the claim that Abbyshire’s negligence
resulted in Bebea’s fall, injuries, and death is a general negligence claim, not a medical
claim. Therefore, instead of dismissing the general negligence claim in Counts One/Two
and allowing the medical claim in Counts Six/Seven to proceed, the trial court should have
dismissed the medical claim in Counts Six/Seven and allowed the general negligence
claim in Counts One/Two to proceed.
{¶54} As for Counts Four/Five (nursing home breaches of duty of care – nonfatal
and fatal), it appears that the trial court dismissed these claims because it determined
they stated the same medical claim as the one asserted in Counts Six/Seven. We agree
that Counts Four/Five should be dismissed as redundant, but for a different reason. We
Gallia App. No. 20CA18 29
find no legal distinction between Counts Four/Five and Counts One/Two. All four claims
state a negligence claim against the Defendants. O’Dell’s experts testified that Abbyshire
breached its duty of care to Bebea in the way it assessed her fall risk and implemented
fall prevention measures. This general negligence claim is set forth in Counts One/Two.
If O’Dell has any evidence that Abbyshire’s fall prevention measures violated a
government regulation, it might use the alleged violations as evidence of negligence (to
support the claim in Counts One/Two)3 but it cannot be used to assert a claim for
negligence per se. See Lang v. Beachwood Pointe Care Ctr., 2017-Ohio-1550, 90 N.E.3d
102, ¶ 74. O’Dell appears to concede as much in its brief. Therefore, we find that Counts
Four/Five were, for a different reason, properly dismissed.
2. Malice Claim – Punitive Damages
{¶55} Count Eight is a claim for punitive damages and asserts that the defendants
acted with malice and gross negligence, with a willful, wanton, or reckless disregard for
Bebea’s safety.
{¶56} Ohio recognizes no separate cause of action for punitive damages:
In Ohio, no civil action may be maintained simply for punitive damages.
Rather, punitive damages are awarded as a mere incident of the cause of
action in which they are sought. Thus, compensable harm stemming from a
cognizable cause of action must be shown to exist before punitive damages
can be considered.
Moskovitz v. Mt. Sinai Med. Ctr., 69 Ohio St.3d 638, 650, 635 N.E.2d 331, 342 (1994);
Whetstone v. Binner, 146 Ohio St.3d 395, 2016-Ohio-1006, 57 N.E.3d 1111, ¶ 20
(“Punitive damages are not an independent cause of action; rather, they arise incident to
compensable harm”).
3 We take no position on whether O’Dell may introduce government regulations as evidence at trial as
that issue is not before us.
Gallia App. No. 20CA18 30
{¶57} Under R.C. 2315.21(C) punitive damages cannot be recovered in a tort
action unless the jury has awarded compensatory damages and the plaintiff can show
malice:
(C) * * * , punitive or exemplary damages are not recoverable from a
defendant in question in a tort action unless both of the following apply:
(1) The actions or omissions of that defendant demonstrate malice or
aggravated or egregious fraud, or that defendant as principal or master
knowingly authorized, participated in, or ratified actions or omissions of an
agent or servant that so demonstrate.
(2) The trier of fact has returned a verdict or has made a determination
pursuant to division (B)(2) or (3) of this section of the total compensatory
damages recoverable by the plaintiff from that defendant.
{¶58} The Supreme Court of Ohio has described malice required for an award of
punitive damages as:
[A]ctual malice, necessary for an award of punitive damages, is (1) that
state of mind under which a person's conduct is characterized by hatred, ill
will or a spirit of revenge, or (2) a conscious disregard for the rights and
safety of other persons that has a great probability of causing substantial
harm.
Preston v. Murty, 32 Ohio St.3d 334, 336, 512 N.E.2d 1174, 1176 (1987).
{¶59} O’Dell argued in his opposition to the summary judgment motion that he had
sufficient evidence to support punitive damages because “there were known staffing
issues,” “the repeated failures related to [Bebea’s] care” and “Nurse Hill-O’Neill’s opinion
that [Bebea] suffered abuse and neglect, supports punitive damages in this matter.”
However, Nurse Hill-O’Neill provided no testimony that Bebea suffered abuse as that term
is defined in R.C. 3721.21. The term “abuse” includes physical, psychological, or sexual.
Under R.C. 3721.21(H)-(J):
Gallia App. No. 20CA18 31
(H) “Physical abuse” means knowingly causing physical harm or recklessly
causing serious physical harm to a resident through either of the following:
(1) Physical contact with the resident; (2) The use of physical restraint,
chemical restraint, medication that does not constitute a chemical restraint,
or isolation, if the restraint, medication, or isolation is excessive, for
punishment, for staff convenience, a substitute for treatment, or in an
amount that precludes habilitation and treatment.
(I) “Psychological abuse” means knowingly or recklessly causing
psychological harm to a resident, whether verbally or by action.
(J) “Sexual abuse” means sexual conduct or sexual contact with a resident,
as those terms are defined in section 2907.01 of the Revised Code
The term “neglect” is defined in R.C. 3721.21(D):
(D) “Neglect” means recklessly failing to provide a resident with any
treatment, care, goods, or service necessary to maintain the health or safety
of the resident when the failure results in serious physical harm to the
resident. “Neglect” does not include allowing a resident, at the resident's
option, to receive only treatment by spiritual means through prayer in
accordance with the tenets of a recognized religious denomination.
{¶60} When we review the portion of her deposition testimony cited by O’Dell in
support of punitive damages, we find that Nurse Hill-O’Neill simply confirms that it is
“anticipated” that she will testify that Abbyshire’s conduct constituted abuse and neglect.
Further, she conflates the terms “abuse” and “neglect” as though they share a singular
meaning. She includes the definition of neglect as part of the definition of abuse:
Again, to the best of my recollection, I think that the definition that they have
here in this policy on abuse comports with that deprivation of an individual,
including a caretaker of goods or services that are necessary to obtain or
maintain physical, mental and psychosocial well-being. It goes on from
there about verbal abuse, sexual abuse, physical and mental abuse.
Nurse Hill-O’Neill incorrectly testified that “abuse” is the deprivation of goods or services
necessary to maintain physical, mental, or psychosocial well-being, but that is the
definition of “neglect” (when done recklessly), not the definition of “abuse.” Moreover,
even if Nurse Hill-O’Neill believed that Abbyshire’s conduct constituted “abuse and
Gallia App. No. 20CA18 32
neglect,” she identified no abusive conduct by Abbyshire. And, there is nothing in Nurse
Hill-O’Neill’s testimony that provides evidence that Abbyshire acted out of hatred, ill-will,
or a spirit of revenge. Likewise vague allegations of “staffing issues” and “repeated
failures in Bebea’s care” are not evidence of hatred, ill-will, or a spirit of revenge. Finally,
O’Dell claimed that Abbyshire’s director of nursing testified that there must be a new
intervention with each fall and that a new intervention for Bebea was not put in place after
Bebea had a knee buckling incident about a week before the fall that fractured her hip.
O’Dell argued that this testimony was sufficient to establish an entitlement to punitive
damages. However, in the testimony O’Dell references, the nursing director appears to
testify that Abbyshire did, in fact, implement a new intervention – a gait belt for assistance:
Q. And what was the intervention you’re referring to on the care plan?
A. “Staff educated to use the gait belt to assist in the UA,” the urinalysis.
However, even if O’Dell is correct and Abbyshire’s nursing director testified that no
intervention was put in place after Bebea’s knee buckling incident, the failure to implement
an intervention may, depending upon the facts, be evidence of negligence, but it is not
evidence of hatred, ill-will, a spirit of revenge, or a conscious disregard for Bebea.
{¶61} None of the witnesses O’Dell identified to support his request for punitive
damages provided evidence that Abbyshire’s conduct rose to the level of hatred, ill-will,
revenge, or a conscious disregard for the safety of Bebea. We find that the trial court
properly dismissed O’Dell’s request for punitive damages in Court Eight because it is not
an independent cause of action and because there is no genuine issue of material fact
about the lack of evidence of malice.
Gallia App. No. 20CA18 33
3. Fraud
{¶62} Count Nine alleges a fraud claim in which O’Dell contends that the
Defendants intentionally fraudulently concealed material facts from Bebea and her family
during the admissions process.
{¶63} Under Ohio law, common law fraud requires proof of the following six
elements:
(a) a representation or, where there is a duty to disclose, concealment
of a fact, (b) which is material to the transaction at hand, (c) made falsely,
with knowledge of its falsity, or with such utter disregard and
recklessness as to whether it is true or false that knowledge may be
inferred, (d) with the intent of misleading another into relying upon it, (e)
justifiable reliance upon the representation or concealment, and (f) a
resulting injury proximately caused by the reliance.
Russ v. TRW, Inc., 59 Ohio St.3d 42, 49, 570 N.E.2d 1076 (1991).
{¶64} O’Dell admitted in his response to the summary judgment motion that “there
has been scant evidence of verbal affirmative representations by Defendants.” However,
he claims that written fraudulent representations were made in a 2017 “Heath Care
Center Residency Agreement,” which states “Abbyshire * * * shall exercise reasonable
care toward the Resident based on his or her known condition” and, “Abbyshire Place is
committed to making reasonable efforts to provide the resident with appropriate care and
services with respect to his or her known condition.” O’Dell also argued that there were
“issues with providing sufficient staff” and that Bebea’s family members testified that “a
patient advocate at Holzer helped us talk to different places * * * Abbyshire was one that
basically was the only one local that could accept her because they have a * * * dementia
ward.” O’Dell argued that this evidence satisfied the first element of the fraud claim, a
concealment of a fact.
Gallia App. No. 20CA18 34
{¶65} We disagree. Even if the 2017 Residency Agreement applied to Bebea’s
August 2018 residency, the failure of Abbyshire to honor statements made in the
agreement might give rise to a breach of contract claim; but, without evidence that
Abbyshire made those statements knowing that they were false when they were made
and with the intent of misleading Bebea and her family, they are not evidence of fraud.
Moreover, O’Dell’s response included no evidence to establish any of the other five
remaining elements of fraud. He simply alleges that the concealed facts were material,
were made with the knowledge they were false, with the intent to mislead Bebea’s family
and have them place her at Abbyshire.
{¶66} The trial court rejected O’Dell’s argument because: (1) O’Dell conceded
there was of “scant evidence of verbal affirmative representations” and (2) the Health
Care Residency Agreement was dated and signed on January 20, 2017. Bebea was
admitted in August 2018. Thus, the trial court found the agreement had no evidentiary
value and was irrelevant.4
{¶67} We find that O’Dell has failed to establish a genuine issue of material fact
concerning his fraud claim. There is no evidence that any of the Defendants knowingly
made a false representation or made it with such utter disregard and recklessness as to
whether it is true or false that knowledge may be inferred, or that they did so with the
intent of misleading Bebea and her family into relying upon it. The trial court properly
dismissed O’Dell’s fraud claim.
4 According to the deposition testimony of Gary O’Dell, Bebea was placed in Abbyshire twice. Once in late
2016 or early 2017 for approximately two to four weeks for physical therapy due to a bleeding ulcer.
Therefore, the Health Care Center Residency Agreement O’Dell submitted dated January 20, 2017 was
likely executed for Bebea’s first stay in 2017. The record contains no similar agreement for Bebea’s August
2018 residency.
Gallia App. No. 20CA18 35
4. Breach of Fiduciary Duty
{¶68} Count Ten alleges that the Defendants owed Bebea a fiduciary duty which
they breached by failing to provide the appropriate level of care to her. Defendants
argued that Ohio does not recognize a fiduciary relationship between a nursing home and
its residents. The Defendants also cite an Ohio case that rejected a breach of fiduciary
claim brought by a patient against a physician. See Lykins v. Miami Valley Hosp.,157
Ohio App.3d 291, 323, 2004-Ohio-2732 (2d Dist.2004). In response, O’Dell conceded
that there is no Ohio authority establishing a fiduciary relationship between a resident and
a nursing home, but he cited a Louisiana case in which a fiduciary relationship was
recognized. See Petre v. Living Ctrs.-East, Inc. 935 F.Supp. 808 (E.D. La 1996).
{¶69} Very few courts across the country have imposed a fiduciary relationship
upon a resident and a nursing home. In Manor Care, Inc. v. Douglas, 234 W.Va. 57, 763
S.E.2d 73 (2014) the court dismissed a claim for breach of fiduciary duty by a nursing
home resident and explained that a fiduciary relationship can only arise when both parties
to the relationship agree to it:
It is well established that
“[t]he fiduciary duty is ‘[a] duty to act for someone else's
benefit, while subordinating one's personal interests to that of
the other person. It is the highest standard of duty implied by
law [.]’ ” Elmore v. State Farm Mut. Auto. Ins. Co., 202 W.Va.
430, 435, 504 S.E.2d 893, 898 (1998) (quoting Black's Law
Dictionary 625 (6th ed.1990)).
Napier v. Compton, 210 W.Va. 594, 598, 558 S.E.2d 593, 597 (per curiam)
(2001). See also McKinley v. Lynch, 58 W.Va. 44, 57, 51 S.E. 4, 9 (1905)
(observing that a fiduciary relationship exists “whenever a trust, continuous
or temporary, is specially reposed in the skill or integrity of another”).
Furthermore, this Court has explained that,
Gallia App. No. 20CA18 36
“[a]s a general rule, a fiduciary relationship is established only
when it is shown that the confidence reposed by one person
was actually accepted by the other, and merely reposing
confidence in another may not, of itself, create the
relationship.” 36A C.J.S. Fiduciary, p. 385 (1961).
Elmore v. State Farm Mut. Auto. Ins. Co., 202 W.Va. 430, 436, 504 S.E.2d
893, 899 (1998).
This Court has not previously recognized a cause of action for breach of
fiduciary duty against a nursing home. In other words, we have not ruled
that a nursing home owes a fiduciary duty to its residents or what the
parameters of such a duty would be. Based upon the particular facts of the
instant matter, and the small number of jurisdictions who have expressly
recognized such a cause of action,27 we decline Mr. Douglas' invitation to
recognize such a cause of action at this time. See, e.g., Howard v. Estate
of Harper ex rel. Harper, 947 So.2d 854, 861–62 (Miss.2006) (“ ‘If the Court
were to find a fiduciary relationship between Plaintiff and [the nursing home
licensee and administrators], then a reasonable inference could be made
that each and every employee of [the nursing home], from the janitorial staff
who cleaned Plaintiff's room to the chief executive officer who established
policies and procedures for [the nursing home], owed a fiduciary duty to the
Plaintiff. The [nursing home licensee and administrators] were primarily
responsible for the management of [the nursing home], a responsibility that
typically does not create a fiduciary duty.’ ” (quoting Gray v. Beverly Enters.-
Miss., Inc., 261 F.Supp.2d 652, 662–63 (S.D.Miss.2003), rev'd on other
grounds, 390 F.3d 400 (5th Cir.2004))). Accordingly, we conclude that the
circuit court erred in recognizing a cause of action for breach of fiduciary
duty against a nursing home, and we dismiss this cause of action. (Brackets
sic.)
Manor Care, Inc. at 77 (In footnote 27, the “small number of jurisdictions” the court
referred to were three cases that allowed a breach of a fiduciary duty claim brought by a
nursing home resident to survive a motion for judgment on the pleadings or a summary
judgment motion: Petre v. Living Ctrs.-East, Inc., 935 F.Supp. 808, 812 (E.D.La.1996)
(allowing a breach of fiduciary duty claim to survive summary judgment, “The burden of
proving that a fiduciary relationship existed in this case still lies with the plaintiff but such
a factual determination in [sic] more properly handled at trial and not on a motion for
summary judgment”); Greenfield v. Manor Care, Inc., 705 So.2d 926, 932
Gallia App. No. 20CA18 37
(Fla.Dist.Ct.App.1997) (reversing the trial court’s dismissal of entire complaint and
concluding that because the plaintiff “properly alleged a fiduciary duty between Manor
Care and it [sic] residents, which arose out of a special relationship independent of the
contract, and a breach of same,” the trial court erred in dismissing the breach of fiduciary
duty claim); and Zaborowski v. Hospitality Care Ctr. of Hermitage, Inc., 60 Pa. D. & C.
4th 474, 488–89 (Pa.Com.Pl.2002) (trial court allowed a breach of fiduciary duty claim to
survive a demurrer, but noted “[t]his court, however, is reluctant to broadly hold that a
nursing home resident is always subject to the ‘overmastering dominance’ of the nursing
home. Instead, like other courts that have previously addressed this issue, this court holds
that the nature of the relationship between the nursing home and its resident must be
determined on a case by case basis and the burden of establishing such a relationship
rests with the plaintiff”); see also Cunningham v. Kentmere Rehab. & Healthcare Ctr.,
Inc., C.A. No. N20C-10-287 VLM, 2021 WL 1157991, *4 (Del. Supr. Ct. Mar. 25, 2021)
(allowing a breach of fiduciary duty claim against a nursing home to survive a motion to
dismiss, “the burden of proving that the relationship exists remains on Plaintiff, but the
claim cannot be dismissed at this stage. Defendants may renew their dispositive motion
after discovery, if appropriate”).
{¶70} A Connecticut federal court declined to impose a fiduciary relationship upon
a long-term care facility and its resident. It dismissed a breach of fiduciary duty claim
asserted by an adult mentally disabled client against Chapel Haven, a facility that
provided lifetime care services to developmentally disabled adults, reasoning that it is “a
task for the legislature” to impose “a heightened duty upon an entire industry”:
The plaintiffs may be arguing more generally that because decisions made
by entities that provide care to the mentally disabled have such an outsize
Gallia App. No. 20CA18 38
impact on the recipients of their services, those entities owe a special duty
to make all such decisions with care and a bias towards the needs of the
recipient. See Petre, 935 F. Supp. at 810 (using that reasoning to impose a
general fiduciary duty on a nursing home, which it found was breached by
providing inadequate care). That argument does not, however, seem
appropriate for a fiduciary duty claim. First, imposing a heightened duty on
an entire industry is a task for the legislature or, at least, the Connecticut
Supreme Court—as discussed above, Connecticut already has a list of “per
se” fiduciary relationships, not including care providers. Second, the
foreseeable harms caused by an allegedly arbitrary and capricious
termination of services are already addressed through several of the other
causes of action raised in this complaint, including the breach of contract
and the implied covenant claims, and the negligent infliction of emotional
distress claim. Accordingly, I grant the motion to dismiss the breach of
fiduciary duty claim. (Emphasis sic.)
Edelson v. Chapel Haven, Inc., D. Conn. No. 3:15-cv-1862 (SRU), 2017 WL 810274, *19
(D. Conn.).
{¶71} In Lykins, supra, the Ohio case cited by the Defendants, the court stated
that a patient’s action arising out of a physician’s negligence is based in malpractice, not
contract. Therefore, where the plaintiff has raised a malpractice claim in the complaint, it
was proper to dismiss the plaintiff’s claim for breach of a fiduciary duty. The breach of
fiduciary duty claim was encompassed in the negligence claim.
{¶72} In Aristocrat Lakewood Nursing Home v. Mayne, 133 Ohio App.3d 651, 729
N.E.2d 768, (8th Dist. 1999), a nursing home alleged that a resident’s stepdaughter, who
was the resident’s attorney-in-fact, had a fiduciary duty to the resident via the power of
attorney and therefore also had a fiduciary duty to the nursing home to ensure that the
resident’s nursing home bills were paid. The court rejected this argument and granted
summary judgment dismissing the nursing home’s claim for breach of fiduciary duty. The
court recognized that an attorney-in-fact has a fiduciary duty to the principal, but the
nursing home failed to show how this duty extended beyond the principal to third parties
Gallia App. No. 20CA18 39
like the nursing home. In discussing the relationships between the parties, the court
describe the relationship between a nursing home and its resident as one of “debtor and
creditor.”
At most, the relationship between that of the nursing home and [its resident]
Nelson was that of debtor and creditor. The Ohio Supreme Court has
repeatedly held that, without more, the relationship of debtor and creditor
does not constitute a fiduciary relationship. See, e.g., Stone v.
Davis (1981), 66 Ohio St.2d 74, 78, 20 O.O.3d 64, 66–67, 419 N.E.2d 1094,
1097–1098 (citing Umbaugh Pole Bldg. Co. v. Scott [1979], 58 Ohio St.2d
282, 12 O.O.3d 279, 390 N.E.2d 320.) A fiduciary relationship arises only
when the parties, by contract or less formal relationship, understand that a
special trust or confidence has been reposed. Id.
No such understanding between any parties was alleged or established in
the case at bar. Because [the resident] Nelson did not owe any fiduciary
duty to the nursing home, and the nursing home has not shown any
independent basis for establishing such a relationship directly with [the
attorney-in-fact] Mayne, it has not shown that it can recover against Mayne
derivatively on this theory. (Brackets in Umbaugh citation sic.)
Id. at 674.
{¶73} In In re Estate of Hill, we explained that a formal written agreement is
generally required to create a fiduciary relationship. However, a fiduciary relationship may
arise informally when both parties understand that a special trust has been reposed:
A fiduciary relationship is “one in which special confidence and trust is
placed in the integrity and fidelity of another, who acquires a resulting
position of superiority or influence by virtue of this special trust.” A fiduciary
relationship generally is formed through a formal document. A fiduciary
relationship may be created out of an informal relationship, but only “when
both parties understand that a special trust or confidence has been
reposed.” However, a mere friendship in which a person renders gratuitous
assistance to a friend does not give rise to a confidential or fiduciary
relationship. (Citations omitted.)
In re Estate of Hill, 4th Dist. Scioto No. 99CA2663, 2000 WL 326134, *3 (Mar. 15, 2000).
{¶74} To maintain a claim of breach of a fiduciary duty, a plaintiff must prove: (1)
the existence of a duty arising from a fiduciary relationship; (2) a failure to observe the
Gallia App. No. 20CA18 40
duty; and (3) an injury resulting proximately therefrom. Strock v. Pressnell, 38 Ohio St.3d
207, 216, 527 N.E.2d 1235 (1988). O’Dell has failed to present any evidence of a formal
document creating a fiduciary relationship between Bebea and Abbyshire. Similarly,
O’Dell has failed to present any evidence that the parties mutually, bilaterally and
informally established a fiduciary relationship. See Hanick v. Ferrara, 2020-Ohio-5019,
161 N.E.3d 1, ¶ 77-78 (7th Dist.) (factors considered when determining if a fiduciary
relationship has been created out of an informal relationship is the number of years the
relationship existed, whether the party alleging the existence of a fiduciary relationship
communicated a reliance that indicated that the party reposed a special trust in the other,
and whether there was any evidence of a bilateral or mutual understanding that the
ordinary business relationship had been converted into a fiduciary one).
{¶75} Ohio does not recognize a common law or statutory fiduciary relationship
between a nursing home and its residents. O’Dell presented no evidence the parties,
either formally or informally, contractually created a fiduciary relationship. Therefore, the
trial court did not err when it dismissed the breach of fiduciary duty claim.
5. Premises Liability
{¶76} Count Eleven alleges a claim for premises liability. O’Dell contends that
Abbyshire created and knew of a dangerous condition and failed to warn or remedy the
dangerous condition. The Defendants argued that this was simply a medical negligence
claim disguised with another name and asked to have it dismissed. O’Dell argued that his
expert testimony established this claim, though he did not state which expert’s testimony
supported it and he did not cite to portions of deposition testimony that he believed
Gallia App. No. 20CA18 41
supported this claim. The trial court determined that the premises liability claim was the
same as the medical claim and dismissed it.
{¶77} To survive summary judgment, O’Dell had to establish that a genuine issue
of material fact existed on each of the elements of premises liability. “In Ohio, the status
of the person who enters upon the land of another (i.e., trespasser, licensee, or invitee)
continues to define the scope of the legal duty that the landowner owes the entrant.
Invitees are persons who rightfully come upon the premises of another by invitation,
express or implied, for some purpose which is beneficial to the owner.” Gladon v. Greater
Cleveland Regional Transit Auth., 75 Ohio St.3d 312, 315, 662 N.E.2d 287, 291 (1996).
A business owes invitees a duty of ordinary care in maintaining the premises in a
reasonably safe condition so that its customers are not unnecessarily and unreasonably
exposed to danger. The business is not, however, an insurer of the customer's safety.
Further, a business is under no duty to protect business invitees from dangers “which are
known to such invitee or are so obvious and apparent to such invitee that he may
reasonably be expected to discover them and protect himself against them.” Paschal v.
Rite Aid Pharmacy, Inc., 18 Ohio St.3d 203, 203–04, 480 N.E.2d 474, 475 (1985). A
resident of a senior-living home offering assisted living and skilled nursing care is “at least
owed the due care as exercised by a reasonably prudent person under the circumstance
to prevent foreseeable harm.” Perko v. Healthcare Servs. Group, Inc., 8th Dist. Cuyahoga
No. 110267, 2021-Ohio-4216, ¶ 7 (resident slipped on waxed floor of community room;
court found landlord tenant duties established under R.C. 5321.04 inapplicable to nursing
homes, granted summary judgment to nursing home where it hired independent
contractor to wax floors).
Gallia App. No. 20CA18 42
In a premises liability case against an owner or occupier, an injured plaintiff
must show 1) that the owner or one of its employees had actual knowledge
of the hazard and neglected to give adequate notice of it or remove it
promptly; or 2) that the danger had existed for a period of time sufficient to
justify the conclusion that the failure to warn against it or remove it was
attributable to a lack of ordinary care.
Cohen v. Meridia Health Sys., 8th Dist. Cuyahoga No. 87001, 2006-Ohio-3593, ¶ 14.
In Cohen, a woman transporting herself in an electric wheelchair down an aisle in the
waiting area of a hospital turned her wheelchair around and bumped into a nearby chair.
Shortly thereafter the woman noticed that her leg was bleeding profusely. However, there
was no evidence of the cause of the cut. The woman contended there must have been a
sharp metal sticking out of the chair she bumped into that caused her injuries. However,
she had seen nothing abnormal about the chair and did not see any metal protruding from
it. The court granted summary judgment against her and in favor of the hospital on her
premises liability claim because she was unable to identify any hazard.
“Negligence shall not be presumed absent an affirmative
demonstration from the evidence.” Thus, in the context of injuries to
plaintiffs resulting from a fall, this court and others have clearly held
that mere speculation about the cause of an injury is insufficient to
establish liability on a negligence claim. In Johnson v.
Duncan, Cuyahoga App. No. 86074, 2005-Ohio-5726, at ¶ 11, this
court stated:
“ ‘As such, a plaintiff will be prevented from establishing negligence
when he, either personally or with the use of outside witnesses, is
unable to identify what caused the fall. In other words, a plaintiff must
know what caused him to slip and fall. A plaintiff cannot speculate as
to what caused the fall.” ’
The same reasoning applies here. Cohen cannot identify any defect
with the chair at issue. She assumes that a piece of metal sticking
out from the chair caused her injury when she bumped the chair, but
such an assumption is nothing more than mere speculation. She
does not know what caused her injury and consequently, presented
no evidence of a defect on the premises. (Citations omitted.)
Gallia App. No. 20CA18 43
Cohen at ¶ 11-13.
{¶78} Here it is not known what hazard, if any, caused Bebea’s fall. There is no
evidence that Bebea slipped and fell on anything hazardous on the floor. O’Dell does not
cite to any witness testimony that identified any hazard that caused Bebea to slip and fall.
He devotes one sentence in his brief arguing that all the elements of premises liability
“are met by the expert testimony described herein * * *.” Yet, as in his opposition to the
summary judgment motion, he failed to identify any specific witness testimony that meets
any of the elements of premises liability. The premises liability claim has no merit and
does not even seem to fit O’Dell’s general theory of the case. Eastley v. Volkman, 4th
Dist. Scioto No. 09CA3308, 2012-Ohio-4528, ¶ 21 (finding that premises liability
principles did not seem to fit the plaintiff's theory of the case, i.e., the decedent was not
injured by any physical defects on the premises but by medical malpractice related to
improperly prescribed drugs.). The trial court did not err when it dismissed the premises
liability claim in Count Eleven.
6. Summary
{¶79} We find that O’Dell presented sufficient evidence to survive summary
judgment on one claim: the claim that Abbyshire’s negligence resulted in Bebea’s fall,
injuries, and death. This is a general negligence claim, not a medical claim, because
Bebea’s fall occurred at approximately 1:30 a.m. while she was alone in her room and did
not involve the use of medical equipment and did not occur as part of a medical test,
procedure, or treatment. O’Dell’s general negligence claim is set forth in Counts One/Two.
The trial court erred in dismissing Counts One/Two and we reverse the dismissal of those
counts. The nursing home negligence claim in Counts Four/Five is redundant and was
Gallia App. No. 20CA18 44
properly dismissed. The medical negligence claim set forth in Counts Six/Seven should
have been dismissed. The trial court erred in determining that O’Dell’s single claim was
a medical claim and in allowing Counts Six/Seven to stand. We dismiss Counts
Six/Seven. In other words, we agree with the trial court that there is only one claim, but
we find that it is a general negligence claim, not a medical claim. Therefore, we allow the
case to proceed on Counts One/Two rather than Counts Six/Seven.
{¶80} The remaining claims for punitive damages, fraud, breach of fiduciary duty
and premises liability were properly dismissed by the trial court because O’Dell failed to
raise a genuine issue of material fact as to any of those claims. The trial court properly
dismissed Counts Eight, Nine, Ten, and Eleven. We sustain, in part, and overrule, in part,
O’Dell’s first assignment of error.
C. Dismissal of Vrable Healthcare, Inc.
{¶81} In his second assignment of error, O’Dell contends that the trial court erred
in dismissing Vrable Healthcare. Vrable Healthcare provided certain management level
employees to Abbyshire, like administrator Long, and direct services to the home’s
residents via its therapists. Vrable Healthcare is also the sole shareholder of Vrable III
(i.e., Abbyshire), though this irrelevant fact has done nothing but spawn a red herring –
corporate veil piercing.
{¶82} The trial court found that Vrable Healthcare, as the sole shareholder of
Vrable III, was not liable for alleged torts committed by Vrable III under a corporate veil-
piercing theory. However, we found no attempt by O’Dell to use corporate veil piercing
to hold Vrable Healthcare liable for Vrable III’s alleged torts. And, despite the trial court’s
reference to “Defendants citing Belvedere” we found nowhere in the Defendants’
Gallia App. No. 20CA18 45
summary judgment motion or their reply brief where Belvedere Condominium, 67 Ohio
St.3d 274, 1993-Ohio-119, 617 N.E.2d 1075, the leading corporate veil piercing case,
was cited or discussed to defend against a veil piercing attempt. To the contrary, at the
oral argument on the motion, defense counsel stated that plaintiff was not raising
corporate veil-piercing:
What seems kind of unclear is this control factor. Um, is something that’s
relevant if a claim is based on veil piercing. That a corporate parent is going
to be held liable for the actions of a subsidiary because they are an alter
ego of the subsidiary. Plaintiff’s never made that kind of claim so this control
analysis, I don’t know where it fits in * * *. (Emphasis added.)
{¶83} The trial court seemed to incorrectly infer that a corporate veil piercing
theory was being raised in this case, “Here, Defendants appear to be arguing that Plaintiff,
by bringing claims against Vrable Healthcare, Inc. the parent, is attempting to pierce the
corporate veil.”
{¶84} We find no attempt by O’Dell to pierce the corporate veil and argue that,
as the sole shareholder, Vrable Healthcare is liable for the alleged negligence of Vrable
III. Instead, O’Dell is attempting to hold Vrable Healthcare liable in two other ways: (1)
directly liable for what he alleges are negligent acts by Vrable Healthcare and (2) liable
via respondeat superior for the alleged negligent acts of Long. Nevertheless, we find the
trial court’s corporate veil piercing analysis irrelevant because it ultimately dismissed
Vrable Healthcare on other grounds (i.e., it found no evidence of negligence).
{¶85} In its summary judgment motion, the Defendants argued that Vrable
Healthcare should be dismissed because none of the staff it employed at Abbyshire
provided care to Bebea. They argued that O’Dell’s expert witnesses provided no
testimony of any specific act or omission of Vrable Healthcare that constituted a breach
Gallia App. No. 20CA18 46
of the standard of care that was a proximate cause of injury to Bebea. O’Dell responded
by arguing that Vrable Healthcare’s Civ.R. 30(B) witness testified that Vrable Healthcare
oversaw Abbyshire to ensure regulation compliance, reviewed the budget, provided
employee handbooks, and employed certain management level employees at Abbyshire.
O’Dell also argued that Dr. Fannin and Nurse Hill-O’Neill both “offered opinions related to
any entity involved in the operation of the facility, thus including Vrable Healthcare, Inc.”
{¶86} The trial court closely examined Dr. Fannin and Nurse Hill-O’Neill’s
testimony concerning Vrable Healthcare. After quoting significant portions of relevant
deposition testimony of both witnesses, the trial court determined that neither expert could
identify any negligent act by Vrable Healthcare that caused Bebea to fall and suffer
injuries:
Neither of Plaintiff’s experts had specific criticism of Vrable Healthcare, Inc.
They were unable to identify this Defendant separate and distinct from the
others. They had no opinion relating to Vrable Healthcare, Inc., specifically
and gave no opinion regarding this defendant that it violated any standard
of care. Furthermore, even if a standard of care violation had been shown,
they gave no opinion that it specifically caused injury to Bebea Joyce O’Dell.
{¶87} On appeal, O’Dell contends that “Vrable Healthcare, Inc. owed a duty to
Bebea O’Dell, breached that duty, and such breach was the proximate cause of her
injuries.” O’Dell explains that Vrable Healthcare had certain oversight duties to ensure
Abbyshire followed government regulations, engaged in union negotiations, provided
employee handbooks, and reviews its budgets. But he makes no connection between
these duties and Bebea’s fall. There is no evidence that any of these oversight and
management duties created any duty to Bebea or involved her care in any way. We
reviewed and summarized both experts’ testimony previously. They testified that Bebea’s
fall was caused by inadequate fall prevention measures, with Dr. Fannin opining that the
Gallia App. No. 20CA18 47
fall would have been prevented by a bed alarm and Nurse Hill-O’Neill stating that a bed
alarm, along with blue floor mats, and a lower mattress would have prevented the fall.
There was no testimony that Vrable Healthcare had any duties or responsibilities to make
fall risk assessments of or implement fall prevention measures for the residents at
Abbyshire.
{¶88} Instead, several witnesses testified that employees of Vrable III were
responsible for fall assessment and prevention. Amber Frum, the director of nursing at
the time of Bebea’s fall, testified that Abbyshire’s nursing staff performed the MDS
(Minimum Data Set) assessment, the admissions evaluation, and a baseline care plan
upon admission which included fall risk assessments and fall interventions for Bebea
when she was admitted in August 2018.
{¶89} The Civ.R. 30(B) witness, James Merrill, testified about the corporate
structure of Vrable III and Vrable Healthcare. He testified that Vrable III is the employer
of all employees at Abbyshire, except for the administrator, the director of nursing, the
senior business office manager, and the therapists. Therefore, the nursing staff that
performed the fall risk assessment and fall intervention were employees of Vrable III, not
Vrable Healthcare.
{¶90} O’Dell attempts to hang liability on Vrable Healthcare with Dr. Fannin’s
“whole ball of wax” theory:
Q. Would it be fair to say that your opinions regard the Abbyshire Place
caregivers in this case?
A. I don’t think that’s fair. I think that it’s –it’s the whole ball of wax. You can’t
– whoever owns it, runs it, operates it, and is involved in it, they’re all
responsible, okay. And so I don’t pick out who’s responsible for what,
particularly. I look at the total sum of the care that’s given or not given to the
patient and arrive at my opinion.
Gallia App. No. 20CA18 48
* * *
Q. Okay. Do you have any opinions with regard to Vrable Healthcare, Inc.
one of the defendants in this case?
A. I don’t know who that is.
Q. Okay. And you don’t know what the entity does, fair?
A. I don’t.
However, in Dr. Fannin’s own words, he does not “pick out who’s responsible for what” –
he only renders an opinion about “the care that’s given or not given to the patient.” Dr.
Fannin opined that Babea’s fall was caused by a failure to accurately assess her fall risk
and take adequate measures to prevent the fall. O’Dell cannot rely on Dr. Fannin to make
the connection between Vrable Healthcare and Bebea. Dr. Fannin did not know what
Vrable Healthcare was or what it did.
{¶91} Similarly, Nurse Hill-O’Neill did not identify the role, if any, Vrable
Healthcare had in the residents’ fall assessment and prevention. She was aware that
Vrable Healthcare was somehow involved because she saw the Vrable Healthcare name
on “forms” and “policies and procedures” and “that would mean that they’re involved in
the facility [Abbyshire]. That’s the only way I can tell you right now.” Other than her vague
understanding that Vrable Healthcare was “involved” with Abbyshire, Nurse Hill-O’Neill
did not testify that Vrable Healthcare conducted Bebea’s fall risk assessment or
implemented fall prevention measures.
{¶92} O’Dell has presented no evidence that Vrable Healthcare had any duties to
Abbyshire residents to conduct fall risk assessments and implement prevention
measures. Instead, those duties were the responsibility of Vrable III employees. Because
Gallia App. No. 20CA18 49
Vrable Healthcare had no duties to Bebea, it cannot be held directly liable for the injuries
Bebea suffered. However, Vrable Healthcare could have liability under respondeat
superior if an employee it hired at Abbyshire, specifically administrator Long, conducted
Bebea’s fall risk assessment and implemented her fall prevention. However, as we
determined below in reviewing O’Dell’s third assignment of error concerning Long’s
dismissal, Vrable Healthcare has no respondeat superior liability to Bebea because there
was no evidence that Long was responsible for the Bebea’s fall risk assessment or fall
prevention. Because Long was not negligent, Vrable Healthcare does not have
respondeat superior liability and was properly dismissed as a party in this case.
{¶93} The trial court did not err when it dismissed Vrable Healthcare. We overrule
O’Dell’s second assignment of error.
D. Dismissal of Jeremy Long
{¶94} In his third assignment of error, O’Dell contends that the trial court erred in
dismissing the claims against Jeremy Long, Abbyshire’s administrator, set forth in Count
Three. The Defendants argued that, as Abbyshire’s administrator, Long “was responsible
for oversight and management at the facility including business operations, budgetary
compliance, and supervision of staff” but he “does not provide direct, hands-on care to
residents at Abbyshire Place.” O’Dell argued that Long is liable for Bebea’s fall because
he “was responsible for planning, organizing, directing, controlling, and operating
Abbyshire Place during [Bebea’s] residency.” O’Dell argued that Bebea’s injuries “were
a direct and proximate result of [Long’s] negligent conduct, which evidenced a disregard
for the health and safety of [Bebea].”
Gallia App. No. 20CA18 50
{¶95} O’Dell makes a very broad argument that because Long was responsible
for oversight and management of Abbyshire and Bebea fell while he was the
administrator, then he engaged in negligent conduct that resulted in her fall. O’Dell also
argues that because Long was responsible for ensuring adequate staffing and there were
“staffing issues” mentioned in an email, then this “creates a genuine issue of material fact
as to whether Defendant Long ensured that Abbyshire Place was adequately staffed, and
therefore, whether he breached his duty to operate that facility in a manner that ensured
[Bebea’s] highest practicably physical, mental, and psychosocial well-being.”
{¶96} Long testified that he conducted daily staff meetings with the director of
nursing, the clinical manager, and the human resource manager to discuss any call-offs
or other open positions and decide if there are staff shortages. If they identify a shortage,
then they call in staff to fill those spots. Long testified that he shared staffing oversight
duties with the director of nursing and the clinical manager. However, if a staff member
called off after the schedule was set, the staffing vacancy was handled by the nurse
supervisor for the evening shift. Long also explained that Abbyshire had “PRN staff”
which were staff members who would be called in to work on an as-needed basis if a
vacancy arose due to a vacation or other absence. Long testified that during the time
Bebea was at Abbyshire, he could not recall receiving any complaints about lack of
staffing.
{¶97} Amber Frum, corporate director of nursing at Vrable Healthcare and the
director of nursing at Abbyshire from 2011 to December 2018, testified that Abbyshire
had a low staff turnover rate and received quality points from the government in 2018 for
their low turnover. Frum was unaware of any complaints about Abbyshire having
Gallia App. No. 20CA18 51
insufficient staffing. O’Dell argued that Frum testified that there were staff shortages on
several days, including the day Bebea fell. However, in the deposition testimony O’Dell
cites, Frum testified that the records she reviewed for early September 2018 included
budgeted and actual staffing hours, and that some days appeared to have excess staffing
hours and other days appeared to have insufficient staffing hours. Frum testified that,
based upon the documents shown to her at her deposition, she could not determine
whether adjustments were made to correct the over and under staffing hour figures shown
on the report: “We could have made adjustments that aren’t listed here. Like, there’s
managers on the floor that might not be shown here.” Frum confirmed that for a staffing
report for September 5, 2018, she could not tell based on the document whether budget
shortages were corrected:
Q. And this document indicates, at least on its face, that they were 24 hours short
of the budgeted PPD [per person, per day]; right?
A. Yes.
Q. And you can’t tell me from looking at this that shortage was corrected; is that
right?
A. Correct.
* * *
Q. And my client suffered a fall on or about September 6 th at sometime around
1:00 to 2:00 a.m. in the morning, * * *. But I just wanted for completeness to show
you this. So on the next day, September 6th, it appears that there was a shortage
of 2.25 hours for that day; correct?
A. Yes.
{¶98} Construing Frum’s testimony most strongly in O’Dell’s favor, the most we
can determine is that Abbyshire may have been understaffed by 24 and 2.25 staffing
hours the day prior to and the day of Bebea’s fall, respectively. However, even if we
Gallia App. No. 20CA18 52
assume Abbyshire was understaffed during the time Bebea fell, there is no testimony that
understaffing caused or contributed to Bebea’s fall. There was no testimony about the
appropriate staffing ratio required to meet a standard of care. There was no testimony
that understaffing occurred in the “Living Center” area of Abbyshire, which was the
secured Alzheimer unit where Bebea resided. And, neither of O’Dell’s expert witnesses
blamed Bebea’s fall on understaffing problems. Instead, they blamed inappropriate fall
risk assessment during admission and inadequate and improper fall intervention
implementation.
{¶99} As we discussed previously, Dr. Fannin testified “I don’t pick out who’s
responsible for what” and when asked if he had any opinions with regard to Jeremy Long,
he responded, “Who is that?”
{¶100} Nurse Hill-O’Neill was very vague in her testimony concerning the
administrator. She testified that she believed Abbyshire was not in compliance with
certain state and federal regulations governing fall risk assessment and implementation,
though she did not identify this with any specificity. She testified that it is the
administrator’s role to ensure that a facility is compliant though she did not testify how this
related to any staffing issue or to Bebea’s fall. She gave no opinion that Long was
negligent in carrying out his role. Even if we assume that there was a violation of a
regulation, it does not establish Long was negligent per se. Lang v. Beachwood Pointe
Care Ctr., 2017-Ohio-1550, 90 N.E.3d 102, ¶ 74 (8th Dist.) (violation of regulation not
negligence per se). In other words, a nursing home may violate a regulation without any
negligence on the part of its administrator. Nurse Hill-O’Neill did not testify how the
Gallia App. No. 20CA18 53
administrator’s duties related to, caused, or contributed to Bebea’s fall. She did not know
who Jeremy Long was:
Q. Do you have any opinions with regard to Jeremy Long, one of the defendants
in this case?
A. Only if he’s responsible for oversight or management of the building. Anybody
that’s responsible or involved in that.
Q. But as you sit here today, you do not know what he does specifically?
A. Correct.
{¶101} We find no genuine issue of material fact concerning Long’s
negligence. There was no evidence that Long was negligent in carrying out his duties as
administrator. The trial court did not err in dismissing Count Three and in dismissing Long
as a party to the case. We overrule O’Dell’s third assignment or error.
IV. CONCLUSION
{¶102} We sustain in part and overrule in part O’Dell’s first assignment of
error. We reverse the dismissal of Counts One/Two, dismiss Counts Six/Seven and affirm
the trial court’s dismissal of Counts Four/Five and Counts Eight through Eleven. We
overrule O’Dell’s second assignment of error and affirm the trial court’s dismissal of
Vrable Healthcare, Inc. We overrule O’Dell’s third assignment of error and affirm the trial
court’s dismissal of Jeremy Long and Count Three. The case is remanded for further
proceedings consistent with this opinion.
JUDGMENT REVERSED IN PART,
AFFIRMED IN PART. CAUSE REMANDED.
Gallia App. No. 20CA18 54
JUDGMENT ENTRY
It is ordered that the JUDGMENT IS REVERSED IN PART, AFFIRMED IN PART,
CAUSE REMANDED and that appellant shall pay the costs.
The Court finds there were reasonable grounds for this appeal.
It is ordered that a special mandate issue out of this Court directing the Gallia
County Court of Common Pleas to carry this judgment into execution.
Any stay previously granted by this Court is hereby terminated as of the date of
this entry.
A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of
the Rules of Appellate Procedure.
Smith, P.J. & Wilkin, J.: Concur in Judgment and Opinion.
For the Court
BY: ________________________________
Michael D. Hess, Judge
NOTICE TO COUNSEL
Pursuant to Local Rule No. 14, this document constitutes a final judgment
entry and the time period for further appeal commences from the date of filing with
the clerk. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488319/ | USCA11 Case: 20-14761 Date Filed: 11/21/2022 Page: 1 of 27
[PUBLISH]
In the
United States Court of Appeals
For the Eleventh Circuit
____________________
No. 20-14761
____________________
LARRY ROY,
Plaintiff-Appellant,
versus
KAY IVY,
JEFFERSON DUNN,
WEXFORD MEDICAL SERVICES,
Defendants-Appellees,
RUTH NAGLICH,
Defendant.
USCA11 Case: 20-14761 Date Filed: 11/21/2022 Page: 2 of 27
2 Opinion of the Court 20-14761
____________________
Appeal from the United States District Court
for the Southern District of Alabama
D.C. Docket No. 1:18-cv-00459-CG-MU
____________________
Before LUCK, BRASHER, and HULL, Circuit Judges.
HULL, Circuit Judge:
Larry Roy, an Alabama prisoner, brought this 42 U.S.C.
§ 1983 action alleging long delays in his receipt of treatment for
hernias and for post-surgery complications. In his pro se third
amended complaint, Roy asserted claims for deliberate indifference
to his serious medical needs against: (1) Wexford Health Sources,
Inc. (“Wexford”),1 a private contractor that provides health care
services for Alabama inmates; (2) Kay Ivey, 2 the Governor of
Alabama; and (3) Jefferson Dunn, the Commissioner of the
Alabama Department of Corrections.
In response to Wexford’s summary judgment motion, Roy
submitted statements signed by himself and seven other inmates.
Although most of the statements were labeled as affidavits, only
1 Wexford’s name is listed as “Wexford Medical Services” in the case heading
because its name was misstated in the initial complaint.
2 Governor Ivey’s name is listed as “Ivy” in the case heading because her name
was misspelled in the initial complaint.
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20-14761 Opinion of the Court 3
inmate John Dejnozka indicated his statement was “true and
correct” and was made “under penalty of perjury.”
The district court (1) granted summary judgment in favor of
Wexford and (2) dismissed Roy’s complaint against Governor Ivey
and Commissioner Dunn for failure to state a claim.
After review and with the benefit of oral argument, we
conclude that only inmate Dejnozka’s statement satisfies the
requirements of 28 U.S.C. § 1746 and only that statement can be
considered at the summary judgment stage. Upon considering that
inmate statement, Roy’s verified complaint, and the record as a
whole, we conclude that the district court did not err in entering
judgment for the defendants.
I. BACKGROUND
A. Third Amended Complaint
In his verified third amended complaint, Roy asserted claims
for deliberate indifference to his serious medical needs, in violation
of his constitutional rights, against (1) Wexford, (2) Governor Ivey,
and (3) Commissioner Dunn.
Roy contended that Wexford had a policy, custom, and
pattern of delaying medical treatment following a doctor’s
diagnosis. Roy alleged that he was diagnosed with a hernia in 2014,
but because of a five-year delay in Wexford’s treatment of his initial
hernia, his condition worsened. A physician at Roy’s prison
examined Roy several times but elected to focus on treating Roy’s
failing prostate.
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4 Opinion of the Court 20-14761
In July 2018, a urologist examined a “large lump” on Roy’s
prostate surgery scar and diagnosed Roy with a second hernia. The
“large lump” later was diagnosed as a foreign object.
Roy eventually underwent surgeries to repair both hernias
and to remove the foreign object. Roy continued to suffer “severe
pain” as a result of those surgeries. Roy asserted that the long
delays between diagnosis and treatment “disrupted the healing of
both hernias.”
Roy also alleged that: (1) Governor Ivey, based on records
in her possession, knew or should have known that Wexford had a
pattern or practice of delaying treatment, putting inmates at risk of
more serious harm; and (2) an associate of Commissioner Dunn
had set a policy, custom, or practice that put Roy at greater risk of
harm by causing delays in his treatment and depriving him of
adequate medical care.
At the end of his third amended complaint, Roy signed this
affirmation: “By my signature below, I swear or affirm under
penalty of perjury that the facts set out in this complaint are true
and correct.” The complaint also contained a handwritten
“Notary” section, which read: “Before me, Plaintiff Roy asserts
under penalty of perjury that the statements made herein [sic] this
§ 1983 civil action are true and correct to the best of his
recollection.” Both Roy and a notary signed underneath this
statement.
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20-14761 Opinion of the Court 5
B. Wexford’s Motion for Summary Judgment
Defendant Wexford answered and submitted a “special
report,” in which it argued that it was entitled to judgment as a
matter of law. Wexford acknowledged that it was the functional
equivalent of a municipality because it performed a traditional state
function. Wexford, however, contended that Roy had not
presented evidence to show that it had a policy or custom that
contributed to the alleged delay or denial of his medical treatment.
A magistrate judge converted Wexford’s answer and special
report to a motion for summary judgment. The magistrate judge
gave the parties notice that they could file evidence in support of,
or in opposition to, the motion for summary judgment. The
magistrate judge explained that this evidence could include
“declarations (written statements of fact signed under penalty of
perjury under 28 U.S.C. § 1746).” The magistrate judge also
explained that summary judgment, if granted, would be a final
adjudication of this action.
C. Governor Ivey and Commissioner Dunn’s Motion to
Dismiss
Defendants Governor Ivey and Commissioner Dunn moved
to dismiss Roy’s complaint for failure to state a claim. They argued
Roy had not alleged: (1) that either of them had personal
involvement in his medical treatment; or (2) that a causal
connection existed between any specific policy that they had
implemented and his medical care.
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6 Opinion of the Court 20-14761
D. Roy’s Brief in Response
In June 2020, Roy filed a 61-page “Brief in Response to
Defendant’s Claim to Summary Judgment” (the “brief”). Roy’s
brief had a table of contents and included these documents as
exhibits: (1) his inmate request slips, sick call requests, and
grievances, which detailed his efforts to receive treatment for
various medical conditions; (2) responses from prison officials;
(3) his daily medical reports; and (4) a news article about a
Department of Justice report on unconstitutional conditions in
Alabama prisons.
Roy’s brief also included separate, signed statements from
Roy himself and seven other inmates. All of the inmate statements
were labeled “affidavits,” except for the statements of Nevis
Jennings, Jr. and Edward Pringle. For consistency, we refer to all
of them as statements. All of the statements were unsworn.
However, the statement that Roy obtained from inmate
Dejnozka indicated at the beginning that Dejnozka “testifie[d] and
assert[ed] under penalty of perjury, that his stated facts and
statements [we]re true and correct to the best of his recollection.”
Dejnozka dated and signed his statement. As explained later,
Dejnozka’s unsworn statement complies with § 1746 and may
substitute for a sworn affidavit at the summary judgment stage.
By contrast, in his own statement, Roy did not certify that
the content of his statement was true or correct or made under
penalty of perjury. Similarly, the texts of the other attached inmate
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20-14761 Opinion of the Court 7
statements contained no language confirming their statements
were true or correct or made under penalty of perjury.
At most, inmate Kevin Manning asserted in his statement
that he was “submit[ting] the following testimony.” Manning
styled his inmate statement as a court pleading by (1) listing the
district court at the top of the document and (2) including the terms
“v.” and “Civil Action No.”
Inmate Carl Salter’s statement indicated in the last
paragraph that it was “[d]one in good faith, with a justified concern
for Roy.” Inmate William Mason’s statement was signed, but not
dated.
We do recognize that Roy’s brief contained the “penalty of
perjury” language in two places. First, Roy’s table of contents had
an entry that reads:
2. AFFIDAVITS/DEPOSITIONS - under penalty of
perjury. (pages 4-19)
Second, the fifth page of Roy’s brief contained a heading 3 titled as
follows:
3 Although neither party’s brief addresses this heading, we consider it because
it contains “penalty of perjury” language that is similar to the language
appearing in the table of contents of Roy’s brief.
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8 Opinion of the Court 20-14761
AFFIDAVITS/DEPOSITIONS – under penalty of
perjury testifying concerning having personal
knowledge of facts in case:
Under that heading, Roy listed the names of all eight inmates who
gave statements, including his own name, followed by a dash (for
example, “Larry Roy-”). Nonetheless, neither Roy nor any of the
inmates signed either of those two pages from his brief.
Turning to the content of the inmate statements, we note
that Roy’s and Dejnozka’s statements allege only facts concerning
Roy’s own delays in receiving medical treatment. While Roy’s
statement was consistent with the allegations in his verified third
amended complaint, it contained more detail about his diagnoses
and the amount of time that passed between a diagnosis and
surgery. 4 In his statement, Roy contended that: (1) he had
struggled to get minimal adequate treatment after being diagnosed
with a hernia in 2014; (2) a nurse initially was unable to diagnose
Roy’s “large lump”; (3) in August 2018, a physician diagnosed the
“large lump,” which had burst, as an infection and “put Roy in for
surgery”; (4) in September 2018, a surgeon diagnosed the “large
lump” as a “foreign object”; and (5) in October 2018, Roy received
exploratory surgery to remove the foreign object.
4 Roy’s statement also included more detail about his allegedly inadequate
medical care that is not relevant to his claim that the defendants had a policy
or custom of long delays between diagnosis and treatment.
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20-14761 Opinion of the Court 9
In his own statement, Dejnozka wrote that: (1) he saw Roy
continually seek treatment from medical staff for pain caused by a
“large lump” on the right side of a surgical scar; and (2) he observed
Roy’s physical health deteriorate as a result of long delays between
diagnosis and treatment. 5
Because we later conclude that the district court properly
declined to consider the six other inmate statements, we do not
recount their contents.
E. Magistrate Judge’s Report and Recommendation
The magistrate judge issued a report and recommendation
(“R&R”), recommending that the district court grant Wexford’s
motion for summary judgment and Governor Ivey and
Commissioner Dunn’s motion to dismiss. As to Wexford, the
magistrate judge observed that Roy had provided only one sworn
statement and determined that Roy had provided an account of
5 In his statement, Dejnozka also asserted that a nurse practitioner at the
prison had told Roy that he was not in pain because he had walked to the
prison’s health care unit. Unlike the other facts alleged in his statement,
Dejnozka did not indicate that he personally observed the nurse practitioner
make this statement. The district court therefore could not consider it at the
summary judgment stage. See Fed. R. Civ. P. 56(c)(4) (“An affidavit or
declaration used to support or oppose a motion must be made on personal
knowledge . . . .”); Ellis v. England, 432 F.3d 1321, 1326 (11th Cir. 2005)
(“[S]tatements in affidavits that are based, in part, upon information and belief,
cannot raise genuine issues of fact, and thus also cannot defeat a motion for
summary judgment.”).
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10 Opinion of the Court 20-14761
only a single incident, which was insufficient to establish that
Wexford had a policy or custom of constitutional violations.
As to Governor Ivey and Commissioner Dunn, the
magistrate judge determined that: (1) Roy had not alleged, nor
presented evidence, that these defendants were personally
involved in his medical treatment; and (2) Roy had failed to
establish either defendant’s supervisory liability, as he had not
shown a causal connection between these defendants and the harm
that he suffered. The magistrate judge’s report warned that if a
party did not object to the R&R within fourteen days, that party
would waive the right to challenge on appeal any unobjected-to
factual and legal conclusions.
F. Roy’s Objections
Roy filed timely objections to the R&R, contending that:
(1) he had alleged multiple instances where Wexford’s policy or
custom exacerbated his medical issues; and (2) the inmate
“[a]ffidavits” constituted evidence of a persistent or widespread
policy. Roy, however, did not challenge the magistrate judge’s
recommendation that his claims against Governor Ivey and
Commissioner Dunn be dismissed.
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20-14761 Opinion of the Court 11
G. District Court Order and the Appeal
The district court adopted the R&R and granted the
defendants’ motions. Roy appealed. 6 Following briefing by the
parties, we appointed appellate counsel for Roy. We separately
address the summary judgment granted to Wexford and then the
dismissal of defendants Governor Ivey and Commissioner Dunn.
II. WEXFORD
A. Standard of Review
We review de novo the district court’s grant of summary
judgment, viewing the record in the light most favorable to the
non-moving party. Moton v. Cowart, 631 F.3d 1337, 1341 (11th
Cir. 2011). A movant is entitled to summary judgment upon
showing that there are no genuine disputes of material fact and the
movant is entitled to judgment as a matter of law. Fed. R. Civ. P.
56(a). We may affirm summary judgment on any ground
supported by the record. MidAmerica C2L Inc. v. Siemens Energy
Inc., 25 F.4th 1312, 1331 (11th Cir. 2022).
Because Roy proceeded pro se in the district court, we
liberally construe his pleadings. Caldwell v. Warden, FCI
Talladega, 748 F.3d 1090, 1098 (11th Cir. 2014). Pro se litigants,
6 Although Roy’s initial complaint asserted a deliberate indifference claim
against Ruth Naglich, his third amended complaint did not raise any claims
against Naglich, who is not a party to this appeal.
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12 Opinion of the Court 20-14761
however, are required to conform to procedural rules. Albra v.
Advan, Inc., 490 F.3d 826, 829 (11th Cir. 2007).
B. Deliberate Indifference
Roy’s third amended complaint against Wexford contends
that Wexford had a custom or policy of delaying medical treatment
for inmates’ serious medical needs and such deliberate indifference
caused Roy’s injury and pain. We discuss the legal principles
applicable to deliberate indifference claims and then Roy’s
evidence.
To establish a deliberate indifference claim, a plaintiff must
show: (1) a serious medical need; (2) the defendant’s deliberate
indifference to that need; and (3) causation between the
defendant’s indifference and the plaintiff’s injury. Goebert v. Lee
Cnty., 510 F.3d 1312, 1326 (11th Cir. 2007). Delays in medical
treatment “that [are] tantamount to unnecessary and wanton
infliction of pain[] may constitute deliberate indifference.” Adams
v. Poag, 61 F.3d 1537, 1544 (11th Cir. 1995) (quotation marks
omitted).
A private entity, like Wexford, that contracts to provide
medical services to inmates performs traditional state functions
and, therefore, is treated as a municipality for purposes of § 1983
claims. Craig v. Floyd Cnty., 643 F.3d 1306, 1310 (11th Cir. 2011).
“[Section] 1983 does not provide for liability under a theory of
respondeat superior . . . .” Richardson v. Johnson, 598 F.3d 734,
738 (11th Cir. 2010). A municipality, however, may be held liable
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20-14761 Opinion of the Court 13
under § 1983 if its policy or custom causes the plaintiff’s
injury. Swain v. Junior, 958 F.3d 1081, 1091 (11th Cir. 2020).
In the absence of an official policy endorsing a constitutional
violation, a plaintiff must show: (1) that the municipality had a
custom or practice of permitting such a violation; and (2) that this
custom or practice was the “moving force” behind the violation.
Craig, 643 F.3d at 1310 (quotation marks omitted). Proof of a single
incident of an unconstitutional activity is insufficient to show a
custom, which must be such “a longstanding and widespread
practice that it is deemed authorized by the policymaking officials
because they must have known about it but failed to stop it.” Id.
(alteration and quotation marks omitted).
C. Requirements for Unsworn Declarations under Section 1746
To show Wexford’s policy or custom of delays, Roy
submitted: (1) Roy’s, Dejnozka’s, and four other inmates’
statements about Roy’s own delays in receiving medical treatment
and (2) statements from two other inmates (Jennings and Pringle)
about their own delays in receiving medical treatment. Although
some statements were labeled “affidavits,” the statements Roy
submitted were all unsworn statements. As explained below, all of
the unsworn statements, except for Dejnozka’s, did not comply
with the requirements of 28 U.S.C. § 1746, and thus those unsworn
statements could not be considered by the district court.
At the summary judgment stage, parties may submit
traditional affidavits sworn under oath before a notary (or another
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14 Opinion of the Court 20-14761
oath-taker) affixed with the notary seal. Affidavits must: (1) be
made on personal knowledge, (2) set forth facts that would be
admissible in evidence, and (3) show that the affiant is competent
to testify on the relevant matter. Fed. R. Civ. P. 56(c)(4). Unsworn
statements may not be considered by a district court in evaluating
a motion for summary judgment. Carr v. Tatangelo, 338 F.3d
1259, 1273 n.26 (11th Cir. 2003). An unsworn statement is
incompetent to raise a fact issue precluding summary judgment.
See id.; United States ex rel. Doe v. Heart Sol., PC, 923 F.3d 308,
315–16 (3d Cir. 2019) (concluding that an unsworn statement that
was not given under the penalty of perjury was “incompetent
summary judgment evidence”).
A statutory exception to this rule exists under 28 U.S.C.
§ 1746, which permits unsworn declarations to substitute for a
sworn affidavit or sworn declaration for purposes of summary
judgment if certain statutory requirements are met. See 28 U.S.C.
§ 1746; see also Fed. R. Civ. P. 56(c) advisory committee’s note to
2010 amendment (“28 U.S.C. § 1746 allows a written unsworn
declaration, certificate, verification, or statement subscribed in
proper form as true under penalty of perjury to substitute for an
affidavit.”). Specifically, under § 1746, a declaration executed
within the United States will substitute for a sworn affidavit if the
declarant dates and subscribes the document as true under penalty
of perjury in substantially the following form: “I declare (or certify,
verify, or state) under penalty of perjury that the foregoing is true
and correct. Executed on (date). (Signature).” 28 U.S.C. § 1746(2).
USCA11 Case: 20-14761 Date Filed: 11/21/2022 Page: 15 of 27
20-14761 Opinion of the Court 15
In short, § 1746 has these statutory requirements for an
unsworn statement to substitute for a sworn affidavit: The
declarant must (1) date and sign the document, and (2) subscribe
its content as “true,” (3) under “penalty of perjury,” (4) in
substantially the above-quoted pattern language. Id.
The parties agree that Dejnozka’s unsworn statement
complied with the requirements of § 1746. His statement was
signed, dated, and subscribed as true and correct under penalty of
perjury. See id. § 1746. We thus turn our focus to the six other
inmate statements and then to Roy’s own statement
D. Six Other Inmate Statements
The six other unsworn inmate statements, submitted by
Roy, did not satisfy the § 1746 requirements. None of the
statements contained any language declaring the statements were
true or that they were made under penalty of perjury. Because the
six other inmate statements did not satisfy § 1746, the district court
properly declined to consider them for purposes of summary
judgment.
To avoid this result, Roy argues that, inter alia, we should
liberally construe these six inmate statements because: (1) the
inmates may not have had knowledge of or access to the pattern
language in § 1746, and (2) the statements were signed when his
prison was closed due to the COVID-19 pandemic.
First, we decline Roy’s invitation to “liberally construe” the
six other inmate statements as satisfying § 1746 because there is no
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16 Opinion of the Court 20-14761
language in them for us to liberally construe as substantially
complying with the pattern language in § 1746. None of the
statements referred to “penalty of perjury” or were certified as true.
For instance, inmate Manning asserted within his statement
that he was “submit[ting] the following testimony” and styled his
statement as a court pleading, while inmate Salter acknowledged
that his statement was made “in good faith.” This language does
not come close to substantially complying with the requirements
or pattern language of § 1746.
Second, we recognize that Roy’s brief refers to “penalty of
perjury” in two places: (1) in the table of contents; and (2) on page
five in the heading: “AFFIDAVITS/DEPOSITIONS – under
penalty of perjury[.]” This language in Roy’s brief, however, did
not cure the defects in the six inmate statements. The record
contains no evidence that the inmates adopted (or even saw for
that matter) this “penalty of perjury” language in Roy’s brief.
Further, no inmate signed either of these two pages in Roy’s brief.
There is another, independent reason the inmates’ unsworn
statements do not comply with § 1746. The “penalty of perjury”
language contained within Roy’s brief, but not within the
individual inmates’ own unsworn statements, would not make any
of the six inmates subject to a perjury charge for making a false
declaration in their separately attached statements. See Dickinson
v. Wainwright, 626 F.2d 1184, 1186 (5th Cir. Unit B 1980) (“One
who subscribes to a false statement under penalty of perjury
pursuant to section 1746 may be charged with perjury under [18
USCA11 Case: 20-14761 Date Filed: 11/21/2022 Page: 17 of 27
20-14761 Opinion of the Court 17
U.S.C. § 1621], just as if the statement were made under oath.”);
Nissho-Iwai Am. Corp. v. Kline, 845 F.2d 1300, 1305–06 (5th Cir.
1988) (declining to consider a self-described affidavit that was not
declared to be true and correct or made under penalty of perjury
when “it allow[ed] the affiant to circumvent the penalties for
perjury in signing onto intentional falsehoods”).
Third, and in any event, Roy’s arguments about inmate
access fail because the key is what Roy knew as he procured the
statements from the other inmates, not what the other inmates
knew. Here, the magistrate judge informed Roy that he could
submit “declarations (written statements of fact signed under
penalty of perjury under 28 U.S.C. § 1746).” The unsworn
statement Roy obtained from Dejnozka conformed to the § 1746
requirements, despite the challenges presented by the pandemic.
Even before the magistrate judge’s notice, Roy’s own complaint
affirmed that the facts set out in his complaint were true and
correct under penalty of perjury.
For these reasons, the district court correctly did not
consider the six unsworn inmate statements at the summary
judgment stage. 7 See Carr, 338 F.3d at 1273 n.26.
7 Inmate Mason’s unsworn statement does not satisfy § 1746 for the additional
reason that it was not dated. See 28 U.S.C. § 1746.
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18 Opinion of the Court 20-14761
E. Roy’s Statement
Roy’s own unsworn statement arguably presents a closer
question. We previously have not addressed whether an unsworn
statement complied with § 1746 when: (1) the statement was not
subscribed as true or correct under penalty of perjury by a
declarant-plaintiff, but (2) the statement was attached as an exhibit
to and part of a declarant-plaintiff’s 61-page brief that contained
“penalty of perjury” language on two pages—in the table of
contents and in the heading described above. Roy argues that his
unsworn statement satisfied the standards of § 1746 because: (1) he
was the author of the summary judgment brief and his unsworn
statement, and (2) he stated in the brief’s table of contents that the
inmate statements were made “under penalty of perjury.” We
disagree.
First, Roy did not sign and date the pages of his brief that
contain the “penalty of perjury” language. That alone leads us to
conclude that his unsworn statement did not comply with § 1746.
Second, Roy’s unsworn statement did not adopt or
otherwise reference the “penalty of perjury” language in his brief.
As discussed above, this unsigned “penalty of perjury” language in
his brief—in the table of contents and a heading—would not make
Roy subject to a perjury charge for intentional falsehoods in his
statement. Rather, if accepted as sworn evidence here, Roy’s
statement would allow him to circumvent perjury penalties.
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20-14761 Opinion of the Court 19
Third, neither Roy’s statement nor his brief contained a
certification that his statement (“the foregoing”) was true and
correct. As observed earlier, Roy was aware of § 1746’s
requirements, but he did not comply with the penalty of perjury
requirement or certify that his statement was true. 8
As the defendants rightly point out, the Fifth Circuit’s
decision in Nissho-Iwai American Corp. v. Kline provides sound
guidance here. In that case, the unsworn affidavit was neither
certified as true and correct nor made under penalty of perjury. 845
F.2d at 1305–06. The Fifth Circuit concluded that the unsworn
affidavit did not substantially conform to the pattern language in
§ 1746. Id. at 1306. The court observed that the affidavit, as
drafted, “allow[ed] the affiant to circumvent the penalties for
perjury in signing onto intentional falsehoods.” Id. (“Kline never
8 Before concluding, we recite language on page thirty of Roy’s brief that no
party pointed out or argued about. Roy’s brief included handwritten
“Statement of Facts” and “Argument” sections, which immediately follow the
last inmate statement. Roy ended the “Argument” section of his brief with
this sentence: “Therefore, WEXFORD’s Answer of denial is contradicted to
[sic] the record, and Plaintiff’s facts and allegations are to be taken as being
‘true.’” Roy signed that page.
For completeness, however, we note this “true” language in the
“Argument” section on page thirty of Roy’s brief also would not subject Roy
to a perjury charge, given that: (1) it contains no reference to his unsworn
statement; (2) his unsworn statement itself contains no “true” language or
reference to page thirty of the brief; and (3) this sentence on page thirty clearly
is a closing argument in the brief and not a certification or verification of the
accuracy of the content of Roy’s statement.
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20 Opinion of the Court 20-14761
declared her statement to be true and correct; therefore, her
affidavit must be disregarded as summary judgment proof.”).9
The Fifth Circuit’s reasoning in Nissho-Iwai American Corp.
is equally applicable here. Like the affidavit in that case, Roy’s
unsworn statement did not include any “penalty of perjury”
language, nor did it contain a certification that his statement (“the
foregoing”) was “true and correct.” Roy’s unsworn statement, as
drafted, would allow him “to circumvent the penalties for perjury
in signing onto intentional falsehoods.” See id. at 1306; Dickinson,
626 F.2d at 1185–86 (concluding that a prisoner who signed a
9 Although the parties do not cite it, we have located a Second Circuit case
that warrants discussion. In LeBoeuf, Lamb, Greene & MacRae, L.L.P. v.
Worsham, an unsworn letter was signed with the statement, “[u]nder penalty
of perjury, I make the statements contained herein,” but it did not state the
contents were true and correct. 185 F.3d 61, 65–66 (2d Cir. 1999). The Second
Circuit concluded the letter substantially complied with the § 1746
requirements. Id. (“Although the letter does not contain the exact language
of Section 1746 nor state that the contents are ‘true and correct,’ it
substantially complies with these statutory requirements, which is all that this
Section requires.”).
Worsham is inapposite here. Unlike the unsworn letter in that case,
Roy’s unsworn statement did not comply with two § 1746 requirements: (1) it
was not made under penalty of perjury; and (2) it did not declare (or certify,
verify, or state) that its contents were true or correct. Thus, we have no
occasion to address the narrow issue in Worsham. See also Nguhlefeh Njilefac
v. Garland, 992 F.3d 362, 365 n.4 (5th Cir. 2021) (“[O]ur circuit does not appear
to have addressed . . . whether a ‘declaration’ passes muster if . . . it was made
‘under penalty of perjury’ but does not represent that its contents are ‘true and
correct,’ thereby failing to comply with the full text of § 1746.”).
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20-14761 Opinion of the Court 21
habeas corpus petition that complied with § 1746 “may be charged
with perjury under [18 U.S.C. § 1621], just as if the statement were
made under oath”). Therefore, Roy’s unsworn statement “must
be disregarded as summary judgment proof.” See Nissho-Iwai Am.
Corp., 845 F.2d at 1306.
Under the totality of the facts here, we conclude that Roy’s
unsworn statement does not comply with § 1746 and the district
court correctly did not consider Roy’s unsworn statement, even
though he labeled it as an “affidavit.”
Further, as an independent, alternative conclusion, even if
we assume arguendo that Roy’s unsworn statement complied with
§ 1746 and constituted evidence at the summary judgment stage,
that evidence would not change any result here as outlined below.
F. Evidence of Wexford’s Policy or Custom
Without these inmate statements, Roy’s “proof of a policy
or custom rests entirely on a single incident of alleged
unconstitutional activity.” Craig, 643 F.3d at 1311. He produced
no evidence that Wexford had a policy or custom of constitutional
violations “so persistent and widespread as to be deemed
authorized by the policymaking officials because they must have
known about it but failed to stop it.” Id. at 1312 (quotation marks
omitted).
To the extent that Roy contends he can show an
unconstitutional custom or practice by Wexford based solely on
the multiple delays that he experienced, this contention is
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22 Opinion of the Court 20-14761
meritless. In Craig, this Court concluded that a prisoner could not
establish that a private health care provider had an unconstitutional
policy or custom when he “did not even present evidence that
these practices had been employed by [the provider] for any other
detainees.” Id. at 1311. Without evidence demonstrating that
other inmates were injured by Wexford’s allegedly
unconstitutional custom or practice, Roy cannot show that this
custom or practice was “so widespread as to have the force of law.”
Id. at 1312 (quotation marks omitted). And even if Roy’s statement
satisfied § 1746, he still could not prevail on his deliberate
indifference claim against Wexford because his inmate statement
only addressed the medical delays that Roy himself experienced.
We also reject Roy’s argument that the district court failed
to address facts that would have precluded summary judgment.
Roy’s evidence related to only his own medical conditions and the
delays that he experienced in receiving treatment for his own
medical issues. Because Roy did not present evidence of another
instance where Wexford’s alleged policy or custom of delaying
medical treatment exacerbated an inmate’s medical condition, he
failed to establish that Wexford was liable under § 1983. See Swain,
958 F.3d at 1091. Thus, we affirm the district court’s grant of
summary judgment in favor of Wexford.
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20-14761 Opinion of the Court 23
III. GOVERNOR IVEY AND COMMISSIONER DUNN
A. Standard of Review
We review de novo a district court’s grant of a motion to
dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) for
failure to state a claim. Hopper v. Solvay Pharms., Inc., 588 F.3d
1318, 1324 (11th Cir. 2009). To survive a Rule 12(b)(6) motion to
dismiss, a complaint must allege sufficient facts to state a claim that
is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.
Ct. 1937, 1949 (2009). “[C]onclusory allegations, unwarranted
deductions of facts or legal conclusions masquerading as facts will
not prevent dismissal.” Oxford Asset Mgmt., Ltd. v. Jaharis, 297
F.3d 1182, 1188 (11th Cir. 2002).
Under our Rule 3-1, a plaintiff who fails to object to a factual
or legal conclusion in a magistrate judge’s R&R after being
informed of the time period for objections and the consequences
of not objecting waives his right to challenge the unobjected-to
determination on appeal. 11th Cir. R. 3-1. In the absence of a
proper objection, however, this Court may review the issue in this
civil appeal “for plain error if necessary in the interests of justice.”
Id. Once we determine that reviewing an unobjected-to error in
an R&R is necessary in the interests of justice, then we apply the
heightened civil plain error standard. “Under the civil plain error
standard, ‘we will consider an issue not raised in the district court
if it involves a pure question of law, and if refusal to consider it
would result in a miscarriage of justice.’” Burch v. P.J. Cheese, Inc.,
861 F.3d 1338, 1352 (11th Cir. 2017) (quoting Roofing & Sheet
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24 Opinion of the Court 20-14761
Metal Servs., Inc. v. La Quinta Motor Inns, Inc., 689 F.2d 982, 990
(11th Cir. 1982)).
B. Supervisory Liability under Section 1983
Similar to municipalities, supervisory officials are not liable
under § 1983 for the unconstitutional acts of their subordinates
based on a theory of respondeat superior or vicarious liability.
Keith v. DeKalb Cnty., 749 F.3d 1034, 1047 (11th Cir. 2014). Rather,
to hold a supervisor liable under § 1983, the plaintiff must show:
(1) that the supervisor personally participated in the alleged
unconstitutional conduct; or (2) there was a causal connection
between the actions of a supervising official and the alleged
constitutional deprivation. Id. at 1047–48. This Court has
explained that:
The necessary causal connection can be established
when a history of widespread abuse puts the
responsible supervisor on notice of the need to
correct the alleged deprivation, and he fails to do so.
Alternatively, the causal connection may be
established when a supervisor’s custom or policy
results in deliberate indifference to constitutional
rights or when facts support an inference that the
supervisor directed the subordinates to act unlawfully
or knew that the subordinates would act unlawfully
and failed to stop them from doing so.
Id. at 1048 (cleaned up). “The deprivations that constitute
widespread abuse . . . must be obvious, flagrant, rampant and of
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20-14761 Opinion of the Court 25
continued duration, rather than isolated occurrences.” Id.
(quotation marks omitted).
C. Analysis
As an initial matter, although the R&R sufficiently informed
Roy of the time period for objecting and the consequences for
failing to object, he did not challenge the magistrate judge’s
recommendation that his claims against Governor Ivey and
Commissioner Roy be dismissed. Accordingly, we may review
Roy’s argument that the district court erred by dismissing these
claims for plain error only. See 11th Cir. R. 3-1.
In any event, the district court did not err, plainly or
otherwise, in dismissing Roy’s claims against these defendants.
Roy did not allege that Governor Ivey or Commissioner Dunn
personally participated in his alleged constitutional deprivations.
He also did not plead specific facts that showed a causal connection
between these defendants and the harm that he suffered. See Iqbal,
556 U.S. at 678, 129 S. Ct. at 1949; Jaharis, 297 F.3d at 1188. Roy’s
allegation that Governor Ivey had knowledge of his constitutional
deprivations based on records in her possession was too speculative
to establish that she had notice of “widespread abuse.” See Keith,
749 F.3d at 1047–48.
Further, while Roy asserted that the defendants had a
custom or policy of delaying medical treatment to inmates, he only
alleged isolated incidents of unconstitutional misconduct, not “a
persistent and wide-spread practice.” McDowell v. Brown, 392 F.3d
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26 Opinion of the Court 20-14761
1283, 1290 (11th Cir. 2004) (quotation marks omitted). Because
Roy failed to allege that Governor Ivey and Commissioner Dunn
had a policy, custom, or practice of delaying medical treatment to
inmates, the district court properly dismissed his claims against
these defendants.
IV. OTHER ISSUES
Liberally construed, Roy’s appellate brief also argues: (1) the
district court failed to address the merits of his initial complaint;
(2) he still can obtain a default judgment against the defendants;
(3) the district court failed to address two motions that he filed; and
(4) the district court failed to address his arguments and supporting
evidence regarding the overcrowding of his prison and the failure
of prison officials to protect inmates from violence and sexual
assault. All of these arguments lack merit.
First, the district court was under no obligation to consider
the merits of the initial complaint, which was superseded by Roy’s
third amended complaint. See Varnes v. Local 91, Glass Bottle
Blowers Ass’n, 674 F.2d 1365, 1370 n.6 (11th Cir. 1982) (stating that
an amended complaint supersedes and replaces the original
complaint unless the amended complaint specifically refers to or
adopts the earlier pleading).
Second, Roy could not obtain default judgment once the
defendants responded to his complaint. See Fed. R. Civ. P. 55(b)
(stating that, upon a plaintiff’s request, the clerk must enter a
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20-14761 Opinion of the Court 27
default judgment “against a defendant who has been defaulted for
not appearing”).
Third, Roy did not raise any supporting arguments
explaining why the district court erred in failing to address two of
his motions (nor did Roy even identify the motions that the court
did not resolve). He thus has abandoned this argument on appeal.
See Sapuppo v. Allstate Floridian Ins. Co., 739 F.3d 678, 681 (11th
Cir. 2014) (“We have long held that an appellant abandons a claim
when he either makes only passing references to it or raises it in a
perfunctory manner without supporting arguments and
authority.”).
Fourth, because Roy only raised deliberate indifference
claims in his third amended complaint, we need not address his
overcrowding and failure-to-protect arguments. See Miller v. King,
449 F.3d 1149, 1150 n.1 (11th Cir. 2006) (holding that, because the
pro se plaintiff failed to raise a claim in the district court, we would
not consider the claim for the first time on appeal).
V. CONCLUSION
In sum, we affirm (1) the district court’s grant of summary
judgment in favor of Wexford on Roy’s deliberate indifference
claim, and (2) the district court’s dismissal of Roy’s deliberate
indifference claims against Governor Ivey and Commissioner
Dunn.
AFFIRMED. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488321/ | NOT FOR PUBLICATION IN WEST'S HAWAII REPORTS OR THE PACIFIC REPORTER
Electronically Filed
Intermediate Court of Appeals
CAAP-XX-XXXXXXX
21-NOV-2022
07:55 AM
Dkt. 126 SO
NO. CAAP-XX-XXXXXXX
IN THE INTERMEDIATE COURT OF APPEALS
OF THE STATE OF HAWAI#I
U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE FOR
STRUCTURED ASSET INVESTMENT LOAN TRUST MORTGAGE
PASS-THROUGH CERTIFICATES, SERIES 2006-4,
Plaintiff-Appellee,
v.
MILAGROS LEANO CASTRO; BENNY F. CASTRO,
Defendants-Appellants,
and
OWANA HOMEOWNER'S ASSOCIATION; CACH, LLC;
ASSOCIATION OF APARTMENT OWNERS OF VALLEYVIEW
MELEMANU WOODLANDS; and DOES 1 through 20, inclusive,
Defendants
APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT
(CIVIL NO. 14-1-0808-03)
SUMMARY DISPOSITION ORDER
(By: Wadsworth, Presiding Judge, and Nakasone and McCullen, JJ.)
Self-represented Defendants-Appellants Milagros Leano
Castro and Benny F. Castro (the Castros) appeal from the
following post-judgment orders entered by the Circuit Court of
the First Circuit (Circuit Court): (1) the June 28, 2018 "Order
Denying [the Castros'] Renewed Motion for Relief from Judgment
Filed May 3, 2018" (Order Denying Motion for Relief from
Judgment); and (2) the September 4, 2018 "Order Denying [the
Castros'] Motion for Reconsideration Filed on June 18, 2018"
(Order Denying Motion for Reconsideration) (collectively, the
Post-Judgment Orders).1/ For the reasons explained below, we
affirm.
1/
The Honorable Jeanette H. Castignetti presided.
NOT FOR PUBLICATION IN WEST'S HAWAII REPORTS OR THE PACIFIC REPORTER
On March 31, 2014, Plaintiff-Appellee U.S. Bank
National Association, as Trustee for Structured Asset Investment
Loan Trust Mortgage Pass-Through Certificates, Series 2006-04
(U.S. Bank), filed a complaint for declaratory relief and
mortgage foreclosure against the Castros and others. The Castros
filed a response to the complaint, alleging that the purported
assignments of the subject mortgage and promissory note were
fraudulent and that U.S. Bank lacked standing to foreclose.
On August 22, 2014, U.S. Bank filed a motion for
summary judgment and for interlocutory decree of foreclosure.
The Castros did not file an opposition. The motion was heard on
December 24, 2014. The Castros did not appear at the hearing.
The record on appeal does not contain a transcript of the
hearing, but the Circuit Court minutes indicate that the motion
was orally granted at that time. On January 29, 2015, the
Circuit Court entered findings of fact, conclusions of law, and
an order granting U.S. Bank's motion for summary judgment and for
interlocutory decree of foreclosure (Foreclosure Decree). The
Judgment in favor of U.S. Bank and against all defendants was
entered the same day.2/ The Judgment was appealable under Hawaii
Revised Statutes § 667-51(a)(1) (2016).
The Castros did not appeal from the Judgment.
On May 3, 2018, the Castros filed a "Renewed Motion for
Relief from Judgment" (Motion for Relief from Judgment),3/
purportedly brought under a variety of authorities, including
Hawai#i Rules of Civil Procedure (HRCP) Rule 60(b)(3) and (4).4/
The Castros' argument is difficult to discern, but it appears
2/
The Honorable Bert I. Ayabe entered the Foreclosure Decree and the
Judgment.
3/
The Castros' April 5, 2018 motion for relief from judgment was
stricken for failure to comply with court rules regarding service and notice
of the motion.
4/
Although the Castros listed various statutes, court rules, and a
constitutional provision (the Fourteenth Amendment) in their motion, the only
listed authority that could properly serve as a procedural vehicle for the
motion was HRCP Rule 60(b)(3) and (4). The rule states, in relevant part:
"On motion and upon such terms as are just, the court may relieve a party
. . . from a final judgment, order, or proceeding for the following reasons:
. . . (3) fraud (whether heretofore denominated intrinsic or extrinsic),
misrepresentation, or other misconduct of an adverse party; [and] (4) the
judgment is void[.]"
2
NOT FOR PUBLICATION IN WEST'S HAWAII REPORTS OR THE PACIFIC REPORTER
they claimed the Judgment was void under HRCP Rule 60(b)(4)
because the Circuit Court lacked subject matter jurisdiction.
Relatedly, the Castros appear to have argued that the promissory
note was fraudulently endorsed; U.S. Bank did not own or control
the note at the commencement of the foreclosure action; and U.S.
Bank thus failed to establish its standing. The Castros also
argued that indispensable parties had not been joined in the
litigation.
On June 4, 2018, the Circuit Court denied the Castros'
Motion for Relief from Judgment by minute order, and on June 28,
2018, the Circuit Court entered the Order Denying Motion for
Relief from Judgment. On June 18, 2018, the Castros filed a
motion for reconsideration. The Circuit Court denied the motion
for reconsideration in a July 27, 2018 minute order, which stated
in relevant part:
[The Castros] have not presented new evidence or arguments
that could not have been presented during the adjudicated
motion, e.g., [U.S. Bank's] motion for summary judgment,
filed on August 22, 2014, to which [the Castros] did not
file an opposition . . . .
(Letter case altered.) On September 4, 2018, the Circuit Court
entered the Order Denying Motion for Reconsideration.
On appeal, the Castros raise eleven points of error,
many of which are difficult to discern and appear to overlap, and
all of which appear to challenge the foreclosure, as if the
Castros had appealed from the Judgment. See Nationstar Mortgage
LLC v. Akepa Properties LLC, No. CAAP-XX-XXXXXXX, 2017 WL
1401468, at *2 (Haw. App. Apr. 19, 2017) (SDO) ("[Appellant]
makes little effort to address the requirements under [HRCP] Rule
60(b), but instead argues as if it had appealed from the
Foreclosure Judgment."). The Castros' sole discernible
contention related to the Post-Judgment Orders appears to be that
U.S. Bank lacked standing to bring the foreclosure action, which
the Castros assert deprived the Circuit Court of subject matter
jurisdiction. Relying on Bank of Am. N.A. v. Reyes-Toledo, 139
Hawai#i 361, 370, 390 P.3d 1248, 1257 (2017), the Castros
seemingly argue that U.S. Bank failed to show it had standing to
enforce the note and mortgage at the commencement of the
3
NOT FOR PUBLICATION IN WEST'S HAWAII REPORTS OR THE PACIFIC REPORTER
foreclosure action, and the Judgment was therefore "void." The
Castros do not specifically invoke HRCP Rule 60(b)(4) in making
this argument, but that appears to have been the basis for their
related argument in the Circuit Court.5/
We review a circuit court's decision on an HRCP Rule
60(b) motion for abuse of discretion. PennyMac Corp. v. Godinez,
148 Hawai#i 323, 327, 474 P.3d 264, 268 (2020). However, "[t]he
determination of whether a judgment is void [under HRCP Rule
60(b)(4)] is not a discretionary issue. It has been noted that a
judgment is void only if the court that rendered it lacked
jurisdiction of either the subject matter or the parties or
otherwise acted in a manner inconsistent with due process of
law." In re Hawaiian Elec. Co., 149 Hawai#i 343, 362, 489 P.3d
1255, 1274 (2021) (quoting International Sav. & Loan Ass'n v.
Carbonel, 93 Hawai#i 464, 473, 5 P.3d 454, 463 (App. 2000)).
The Circuit Court did not err in denying the Castros'
Motion for Relief from Judgment. Under Hawai#i law, standing is
not an issue of subject matter jurisdiction. Tax Found. of
Hawai#i v. State, 144 Hawai#i 175, 192, 439 P.3d 127, 144 (2019).
The Castros make no other discernible argument challenging the
Circuit Court's subject matter jurisdiction, and they do not
contend that the Circuit Court lacked personal jurisdiction over
them. Similarly, the Castros make no discernible argument that
the Circuit Court acted in a manner inconsistent with due process
of law.6/ Accordingly, the Circuit Court had jurisdiction to
enter the Judgment, and it was not void under HRCP Rule
5/
Although the Motion for Relief from Judgment also cited HRCP Rule
60(b)(3), this ground was precluded by the rule itself, because the motion was
brought "more than one year after the [J]udgment . . . was entered . . . ."
HRCP Rule 60(b).
6/
The Castros assert generally that U.S. Bank "[took] action in
violation of due process," but made no discernible argument below and offer
none on appeal as to how they were deprived of due process. See Citicorp
Mortgage Inc. v. Bartolome, 94 Hawai#i 422, 433, 16 P.3d 827, 838 (App. 2000)
("An appellate court does not have to address matters for which the appellant
has failed to present discernible argument."); Hawai #i Rules of Appellate
Procedure (HRAP) Rule 28(b)(7); see also Ito v. Investors Equity Life Holding
Co., 135 Hawai#i 49, 74, 346 P.3d 118, 143 (2015) ("Where an appellant makes
general assertions of a due process violation, without further elaboration or
citation to authority, the court cannot reach a reasoned conclusion, and the
due process argument is deemed waived." (citing Cty. of Hawaii v. C & J Coupe
Family Ltd. P'ship, 119 Hawai#i 352, 373, 198 P.3d 615, 636 (2008))).
4
NOT FOR PUBLICATION IN WEST'S HAWAII REPORTS OR THE PACIFIC REPORTER
60(b)(4).7/ Because the Judgment was not void, the Circuit Court
did not err in denying the Castros' motion to set it aside.
The Castros do not argue any error unique to the Order
Denying Motion for Reconsideration.
For the reasons discussed above, we affirm the
following orders entered by the Circuit Court of the First
Circuit: (1) the June 28, 2018 "Order Denying [the Castros']
Renewed Motion for Relief from Judgment Filed May 3, 2018"; and
(2) the September 4, 2018 "Order Denying [the Castros'] Motion
for Reconsideration Filed on June 18, 2018."
DATED: Honolulu, Hawai#i, November 21, 2022.
On the briefs:
/s/ Clyde J. Wadsworth
Milagros Leano Castro and Presiding Judge
Benny F. Castro,
Self-represented Defendants-
Appellants. /s/ Karen T. Nakasone
Associate Judge
Edmund K. Saffery and
Deirdre Marie-Iha
(Goodsill Anderson Quinn & /s/ Sonja M.P. McCullen
Stifel) Associate Judge
for Plaintiff-Appellee.
7/
The Castros did not argue below — or on appeal — that relief was
warranted under HRCP Rule 60(b)(6). The issue is thus deemed waived. See
Ass'n of Apartment Owners of Wailea Elua v. Wailea Resort Co., Ltd, 100
Hawai#i 97, 107, 58 P.3d 608, 618 (2002) (arguments not raised in the trial
court are ordinarily deemed waived on appeal); HRAP Rule 28(b)(7).
5 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488322/ | State of Maryland v. Kirk Matthews, No. 15, September Term, 2021. Opinion by Biran, J.
EXPERT WITNESSES – ADMISSIBILITY OF EXPERT TESTIMONY –
MARYLAND RULES 5-702 AND 5-403 – REVIEW FOR ABUSE OF DISCRETION
The Court of Appeals held that the trial court did not abuse its discretion by admitting
testimony of the State’s photogrammetry expert witness. At the hearing on the defendant’s
motion to exclude the expert testimony, the expert opined that a person shown carrying a
shotgun in an image captured by a video camera was approximately 5’8” plus or minus
two-thirds of an inch. The expert acknowledged that she was unable to calculate the effect
of certain variables on the degree of uncertainty of the height measurement. The Court held
that the unknown degree of uncertainty with respect to the expert’s conclusions went to the
weight of her testimony, not its admissibility. The expert’s methodology was reliable and
there was no analytical gap in her testimony. The trial court acted within its broad discretion
in concluding that, despite the unknown degree of uncertainty in the height measurement,
the expert’s testimony would assist the jury in understanding the evidence or in deciding a
fact in issue in the case. Therefore, the expert testimony was admissible under Maryland
Rule 5-702.
The Court also affirmed the trial court’s ruling with respect to Maryland Rule 5-403,
concluding that the probative value of the expert testimony was not outweighed by the
danger of unfair prejudice, confusion of the issues, or misleading the jury.
Circuit Court for Anne Arundel County
Case No. C-02-CR-17-002275
Argued: November 1, 2021
IN THE COURT OF APPEALS
OF MARYLAND
No. 15
September Term, 2021
STATE OF MARYLAND
v.
KIRK MATTHEWS
*Getty, C.J.
*McDonald
Watts
Hotten
Booth
Biran
Wilner, Alan M.
(Senior Judge, Specially Assigned),
JJ.
Opinion by Biran, J.
Watts, J., dissents.
Filed: June 22, 2022
*Getty, C.J., and McDonald, J., now Senior
Judges, participated in the hearing and
Pursuant to the Maryland Uniform Electronic Legal Materials Act (§§ 10-1601 et seq. of the State
Government Article) this document is authentic. conference of this case while active members of
2022-11-21 13:31-05:00 this Court; after being recalled pursuant to
Maryland Constitution, Article IV, Section 3A,
they also participated in the decision and
Gregory Hilton, Clerk adoption of this opinion.
In Rochkind v. Stevenson, 471 Md. 1 (2020), this Court adopted the analysis set forth
in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), concerning the
admissibility of expert testimony. Our decision in Rochkind generated substantial comment
from the Maryland bar.1 It was unclear to some commentators how trial courts would
interpret Rochkind and how, if at all, Rochkind would change the dynamics of litigation in
Maryland.2 The case presently before us provides the first opportunity for us to address,
post-Rochkind, whether a trial court erred in deciding the admissibility of expert testimony.
Kirk Matthews, the Respondent here, was convicted in the Circuit Court for Anne
Arundel County of murder and related charges in connection with the shooting deaths of
Linda McKenzie and Leslie Smith in the early morning on June 1, 2017. Evidence collected
at the crime scene indicated that the shooter used a 12-gauge shotgun to kill McKenzie and
Smith. Video footage obtained from a nearby home security camera showed a person
carrying a shotgun a few minutes after the shootings. The suspect’s face was indiscernible
in the video.
Prior to Matthews being charged in the killings, the investigating police officers
attempted to determine the height of the person shown in the video footage. To that end,
1
See, e.g., Derek Stikeleather, It’s Official: Maryland Accepts Daubert as
Controlling Law for Admitting Expert Testimony, Maryland Appellate Blog (Aug. 31,
2020), available at https://perma.cc/A342-NSSL; William Sinclair, Weird Science:
Maryland’s New Test for the Admissibility of Expert Testimony, Maryland Business
Litigation Lawyer Blog (Oct. 1, 2020), available at https://perma.cc/49A5-N9Z4.
2
See, e.g., Ronald V. Miller, Jr., Maryland Dumps Frye-Reed for Daubert:
Rochkind v. Stevenson, Maryland Injury Lawyer Blog (Sept. 16, 2020), available at
https://perma.cc/MA76-L6LB (posing the question whether the adoption of Daubert in
Maryland is a “big deal”).
they enlisted the assistance of the Federal Bureau of Investigation (“FBI”). Using a
technique known as “reverse projection photogrammetry,” FBI scientists determined that
the person shown carrying the shotgun was approximately 5’8” tall, plus or minus two-
thirds of an inch. However, the FBI scientists noted in the report detailing their analysis
and findings that, due to several variables, “the degree of uncertainty in this measurement
could be significantly greater.”
Police measured Matthews’s height as approximately 5’9”. Prior to Matthews’s
trial, his attorneys moved to preclude the State from introducing expert testimony from the
FBI scientists who had conducted the reverse projection photogrammetry analysis. The
defense argued that, given the unknown degree of uncertainty that applied to the FBI’s
height measurement, the jury should not be permitted to hear expert testimony concerning
the FBI’s analysis. After holding a hearing on the defense’s motion, the trial court denied
the motion, ruling that the State would be permitted to introduce the challenged expert
testimony.
One of the FBI scientists testified at Matthews’s trial, consistent with her report,
that the subject shown in the video was approximately 5’8” plus or minus two-thirds of an
inch. The expert stated that she could not scientifically quantify several variables that might
lead to a higher degree of uncertainty than plus or minus two-thirds of an inch. However,
she explained why she nevertheless believed that her height measurement was reasonably
accurate. Defense counsel cross-examined the expert at length about the variables that
could lead to the higher degree of uncertainty. The jury found Matthews guilty of two
counts of second-degree murder and several related charges. Matthews appealed.
2
The Court of Special Appeals reversed Matthews’s conviction, holding that the trial
court erred in admitting the expert testimony. The intermediate appellate court reasoned
that the inability of the expert witness to provide a margin of error that accounted for
several potential variables rendered the height measurement unreliable and therefore
inadmissible under Maryland Rule 5-702 and Rochkind. The State petitioned this Court for
further review.
As we explain more fully below, after Rochkind (as it was before Rochkind) it is the
rare case in which a Maryland trial court’s exercise of discretion to admit or deny expert
testimony will be overturned. This is not one of those cases. Accordingly, we will reverse
the judgment of the Court of Special Appeals and direct that Matthews’s convictions be
reinstated.
I
Background
A. The Double Homicide
Early on June 1, 2017, police responded to the area of Scott Town Road in Shady
Side, Maryland, based on a 911 call involving the sighting of a man armed with a shotgun
and gunshots having been fired. The officers eventually discovered the bodies of Linda
McKenzie and Leslie Smith in a dirt clearing off Scott Town Road. The cause of death for
each victim was multiple shotgun wounds to the upper extremities, at close range. Trails
of blood leading from the road to the location of McKenzie’s and Smith’s bodies indicated
that they had been shot on Scott Town Road and then dragged into the clearing. Ballistics
3
evidence indicated that the shooter used a 12-gauge shotgun, but the murder weapon was
never recovered.
McKenzie and Smith were romantic partners, but McKenzie was angry at Smith on
the evening of May 31, 2017. McKenzie and Smith separately drove to Scott Town Road
that night. After Smith arrived at the dead-end area at the west end of Scott Town Road,
McKenzie chased Smith back up Scott Town Road in a pickup truck, with Smith driving a
white Saturn sedan in reverse. Shortly after the two vehicles passed the intersection of Scott
Town Road and Nick Road, the car Smith was driving backed into a ditch and came to a
stop on Scott Town Road near the intersection of Shady Side Road. That occurred at 11:08
p.m. At approximately 11:57 p.m., police arrived on the scene. The car was removed from
the ditch, and at 12:08 a.m. on June 1, Smith pushed the car down Scott Town Road along
with a man named Joseph Tongue; they placed the car in the driveway of the home that
belonged to Tongue’s grandmother on Scott Town Road just west of the intersection of
Nick Road. The police then left the scene.3
After the car was removed, Smith and McKenzie remained in the vicinity of Scott
Town Road. Smith and McKenzie were shot in quick succession on a stretch of Scott Town
3
Neither Smith, McKenzie, nor Tongue was in possession of a valid driver’s license
when police arrived on the scene. For that reason, the officers did not allow any of them to
operate the Saturn after it was removed from the ditch. Thus, Smith and Tongue pushed
the car down Scott Town Road to Tongue’s grandmother’s house, with someone (possibly
McKenzie) at the wheel, steering.
4
Road that lies to the west of Nick Road shortly before 12:39 a.m. At trial, no witness
testified to having seen the shootings.4
B. The Video Footage of the Suspect
Having received a 911 call that included a report of shots being fired, police officers
returned to Scott Town Road at approximately 12:43 a.m.; they subsequently discovered
the bodies of McKenzie and Smith in a clearing off Scott Town Road to the west of Nick
Road. Later in the morning on June 1, officers obtained video footage from two security
cameras affixed to the home located at 1291 Scott Town Road, a short distance from where
the shootings occurred. While those cameras did not record the shootings, they did capture
relevant events before and after the shootings. Before the shootings, the video footage
showed McKenzie chasing Smith in their respective vehicles. Shortly after the shootings,
the cameras captured several people quickly walking west on Scott Town Road, away from
the scene of the crime, as well as a car backing down Scott Town Road, also away from
the crime scene. A few minutes later, one of the cameras recorded an individual cutting
across the front yard of 1291 Scott Town Road. The individual shown in that footage
carried what appeared to be a shotgun. The suspect’s facial features and race were
completely indiscernible, due to the video being captured at night and the significant
distance between the camera and the suspect. However, it was clear that the suspect was
wearing a cap or some other kind of head covering.
4
However, as discussed below, multiple witnesses who were near the scene of the
crime provided evidence, some of it conflicting, about what they saw and heard before and
after the murders. Several of these witnesses had taken drugs or consumed a substantial
amount of alcohol in the hours leading up to the killings.
5
C. The FBI’s Analysis of the Video Footage
The Anne Arundel County Police Department (“AAPD”) sought to determine the
height of the person pictured in the video carrying a shotgun. On June 23, 2017, a request
to determine the height of the individual was submitted to the Forensic Audio, Video and
Image Analysis Unit of the FBI’s Digital Evidence Laboratory.
According to a December 5, 2017 report written by Kimberly A. Meline, a forensic
scientist in that unit, the FBI received a DVD containing four videos and 13 still images.
Meline wrote that “[t]he video files were processed for images best depicting the subject,”
and “[o]ne image depicting the questioned individual was selected for photogrammetric
analysis.” Meline reported that, after conducting a reverse projection photogrammetry
analysis on site at 1291 Scott Town Road on November 28, 2017, “[t]he vertical distance
from the ground to the top of the headwear of the questioned individual was determined to
be approximately 5’8”, +/- .67”.” The report then provided a qualification: “However, due
to the subject to camera distance, the resolution of the imagery, the unevenness of the
landscape, and the body position of the subject, the degree of uncertainty in this
measurement could be significantly greater.”
D. The Pretrial Motion to Exclude Expert Testimony
In the meantime, on September 29, 2017, a grand jury returned an indictment in the
Circuit Court for Anne Arundel County charging Matthews with murder and related
offenses.
On August 3, 2018, Matthews filed a pretrial motion to exclude expert testimony
regarding the FBI’s photogrammetric analysis. Matthews contended that exclusion of such
6
expert testimony was warranted, among other grounds, under Maryland Rules 5-7025 and
5-4036 and under the Frye-Reed7 standard for admissibility of expert testimony. The State
filed a response asserting that photogrammetry is a generally accepted methodology and
that “concerns about the validity of the experts [sic] conclusions … should be presented to
the jury through cross examination regarding the margin of error, environmental factors
5
Maryland Rule 5-702 provides:
Expert testimony may be admitted, in the form of an opinion or otherwise, if
the court determines that the testimony will assist the trier of fact to
understand the evidence or to determine a fact in issue. In making that
determination, the court shall determine
(1) whether the witness is qualified as an expert by knowledge, skill,
experience, training, or education,
(2) the appropriateness of the expert testimony on the particular
subject, and
(3) whether a sufficient factual basis exists to support the expert
testimony.
6
Maryland Rule 5-403 provides: “Although relevant, evidence may be excluded if
its probative value is substantially outweighed by the danger of unfair prejudice, confusion
of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or
needless presentation of cumulative evidence.”
7
The Frye-Reed standard for admissibility of expert testimony applied in Maryland
courts at the time of Matthews’s trial. “Frye” came from Frye v. United States, 293 F. 1013,
1014 (D.C. Cir. 1923), in which the D.C. Circuit announced a then-new evidentiary
standard by which the admissibility of expert testimony involving a scientific principle or
discovery turned on the “general acceptance” of such evidence “in the particular field in
which it belongs.” “Reed” came from Reed v. State, 283 Md. 374 (1978), in which this
Court adopted the Frye standard for use in Maryland courts. After Reed, the rule in
Maryland for the next 42 years was that, “before a scientific opinion will be received as
evidence at trial, the basis of that opinion must be shown to be generally accepted as
reliable within the expert’s particular scientific field.” Id. at 381. We decided Rochkind v.
Stevenson, 471 Md. 1 (2020), abrogating the Frye-Reed standard, while Matthews’s appeal
was pending in the Court of Special Appeals.
7
and degree of uncertainty in the measurement, as well as presentation of contrary expert
testimony.”
On September 21, 2018, the trial court held an evidentiary hearing on Matthews’s
motion to preclude the expert testimony. While Matthews did not dispute that
photogrammetry was a generally accepted methodology, he challenged its application in
his case. The State called Meline as a witness at the hearing. She was accepted as an expert
in “photogrammetry and reverse projection photogrammetry.” Meline explained that
“[p]hotogrammetry is just a very long word that means we’re trying to make measurements
in photos.” She further testified that there are two basic forms of photogrammetry: (1)
reverse projection photogrammetry, which requires going to the place where the questioned
image was created and “duplicating the imaging conditions that captured the original scene
in order to make a measurement”; and (2) analytical photogrammetry, which relies on
software to make measurements based on the image itself, and does not require going to
the scene. According to Meline, software-based photogrammetry is less accurate than
reverse projection photogrammetry.
Meline testified that she analyzed the home surveillance video taken on the night of
the homicides, which depicted a walking individual, to determine “which specific frame of
the video would be most conducive for photogrammetric analysis” for height. Meline was
able to identify “one image that would be within a reasonable margin of error in order to
complete photogrammetric analysis.” That image became what Meline referred to as the
“questioned image.” Meline then described how she and a colleague went to 1291 Scott
8
Town Road on November 28, 2017, and conducted the reverse projection photogrammetry
analysis.
First, Meline located and identified the camera that had captured the questioned
image. Using that same camera to conduct the reverse projection photogrammetry analysis
allowed Meline to “mimic any lens distortion that’s inherent to the image.” She then
examined live footage “to ensure alignment of stationary items within both the foreground
and the background of the image to make sure that that camera was still in the same
position.” After confirming this alignment, she walked to the location where the suspect
was pictured standing in the questioned image, placed a height chart at that spot, and then
“completed overlays of [her]self in position as well as the subject in the image … to make
sure that [they] were standing in the same location.”
Meline explained that she then created an “overlay” of the questioned image and the
height chart to measure the height of the individual in the image. To indicate the height,
she superimposed a yellow arrow “at the top of the headwear of the questioned individual
and where it aligns on the height chart that was placed in the position the subject was
standing.” The height thus indicated was 5’8.”
Meline also took measurements to estimate “the uncertainty or the error” associated
with her height estimate based on the resolution of the questioned image and the positional
accuracy of the height chart. She explained that the image resolution affects how much the
estimated height changes for every pixel by which her placement of the yellow arrow was
mistaken, and here, one pixel represented 0.53 inches. She further explained that
quantifying “positional accuracy” involves using planar geometry to calculate how much
9
the height would change, assuming a standard three-inch error in the placement of the
height chart, and here, based on the distance from the camera to the ground (110”) and the
distance of the subject from the camera (62’), a three-inch error in the placement of the
height chart would alter the height by 0.133 inches. Based on those two calculations,
Meline determined that the margin of error of her height measurement was plus or minus
two-thirds of an inch. Thus, Meline opined that the suspect’s height, as measured from the
ground to the top of their headwear, was 5’8” plus or minus two-thirds of an inch.
Meline also captured images of herself beside the height chart at the scene to provide
an additional known height value. She explained that
[t]he purpose of doing that is essentially as a double check of my
measurement. And so when I’m standing in the location of the individual you
can see that I’m attempting to mimic the position of both the feet as well as
essentially how the person is standing so that I can double check the
measurement that I calculate against my own known height and determine
whether it appears to be reasonable based on those factors.
When asked what Meline was “able to determine in terms of … the subject’s height
in comparison to [Meline’s] height,” Meline stated that “[t]he subject’s height appeared to
be slightly shorter than my own height based on overlay of myself in that same scene
against the questioned image.” Meline testified that, “depending on which footwear [she
is] wearing,” her height is “between five-nine and a half and five-ten.”
Meline opined that her estimate of the height of the subject was within a reasonable
degree of scientific certainty. Meline further testified that she was never told Matthews’s
height.
10
On cross-examination, defense counsel asked Meline about the qualifying statement
in her report that “the degree of uncertainty in this measurement could be significantly
greater” based on several variables, including “the subject to camera distance, the
resolution of the imagery, the unevenness of the landscape, and the body position of the
subject.” Meline testified: “I don’t have a scientific way of quantifying how those
dimensions had an effect on my measurement and consequently I wanted in an abundance
of caution to mention them.”8
Defense counsel asked Meline, “you’re familiar with the 2009 report on forensics
from the National Research Council” which “discussed a need for any scientific report to
include clear characterizations on the limits of the analysis that was done; is that accurate?”
Meline replied: “Certainly,” which is “why I included the calculable uncertainty as well as
the incalculable uncertainty.” The following exchange then occurred:
[Defense Counsel]: Okay, which means ultimately we don’t know how
uncertain this result is?
[Meline]: I would say that I have some indication based on the
overlay of my own, myself in that similar position with
the image of the questioned individual and knowing that
the questioned individual appeared to be slightly shorter
than I, myself, am that I have some indication as to the
8
Defense counsel also asked Meline about an email that Meline’s assistant, Jenna
Walker, sent to an FBI special agent in September 2017, when authorities were considering
whether to go forward with a reverse photogrammetric analysis to ascertain the suspect’s
height. In the email, Walker stated that, based on the “subject to camera distance, resolution
and adequate lighting to view the subject head-to-toe in an upright position,” as well as
other factors, “[w]e have estimated that … you are looking at [an error rate] range of +/-
close to 3”.” Meline noted in her testimony at the motions hearing that Walker provided
this plus-or-minus three-inch figure before the reverse photogrammetric analysis was
conducted and, therefore, it was “not based on any specific measurements done at the
scene” and was “no more than an estimate.”
11
uncertainty with the method. However, there are factors
in here that I cannot calculate.
….
[Defense Counsel]: [A]s here where the conditions are far from pristine,
[the] margin of error is going to become greater it stands
to reason, right?
[Meline]: It does.
Upon further questioning concerning the scientifically unquantifiable variables,
Meline explained why – despite those variables – she considered her height measurement
to be accurate within a reasonable degree of scientific certainty. She stated that “the body
position of the individual is the factor that [she was] most concerned about,” which is why
she is “so careful when it comes to image selection and trying to … use an image that
depicts the individual from head to toe in as upright of a position as possible.” In response
to defense counsel’s question, “would you agree that how someone wears a head covering
even if you knew what it was could impact the reported height of an individual?”, Meline
stated, “I would, which is why when I report a measurement I report that measurement as
a measured distance from the ground to the top of the headwear of the individual.” Defense
counsel also asked, “Can you tell us exactly how you located where the bottom of the foot
would be for that individual?” Meline replied, “[W]e indicated where the back of the heel
was and then essentially worked from there on the left foot.”
Matthews called two witnesses in support of his motion, including Robert
Sanderson, who was accepted as an expert in photogrammetry. Sanderson disagreed with
Meline’s opinion that the suspect’s height could be reliably estimated as 5’8” +/- .67”. With
12
respect to the body position of the subject, Sanderson did not seriously quarrel with
Meline’s contention that the questioned image captured the subject in a position that was
conducive to photogrammetric analysis, referring to the questioned image as “a correctly
selected frame.” However, according to Sanderson, other factors made the questioned
image unsuitable for analysis. These included “whether or not you could see things in it,
most notably the feet and the top of the headwear. The unevenness of the landscape which
is a strong issue here, because when you don’t have the footwear and you can’t see where
whatever footwear the person had on contacted the ground because of vegetation or
unevenness, you have a variable there that is not really quantifiable.”9
The State recalled Meline as a rebuttal witness. With respect to foot placement,
Meline testified:
So what I did was I actually start by placing myself right on the height chart.
And we saw that in the video that we showed earlier this morning. So
essentially what I do is I align my leg and my foot with what I can see in the
video in order to show that the foot where all the weight of the individual
was balanced is in the proper location.
And then I actually do the same to the best of my ability with the right leg
where you can see that the right leg was slightly forward as Mr. Sanderson
testified, so that you could see the knee of the right leg. I make sure that both
of those legs match up, and then based on the stature that I have … I place
the height chart to within the center of gravity of the individual, again to
make sure that it’s going to the best of my ability through the top of their
head so that I can make an accurate measurement.
9
Matthews’s other witness at the hearing was a private investigator who described
the area of Scott Town Road as “swampy” and the terrain of 1291 Scott Town Road as
“uneven.”
13
The prosecutor then asked: “[I]n talking about foot placement and terrain, what’s
the best way for you to see how the ground would affect that measurement?” Meline
replied: “To go to the scene.”
On cross-examination, Meline stated that, “with the exception of the possibility of
changes in the terrain between June and November, I would say that my ability to stand
where the individual was standing tells me what the terrain was like.” Defense counsel
followed up: “So you wouldn’t be aware of what kind of minor changes in terrain there
might have been within that time?” Meline responded, “No, ma’am.”
Defense counsel asked Meline if “at the end of the day this is not an opinion that is
offered with a reasonable degree of scientific certainty with respect to the 0.67-inch degree
of uncertainty?” Meline replied: “The 0.67 as well as the five-foot-eight were both offered
with a reasonable degree of scientific certainty. However, I mentioned that the 0.67 does
not incorporate all areas of potential uncertainty.” Meline acknowledged that she could not
quantify the overall margin of error based on the variables that were not calculable.
On redirect examination, the prosecutor and Meline had the following exchange:
[Prosecutor]: You cannot scientifically say a quantification, but you testified
earlier that that means you cannot plug it into a mathematic
formula, correct?
[Meline]: That’s correct.
[Prosecutor]: So you are able to say that you visually can indicate that your
height was taller, slightly taller than the individual in the video;
is that correct?
[Meline]: That is correct.
14
After hearing counsel’s subsequent arguments, the trial court denied Matthews’s
motion to exclude Meline’s testimony. Addressing the defense’s argument under Maryland
Rule 5-403, the court stated that the “potential height of the individual in question is of
value, and the information is probative.” The court continued:
So the question in my mind is whether or not [the probative value] is
outweighed by the danger of unfair prejudice, confusion of the issues, or
misleading the jury…. [A]ll evidence is prejudicial, … [t]he question is
whether or not it is … [u]nfairly prejudicial.
[The evidence] does have … certainly a qualifier as [defense counsel]
correctly points out. But it is right there, available to the jury, available for
cross-examination, there is a conclusion that is reached. It is clear. It is
concise. It is not confusing. It was not particularly confusing to the Court to
see it. When you look at the photos, and you look at the overlay, and you
look at all the images, it – it’s something that is clear to your eye, and then is
explained by an expert, and there are mathematical calculations, but in
addition to that, as to the – the second sentence, if you will, of the opinion
regarding the potential of uncertainty, that is clear as well, and it is
particularly stated, and it is available to the Defense for cross-examination,
and, quite candidly, I find it very easy to understand.
… I do not find it unfairly [prejudicial]. I do not find that it confuses the
issues, and nor do I find that it would be misleading to the finder of fact[.]
Thus, the trial court declined to exclude Meline’s testimony under Rule 5-403.
With respect to Rule 5-702, the trial court found that Meline was qualified as an
expert based on knowledge, skill, experience, training, or education in the relevant area.
The court further found that Meline’s testimony about the use of reverse-photogrammetric
analysis to calculate the height of the individual captured in the surveillance video was
appropriate in Matthews’s case. Finally, the court found that “based on all of the
information presented, … there is a sufficient factual basis for her to testify, to support her
testimony, as to the opinion that she indicated that she would express.” Thus, the trial court
15
denied Matthews’s motion and ruled that the State would be permitted to introduce
Meline’s expert testimony concerning reverse projection photogrammetry and her height
measurement of the person shown in the questioned image. The prosecutor confirmed with
the trial court that Meline would be permitted to “say that visually I am 5’10”, I was on the
video, and the person visually … was shorter than she was, in that position.”
E. The Trial
Matthews’s jury trial began on October 16, 2018. In her opening statement, the
prosecutor explained that locals call Scott Town Road the “Lane.” They refer to the dead-
end section of the Lane (at its western end point) as “Down Bottom” and the section closer
to the intersection with Nick Road as “Up Top.” The police know the intersection of Scott
Town Road and Nick Road to be an “open-air drug market.” Indeed, earlier in the day on
May 31, 2017, police had installed a pole camera near that intersection as part of an effort
to investigate illegal drug sales.
The State introduced footage recorded by the pole camera between 11:00 p.m. on
May 31 and 2:00 a.m. on June 1, which captured events occurring in the section of Scott
Town Road immediately to the east of Nick Road. The State also introduced video footage
from that same three-hour period that was taken from the cameras located at 1291 Scott
Town Road, including the footage of the suspect cutting through the front yard of the
property at approximately 12:43 a.m. while carrying what appeared to be a shotgun. The
murders occurred in the area between the pole camera and 1291 Scott Town Road, and
were not captured on any of the cameras.
16
The State called several witnesses who were blood relations or long-time friends or
acquaintances of Matthews. Some of these witnesses testified that they consumed drugs
and/or alcohol on the night of May 31 and into the early morning of June 1. Several were
uncooperative on the witness stand and were effectively impeached by defense counsel.
Still, they provided testimony that was damaging to Matthews.
For example, Richard Jackson, who had known Matthews for “20 years or so,”
testified that after Smith’s car backed into the ditch, he saw McKenzie and Smith arguing
before police arrived. According to Richard Jackson, at that time Matthews “was trying to
have them, you know, quiet down because they were being super loud.” Smith was
“running his mouth,” and Matthews said, “that’s all right, I got something for your ass or
something along those lines.” Matthews then walked away. After the car was removed
from the ditch and the police left the scene, Richard Jackson saw Matthews “walking down
the road with a shotgun.” At that time, Matthews was on Nick Road approaching Scott
Town Road, where McKenzie and Smith were. While Richard Jackson was on the stand,
the State showed him the video footage taken from one of the cameras at 1291 Scott Town
Road and, in particular, the footage of the man carrying what appeared to be a shotgun.
Richard Jackson testified that the person shown in that footage looked like Matthews. 10
10
On cross-examination, Richard Jackson admitted to being a drug addict and to
buying (and most likely using) crack cocaine on the night of May 31. He also confirmed
that, prior to trial, while he told the detectives about hearing Matthews say, “I’ve got
something for you,” he only mentioned seeing Matthews with a shotgun earlier in the
evening (approximately 40 minutes prior to the car going into the ditch).
17
Joseph Tongue – the person who helped Smith push the Saturn down Scott Town
Road – testified that he is Matthews’s cousin. According to Tongue, after the car went into
the ditch, Tongue heard McKenzie and Smith “screaming,” “fussing,” and “arguing.”
Tongue told them that they needed to get their car out of the ditch before police arrived,
but “the police showed up.” After the car was removed from the ditch and had been pushed
down the road, McKenzie and Smith continued to argue in front of Tongue’s
grandmother’s house. Tongue saw Matthews coming, and knew that Matthews “was mad.”
Tongue told McKenzie and Smith to leave. As Matthews, McKenzie, and Smith were
arguing, Tongue “started walking off” and then “heard a gunshot” followed by “another
gunshot.” When he looked back, he saw “Kirk [Matthews] and Linda and them,” and
Matthews was holding what “[l]ooked like a gun,” “a large gun.”
The prosecutor asked, “[W]hen’s the first time you saw him with a shotgun?”
Tongue replied, “When he was coming around the corner.” The prosecutor asked, “[D]id
you see anybody other than Kirk Matthews with a gun?” Tongue replied, “Nah.” The
prosecutor asked what, if anything, Tongue heard Smith say to Matthews. Tongue replied,
“You not going to shoot nobody.”11
Charles Jackson testified that he has known Matthews for about 10 years. He stated
that he lives less than a mile from the Lane and went there to buy drugs. On May 31, 2017,
Charles Jackson arrived at the Lane around 10:30 or 11:00 p.m., and was “Down Bottom”
11
On cross-examination, Tongue stated that he consumed alcohol and drugs on the
night of the killings, including PCP, Xanax, and a pint of vodka. He testified that he had
smoked PCP every day for ten years.
18
with several others – including Matthews – when McKenzie came “speeding down there,
cussing about looking for her car.” According to Charles Jackson, Matthews told
McKenzie: “You’re making the lane hot. Take that shit up out of here.” Charles Jackson
was also present when Smith arrived and subsequently backed the car into the ditch. After
watching the video footage taken in front of 1291 Scott Town Road, Charles Jackson
testified that the person shown carrying a gun “looks like” Matthews.
Rico Hicks testified that Matthews is a “good friend of the family.” Rico Hicks also
testified that he was on the Lane on the night of the shooting and “heard gunshots,”
however, he never saw anyone with a gun and never saw who was shot. Rico Hicks’s
testimony was impeached through the testimony of Edward Hicks – his relative12 – who
testified that in the days following the shooting, Rico Hicks “told me that he seen Kirk
[Matthews] shoot the – two people and then just dragged them off the road” and that “it
was the worst thing he ever saw.”
Crime Scene Technician Katie Ladue testified that four shotgun shells were
recovered at the scene of the crime and “it did appear that [the victims] had been dragged
out of the road because there was blood that trailed from an original location where there
was blood pooling off to the location of the dirt area where they were found.” The State
introduced crime scene photographs showing the blood trails leading from the middle of
Scott Town Road to the victims’ bodies in the nearby dirt clearing.
12
Rico Hicks testified that Edward Hicks is his “uncle,” while Edward Hicks
testified that Rico Hicks is his “cousin.”
19
On October 23, 2018, the fifth day of the State’s case-in-chief, the State called
Steven Marchant as a witness. Marchant was a crime scene technician for AAPD in June
2017. Marchant testified that, on June 3, 2017, he executed a search warrant to obtain,
among other things, Matthews’s height. According to Marchant, he “used the tape measure
that we have in the van, and I ran it straight up behind the subject and then took a
photograph of it.” The State introduced a copy of that photograph, which reflected that
Matthews’s height was measured to be approximately 5’9”. Later on October 23, 2018,
AAPD Detective Jason DiPietro testified that he witnessed Marchant measure Matthews’s
height, that “the tape was to the ground,” and that Matthews was measured at
approximately 5’9” in height.
The State then called Meline as an expert witness in the areas of photogrammetry
and reverse projection photogrammetry. Meline testified in keeping with her testimony at
the motions hearing regarding the reverse-projection photogrammetry analysis that she
performed on site at 1291 Scott Town Road. Meline opined, to a reasonable degree of
scientific certainty, that the person shown in the video footage carrying what appeared to
be a shotgun was 5’8” plus or minus two-thirds of an inch. Meline also explained on direct
examination that several other factors, including the unevenness of the ground and the
distance of the camera from the subject, could add to the degree of uncertainty in a way
she could not calculate. Defense counsel cross-examined Meline at length concerning these
variables and other points. Among other things, Meline acknowledged that she could not
tell what kind of head covering the subject was wearing or if the subject was wearing it
high on the head or pulled down tight to the scalp. In addition, Meline conceded that she
20
could not determine what kind of shoes the person was wearing and if they contained a
heel of any height. However, Meline took issue with defense counsel’s suggestion that it
was difficult to see the subject’s feet; according to Meline, “[W]e believe that we could see
one foot very firmly of the individual.” And, while she again acknowledged that there were
“additional considerations that may have affected uncertainty that can’t be calculated,”
Meline maintained that she “still was comfortable with” her opinion that the subject’s
height was 5’8” plus or minus two-thirds of an inch.
After the State rested its case, the defense called several witnesses,13 including
Katherine Bragg. Bragg testified that she moved to Shady Side with her husband and
children in November 2016. She and her family lived at 5218 Nick Road. Bragg testified
that, on the evening of May 31, 2017, she sat outside her house and drank four or five
White Russian cocktails while she waited for her husband to return home from work. At
one point, she heard what sounded like a car getting stuck. Subsequently, she saw a white
woman wearing “short, short shorts” walk past her house approaching Scott Town Road.14
Soon afterwards, Bragg saw a white man wearing a gray t-shirt come from the same
direction as the white woman.15 After the man passed Bragg’s house, Bragg heard arguing
between male and female voices. Approximately 10 minutes after that, Bragg saw a second
13
Although the defense had called Robert Sanderson as an expert witness in
photogrammetry at the hearing on Matthews’s pretrial motion, the defense did not call
Sanderson at trial.
14
McKenzie was wearing “short shorts” on the night of May 31-June 1, 2017.
15
Smith wore a dark gray t-shirt that night.
21
white man wearing a gray sweatshirt and jeans walk past her house in the same direction
that the two prior white individuals (presumably McKenzie and Smith) had proceeded.
According to Bragg, this second white man was “thin,” “younger,” and “tall” (at least
5’11”) with blonde hair. Bragg testified that this man was carrying a shotgun, and that he
“cocked” the shotgun in front of her driveway. Bragg’s husband then called 911 to report
an armed man. While Bragg’s husband was making the 911 call, Bragg and her husband
heard gunshots, which Bragg’s husband then reported to the 911 operator. It was this 911
call that led police to return to the area of Scott Town Road at approximately 12:43 a.m.
Bragg’s testimony was important to the defense because not only is Matthews
shorter than the man Bragg described having seen with a shotgun16; Matthews is African
American, whereas Bragg described seeing a white man with blonde hair carry and “cock”
a shotgun in front of her house. In addition, at 56 years old in June 2017 and 240 pounds
(according to his driver’s license issued in July 2016), Matthews is not someone most
people would describe as “younger” or “thin.”
After the defense rested, the trial court instructed the jury17 and the parties presented
closing arguments. With respect to Meline’s testimony, defense counsel stated:
16
As stated above, AAPD personnel measured Matthews at approximately 5’9” on
June 3, 2017. Matthews’s driver’s license lists him at 5’6”. The record does not reflect
whether Matthews was wearing shoes at the time AAPD measured his height and, if so,
the heel size of his shoes.
17
Pertinent here, the trial court instructed the jurors, among other things, that “[y]ou
should consider an expert’s testimony together with all the other evidence,” and “[y]ou
should give expert testimony the weight and value you believe it should have. You are not
required to accept an expert’s testimony even if it is uncontradicted. As with any other
witness, you may believe all, part or none of the testimony of an expert.”
22
I’m not going to say a lot about it because I think it’s very simple. Not what
[Meline] does, I think she’s smart. I think she does it well. I think it’s a great
tool. But at the end of the day what she is telling you is nothing.
….
That’s her expert opinion, but however – however, due to the … distance,
the resolution of the imagery, the quality, the unevenness of the landscape,
which you’ll see pictures of – it’s ditches and bumpy and grassy – the body
position because no one’s a hundred percent sure what that is, the degree of
uncertainty – that two-thirds one way or the other – could be significantly
greater and that’s not a quantifiable number. Well, an inch, five inches?
So what does that tell you? He might be five-eight based on what I know, but
there’s a lot of stuff I don’t know which could significantly change that. So
what it’s telling you is nothing….
As smart as Ms. Meline is, and she certainly is, she didn’t add anything. So
why is she here? To bolster a case that has no physical or forensic evidence.
To make it look like what, “We did this and she’s from the FBI and she’s
really smart.” And she’s going to say all these things and it sounds important,
but at the end of the day it’s telling you nothing forensically.
On October 26, 2018, the jury found Matthews guilty of two counts of second-
degree murder, two counts of use of a firearm in the commission of a crime of violence,
and related charges. The trial court subsequently sentenced Matthews to an aggregate
sentence of 110 years of imprisonment, with all but 80 years suspended. Matthews
appealed his convictions.
F. Appeal
The Court of Special Appeals reversed Matthews’s convictions and remanded for a
new trial, holding that the trial court abused its discretion by admitting Meline’s expert
testimony. Matthews v. State, 249 Md. App. 509 (2021). In so holding, the intermediate
23
appellate court concluded that there was an “analytical gap” between the underlying data
and the opinion:
Ms. Meline concluded that the person in the video was 5’8” with a
“calculable uncertainty” of 0.67 inches, which would seem to eliminate a
taller white man as the shooter. But without shrinking from her estimate, she
undermined her calculation by acknowledging that there was no scientific
way to calculate the actual uncertainty, and that the margin of error could be
significantly greater due to the “far from pristine” circumstances of this
case…. [She] admitted that she was unable to see the individual’s feet, that
the individual was wearing a head covering, and that there was “concern”
about the subject not being at “full height” in the video she was measuring.
Under these circumstances, the missing input variables that had not been
considered in the seemingly precise height calculation prevented a reliably
accurate height calculation. Put another way, the analytical gap between the
data available for reverse photogrammetry projections and the conclusion
Ms. Meline offered to the jury remained unbridged. Although Mr. Matthews
was able to challenge [Meline’s] conclusions by cross-examining her about
the missing pieces, it should not have fallen to the jury to work through the
science on its own.
Id. at 543-44. Having ruled in Matthews’s favor under Maryland Rule 5-702, the Court of
Special Appeals did not need to consider his alternative argument under Rule 5-403.
However, the Court stated that “the unreliability of the height estimate resulting from this
expert testimony raises serious doubt about whether the probativity of allowing it in
outweighed the danger of unfair prejudice, especially where the video itself was
unilluminating and the remaining testimony so equivocal.” Id. at 544.
The State filed a petition for certiorari in this Court, seeking review of the following
question: “Did the Court of Special Appeals err by holding that an expert witness created
an ‘analytical gap,’ and thus rendered her testimony inadmissible as a matter of law, by
24
acknowledging the limitations of her scientific methodology?” On June 22, 2021, we
granted the State’s petition. State v. Matthews, 474 Md. 719 (2021).18
II
Standard of Review
Appellate courts review a trial court’s decision concerning the admissibility of
expert testimony under Maryland Rule 5-702 for abuse of discretion. See Rochkind, 471
Md. at 10. Under this standard, an appellate court does “not reverse simply because the …
court would not have made the same ruling.” Devincentz v. State, 460 Md. 518, 550 (2018)
(internal quotation marks and citation omitted). “Rather, the trial court’s decision must be
well removed from any center mark imagined by the reviewing court and beyond the fringe
of what that court deems minimally acceptable.” Id. (internal quotation marks and citation
omitted); see also Williams v. State, 457 Md. 551, 563 (2018) (“An abuse of discretion
occurs where no reasonable person would take the view adopted by the circuit court.”);
Jenkins v. State, 375 Md. 284, 295-96 (2003) (“Abuse occurs when a trial judge exercises
discretion in an arbitrary or capricious manner or when he or she acts beyond the letter or
reason of the law.”).
We also review a trial court’s ruling concerning admissibility of evidence under
Maryland Rule 5-403 for abuse of discretion. Montague v. State, 471 Md. 657, 673-74
(2020).
18
In its opinion, the Court of Special Appeals rejected two arguments Matthews had
raised regarding other evidentiary issues. Matthews did not cross-petition this Court to
review those portions of the Court of Special Appeals opinion, and as such, they are not
before us.
25
III
Discussion
In the pre-Rochkind era, this Court frequently observed that “the admissibility of
expert testimony is a matter largely within the discretion of the trial court, and its action in
admitting or excluding such testimony will seldom constitute a ground for reversal.” Roy
v. Dackman, 445 Md. 23, 38-39 (2015) (quoting Bryant v. State, 393 Md. 196, 203 (2006)
(internal quotation marks omitted)); see also Clemons v. State, 392 Md. 339, 359 (2006);
Oken v. State, 327 Md. 628, 659 (1992); Hartless v. State, 327 Md. 558, 576 (1992);
Johnson v. State, 303 Md. 487, 515 (1985); Stebbing v. State, 299 Md. 331, 350 (1984). In
Rochkind, even as we abrogated the Frye-Reed standard in favor of Daubert, we reiterated
that a trial court’s ruling to admit or to exclude expert witness testimony “will seldom
constitute a ground for reversal.” Rochkind, 471 Md. at 10 (quoting Roy v. Dackman, 445
Md. at 38-39). We reaffirm today that, in this respect, Rochkind did not change the law in
Maryland. Post-Rochkind, it is still the rare case in which a Maryland trial court’s exercise
of discretion to admit or deny expert testimony will be overturned. As we explain below,
the trial court in this case did not abuse its broad discretion in admitting Meline’s expert
testimony.
26
A. The Trial Court’s Ruling Under Maryland Rule 5-702
We begin our analysis of the trial court’s exercise of discretion under Maryland Rule
5-702 by reviewing the governing law. To set the stage, we discuss the evolution of federal
law concerning the admissibility of expert testimony involving scientific matters.
1. The Supreme Court’s Daubert Trilogy19
For 70 years prior to the Supreme Court’s decision in Daubert in 1993, the Frye
“general acceptance” test was the dominant standard that courts used to determine the
admissibility of novel scientific evidence. As noted above, this Court adopted the Frye test
as the law in Maryland in Reed v. State in 1978.
In Daubert, the Supreme Court stated that Federal Rule of Evidence 702 superseded
the Frye test. At the time, Federal Rule 702 provided: “If scientific, technical, or other
specialized knowledge will assist the trier of fact to understand the evidence or to determine
a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or
education, may testify thereto in the form of an opinion or otherwise.” In Daubert, the
Court explained that the inquiry into admissibility of evidence under Rule 702 is “a flexible
one,” and its focus “must be solely on principles and methodology, not on the conclusions
that they generate.” Daubert, 509 U.S. at 594-95. To that end, the Court interpreted Rule
702 to require a determination whether the scientific testimony at issue is “not only
relevant, but reliable.” Id. at 589. With respect to this reliability assessment, the Court
19
See Rochkind, 471 Md. at 14 n.5 (noting that courts have referred to Daubert v.
Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), General Electric Co. v. Joiner,
522 U.S. 136 (1997), and Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999), as the
“Daubert Trilogy”).
27
provided a non-exclusive list of factors for federal trial courts to consider: (1) “whether a
theory or technique ... can be (and has been) tested”; (2) “whether [it] has been subjected
to peer review and publication”; (3) “the known or potential rate of error”; (4) “the
existence and maintenance of standards controlling the technique’s operation”; and
(5) incorporating the Frye test, whether the theory or technique is “general[ly] accepted”
within the relevant scientific community. Id. at 593-94. The Daubert analysis, according
to the Court, was more flexible than the “uncompromising ‘general acceptance’ test,” id.
at 596, and gave trial courts “greater discretion to admit scientific expert testimony that is
relevant and founded on sound principles, even though novel or controversial.” Rochkind,
471 Md. at 14.
In 1997, in General Electric Co. v. Joiner, 522 U.S. 136 (1997), the Supreme Court
first articulated the concept of an “analytical gap” in considering the admissibility of expert
testimony. Joiner was an electrician who developed small-cell lung cancer. Id. at 139.
During his employment, he had been exposed to polychlorinated biphenyls (PCBs) and
products derived from PCBs, which were manufactured by the defendants. Id. at 139-40.
The plaintiff’s experts opined during their depositions that PCBs and the derivative
products at issue promote cancer. Id. at 140. They further opined that Joiner’s exposure to
PCBs and their derivatives was likely responsible for Joiner’s cancer. Id. The trial court
precluded the plaintiff’s experts from testifying at trial, concluding that they had not
established a link between exposure to PCBs and small-cell lung cancer. Id. The Supreme
Court upheld the trial court’s exercise of discretion. The Court explained that none of the
epidemiological studies upon which the experts relied provided a causal link between PCBs
28
and lung cancer. Id. at 145-46. The Court stated that “nothing in either Daubert or the
Federal Rules of Evidence requires a district court to admit opinion evidence that is
connected to existing data only by the ipse dixit of the expert. A court may conclude that
there is simply too great an analytical gap between the data and the opinion proffered.” Id.
at 146.
In Kumho Tire Co. v. Carmichael, 526 U.S. 137, 141 (1999), the Supreme Court
extended applicability of the Daubert test to other kinds of non-scientific knowledge,
including to “testimony based on ‘technical’ and ‘other specialized’ knowledge.” The
Court also explained that “whether Daubert’s specific factors are, or are not, reasonable
measures of reliability in a particular case is a matter that the law grants the trial judge
broad latitude to determine.” Id. at 153.
2. Maryland Rule 5-702
This Court adopted Maryland Rule 5-702 in 1994, soon after the Supreme Court
decided Daubert. The Rule provides:
Expert testimony may be admitted, in the form of an opinion or otherwise, if
the court determines that the testimony will assist the trier of fact to
understand the evidence or to determine a fact in issue. In making that
determination, the court shall determine
(1) whether the witness is qualified as an expert by knowledge, skill,
experience, training, or education,
(2) the appropriateness of the expert testimony on the particular
subject, and
29
(3) whether a sufficient factual basis exists to support the expert
testimony.
Md. Rule 5-702.
Whether the third prong’s requirement of “a sufficient factual basis” has been met
requires analysis of two subfactors: (1) an adequate supply of data; and (2) a reliable
methodology. Rochkind, 471 Md. at 22. Absent either of these factors, an expert opinion is
“mere speculation or conjecture.” Id. (internal quotation marks and citations omitted).
The proponent of challenged expert testimony must establish the three prongs of
Rule 5-702 (including the two subfactors that make up a “sufficient factual basis”) by a
preponderance of the evidence. See Crane v. Dunn, 382 Md. 83, 92 (2004) (explaining that
the trial court generally applies the preponderance of the evidence standard in making
admissibility determinations); see Daubert, 509 U.S. at 592 n.10 (“These matters should
be established by a preponderance of proof.”).
3. The Rochkind Decision
In Rochkind, we abrogated the Frye-Reed general acceptance test and adopted
Daubert. In so doing, we explained that “[a]dopting Daubert eliminates the duplicative
analysis” that courts previously were required to undertake and instead “permits trial courts
to evaluate all expert testimony – scientific or otherwise – under Rule 5-702.” Rochkind,
471 Md. at 35 (emphasis in original). Thus, after Rochkind, Rule 5-702 is the touchstone
when determining the admissibility of expert testimony.
Rochkind held that, in conducting its analysis under Rule 5-702, a trial court should
consider a number of factors in determining whether the proffered expert testimony is
30
sufficiently reliable to be provided to the trier of fact. Several of those factors came from
Daubert itself:
(1) whether a theory or technique can be (and has been) tested;
(2) whether a theory or technique has been subjected to peer review
and publication;
(3) whether a particular scientific technique has a known or potential
rate of error;
(4) the existence and maintenance of standards and controls; and
(5) whether a theory or technique is generally accepted.
Id. (quoting Daubert, 509 U.S. at 593-94; Fed. R. Evid. 702 Advisory Committee Note).
We also favorably cited additional factors that other courts had applied in
determining whether expert testimony is sufficiently reliable. These factors include:
(6) whether experts are proposing to testify about matters growing
naturally and directly out of research they have conducted
independent of the litigation, or whether they have developed their
opinions expressly for purposes of testifying;
(7) whether the expert has unjustifiably extrapolated from an accepted
premise to an unfounded conclusion;
(8) whether the expert has adequately accounted for obvious
alternative explanations;
(9) whether the expert is being as careful as he [or she] would be in
his [or her] regular professional work outside his [or her] paid
litigation consulting; and
(10) whether the field of expertise claimed by the expert is known to
reach reliable results for the type of opinion the expert would give.
Id. at 35-36 (quoting Fed. R. Evid. 702 Advisory Committee Note).
Having provided this non-exclusive list of factors for trial courts to consider as part
of the reliability analysis inherent in Rule 5-702, we added several overarching
observations. First, we noted that the reliability inquiry is “a flexible one.” Id. at 36
(quoting Daubert, 509 U.S. at 594). Second, the trial court must focus “solely on principles
and methodology, not on the conclusions that they generate.” Id. (quoting Daubert, 509
31
U.S. at 595) (internal quotation marks omitted). However, “conclusions and methodology
are not entirely distinct from one another.” Id. (quoting Joiner, 522 U.S. at 146) (internal
quotation marks omitted). Thus, “[a] trial court … must consider the relationship between
the methodology applied and conclusion reached.” Id. Third, a trial court need not “admit
opinion evidence that is connected to existing data only by the ipse dixit of the expert”;
rather, “[a] court may conclude that there is simply too great an analytical gap between the
data and the opinion proffered.” Id. (quoting Joiner, 522 U.S. at 146) (internal quotation
marks omitted).20 Fourth, “all of the Daubert factors are relevant to determining the
reliability of expert testimony, yet no single factor is dispositive in the analysis. A trial
court may apply some, all, or none of the factors depending on the particular expert
testimony at issue.” Id. at 37. Finally, Rochkind did “not upend [the] trial court’s
gatekeeping function. ‘Vigorous cross-examination, presentation of contrary evidence, and
20
Even before we decided Rochkind, this Court had recognized and applied the
concept of an “analytical gap” that the Supreme Court discussed in Joiner. See Rochkind,
471 Md. at 17. In Blackwell v. Wyeth, we stated that generally accepted methodology “must
be coupled with generally accepted analysis in order to avoid the pitfalls of an ‘analytical
gap.’” Blackwell v. Wyeth, 408 Md. 575, 608 (2009). We subsequently discussed the
“analytical gap” concept in Chesson v. Montgomery Mut. Ins. Company, stating that
although “[g]eneral acceptance does not equate to unanimity of opinion within a scientific
community ... [a] trial judge … cannot admit expert testimony based on scientific
methodology without consideration of whether the analysis itself is flawed and posits an
‘analytical gap.’” Chesson v. Montgomery Mut. Ins. Co., 434 Md. 346, 356-57 (2013)
(quoting Blackwell, 408 Md. at 608). In Savage v. State, we held that the expert witness at
issue in that case did not “connect the dots” between the empirical observations and his
ultimate conclusions, and concluded that the existence of an analytical gap undermined the
validity of the expert witness’s testimony. Savage v. State, 455 Md. 138, 158, 170-71
(2017) (discussing how the expert’s “analysis did not bridge the ‘analytical gap’ between
the data available to him and his ultimate conclusions”).
32
careful instruction on the burden of proof are the traditional and appropriate means of
attacking shaky but admissible evidence.’” Id. at 38 (quoting Daubert, 509 U.S. at 596).
Against this backdrop, we now consider whether the trial court abused its discretion
under Maryland Rule 5-702 in admitting Meline’s expert testimony. As part of that
analysis, we assess the trial court’s reliability determination under Rochkind.21
4. The Trial Court Did Not Abuse Its Discretion Under Rule 5-702.
The State argues that the Court of Special Appeals erred in concluding that the trial
court abused its discretion when it admitted Meline’s expert testimony. According to the
State, the Court of Special Appeals misapplied the concept of an “analytical gap.” In the
State’s view, there was no logical disconnect between the underlying photogrammetry data
and Meline’s height estimate. According to the State, while Meline’s inability to quantify
how certain variables affected the degree of uncertainty may have detracted from the
ultimate weight of her height estimate, it did not render her opinion inadmissible. The State
further contends that the Court of Special Appeals failed to afford the appropriate level of
deference to the trial court’s threshold admissibility ruling. According to the State, based
on the evidence presented at the pretrial hearing, the trial court was well within the bounds
of its discretion in finding that Meline had an adequate supply of data and applied a reliable
21
In Rochkind, we stated that our decision would “appl[y] to this case and any other
cases that are pending on direct appeal when this opinion is filed, where the relevant
question has been preserved for appellate review.” 471 Md. at 38-39. We explained that
“[i]n this context, the ‘relevant question’ is whether a trial court erred in admitting or
excluding expert testimony under Maryland Rule 5-702 or Frye-Reed.” Id. at 39. As noted
above, Matthews’s trial occurred before we decided Rochkind. Because Matthews objected
to the admission of Meline’s testimony under Rule 5-702 and Frye-Reed, Rochkind applies
here.
33
methodology. Thus, Meline’s estimate of the vertical distance, as measured from the
ground to the top of the suspect’s headwear, was more than “mere speculation or
conjecture.”
Matthews argues that the Court of Special Appeals correctly held that Meline’s
proffered testimony presented an analytical gap, and that the trial court should not have
admitted it. According to Matthews, Meline’s opinion was unreliable due to the unknown
margin of error. That is, because Meline could not inform the jury of the overall degree of
uncertainty of her height estimate, the jury was not able to make an intelligent decision
about how much weight to ascribe to the evidence, and the trial court therefore should not
have allowed the jury to hear Meline’s testimony.
We agree with the State that the trial court did not abuse its discretion. There is no
dispute that Meline’s methodology was reliable. Nor was there any analytical gap in her
proffered testimony. The unknown degree of uncertainty concerning the accuracy of
Meline’s height estimate went to the weight the jury should give to the expert testimony,
not to its admissibility.22
a. The Expert Testimony Was Not Per Se Inadmissible Due to Meline’s Inability
to Scientifically Calculate the Effect of All Potential Variables on the Degree
of Uncertainty.
Matthews contends that Meline’s opinion was unreliable due to Meline’s inability
to provide an overall margin of error for her height estimate, given that she could not
22
The State alternatively argues that, if the trial court erred in admitting Meline’s
expert testimony, the error was harmless beyond a reasonable doubt. Because we conclude
that there was no error in the admission of Meline’s testimony, we do not reach the State’s
harmless error argument.
34
scientifically calculate the effect of several variables. Other than the error rate, Matthews
points to no other Daubert/Rochkind factor in support of his contention that Meline’s
testimony lacked sufficient reliability. To the extent Matthews argues that an unknown
degree of uncertainty renders an expert opinion per se inadmissible, he is incorrect.
The reliability factors we listed in Rochkind – including “whether a particular
scientific technique has a known or potential rate of error” – are neither exhaustive nor
mandatory. See Kumho Tire, 526 U.S. at 153 (“[W]hether Daubert’s specific factors are,
or are not, reasonable measures of reliability in a particular case is a matter that the law
grants the trial judge broad latitude to determine.”); Savage v. State, 455 Md. 138, 178
(Adkins, J., concurring) (explaining that “a trial court is not required to consider any or all
of the Daubert factors in making its reliability determination”; those factors “were ‘meant
to be helpful, not determinative’”) (quoting Kumho Tire, 526 U.S. at 151).
Thus, it is not sufficient to point to an unknown degree of uncertainty/error rate that
applies to an expert opinion and claim that a trial court is necessarily stripped of discretion
to admit that opinion. Rather, as discussed below, the trial court should first consider
whether the unknown degree of uncertainty inheres in the expert’s methodology or whether
the uncertainty applies to the expert’s conclusions. If the latter scenario is applicable, the
trial court should determine whether the uncertainty in the expert’s conclusions is the
product of an analytical gap in the expert’s analysis and/or whether the uncertainty
ultimately renders the opinion unhelpful to the trier of fact.
35
b. Because Meline’s Methodology Was Reliable, the Trial Court Was Not
Required to Exclude Her Testimony Due to the Unknown Degree of
Uncertainty That Applied to the Height Measurement.
There is no dispute in this case concerning the reliability of Meline’s methodology.
Matthews does not contend that photogrammetry – and, in particular, reverse projection
photogrammetry – is an unreliable technique. Indeed, photogrammetry has been an
accepted technique for making measurements in photographs for many years and has been
deemed reliable by many courts applying the Daubert factors. See, e.g., Chapman ex. rel.
Estate of Chapman v. Bernard’s Inc., 167 F. Supp. 2d 406, 421 (D. Mass. 2001) (“The
application of mathematics to photographs to derive measurements appears reasonable and
does not strike this Court as ‘junk science.’”); Commonwealth v. Caruso, 4 N.E.3d 1283,
1289 (Mass. App. 2014) (“According to the FBI affidavit, photogrammetry has been in use
for over a century[.]”); Gecker as Trustee for Collins v. Menard, Inc., 2019 WL 3778071,
at *4 (N.D. Ill. Aug. 12, 2019) (noting that photogrammetry “has a long, recognized history
of reliability in the scientific and judicial community,” and collecting cases). Rather than
challenging Meline’s methodology, Matthews argues that Meline’s conclusions were
unreliable because she could not account for the effect of several variables on the degree
of uncertainty that applied to her height measurement.
Matthews fails to appreciate the distinction between uncertainty inherent in an
expert’s methodology and uncertainty that applies to an expert’s conclusions following the
application of a reliable methodology. If an unacceptably high margin of error exists
whenever a particular scientific technique is applied or no error rate can ever be determined
with respect to that technique, a trial court may well decide to exclude testimony
36
concerning the application of such a technique. In that situation, the court is concerned
about the inherent unreliability of the expert’s methodology, i.e., the unacceptably high
risk of an inaccurate conclusion being reached in every case where the technique is used.
A different situation applies where an expert applies a reliable technique to an adequate
supply of data, but in reporting her results, states that she is unable to quantify a specific
degree of uncertainty/margin of error. That scenario is generally less problematic than
where an expert has applied a technique that is unreliable in every instance in which it is
used.
For these reasons, in exercising its gatekeeping function under Rule 5-702, a trial
court generally should be most concerned about the reliability of an expert’s methodology.
Once a trial court is satisfied that an expert has applied a reliable methodology to an
adequate supply of data, the court should not exclude the expert’s testimony merely
because the court is concerned that the expert’s particular conclusions may be inaccurate.
See Manpower, Inc. v. Ins. Co. of Pennsylvania, 732 F.3d 796, 806 (7th Cir. 2013) (“The
district court usurps the role of the jury, and therefore abuses its discretion, if it unduly
scrutinizes the quality of the expert’s data and conclusions rather than the reliability of the
methodology the expert employed.”); Ruiz-Troche v. Pepsi Cola of Puerto Rico Bottling
Co., 161 F.3d 77, 85 (1st Cir. 1998) (“Daubert does not require that a party who proffers
expert testimony carry the burden of proving to the judge that the expert’s assessment of
the situation is correct.”). Rather, the trial court should only exclude expert testimony if it
finds that it amounts to “mere speculation or conjecture.” Rochkind, 471 Md. at 22 (internal
quotation marks and citations omitted).
37
Matthews’s reliance on cases such as Polymer Dynamics, Inc. v. Bayer Corp., 2005
WL 1041197 (E.D. Pa. 2005), therefore, is misplaced. In Polymer Dynamics, the federal
district court granted the defendant’s pretrial motion to exclude one of the plaintiff’s
experts. See id. at *3. The court found that the expert’s methodology was unreliable for
several reasons, including the small sample sizes of the experiments the expert conducted
and “an unacceptable margin of error” (25 percent for one experiment and approximately
55 percent for another experiment). Id.; see also Cassidy v. State, 235 N.J. 482, 498 (2018)
(where improper calibration of blood-alcohol testing device resulted in unknown
uncertainty of measurements taken by the device, test results produced by that device were
inadmissible under Frye); United States v. Cordoba, 194 F.3d 1053, 1059-60 (9th Cir.
1999) (testimony regarding results of polygraph held to be inadmissible due to unreliability
of the technique, as reflected in, among other things, the lack of a known error rate for
polygraphs generally).
In this case, unlike Polymer Dynamics, Cassidy, and Cordoba, Meline used a
reliable methodology. And the trial court could conclude, based on Meline’s testimony,
that Meline applied her reliable technique to an adequate supply of data. Thus, the trial
court did not necessarily abuse its discretion by failing to exclude Meline’s testimony after
Meline acknowledged that her reliable methodology did not produce a result for which the
overall margin of error could be quantified. However, we emphasize that just because the
trial court was not required to exclude Meline’s testimony when Meline acknowledged an
unknown degree of uncertainty, it does not follow that the trial court was required to admit
it. In such a situation, before admitting expert testimony, a trial court should consider
38
whether the unknown degree of uncertainty is the result of an analytical gap and, if there
is no such analytical gap, the court should determine whether the opinion would assist the
jury in understanding the evidence and/or deciding a fact in issue, despite the unknown
degree of uncertainty.
c. There Was No Analytical Gap in Meline’s Proffered Testimony.
An “analytical gap” typically occurs as a result of “the failure by the expert witness
to bridge the gap between his or her opinion and the empirical foundation on which the
opinion was derived.” Savage, 455 Md. at 163. For example, in Savage, a criminal case
involving a claim of self-defense, we perceived an analytical gap where the defense expert
failed to “connect the dots” between the results of the psychological tests he had
administered on the defendant and his opinion that the defendant was more likely to have
greater difficulty controlling his reactions under conditions of chaos and stress. Id. at 164.
Here, there was no analytical gap in Meline’s proffered testimony. At the motions
hearing, Meline explained in detail how she conducted the reverse photogrammetry
analysis to arrive at her height estimate of 5’8” and how she calculated the known
uncertainty of plus or minus two-thirds of an inch. She then explained that there were other
variables that might lead to a significantly higher degree of uncertainty, and that she could
not scientifically calculate them.
There was no disconnect between the results of the photogrammetry analysis and
Meline’s opinion. The underlying height value was based on the calibrated height chart in
the overlay image, and the 0.67 inch margin of error was based on calculations that went
essentially unchallenged. To this extent, Meline’s height estimate was the result of
39
combining “generally accepted methodology” with “generally accepted analysis.” See
Rochkind, 471 Md. at 17.
The Court of Special Appeals viewed Meline’s acknowledgment that there were
other variables she could not quantify that could increase the margin of error as indicative
of an analytical gap in her analysis. 249 Md. App. at 543-44. We fail to perceive an
analytical gap in the absence of a demonstrable flaw in Meline’s logic. Meline testified at
the motions hearing that, based on the reverse projection photogrammetric analysis she
conducted, she concluded that the height of the subject in the questioned image was 5’8”
plus or minus two-thirds of an inch, but the plus-or-minus value could be greater based on
other variables she could not quantify. There was nothing illogical about that explanation.
Whether or not Meline’s opinion would assist the jury in understanding the evidence or
deciding a fact in issue, despite the unknown degree of uncertainty, is another question that
the trial court needed to consider. We now turn to that question.
d. The Trial Court Acted Within Its Discretion in Concluding That Meline’s
Opinion Would Assist the Jury to Understand the Evidence or to Determine
a Fact in Issue.
The trial court ruled that Meline’s expert testimony was admissible under Maryland
Rule 5-702. In so doing, the court necessarily found that the testimony would “assist the
trier of fact to understand the evidence or to determine a fact in issue.” Md. Rule 5-702.
This was the case despite Meline’s acknowledgment that the known margin of error of two-
thirds of an inch could be significantly greater due to certain scientifically unquantifiable
variables. The trial court acted within its discretion in making this finding.
40
First, Meline explained in detail how she conducted her analysis, which allowed the
trial court to assess the rigor and care with which Meline approached her work. The trial
court could conclude that Meline ensured, among other things, that: (1) the surveillance
camera was in the same position as when the questioned image was captured; (2) she stood
in the same spot in the front yard of 1291 Scott Town Road where the suspect had stood
when the questioned image was captured; (3) she placed the height chart in the same spot
where the subject had been standing; (4) the height chart was placed “within the center of
gravity of the individual”; (5) she appropriately used software to overlay the image
depicting the suspect and the image of the height chart to ensure that the height chart was
in the same location, so that the suspect’s height could be measured; and (6) she accurately
calculated the known degree of uncertainty.
Second, Meline explained at the motions hearing why, despite the unknown degree
of uncertainty attributable to certain variables, she nevertheless was comfortable with her
height estimate of 5’8” plus or minus two-thirds of an inch. She stated that “the body
position of the individual is the factor that [she was] most concerned about,” which is why
she is “so careful when it comes to image selection and trying to … use an image that
depicts the individual from head to toe in as upright of a position as possible.” Notably, the
defense expert agreed that the questioned image was a “correctly selected image.” In
response to defense counsel’s question, “[W]ould you agree that how someone wears a
head covering even if you knew what it was could impact the reported height of an
individual?”, Meline stated, “I would, which is why when I report a measurement I report
that measurement as a measured distance from the ground to the top of the headwear of the
41
individual.” Defense counsel also asked, “Can you tell us exactly how you located where
the bottom of the foot would be for that individual?” Meline replied, “[W]e indicated where
the back of the heel was and then essentially worked from there on the left foot.” Meline
further stated that her “ability to stand where the individual was standing tells me what the
terrain was in that location,” although she acknowledged that she would not be aware of
“minor changes” in the terrain between June and November. The trial court was entitled to
credit Meline’s assessment that she had sufficiently addressed the impact of these variables
on her height estimate, despite the fact that she could not quantify them.
Third, given Meline’s known height of between 5’9” and a half and 5’10”, and the
fact that she ensured that she stood in the same spot and position as the subject in the
questioned image, Meline was able to opine that the subject appeared to be slightly shorter
than Meline herself. Given that 5’8” plus or minus two-thirds of an inch is, in fact, “slightly
shorter” than Meline’s height, the trial court reasonably could conclude that the unevenness
of the terrain and the other unquantifiable variables – to the extent Meline could not
completely eliminate them from having any impact – had little to no effect on her height
estimate.
All of these factors allowed the trial court to reasonably conclude that the height
estimate of the subject as 5’8” plus or minus two-thirds of an inch would assist the jury in
determining the identity of the person in the questioned image, despite the fact that Meline
could not calculate the effect of all variables on the degree of uncertainty. The trial court’s
finding that Meline’s testimony would assist the jury in understanding the evidence or
deciding a fact in issue was not an endorsement of the accuracy of Meline’s height
42
measurement. Rather, it was a determination that Meline’s testimony had probative value.
The trial court acknowledged Meline’s statement regarding the potential uncertainty of her
assessment, and observed that cross-examination by the defense would be the proper
vehicle to attack the validity of Meline’s height estimate. We agree. But even if one or
more members of this Court would have decided to exclude Meline’s testimony had we
been the trial judge, we certainly cannot say that the trial court’s decision to admit the
challenged testimony was “well removed from any center mark imagined by the reviewing
court and beyond the fringe of what that court deems minimally acceptable.” Devincentz,
460 Md. at 550 (citing North v. North, 102 Md. App. 1, 14 (1994)).
In this regard, we find the reasoning of the federal court in Gecker persuasive. In
that case, an expert testified concerning close-range photogrammetry in a personal injury
case. Gecker, 2019 WL 3778071, at *1. The expert recreated the estimated force of motion
when a woman was hit by a shopping cart train in a grocery store parking lot. Id. At issue
in the case were unquantifiable “error rates” in a fact-specific case. The court stated that:
The fact that Dr. Fisher’s specific application of photogrammetric principles
cannot be evaluated in light of potential error rates is not fatal to the
admissibility of Dr. Fisher’s testimony. As Dr. Fisher explained during his
deposition, error rates in the field of close-range photogrammetry depend on
the quality of the available data, which is fact specific to each case…. Nor is
he the first expert applying photogrammetry to have cited this limitation.
Therefore, if the error rate for photogrammetry depends on the video or photo
quality in each case, it is of no surprise that Dr. Fisher is unable to provide
specific error rates for the interior and exterior Menards surveillance cameras
as they existed in 2014. To the extent Dr. Fisher was able to account for error
rates in his analysis of Plaintiff’s specific case, he did so…. This, again, is
something that goes to credibility but not threshold admissibility of Dr.
Fisher’s opinions.
….
43
… While the Court is mindful of the fact that reliable methods do not always
produce reliable conclusions, Daubert only requires courts to scrutinize the
former. The latter is a question for the jury. The Court can find an expert
opinion reliable if it is based on “good grounds” or methods and procedures
of science rather than on subjective belief or unsupported speculation.
Daubert, 509 U.S. at 590. Because Dr. Fisher’s theory can be tested, the
science of close-range photogrammetry has been subject to peer review and
is accepted in the relevant scientific community, Dr. Fisher’s methodology
and testimony meet the standard for admissibility under Daubert and Rule
702.
Gecker, 2019 WL 3778071, at *6-*7. See also United States v. Williams, 235 F. App’x
925, 928-29 (3d Cir. 2007) (notwithstanding defendant’s argument that, among other flaws,
the government failed to proffer evidence as to reverse projection photogrammetry’s error
rate, affirming trial court’s admission of expert testimony concerning height estimate of
bank robber); Aviva Sports, Inc. v. Fingerhut Direct Mktg., Inc., 829 F. Supp. 2d 802, 830
(D. Minn. 2011) (denying motion to exclude photogrammetry expert’s testimony; where
the expert “thoroughly detailed his methods, including … his criteria for making
measurements … and reducing errors due to inherent measurement error, poor photograph
quality, parallax (or perspective), and age estimates,” court held that movant’s criticisms
were “issues concerning the factual basis of [the expert’s] calculations and the errors in his
measurements—issues well-suited for vigorous cross-examination and presentation of
contrary evidence”) (cleaned up).
Our conclusion respects the trial court’s role as a “gatekeeper,” and does not
transform the trial court into an “armed guard.” Ruiz-Troche, 161 F.3d at 86. “As long as
an expert’s scientific testimony rests upon ‘good grounds, based on what is known,’ it
should be tested by the adversary process – competing expert testimony and active cross-
44
examination – rather than excluded from jurors’ scrutiny for fear that they will not grasp
its complexities or satisfactorily weigh its inadequacies.” Id. at 85 (quoting Daubert, 509
U.S. at 590).
The trial court did not require “the jury to work through the science on its own.”
Matthews, 249 Md. App. at 544. Indeed, Matthews’s counsel ably cross-examined Meline
at the trial, and highlighted the uncertainty in Meline’s opinion in her closing argument,
contending that Meline’s opinion is “telling you nothing forensically.” In addition,
Matthews could have called Sanderson in his defense case had he decided to offer the jury
a competing expert opinion.
In sum, the trial court did not abuse its broad discretion under Maryland Rule 5-702
in admitting Meline’s testimony.
B. The Trial Court’s Ruling Under Maryland Rule 5-403.
We also conclude that the trial court did not abuse its discretion by declining to
exclude Meline’s testimony under Maryland Rule 5-403.
The trial court found that the proffered testimony had probative value and that its
probative value was not outweighed by the danger of unfair prejudice, confusion of the
issues, or misleading the jury. In particular, the trial court found that Meline’s proffered
testimony
… is clear. It is concise. It is not confusing. It was not particularly confusing
to the Court to see it. When you look at the photos, and you look at the
overlay, and you look at all the images, it – it’s something that is clear to
your eye, and then is explained by an expert, and there are mathematical
calculations, but in addition to that, as to the – the second sentence, if you
will, of the opinion regarding the potential of uncertainty, that is clear as well,
45
and it is particularly stated, and it is available to the Defense for cross-
examination, and, quite candidly, I find it very easy to understand.
… I do not find it unfairly [prejudicial]. I do not find that it confuses the
issues, and nor do I find that it would be misleading to the finder of fact[.]
Matthews argues that the trial court’s ruling was an abuse of discretion. According
to Matthews, Meline’s testimony “had virtually no probative value. Since the suspect’s
height could not be estimated with any degree of certainty, the evidence did not rule out a
suspect who was 5’11.” And, Matthews argues, whatever minimal probative value it had
was substantially outweighed by the danger of unfair prejudice. In particular, Matthews
contends that “[t]he manner in which [Meline’s] height estimate was presented—a
seemingly precise estimate of height and ‘calculable’ margin of error—is confusing and
misleading. It suggests that the FBI believed the suspect to be within .67 inches of 5’8”,
when in fact, this ‘calculable’ margin of error has no practical significance at all and the
actual margin of error is unknown.”
We disagree with Matthews’s assessment. The trial court easily could conclude that
Meline’s testimony was probative of the issue of the identity of the shooter. Among other
things, Meline testified that the subject in the questioned image was slightly shorter than
Meline herself, who measures between 5’9” and a half and 5’10”. The evidence before the
jury was that Matthews was approximately 5’9”. Meline’s testimony tended to corroborate
the testimony of Joseph Tongue and others who said that they saw Matthews with a shotgun
around the time of the murders. Her testimony also tended to corroborate the State’s
witnesses who testified that the subject in the questioned image looked like Matthews.
46
We also agree with the trial court’s conclusion that the probative value of Meline’s
testimony was not substantially outweighed by the danger of unfair prejudice. The trial
court explained that it found Meline’s testimony easy to understand. The court
acknowledged the “qualifier” that was part of Meline’s testimony, but decided that any
flaws in Meline’s conclusions attributable to this qualifier were properly the subject of
cross-examination or competing expert testimony. As we said in Rochkind, “[v]igorous
cross-examination, presentation of contrary evidence, and careful instruction on the burden
of proof are the traditional and appropriate means of attacking shaky but admissible
evidence.” 471 Md. at 38 (quoting Daubert, 509 U.S. at 596) (internal quotation marks
omitted). The trial court acted well within its discretion in rejecting Matthews’s argument
under Rule 5-403.
IV
Conclusion
For the reasons stated above, we conclude that the trial court did not abuse its
discretion in admitting expert testimony concerning the reverse projection photogrammetry
analysis that the FBI performed, and the height estimate of the suspect that resulted from
that analysis. Accordingly, we reverse the judgment of the Court of Special Appeals and
order that Matthews’s convictions be reinstated.
JUDGMENT OF THE COURT OF SPECIAL
APPEALS REVERSED; CASE REMANDED
TO THE COURT OF SPECIAL APPEALS
WITH THE INSTRUCTION TO REINSTATE
THE JUDGMENT OF CONVICTION. COSTS
IN THE COURT OF SPECIAL APPEALS AND
47
THIS COURT TO BE PAID BY
RESPONDENT.
48
Circuit Court for Anne Arundel County
Case No. C-02-CR-17-002275
Argued: November 1, 2021
IN THE COURT OF APPEALS
OF MARYLAND
No. 15
September Term, 2021
______________________________________
STATE OF MARYLAND
v.
KIRK MATTHEWS
______________________________________
*Getty, C.J.
*McDonald
Watts
Hotten
Booth
Biran
Wilner, Alan M. (Senior Judge,
Specially Assigned),
JJ.
______________________________________
Dissenting Opinion by Watts, J.
______________________________________
Filed: June 22, 2022
*Getty, C.J., and McDonald, J., now Senior
Judges, participated in the hearing and
conference of this case while active members of
this Court. After being recalled pursuant to Md.
Const., Art. IV, § 3A, they also participated in
the decision and adoption of this opinion.
Respectfully, I dissent. I would hold that the Court of Special Appeals correctly
determined that the Circuit Court for Anne Arundel County abused its discretion in
admitting the testimony of Kimberly Meline, the State’s expert witness, because there was
an analytical gap between the facts and data available to the expert and the opinion that the
expert rendered. Based on a technique known as “photogrammetry and reverse projection
photogrammetry,” the State’s expert rendered an opinion as to the height of a person
depicted in a video image/frame even though there were a number of variables or pieces of
information missing for use in the analysis. At trial, the expert candidly acknowledged that
she had no way of knowing the effect that the missing information had on the outcome of
her estimate. The Court of Special Appeals held that, based on the record, the circuit court
should have precluded the expert from testifying and that the error in allowing the
testimony was not harmless. See Matthews v. State, 249 Md. App. 509, 544, 246 A.3d
644, 664. I agree.
First, this case illustrates some of the problems inherent in this Court’s decision to
apply the holding of Rochkind v. Stevenson, 471 Md. 1, 38, 236 A.3d 630, 651-52
(2020), reconsideration denied (Sept. 25, 2020)—in which the Court adopted the factors
discussed in Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 593 (1993) and
additional factors contained in the Advisory Committee Notes to Federal Rule of Evidence
702—retroactively. In adopting the Daubert factors and additional ones, this Court
emphasized that its holding did not represent a significant change in the law because a drift
toward Daubert had been occurring for many years. See Rochkind, 471 Md. at 17, 236
A.3d at 639. In an effort to assuage concerns about the change that adopting Daubert would
create, this Court engaged in a lengthy analysis to show that for the admission of expert
testimony, an assessment of the Daubert factors was already partially required under
Maryland Rule 5-702 and our case law. See Rochkind, 471 Md. at 26, 236 A.3d at 644-
45. There is no question that our case law on admission of expert testimony concerning
novel scientific issues under the approach adopted in Reed v. State, 283 Md. 374, 382, 391
A.2d 364 (1978) had evolved since 1978, see Savage v. State, 455 Md. 138, 180–81, 166
A.3d 183, 208-09 (2017) (Adkins, J., concurring), but from my perspective the adoption of
the Daubert factors and additional ones constituted a significant change in the standard for
admission of expert testimony in Maryland.
The adoption of the Daubert factors and additional ones involves a new evidentiary
analysis that garners a different standard of review. Before Rochkind, although appellate
courts reviewed application of Maryland Rule 5-702 for abuse of discretion, a circuit
court’s analysis under Frye-Reed warranted a de novo standard of review. See Rochkind,
471 Md. at 37, 236 A.3d at 651. In Rochkind, this Court changed that and held that “all
[expert] testimony is reviewed under an abuse of discretion standard.” Id. at 37, 236 A.3d
at 651 (citing Gen. Elec. Co. v. Joiner, 522 U.S. 136, 143 (1997)). The majority opinion
states that “after Rochkind (as it was before Rochkind) it is the rare case in which a
Maryland trial court’s exercise of discretion to admit or deny expert testimony will be
overturned.” Maj. Slip Op. at 3. So, what can be gleaned from this is that unlike with the
Frye-Reed de novo standard of review, a trial court’s decision to admit or preclude expert
testimony under the Daubert factors and additional ones will rarely be reversed under an
abuse of discretion standard. Whether this prediction will prove to be accurate remains to
-2-
be seen.
In addition, it seems apparent that even though consideration of issues such as
whether an analytical gap existed was already required under Maryland Rule 5-702, the
adoption of the five Daubert factors and five additional ones imposed additional standards
that must be met or, at a minimum, more factors to be considered before expert testimony
may be admitted. Next, it seems fair to consider whether the adoption of the Daubert
factors and other additional factors will create similar results in Maryland as their adoption
has in other jurisdictions. For example, recent scholarship suggests “the Daubert
admissibility standard impacts filings exactly like a method of tort reform, but only for
claimants of color.” Rochkind, 471 Md. at 58, 236 A.3d at 664 n.4 (Watts, J., dissenting
(quoting Andrew W. Jurs & Scott DeVito, A Tale of Two Dauberts: Discriminatory Effects
of Scientific Reliability Screening, 79 Ohio St. L.J. 1107, 1109-10 (2018))).
After assuring that the adoption of Daubert and other additional factors was not a
significant change, the Rochkind opinion made the shift to the Daubert factors and
additional ones apply retroactively to any case that was pending at the time of the issuance
of the opinion “where the relevant question has been preserved for appellate review.”
Rochkind, 471 Md. at 38, 236 A.3d at 652 (quoting Kazadi v. State, 467 Md. 1, 47, 223
A.3d 554, 554 (2020)). In doing so, this Court cited a standard for retroactivity that applies
to changes in constitutional rules in criminal cases. In other words, after announcing the
evolution from Frye-Reed to Daubert and additional factors, the Court made it retroactive
under a standard reserved for changes to constitutional rules in criminal cases. See
Rochkind, 471 Md. at 67 n.6, 236 A.3d at 669 n.6 (Watts, J., dissenting) (observing that
-3-
Griffith v. Kentucky, 479 U.S. 314, 322 (1987), concerned the retroactive application of
constitutional rules in criminal cases).
Now, this Court has before it a case that was tried before the decision in Rochkind.
And, after the Court of Special Appeals permitted additional briefing concerning Rochkind,
Matthews, 249 Md. App. at 542 n.9, 246 A.3d at 663 n.9, the majority opinion reverses the
Court of Special Appeals’s determination under Rochkind (which excluded the expert’s
testimony) to render admissible the testimony of a State’s expert witness in the field of
“photogrammetry and reverse projection photogrammetry analysis” against a defendant in
a criminal case. See Maj. Slip. Op. at 47.
In this case, the expert analyzed home surveillance video that depicted an individual
(who had been identified as a suspect) and selected a particular image/frame of the video
from which to conduct a “reverse photogrammetric analysis” to estimate the individual’s
height. In other words, the expert rendered an opinion as to the height of an individual
depicted in a video using calculations based on an image or frame of the video and other
information she gathered. It was undisputed that the image or frame chosen for the analysis
was captured at night and could not be enhanced, that the person in the video wore a hat
(meaning that the expert could not see the top of the person’s head and the expert did not
know the measurements of the hat), and that the expert could not see both of individual’s
feet (meaning that the expert could not know whether the person was standing at full
height). In addition, the expert acknowledged that there was uncertainty in “the subject to
camera distance, the resolution of the imagery, the unevenness of the landscape, and the
body position of the subject[.]”
-4-
In my view, the issue of the admissibility of the expert testimony in this case
centered squarely on whether there was an analytical gap between the expert’s opinion and
the data underlying the opinion. With certainty, there was an insufficient factual basis for
the expert’s opinion and an analytical gap existed between the available facts and the
opinion rendered by the expert. The issue of whether there is an analytical gap between an
expert’s opinion and the data underlying it is a component of the analysis of the
admissibility of expert testimony that existed under Maryland Rule 5-702 separate and
apart from this Court’s adoption of Daubert and other additional factors in Rochkind. See
Savage, 455 Md. at 183-84, 166 A.3d at 210 (Adkins J., concurring) (discussing that this
Court considered whether there existed an analytical gap under Maryland Rule 5-702).
From my perspective, that the analysis of expert opinion under Maryland Rule 5-702 for
the existence of an analytical gap predated the adoption of the Daubert factors and
additional ones in Rochkind raises an interesting point about this case. Given that this
Court’s abandonment of Frye-Reed and embrace of Daubert-Rochkind is unnecessary to
the analysis of whether an analytical gap involving the expert’s opinion existed, any
observations about the general applicability of Rochkind would be mostly dicta.
It is well-established that not every Daubert factor and other additional factor
adopted under Rochkind will apply in every case. See Rochkind, 471 Md. at 37, 236 A.3d
at 651. Stated otherwise, it is acknowledged that not all of the Daubert factors fit each
case. In this case, the question of admissibility focused on whether an analytical gap
existed. The notion that Kirk Matthews, Respondent, has not challenged the State’s
expert’s testimony under any Daubert factor or additional factor apart from the error rate
-5-
is simply wrong. See Maj. Slip Op. at 34-35. The question of whether a technique has a
known rate of error or whether its results fall within a certain margin of error is far different
from the question of whether the technique was performed with a lack of relevant
information and therefore the reliability of the results cannot be ascertained, which is the
circumstance in this case. Here, the question is not whether the applicable technique has a
known rate of error or whether the expert could correctly calculate a rate of error. Rather,
the question is whether the expert had access to sufficient information to render a reliable
opinion. The answer is plainly no.
On brief before this Court, Matthews specifically contended that “[t]the Court of
Special Appeals correctly concluded that there was an ‘analytical gap’ between the data
available for reverse photogrammetry in this case and the ‘specific height estimate’ that
Meline offered the jury.” Matthews argued:
The analytical gap analysis is nothing more than a reliability test. City of San
Antonio v. Pollock, 284 S.W.3d 809, 822 (Tex. 2009) (“Analytical gaps can
undermine the reliability of an expert’s opinion. The Supreme Court said as
much in … Joiner, [ ] observing that courts … are free to test reliability by
analyzing whether the expert’s opinion fits the facts of the case.”).
The concept of an analytical gap between the facts available and the
conclusion offered, as set forth in Joiner, 522 U.S. at 146, is captured by Rule
5-702(3)’s requirement that a sufficient factual basis exists to support the
expert testimony. “‘[S]ufficient factual basis’ includes two sub-elements: (1)
an adequate supply of data; and (2) a reliable methodology.” Rochkind, 471
Md. at 22. See § 22:13. Fit, 3 Mod. Sci. Evidence § 22:13 (2020-2021
Edition) (“The fit concept is now captured in Federal Rule of Evidence
702(b) that requires the testimony to be ‘based on sufficient facts or data.’
Courts increasingly rely on this section rather than the Joiner ‘fit’ language
to exclude expert evidence.”). As this Court has explained, the concept of an
analytical gap simply means that “generally accepted methodology ‘must be
coupled with generally accepted analysis’….” Rochkind, 471 Md. at 17
(quoting Blackwell, 408 Md. at 608). Joiner, 522 U.S. at 146[] (“A court
-6-
may conclude that there is simply too great an analytical gap between the
data and the opinion proffered.”).
The record demonstrates that the State’s expert testified, among other things, that
due to several variables the degree of uncertainty with respect to her conclusions could be
greater. Specifically, on cross-examination, the following exchange occurred:
[MATTHEWS’S COUNSEL]: Okay, which means ultimately, we don’t
know how uncertain this result is?
[MELINE]: I would say that I have some indication based on the overlay of
my own, myself in that similar position with the image of the questioned
individual and knowing that the questioned individual appeared to be slightly
shorter than I, myself, am that I have some indication as to the uncertainty
with the method. However, there are factors in here that I cannot calculate.
***
[MATTHEWS’S COUNSEL]: [A]s here where the conditions are far from
pristine, [the] margin of error is going to become greater it stands to reason,
right?
[MELINE]: It does.
When asked by Matthews’s counsel about the statement in her report that “the
degree of uncertainty in this measurement could be significantly greater” based on several
variables, including “the subject to camera distance, the resolution of the imagery, the
unevenness of the landscape, and the body position of the subject,” the expert
acknowledged: “I don’t have a scientific way of quantifying how those dimensions had an
effect on my measurement and consequently I wanted in an abundance of caution to
mention them.”
Insofar as to whether it was an abuse of discretion for the circuit court to admit the
expert’s testimony under Maryland Rule 5-702, I would hold that it was because an
-7-
analytical gap clearly existed between the facts—known and unknown to the expert—and
the conclusions that were drawn by the expert. Under Maryland Rule 5-702, expert
testimony is admissible where it “will assist the trier of fact to understand the evidence or
to determine a fact at issue.” A “court shall determine (1) whether the witness is qualified
as an expert by knowledge, skill, experience, training, or education, (2) the appropriateness
of the expert testimony on the particular subject, and (3) whether a sufficient factual basis
exists to support the expert testimony[]” in deciding whether the testimony will be
admissible. Md. R. 5-702. The “hallmark” of [an] analytical gap is “the failure by the
expert witness to bridge the gap between his or her opinion and the empirical foundation
on which the opinion was derived.” Sugarman v. Liles, 460 Md. 396, 425, 190 A.3d 344,
361 (2018) (quoting Savage, 455 Md. at 163, 166 A.3d at 183). In order “[t]o bridge the
analytical gap, an expert’s testimony must have a sufficient factual foundation.” Id. at 427,
190 A.3d at 362 (quoting Savage, 455 Md. at 163, 166 A.3d 183).
In Joiner, 522 U.S. at 146, the Supreme Court held that a trial court’s decision to
admit “scientific evidence” is reviewed under an abuse of discretion standard of review,
and that in a trial court’s discretion, it “may conclude that there is simply too great an
analytical gap between the data and the opinion proffered[]” and refuse to admit the
testimony on that basis. In Joiner, a plaintiff offered testimony of experts to support an
argument that exposure to a chemical in the workplace “promoted” the development of the
plaintiff’s lung cancer. Id. at 139-40. The experts relied upon studies for their conclusions,
including animal studies as well as four epidemiological studies. See id. at 146. The trial
court refused to admit the expert testimony because the studies relied upon did not support
-8-
the conclusions of the experts, i.e., given the lack of support, the proffered opinions failed
to transcend “subjective belief or unsupported speculation.” Id. at 140 (citations omitted).
The United States Court of Appeals for the Eleventh Circuit reversed, determining that the
trial court exceeded its authority in refusing to admit the evidence. See id. at 141.
After clarifying that abuse of discretion was the correct standard of review, the
Supreme Court held that the Court of Appeals failed to accord deference to the trial court
and that the trial court did not abuse its discretion. See id. at 143. Specifically, it was not
an abuse of discretion for the trial court to reject the reliance on animal studies, where the
animals in question—infant mice—received “massive” doses of the chemical and Joiner,
an adult man, received much less. Id. at 144-45. Likewise, the trial court did not abuse its
discretion in rejecting the experts’s reliance on the epidemiological studies because the
studies either did not “support” a “conclusion that [the plaintiff’s] exposure to [the
chemical] caused his cancer[,]” “did not suggest a link between the increase in lung cancer
deaths and the exposure to the [chemical,]” made no mention of the chemical, or in one
study, involved “subjects” who “had been exposed to numerous potential carcinogens”
beyond the chemical at issue and consequently failed to afford a sufficient factual basis for
the asserted conclusions. Id. at 144-46. In rejecting Joiner’s argument that under Daubert
a trial court may consider only the principles and methodology as opposed to the
conclusions of the expert, the Supreme Court explained that “nothing in either Daubert or
the Federal Rules of Evidence requires a district court to admit opinion evidence that is
connected to existing data only by the ipse dixit of the expert[,]” and that on the contrary,
-9-
“[a] court may conclude that there is simply too great an analytical gap between the data
and the opinion proffered.” Joiner, 522 U.S. at 146.
In Rochkind v. Stevenson, 454 Md. 277, 295, 164 A.3d 254, 264 (2017), this Court
held that a trial court abused its discretion in permitting the plaintiff’s expert testimony
under Maryland Rule 5-702 where the court “failed to check for an ‘analytical gap’ between
the expert's data and her conclusion.” In order to testify that exposure to lead paint caused
Stevenson’s ADHD, the expert relied on an EPA-ISA paper, which discussed the fact that
multiple studies had found a causal relationship between exposure to lead and some
symptoms of ADHD, but not ADHD itself. See id. at 288, 164 A.3d at 260. This Court
explained that Maryland Rule 5-702(c)’s requirement of a “sufficient factual basis . . . to
support the expert testimony[]” involves assessment of two factors: “adequate supply of
data and a reliable methodology.” Id. at 286, 164 A.3d at 259 (quoting Roy v. Dackman,
445 Md. 23, 42–43, 124 A.3d 169 (2015)).
This Court concluded that the expert failed to supply adequate data to support the
conclusion that lead exposure caused ADHD where the discussion of the studies in the
EPA-ISA paper did not say that lead exposure caused ADHD, but rather indicated that such
exposure caused only some symptoms associated with ADHD. Id. at 291-94, 164 A.3d at
262-64. To render an opinion, the expert needed to “jump” from studies showing that lead
exposure causes symptoms of ADHD to an opinion that it caused “a clinical ADHD
diagnosis[.]” Id. at 291, 164 A.3d at 262. Although “seem[ingly] reasonable,” this Court
stated that such a jump was an analytical gap of the sort discussed in Joiner, and that it was
an overstatement and impermissible especially given “the added weight a jury might give
- 10 -
to testimony from a designated expert[.]” Rochkind, 454 Md. at 291, 164 A.3d at 262
(citations omitted).
By contrast, in Sugarman, 460 Md. at 427-29, 190 A.3d at 362-63, another lead
exposure case, this Court perceived no analytical gap in an expert’s conclusion that lead
exposure caused the plaintiff’s defects in auditory encoding and processing speeds based
on the EPA-ISA’s discussion of lead exposure’s tendency to cause general attention
defects—even though the EPA-ISA did not identify the specific types of attention
disorders—because the experts explained that defects in auditory encoding and processing
speeds fell within the umbrella of general attention defects.
As in Joiner and the earlier opinion in Rochkind, in this case, I would hold that there
was an analytical gap between the expert’s opinion as to the height of the suspect and the
data available, where the expert acknowledged that she did not “have a scientific way of
quantifying how” missing variables, i.e., unknown information such as the “subject to
camera distance, the resolution of the imagery, the unevenness of the landscape, and the
body position of the subject,” would have “had an effect on [her] measurement.” The
expert testified honestly that the missing information all meant that the margin of error as
to her calculations could be much greater than estimated. In other words, the expert
essentially testified that she could not assure the reliability of her test results. Similar to
one of the studies at issue in Joiner, 522 U.S. at 144-46, which showed increased cancer
rates but which did not serve as a sufficient factual predicate for the proposition that a
specific chemical caused cancer because the expert failed to account for the numerous other
toxins to which the subjects in the study were exposed, in this case, numerous unavailable
- 11 -
pieces of information prevented the State’s expert witness from rendering a reliable
opinion. As the Court of Special Appeals stated, “the analytical gap between the data
available for reverse photogrammetry projections and the conclusion [the expert] offered
to the jury remained unbridged.” Matthews, 249 Md. App. at 544, 246 A.3d at 664.
In this case, in addition to all of the above, the expert acknowledged that the trainee
who assisted her with making the height estimate identified “difficulties” with the
photograph chosen for the photogrammetric analysis. Among other things, the trainee
noted “issues with not being able to see the suspect’s feet clearly[]” and stated that “not a
lot of detail could be seen in any of the enhanced images[.]” Significantly, the expert
acknowledged that when authorities were considering whether to even go forward with a
reverse photogrammetric analysis in the case, her trainee had estimated a margin of error
of plus or minus three inches.
As to the relevant terrain, the expert indicated that in the photograph the suspect
stood in a grassy area. The expert testified that she visited the scene at the end of
November. Thomas Lancaster, a private investigator, testified on behalf of the defense that
the terrain was different every time he visited, and “very different” between the winter and
summer months because in summer, the ground was less solid overall and because grasses
and other vegetation obscured the scene.
On recross-examination, the State’s expert testified, in part, about the terrain as
follows:
[MATTHEWS’S COUNSEL:] Okay. You spoke about foot placement of
the individual and you testified that you aligned your own leg and foot to
mimic what you saw in the individual from the questioned image, correct?
- 12 -
[MELINE:] That’s correct.
[MATTHEWS’S COUNSEL:] Now that in itself still doesn’t tell us anything
about the footwear of the individual in the questioned image, correct?
[MELINE:] That’s correct.
[MATTHEWS’S COUNSEL:] And it doesn’t tell us anything about whether
that person may have been standing in some kind of hole or divot or on a hill
or something of that nature, correct?
[MELINE:] I would disagree, because in this particular case because I was
on scene I was able to see the land on which I was standing. And with the
exception of the possibility of changes in the terrain between June and
November, I would say that my ability to stand where the individual was
standing tells me what the terrain was in that location.
[MATTHEWS’S COUNSEL:] So certainly you were there November 28th,
you weren’t out there June 1st, correct?
[MELINE:] No, I was not there June 1st.
[MATTHEWS’S COUNSEL:] You weren’t out there anytime before
November 28th, 2017, nearly six months later, correct?
[MELINE:] That’s correct.
[MATTHEWS’S COUNSEL:] Okay. So you wouldn’t be aware of what
kind of minor changes in terrain there might have been within that time?
[MELINE:] No, ma’am.
Beyond the differences between the terrain’s features in summer versus winter, Mr.
Lancaster also testified that the property is uneven, with depressions, ditches, and downed
trees or branches, that the ground is “marshy in a lot of places especially in the wooded
area surrounding” the house, and that the region overall is a peninsula which is “mostly at
or below sea level” characterized by swampy, sandy, and marshy conditions.
- 13 -
The suspect’s headwear and foot positioning presented other uncertainties that
affected the expert’s opinion. The expert acknowledged that in the photograph the suspect
appeared to be wearing a hat and that given her inability to calculate the impact of the
headwear, she provided an estimate of the suspect’s height including any headwear. As
for the position of the suspect’s feet, the expert testified that because in the photograph the
left heel was difficult to see, she determined the position of the suspect’s heel by visiting
the scene and assessing the terrain, which she indicated is a best practice. But the expert
visited the scene at a time when the terrain would have been “very different” from when
the image in the photograph was captured and the expert acknowledged that “changes in
the terrain between June and November” could have undermined her assessment of the
terrain and by extension her assessment of the suspect’s foot placement.
In contrast to the State’s expert, Robert Sanderson an expert in photogrammetry,
who testified on behalf of the defense, testified that unknown information created
uncertainty in any estimate of the suspect’s height. Mr. Sanderson expressed the opinion
that it was not possible to provide a height estimate from the image chosen by the State’s
expert using photogrammetry in light of the unknown information. Mr. Sanderson
explained that even with “contrast adjustment and sharpening” applied to the image, he
could “not really see[] the detail [he would] need to see” with respect to “[f]oot placement,
footwear, headwear[,]” or “terrain.” Mr. Sanderson testified that these were “core”
variables, and the State’s expert acknowledged that they were “unknowns[.]” In addition,
Mr. Sanderson identified the issue of whether the camera had moved after the video had
been taken as an additional variable because “[c]ertain movements of the camera . . . can
- 14 -
affect the end result[,]” and he questioned the State’s expert’s method of compensating for
the movement. At bottom, Mr. Sanderson’s testimony did not result in conflicting expert
opinion (a circumstance often encountered at trials with expert testimony), but rather his
testimony was that of another expert in the field of photogrammetric analysis essentially
identifying the existence of an analytical gap between the available facts and the ability to
render a reliable opinion.
Although the State’s expert testified extensively as to her qualifications in the area
of photogrammetry and regarding her methodology in conducting an analysis of the
photograph at issue, this does not change the underlying requirement of Maryland Rule 5-
702(c) that a sufficient factual basis support the expert’s opinion. Maryland Rule 5-702
does not require perfection. In this case, though, the expert recognized the significance of
unknown information on the reliability of her opinion when she testified that there was no
“scientific way of quantifying” how the missing information would have affected her
work.1
The overarching inquiry in admission of expert testimony is a determination that it
is reliable. See Daubert, 509 U.S. at 589 (“[U]nder the Rules [of Evidence] the trial judge
must ensure that any and all scientific testimony or evidence admitted is not only relevant,
but reliable.”). As the Supreme Court recognized in Daubert, the trial court is in essence
the “gatekeep[er]” of reliability and this function will “inevitably on occasion . . . prevent
In light of the expert’s acknowledgment that she did not have a scientific way of
1
quantifying how the missing information affected her measurement, any probative value
with respect to the expert’s opinion was substantially outweighed by the danger of unfair
prejudice. See Md. R. 5-403.
- 15 -
the jury from learning of authentic insights and innovations.” Id. at 597.
It will not be the case that an analytical gap will exist in every instance in which an
expert cannot account for unknown facts. But in this case unknown information, such as
the condition of the terrain on which the person stood, the distance of the person from the
camera, and the positioning of person’s body, and the poor quality of the photograph at
issue, created an analytical gap that the expert herself recognized when she acknowledged
that she had no way of calculating the effect that the missing information had on the
outcome of her measurements. Although the expert indicated that she felt comfortable with
her analysis, the missing variables concerned core information that an expert performing a
reverse projection photogrammetric analysis would have needed to render a reliable
opinion. There can be no reasonable quarrel with the Court of Special Appeals’s
determination in this case that it was an abuse of discretion to admit expert testimony where
the expert essentially acknowledged that she could not say that her opinion was reliable.2
2
This is not a case of harmless error. To hold that the admission of the State’s
expert’s testimony was harmless, a determination must be made “beyond a reasonable
doubt, that the error in no way influenced the verdict[.]” Dionas v. State, 436 Md. 97, 108,
80 A.3d 1058, 1065 (2013) (quoting Dorsey v. State, 276 Md. 638, 359 A.2d 665, 678
(1976)). No such determination could be reached here. Although the State argues that
witnesses testified to seeing Matthews approach the victims with a gun, that does not get
around the fact that the State’s expert testimony was the only scientific evidence
implicating Matthews, the State’s lay witnesses were beset with credibility problems, none
of the State’s witnesses purported to have witnessed the shooting, and Bragg’s testimony
was “important” to the defense because “Matthews is African American, whereas Bragg
described seeing a white man with blonde hair carry and ‘cock’ a shotgun in front of her
house[,]” Maj. Slip Op. at 22. Indeed, the Court of Special Appeals described the
circumstances of the case as follows:
- 16 -
For the above reasons, respectfully, I dissent.
The story of this case is complicated and hard to follow. A great many people
were involved; many of them are related, others have lived in the affected
neighborhood for years. Everything happened late at night, and the
participants’ vision and memories were incomplete and frequently clouded
by substances. There was some video footage, but it too was incomplete.
The challenge for everyone lay in piecing together fragments of evidence that
took many different forms.
Matthews, 249 Md. App. at 516, 246 A.3d at 648.
- 17 -
STATE OF MARYLAND * IN THE
* COURT OF APPEALS
* OF MARYLAND
v.
* COA-REG-0015-2021
* No. 15
KIRK MATTHEWS * September Term, 2021
ORDER
Upon consideration of the Motion for Corrected Mandate as to Costs filed on
October 28, 2022, by Petitioner, State of Maryland, and no opposition having been filed by
Respondent, Kirk Matthews, it is this 21st day of November, 2022,
ORDERED, by the Court of Appeals of Maryland that the Motion for Corrected
Mandate as to Costs filed by Petitioner, State of Maryland, on October 28, 2022, is
GRANTED; and it is further
ORDERED, that the final sentence of the Mandate set forth at the conclusion of the
Majority Opinion in the above-captioned case is modified to read as follows: “COSTS IN
THE COURT OF SPECIAL APPEALS AND THIS COURT TO BE PAID BY
RESPONDENT.”
/s/ Shirley M. Watts
Senior Judge
*Judge Wilner, Judge Getty, and Judge McDonald participated in the consideration of this
matter.
**Chief Judge Fader, Judge Gould, and Judge Eaves did not participate in the consideration
of this matter. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488317/ | DLD-030 NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 22-2994
___________
IN RE: BRIAN A. PERRI,
Petitioner
____________________________________
On a Petition for Writ of Audita Querela from the
United States District Court for the Eastern District of Pennsylvania
(Related to Crim. No. 2:15-cr-00486-001)
____________________________________
Submitted Pursuant to Rule 21, Fed. R. App. P.
November17, 2022
Before: JORDAN, SHWARTZ, and SCIRICA, Circuit Judges
(Opinion filed: November 21, 2022)
___________
OPINION *
___________
PER CURIAM
Brian Perri has filed a petition for a writ of audita querela. For the reasons below,
we will deny the petition.
In 2016, Brian Perri pleaded guilty in the United States District Court for the
Eastern District of Pennsylvania to a three-count indictment that charged him with
transportation and possession of child pornography. The indictment also included a notice
*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.
of forfeiture, which provided that Perri would forfeit property used to facilitate the
crimes. The executed plea agreement provided that Perri would not contest forfeiture.
The Government moved for entry of judgment and a preliminary notice of forfeiture,
detailing the subject property as three laptop computers and one external hard drive.
During the sentencing hearing, Perri’s counsel acknowledged the motion and declined to
object. The District Court entered the preliminary notice of forfeiture, sentenced Perri to
10 years’ imprisonment followed by 15 years of supervised release, and noted on the
judgment that the computers and hard drive were subject to forfeiture. Perri did not file a
direct appeal. 1
Notice of the judgment and preliminary order of forfeiture was published on an
official government website for 30 days in 2017. On March 28, 2022, the Government
moved for a final order of forfeiture, which the District Court granted on April 4, 2022.
Perri moved to vacate that order, and the District Court denied his motion. 2
Perri then filed this petition under the All Writs Act, 28 U.S.C. § 1651, for a writ
of audita querela to vacate the forfeiture order. 3 “The common law writ of audita querela
1
Perri later filed a motion pursuant to 28 U.S.C. § 2241, which the District Court
construed as seeking relief under 28 U.S.C. § 2255. The District Court dismissed the
motion as time barred and meritless, and this Court denied a certificate of appealability.
Perri v. United States, C.A. No. 18-3471 (order entered Apr. 24, 2019).
2
Perri filed a notice of appeal as to the District Court’s order denying vacatur of the final
forfeiture order, opening a separate appeal. See United States v. Perri, C.A. No. 22-2224.
3
We assume for present purposes that such a petition may be raised in this Court in the
first instance. See 28 U.S.C. § 1651. To the extent that it may not, we construe Perri’s
2
permitted a defendant to obtain relief against a judgment or execution because of some
defense . . . arising subsequent to the rendition of the judgment.” Massey v. United
States, 581 F.3d 172, 174 (3d Cir. 2009) (citation and internal quotation marks omitted),
cert. denied, 130 S. Ct. 2426 (2010). It “has been abolished in civil cases . . . [but] is
available in criminal cases to the extent that it fills in gaps in the current system of post-
conviction relief.” Id. Such a gap must be systemic and not merely reflect a defendant’s
inability to use available remedies. See Cradle v. United States ex rel. Miner, 290 F.3d
536, 538 (3d Cir. 2002) (stating that “[i]t is the inefficacy of the remedy, not the personal
inability to use it, that is determinative”).
Perri has failed to identify a gap in the post-conviction relief system here and we
perceive none. The preliminary order of forfeiture entered at his sentencing and the
portion of his criminal judgment reflecting the forfeiture could have been challenged on
direct appeal. See United States v. Cheeseman, 600 F.3d 270, 275 n.4 (3d Cir. 2010)
(explaining that “a forfeiture becomes final at sentencing and that a defendant may appeal
a forfeiture order once sentenced”); Fed. R. Crim. P. 32.2(b)(4). Thus, if Perri wished to
challenge the forfeiture order, he should have filed a direct appeal from the criminal
filing as a petition for writ of mandamus under § 1651 and deny it for the same reason
discussed below, namely that other avenues exist for the relief Perri seeks. See, e.g., In re
Kensington Int’l Ltd., 353 F.3d 211, 219 (3d Cir. 2003) (“If, in effect, an appeal will lie,
mandamus will not.”).
3
judgment. While his failure to do so in a timely fashion may lead to a personal inability to
seek redress now, it does not reflect a systemic gap in post-conviction remedies. 4
Accordingly, we will deny the petition for a writ of audita querela.
4
We also reject Perri’s meritless assertion that the Supreme Court’s decision in
Honeycutt v. United States, 137 S. Ct. 1626 (2017), provides him with a defense to the
forfeiture that arose subsequent to the criminal judgment.
4 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488329/ | USCA11 Case: 21-11906 Date Filed: 11/21/2022 Page: 1 of 22
[PUBLISH]
In the
United States Court of Appeals
For the Eleventh Circuit
____________________
No. 21-11906
____________________
MARIA DOLORES CANTO MARTI,
as personal representative of the Estates of Dolores Martí Mercadé
and Fernando Canto Bory,
Plaintiff-Appellant,
versus
IBEROSTAR HOTELES Y APARTAMENTOS S.L.,
a Spanish limited liability company,
Defendant-Appellee.
____________________
Appeal from the United States District Court
for the Southern District of Florida
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2 Opinion of the Court 21-11906
D.C. Docket No. 1:20-cv-20078-RNS
____________________
Before WILLIAM PRYOR, Chief Judge, JILL PRYOR, and GRANT,
Circuit Judges.
GRANT, Circuit Judge:
Maria Dolores Canto Marti has waited almost three years
for Iberostar Hoteles y Apartamentos S.L. to respond to her
lawsuit. In January 2020 she sued Iberostar under the Helms-
Burton Act, which grants the right to sue companies trafficking in
property confiscated by the Cuban government. 22 U.S.C. § 6082.
Marti claims that Cuba seized her family’s hotel in 1961 and that
Iberostar and the Cuban government now operate the hotel
together.
Shortly after the suit was filed, the district court stayed the
case at Iberostar’s request. In support of the stay, Iberostar pointed
to a European Union blocking regulation that prohibits
participation in Helms-Burton suits—on pain of a fine that could
reach 600,000 euros here. Iberostar had applied for an exception to
the regulation, and the district court stayed the case pending the
European Commission’s decision. The suit has remained frozen
ever since.
As months passed with no progress from the European
Commission, Marti sought to end the stay. She twice moved to lift
it, first in July 2020 and again in March 2021. The district court
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21-11906 Opinion of the Court 3
refused, relying on international comity, fairness, and judicial
economy. Marti now appeals the denial of her second motion.
European Commission deliberations have stopped this case
in its tracks, with no end in sight. Marti has effectively been pushed
out of federal court. That means we have jurisdiction over the stay
order, which is “immoderate” and thus unlawful. It is indefinite in
duration and has stalled the case for almost three years.
Considering this delay, we find that any earlier justifications for the
stay have eroded. We reverse the district court’s denial of Marti’s
renewed motion and vacate the stay. The case must go on.
I.
The story of this suit began over sixty years ago. In 1959,
Fidel Castro seized power in Cuba and started to confiscate
property from thousands of United States nationals and millions of
his own citizens, many of whom later claimed asylum in the United
States. See 22 U.S.C. § 6081. According to Marti, the Cuban
government seized a hotel called “El Imperial” that belonged in
part to her father, Fernando Canto Bory, whose family had owned
the land and hotel since 1909. At some point, Bory and his wife,
Dolores Martí Mercadé, became United States citizens. Although
the two are now deceased, they allegedly never abandoned their
combined one-half interest in the property.
Iberostar entered the picture in 2016. That was the year
Marti says that Iberostar contracted with the Cuban government
to manage and operate El Imperial, now known as the Cubanacan
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4 Opinion of the Court 21-11906
Imperial. Marti alleges that Iberostar profits from this arrangement
without authorization from the true owners of the hotel, including
the heirs of Bory and Mercadé. She now sues for damages as the
personal representative of both estates under the Cuban Liberty
and Democratic Solidarity (LIBERTAD) Act of 1996, 22 U.S.C.
§§ 6021–6091.
Under that law, also known as the Helms-Burton Act, a
United States national who owns a claim to confiscated property
may sue any entity or person who “traffics in property which was
confiscated by the Cuban Government on or after January 1, 1959.”
22 U.S.C. § 6082(a)(1)(A). Although it was enacted more than
twenty-five years ago, Helms-Burton only recently gained teeth—
it had been suspended by every United States president since its
inception. But in 2019, the suspension lapsed. It has not been
renewed since.
What has been renewed is the importance of oppositional
measures taken by the European Union. Just a few months after
Helms-Burton was passed, the European Union enacted a
regulation barring EU companies from complying with “any
requirement or prohibition, including requests of foreign courts”
that is based on certain laws, including the Helms-Burton Act. See
Council Regulation 2271/96, arts. 5, 11, annex, 1996 O.J. (L 309) 1,
2–5 (EC). The regulation asserts that Helms-Burton could damage
European Union interests by spurring United States legal
proceedings against European companies. Id. at 5. Member states
set their own penalties for violations, and Spain (where Iberostar is
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21-11906 Opinion of the Court 5
incorporated) imposes a fine of up to 600,000 euros for breaches.1
See id. art. 9; B.O.E. 1998, 16716 art. 5 (Spain). No one contests
that the EU regulation seeks to obstruct suits like Marti’s—even
Iberostar has called it a “blocking regulation.”
The regulation does, however, create an exception.
Companies may petition the European Commission for
authorization to litigate under one of the disfavored laws, “to the
extent that non-compliance would seriously damage their
interests” or those of the European Union. See 1996 O.J. (L 309),
arts. 5, 7. As the Commission deliberates on these applications, it
is instructed to set its own internal deadlines while taking “fully
into account the time limits” that bind the person or entity applying
for the exception. Id. art. 7(b).
Iberostar applied for an exception on April 15, 2020, a few
weeks before its answer was due. Right after applying, Iberostar
moved in the district court to stay the proceedings while it waited
for a decision from the Commission. The initial request was
limited to a stay of seventy-five days.
The district court granted the stay on April 24, 2020 in “the
interest of international comity.” The court’s order also
emphasized the fine that Iberostar could face if it chose to litigate
without authorization. Perhaps in recognition of that concern, the
1 Though the law expresses the fine in pesetas, Spain’s currency at the time of
passage, the parties agree that the maximum fine for a breach under Spanish
law is 600,000 euros.
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6 Opinion of the Court 21-11906
court stayed the case not for seventy-five days, as Iberostar had
requested, but “until the European Union grants Iberostar’s
request for authorization.” The court also required status reports
from Iberostar every thirty days.
Three months came and went with no decision from the
Commission. Marti moved to lift the stay, noting that more than
seventy-five days had passed. She also protested that she had no
way to evaluate the Commission’s progress; although she had
asked for copies of Iberostar’s application and other
correspondence, Iberostar refused to disclose any of its
communications with the Commission or Spanish authorities.
That left Marti (and the court) with only Iberostar’s status reports.
Apart from this information deficit, Marti argued, comity did not
demand that United States courts defer to proceedings under
foreign blocking statutes, and the indefinite stay was otherwise
improper. In response, Iberostar asserted that the stay was neither
improper nor indefinite because it was justified by international
comity and because the Commission proceeding was moving
forward.
The district court sided with Iberostar roughly two months
later, in a September 2020 order. Marti v. Iberostar Hoteles y
Apartamentos S.L., No. 20-20078-Civ, 2020 WL 5573265 (S.D. Fla.
Sept. 17, 2020). In deciding to maintain the stay, the court built its
analysis on three principles. The court reasoned that
(1) international comity favored a stay because the European
Commission has a “strong interest in evaluating its own rules and
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21-11906 Opinion of the Court 7
regulations”; (2) fairness to the litigants favored a stay because
Iberostar faced potential fines of up to 600,000 euros; and
(3) judicial efficiency favored a stay because “there is no reason to
presume that the European Commission is unlikely to render a
prompt decision.” Id. at *2–4. The court also concluded that its
stay was “not indefinite because it will end as soon as the European
Commission rules on Iberostar’s application.” Id. at *3.
Five more months passed, along with six more status
reports. In these reports, Iberostar relayed a few updates from the
Commission. According to Iberostar, in September 2020 the
Commission highlighted the “complexity” of the request. Two
months later the Commission blamed the “challenges presented”
by the Covid-19 pandemic for lengthening the process. The next
month it claimed to be “actively liaising” and it assured Iberostar
that any “assessments and investigations will shortly be completed
and the authorization process will pursue its course.” In February
2021, however, the Commission reported that its process had
“raised questions and possible gaps of information that require
further investigation.”
About two weeks later, in March 2021, Marti renewed her
motion to lift the stay and asked, in the alternative, for the district
court to certify an appeal under 28 U.S.C. § 1292(b). She reiterated
her previous arguments and emphasized the continuing passage of
time: “Over 300 days have passed since Defendant submitted its
application,” she said, and “there is no end in sight.” She also
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8 Opinion of the Court 21-11906
argued that Iberostar’s reports of its conversations with the
Commission revealed a pattern of endless delay.
The district court denied both requests two months later in
May 2021. But rather than considering the motion anew, the court
construed Marti’s filing as a motion to reconsider the earlier
September 2020 order denying the first motion to lift the stay.
“Reconsideration is appropriate only in very limited
circumstances,” the court said, and besides “the passage of
additional time, the circumstances presented by this matter have
not changed.” The court also clarified that the stay would last only
until the Commission issued a decision on Iberostar’s application,
even if that decision was a denial of the company’s request. Finally,
the court declined to certify the question for appeal under
§ 1292(b).
Marti now appeals the district court’s May 2021 denial of her
renewed motion to lift the stay, citing 28 U.S.C. § 1291 and the
collateral order doctrine for jurisdiction. She appeals only the May
2021 order, and not the earlier September 2020 denial or the
original April 2020 order staying the case.
II.
Whether Marti’s March 2021 motion is construed as a
motion for reconsideration or a renewed motion, we review for
abuse of discretion. See CTI-Container Leasing Corp. v. Uiterwyk
Corp., 685 F.2d 1284, 1288 (11th Cir. 1982) (stay orders); Corwin v.
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21-11906 Opinion of the Court 9
Walt Disney Co., 475 F.3d 1239, 1254 (11th Cir. 2007) (motions for
reconsideration).
III.
Marti styled her March 2021 filing as a renewed motion to
lift the stay, and we agree with that characterization. The motion
explained that circumstances had changed substantially since the
district court’s original denial in September 2020. Over five more
months had passed without a decision from the Commission—so
the length of the stay had more than doubled. And Marti had
learned from Iberostar’s status reports that the Commission had
reported delays in its process resulting from the complexity of the
issues, the Covid-19 pandemic, and various consultations that it
said required further investigation. The new circumstances here
are “important enough that the latest motion is a viable being in its
own right instead of merely a re-packaging in new garb of the
corpse of an old motion in an attempt to resurrect it.” Birmingham
Fire Fighters Ass’n 117 v. Jefferson Cnty., 290 F.3d 1250, 1254 (11th
Cir. 2002). Significant updates—surrounding a stay with no
specified end date—rendered Marti’s request a renewed motion,
and not a motion for reconsideration.2
2 For these reasons, Marti’s appeal was also timely.
Marti appealed within the
standard thirty-day window for appeal of a “judgment or order.” See Fed. R.
App. P. 4(a)(1)(A). We allow appeals of motions to vacate preliminary
injunctions in similar circumstances. See Birmingham Fire Fighters Ass’n 117,
290 F.3d at 1254.
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10 Opinion of the Court 21-11906
The unique context of a stay admittedly leaves the line
between a renewed motion and a motion for reconsideration
blurry in some circumstances. But here, the district court needed
to review a wide range of facts and circumstances that had emerged
since its previous denial, all of which were crucial to deciding the
question. That is enough to satisfy us that this was necessarily a
renewed motion.
IV.
We now turn to whether we have jurisdiction to hear the
appeal. Congress has granted this Court jurisdiction to hear “final
decisions,” a term that ordinarily refers to decisions ending
litigation on the merits. 28 U.S.C. § 1291; Plaintiff A v. Schair, 744
F.3d 1247, 1252 (11th Cir. 2014). And the “usual rule,” is that a stay
falls outside that category. Moses H. Cone Mem’l Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 10 n.11 (1983). After all, stay
orders generally leave much to be decided. But some stays come
closer to ending litigation than to delaying it. When a stay order
puts a defendant “effectively out of court” we have used a
“practical construction of finality” to treat that order as final for
purposes of § 1291. Miccosukee Tribe of Indians of Florida v. South
Florida Water Mgmt. Dist., 559 F.3d 1191, 1195 (11th Cir. 2009)
(quotations omitted). Because the court’s May 2021 denial left
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21-11906 Opinion of the Court 11
Marti effectively out of court, we conclude that we have
jurisdiction.3
A.
“Effectively out of court” jurisdiction was first recognized by
the Supreme Court in Idlewild Bon Voyage Liquor Corp. v.
Epstein, 370 U.S. 713 (1962). There, a district court had decided to
wait for state courts to decide a particular legal question before it
heard the plaintiff’s claims. Id. at 714. There was just one
problem—no relevant state case had even been filed. Id.
Consequently, the stay effectively barred the litigants from federal
court, which made the district court’s order final for jurisdictional
purposes. Id. at 715 n.2. The Supreme Court later elaborated that
“most stays do not put the plaintiff ‘effectively out of court’”—but
“a stay order is final when the sole purpose and effect of the stay
are precisely to surrender jurisdiction of a federal suit to a state
court.” Moses H. Cone, 460 U.S. at 10 n.11.
To concede in that sort of jurisdictional surrender would
violate the federal courts’ “virtually unflagging obligation” to
exercise jurisdiction. See id. at 15 (quoting Colorado River Water
Conservation Dist. v. United States, 424 U.S. 800, 817 (1976)). And
this same logic led our Circuit to extend “effectively out of court”
jurisdiction to stays entered out of deference to non-state
3 Marti also argued that jurisdiction is proper under the collateral order
doctrine. Because we have jurisdiction under § 1291, we need not consider
this argument.
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12 Opinion of the Court 21-11906
proceedings—including those in foreign countries. Miccosukee,
559 F.3d at 1195.
One way parties may be exiled from the federal court system
and thus “effectively out of court” is when their proceeding is
placed into what we have called a state of “suspended animation.”
Id. at 1197. In Miccosukee, we observed that this Court has found
suspended animation four times. See id. Each time, a federal court
had entered a stay to wait for a different legal proceeding to
conclude—a case in Italian court, a case in a state court, a
jurisdictional inquiry in the Iran Claims Tribunal, and a proceeding
with the Equal Employment Opportunity Commission. See King
v. Cessna Aircraft Co., 505 F.3d 1160, 1169 (11th Cir. 2007);
American Mfrs. Mut. Ins. Co. v. Edward D. Stone, Jr. & Assoc., 743
F.2d 1519, 1522–23 (11th Cir. 1984); CTI-Container, 685 F.2d at
1287–88; Hines v. D’Artois, 531 F.2d 726, 728–32 (5th Cir. 1976). 4
Those four cases also had something else in common: each
of their stays had resulted in “indefinite delays pending the
outcome of proceedings that were unlikely to control or to narrow
substantially the claims or unresolved issues in the stayed lawsuit.”
Miccosukee, 559 F.3d at 1197. The claims in those cases thus
“languished for no good reason.” Id.
4 In our en banc decision in Bonner v. City of Prichard, 661 F.2d 1206, 1209
(11th Cir. 1981), we adopted as binding precedent all decisions of the former
Fifth Circuit handed down before October 1, 1981.
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21-11906 Opinion of the Court 13
Of course, not every stay puts a case in suspended
animation. In Miccosukee itself, the district court had stayed the
case to await the outcome of a parallel appeal—one that was filed
in the same federal district court, between the same parties, and
relating to largely the same issues. Id. at 1193, 1196–98. The
appealed case was “likely to have a substantial or controlling effect”
on the stayed case, which we said was a “good,” if not “excellent”
reason for the stay. Id. at 1198. Put another way, Miccosukee
lacked what unified our prior precedents: a stay resulting in
indefinite delays in favor of a proceeding that was unlikely to
substantially affect the merits of the stayed case.
B.
Guided by Miccosukee’s insights, we consider whether
Marti is effectively out of court by suspended animation.
To begin, it is plain enough that the stay here has resulted in
indefinite delays. When the district court issued the May 2021
order on appeal, the stay had already been in place for over a year—
a lengthy delay. And as the district court emphasized in its order,
the case will only proceed “once the European Commission
reaches a decision.” This condition puts the stay entirely at the
discretion of the Commission, a body that has not proved diligent
in its timing. A stay dependent on the complete discretion of a third
party is almost definitionally indefinite—it has no exact or even
reasonably foreseeable limits.
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14 Opinion of the Court 21-11906
Here, European discretion appears absolute. The blocking
regulation includes no deadlines or timetables for the application
process, and the Commission has not shown steady progress
toward a final decision. See 1996 O.J. (L 309), art. 7. And because
Marti and Iberostar agree that the regulation has “rarely been
tested, and never in the context of a Helms-Burton Act lawsuit such
as this one,” no party has pointed to a historical pattern that could
supply a practical estimate for the length of this process. Compare
CTI-Container, 685 F.2d at 1288 (finding stay indefinite where it
was “difficult to accurately predict” how long the Iran Claims
Tribunal would take to decide its jurisdiction), with Miccosukee,
559 F.3d at 1198 (declining jurisdiction over a stay while appeal was
pending in this Circuit). The “nature, extent, and duration” of the
EU proceeding is unknown; the stay is indefinite. Cessna Aircraft,
505 F.3d at 1169.
The Commission proceeding is also “unlikely to control or
to narrow substantially the claims or unresolved issues in the
stayed lawsuit.” Miccosukee, 559 F.3d at 1197. The proceeding is
entirely unrelated to the merits of this case. Instead, the
Commission will make a purely administrative decision: whether
to authorize Iberostar to defend itself in United States courts or
impede it from doing so. That is all—the administrative decision
will affect neither Marti’s claims nor Iberostar’s defenses. It will
not supply new facts or rule on issues relevant to these claims and
defenses. It has no relation to the claims or issues before the court.
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21-11906 Opinion of the Court 15
Iberostar protests that the Commission’s decision will
“control or significantly inform” this case because it will “govern
whether Iberostar will defend on the merits or will be required to
decide between defaulting or facing hefty fines.” We can see why
Iberostar would like to have that information—the Commission’s
decision will affect the company’s cost-benefit analysis, litigation
strategy, and incentives to settle. All the same, that decision will
not control or inform the legal or factual issues of the case.
We have retained jurisdiction to consider stays even when
the outside proceeding had a much stronger potential effect on the
stayed case than the one here. In CTI-Container, for example, the
Iran Claims Tribunal would have considered the merits of the
defendant’s impleader claim if it had concluded that it had
jurisdiction. See 685 F.2d at 1287–88. In Cessna Aircraft, both
proceedings involved facts about “the same accident” and the
district court believed the Italian case would resolve some of the
Italian law issues in the stayed case. 505 F.3d at 1164–65. And in
Hines, the EEOC action was based on the same alleged
discrimination, so any EEOC investigation or conciliation could
have informed the claims in the stayed case. See 531 F.2d at 728.
Even so, this Court still exercised jurisdiction in all three cases.
Jurisdiction is all the more appropriate here, where the
Commission’s administrative decision will have no conceivable
relation to the claims and issues of this case.
In sum, as of the district court’s May 2021 order (if not
before), Marti’s case was in suspended animation and she was
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16 Opinion of the Court 21-11906
effectively out of court. This case has the “one characteristic”
shared by all four previous cases in this Circuit of suspended
animation: a stay “resulting in indefinite delays pending the
outcome of proceedings that were unlikely to control or to narrow
substantially the claims or unresolved issues in the stayed lawsuit.”
Miccosukee, 559 F.3d at 1197. Jurisdiction is proper under 28
U.S.C. § 1291.
V.
Because we have jurisdiction, we move to the substantive
question—whether to vacate the stay. A district court has “general
discretionary power to stay proceedings before it in the control of
its docket and in the interests of justice.” Hines, 531 F.2d at 733.
Consequently, appellate courts will rarely interfere with stay
orders. But if a stay is “immoderate,” we must vacate it. Id.;
Ortega Trujillo v. Conover & Co. Commc’ns, Inc., 221 F.3d 1262,
1264 (11th Cir. 2000). This one is.
Generally speaking, a stay is not “immoderate” or
“unlawful” if it is designed so that “its force will be spent within
reasonable limits.” Landis v. N. Am. Co., 299 U.S. 248, 257 (1936);
see also CTI-Container, 685 F.2d at 1288. But if it goes beyond
those reasonable limits the equation changes. In evaluating
whether a stay is immoderate, this Court examines “both the scope
of the stay (including its potential duration) and the reasons cited
by the district court for the stay.” Trujillo, 221 F.3d at 1264.
Whether a stay is immoderate hinges on these “two variables.”
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21-11906 Opinion of the Court 17
Hines, 531 F.2d at 733. Here, these points overlap somewhat with
our jurisdictional analysis.
The first factor is easy enough: this stay is indefinite in
duration and scope. Again—the entire case is stayed until the date
of the Commission decision. That date cannot be predicted and
may never occur. Cf. Trujillo, 221 F.3d at 1264.
The second factor requires more analysis, though in the end
it also points against the stay—the district court’s reasoning is not
tenable. The court cited three reasons for its decision:
(1) international comity; (2) fairness to litigants; and (3) judicial
economy.5 These reasons cannot support the stay.
First, international comity. International comity works to
“promote justice between individuals, and to produce a friendly
intercourse between the sovereignties to which they belong.”
Hilton v. Guyot, 159 U.S. 113, 165 (1895) (quotation omitted). It is
not, however, a “matter of absolute obligation, on the one hand,
nor of mere courtesy and good will, upon the other.” Id. at 163–
64.
5 These are the same three “principles” set out in Turner, which considered
whether a lawsuit should have been stayed or dismissed out of deference to
parallel German proceedings. See Turner Ent. Co. v. Degeto Film GmbH, 25
F.3d 1512, 1518 (11th Cir. 1994). Marti asserts that Turner is not an
appropriate comparator case, but we need not decide whether that framework
is workable here to analyze the court’s reasoning.
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18 Opinion of the Court 21-11906
Before considering international comity, a “threshold
question” is whether the proceedings are parallel. Seguros Del
Estado, S.A., v. Scientific Games, Inc., 262 F.3d 1164, 1169–70 (11th
Cir. 2001). The two proceedings here are not because they involve
“materially different issues, documents, and parties.” Id. at 1170;
see also Finova Cap. Corp. v. Ryan Helicopters U.S.A., Inc., 180
F.3d 896, 898 (7th Cir. 1999) (“Suits are parallel if substantially the
same parties are litigating substantially the same issues
simultaneously in two fora.” (quotation omitted)). Marti is not a
party to the Commission deliberation. That deliberation will lead
to a foreign administrative decision, not a judicial act.6 And that
administrative decision will have no effect on the claims here—it
will only influence how one party chooses to litigate.
Three other circumstances of this case further blunt any
force international comity might have as a justification. The
Commission is deliberating under a regulation designed to block
United States law; Iberostar admits as much. And foreign blocking
statutes are not always given the same deference as other rules of
law. Cf. Société Nationale Industrielle Aérospatiale v. U.S. Dist.
Ct. for the S. Dist. of Iowa, 482 U.S. 522, 544 n.29 (1987). Just so
6 Our cases considering international comity have generally occurred in the
context of whether to abstain out of deference to a foreign court, not an
administrative body. See, e.g., Turner, 25 F.3d at 1523 (staying case out of
deference to judgment in a German court case); Posner v. Essex Ins. Co., 178
F.3d 1209, 1224 (11th Cir. 1999) (staying case out of deference to Bermuda
court action); Belize Telecom, Ltd. v. Gov’t of Belize, 528 F.3d 1298, 1308
(11th Cir. 2008) (deferring to a judgment by a court in Belize).
USCA11 Case: 21-11906 Date Filed: 11/21/2022 Page: 19 of 22
21-11906 Opinion of the Court 19
here, where the competing regulation does not just overlap with
United States law generally, but targets the basis for Marti’s suit
specifically. 1996 O.J. (L 309) at 5. We see no reason that comity
should require indefinite suspension of United States law so that a
foreign blocking statute can have its full effect.
Timing plays a role here too. Over two and a half years have
passed since Iberostar first filed its application. We need not decide
when comity expires to recognize that less deference is owed to the
Commission after a few years than after a few days. 7 In fact, the
regulation itself anticipates that applicants for an exception may be
under other deadlines; as we have said, it instructs the Commission
to take “fully into account the time limits which have to be
complied with” as it decides when to issue an opinion. 1996 O.J. (L
309), art. 7(b). It thus recognizes that comity may not always result
in indefinite—much less infinite—accommodation.
Finally, the Commission has not followed through on its
own deadlines. As long ago as December 2020, Iberostar reported
that the Commission’s “assessments and investigations” would
“shortly be completed.” One and a half “short” years later, the
Commission finally provided an estimated decision date. From
Iberostar’s August 2022 status report: “The Commission stated that
it was about to conclude its assessment and the Commission will
7 When asked, Iberostar’s counsel agreed that “at a certain point it does
become too long” to wait for the Commission.
USCA11 Case: 21-11906 Date Filed: 11/21/2022 Page: 20 of 22
20 Opinion of the Court 21-11906
deliver its response ‘by mid-September 2022’ after the summer
recess.”
Mid-September has passed. As have mid-October and mid-
November. The Commission’s unwillingness to commit to its
own deadlines underscores the limits of international comity: less
deference and respect is owed to a foreign body that has not
followed through with its own representations about the length of
its proceeding. Comity cannot justify continuing this stay any
longer.
The second rationale the district court offered was fairness
to the parties. The court determined that the balance of harms
supported the stay because Marti’s harm was “speculative,” while
Iberostar’s was “immediate and concrete.”
We see the harms differently. When evaluating stays, courts
must also consider “the danger of denying justice by delay.”
Gillespie v. U.S. Steel Corp., 379 U.S. 148, 153 (1964) (quotation
omitted). Even ignoring Marti’s concerns about ultimate relief, she
suffers an ever-mounting harm from each passing month without
an opportunity to present her arguments in court. Meanwhile,
Iberostar’s potential fine is anything but immediate and concrete.
Even if the Spanish government chooses to levy a fine—under a
regulation it has never used before—the amount is unclear. The
fine is up to 600,000 euros, which leaves a wide range. B.O.E. 1998,
16716 art. 5. And even if the stay were lifted and the Commission
did not grant an exception, Iberostar may never pay a fine in any
event; it could choose to settle, lobby the Spanish government for
USCA11 Case: 21-11906 Date Filed: 11/21/2022 Page: 21 of 22
21-11906 Opinion of the Court 21
relief from the fine, or not participate in the suit. Iberostar’s harms
are thus more speculative than Marti’s. On balance, fairness to the
litigants does not favor continuing the stay.
Lastly, the court relied on the “efficient use of judicial
resources” in continuing the stay. In explaining this justification,
the court said only that judicial economy weighed in favor of the
stay because there was “no reason to presume that the European
Commission is unlikely to render a prompt decision.”
That rationale has evaporated. With the additional passage
of time, ample reason now exists to doubt the Commission’s
promptness. What’s more, because nothing the Commission says
will affect the merits of this case, waiting on its decision serves
more to conserve Iberostar’s resources than those of the United
States courts.
In short, all signs point to an immoderate stay. This stay’s
duration is indefinite, and the Commission has supplied no reliable
projection for the timing of its decision. Each reason cited to justify
the stay has either been eroded by the passage of time or negated
by the nature and progress (or lack thereof) of the Commission
proceeding. As a result, we conclude that the stay is immoderate
and must be vacated.
* * *
Almost three years have passed since Marti first filed her
lawsuit. She cannot recoup those three years. But now she can
pursue her claims, Iberostar can assert its defenses, and this suit can
USCA11 Case: 21-11906 Date Filed: 11/21/2022 Page: 22 of 22
22 Opinion of the Court 21-11906
continue. We REVERSE the court’s May 2021 order denying the
renewed motion to lift the stay, VACATE the stay, and REMAND
for the case to proceed. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488337/ | Filed 11/21/22 P. v. Johnson CA3
NOT TO BE PUBLISHED
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
THIRD APPELLATE DISTRICT
(Sacramento)
----
THE PEOPLE, C094159
Plaintiff and Respondent, (Super. Ct. No. 93F07155)
v.
ALONZO JOHNSON,
Defendant and Appellant.
In 1993, defendant Alonzo Johnson drove away from William Land Park in his
white sports utility vehicle (SUV) with codefendant, Darrick Jacques Dobynes. A jury
found defendant guilty of murder when Dobynes shot the victim from the SUV on
Freeport Boulevard. Defendant appeals the trial court’s denial of his petition for
resentencing under Penal Code former section 1170.95 (statutory section citations that
follow are found in the Penal Code unless otherwise stated ) because the prosecutor failed
to prove beyond a reasonable doubt defendant and his codefendant were not acting in
self-defense or as a result of a sudden quarrel. We affirm the trial court’s order.
1
FACTS AND HISTORY OF THE PROCEEDINGS
By amended information, the prosecution charged defendant and Dobynes with
first degree murder (§ 187, subd. (a); count 1), and alleged three enhancements to this
count: this was a serious felony, Dobynes used a firearm, and defendant was a principal
in the crime and one or more of the principals were armed with a firearm (§§ 1192.7,
subd. (c)(7), 12022.5, subd. (a), 12022, subd. (a)). The information also charged
defendants with willful discharge of a firearm from a vehicle (§ 246; counts 2 & 3) and
alleged counts 2 and 3 were serious felonies (§ 1192.7, subd. (c)(8)). The information
further alleged defendant allowed Dobynes to discharge a firearm from his vehicle.
(§ 12034, subd. (b); counts 4, 5 & 6.) Finally, the information alleged defendants
committed counts 1 through 3 for the benefit of a street gang. (§ 186.22, subd. (b)(1).)
One Sunday in June 1993, defendant, Dobynes, and their friends went to William
Land Park (Land Park) in defendant’s SUV. Defendant drove and Dobynes was in the
front passenger seat. A month prior to this trip, defendant’s SUV was hit by bullets while
it was parked in Oak Park in an apparent warning for defendant to stay out of Oak Park
Blood territory.
Dobynes was a member of the Meadowview Bloods street gang. Defendant was a
member of the Del Paso Heights Manor Mob Gangsters, a faction of the Del Paso
Heights Bloods. At the time, the Oak Park Bloods considered Land Park part of their
territory. Further, at the time, there was an ongoing feud between the Meadowview
Bloods, the Del Paso Heights Bloods, and the Oak Park Bloods.
Before they went to Land Park, defendant and his friends stopped at a home where
Dobynes armed himself with a .50-caliber handgun. When he returned to the SUV,
Dobynes put the weapon under his seat.
The victim and his cousin S.K. also went to Land Park that day. They were
members of the Oak Park Bloods.
2
When defendant and his friends arrived at Land Park, they spoke with various
women and some rap music artists.
Later that evening, a fight broke out between two women. One of defendant’s
friends, A.A. noticed a large group of the Oak Park Bloods starting to come together.
Defendant, Dobynes, and the other men decided it was time to leave and got into
defendant’s SUV. Shots were fired at the SUV as they drove out of Land Park.
Defendant drove through two cars that attempted to blockade him. Dobynes fired his gun
out of the car window into the air once or twice.
Defendant turned south onto Freeport Boulevard. He drove approximately a mile
and a half before he encountered the victim and S.K. in a blue Oldsmobile Cutlass at
Freeport Boulevard and Wentworth Avenue. At this location, the parties agree the
evidence shows Dobynes fired two shots from the SUV at the blue Cutlass killing the
driver.
Although defendant did not testify at trial, his videotaped statements to police
officers were played for the jury. In the first statement, defendant said he did not have
the SUV with him when he was at Land Park. He claimed he went to Land Park with a
friend named S.R. and they left Land Park via Sutterville Road to I-5 after the shooting
started.
In the second interview with police, defendant admitted he drove his friends to
Land Park in the SUV and he knew Dobynes had a gun with him. After the shooting at
Land Park, but before the fatal confrontation at Freeport Boulevard and Wentworth
Avenue, defendant claimed to have stopped at the Kentucky Fried Chicken parking lot on
Freeport to see if he had any bullet holes in his car. When he saw none, he drove back
onto Freeport. It was then that the blue Cutlass drove up on them and the shooting that
killed the victim occurred. Defendant also admitted to having prior problems with the
Oak Park Bloods when they shot his car. Defendant did not tell the officers he heard or
saw anyone shooting at him while he was driving down Freeport Boulevard.
3
An independent witness, E.R., testified she was in the bank parking lot adjacent to
the shooting when it happened. She testified at trial she heard a loud boom and then
looked up and saw the blue Cutlass come up into the left-hand turn lane and stop. In her
testimony at the preliminary hearing and when she originally spoke to police officers,
however, she said the first sound she heard was the tires screeching. Next, E.R. saw
defendant’s SUV come up quickly next to the blue Cutlass and stop. She saw a person in
the SUV fire at the blue Cutlass from the SUV’s driver’s side window. The SUV then
turned right onto Wentworth and drove away.
The prosecution also presented the testimony of A.A., who was one of the
passengers in defendant’s SUV. His statement to the police and his testimony at trial
were contradictory.
In his original statement to the police, he did not tell the police the occupants of
the blue Cutlass were shooting at defendant’s white SUV and he affirmatively said he did
not see anyone shooting any guns on Freeport Boulevard. A.A. reported when the
victim’s blue Cutlass caught up to them, defendant stared at the blue Cutlass for a minute,
and then said, “There they go, there they go.” Defendant sped up and got right next to
the blue Cutlass and Dobynes shot at it twice through the driver’s side window.
At trial, A.A. testified that while they were traveling down Freeport Boulevard,
A.A. saw Dobynes with a gun in his lap. His testimony about whether they were shot at
and where the shots came from was inconsistent. First he said, the occupants of the blue
Cutlass were following the SUV, shooting at them while they were traveling on Freeport
Boulevard. Next, however, he testified shots were being fired at them but not from the
blue Cutlass. Ultimately, A.A. testified he never saw anyone firing weapons on Freeport
Boulevard.
A.A. testified he saw the blue Cutlass pass them and get in the left-turn lane as if it
was going to make a U-turn. At that time, Dobynes said, “There go them fools that shot
at us right there.” A.A. testified the defendant sped up his car to catch up to the blue
4
Cutlass and defendant said, “That’s the fool that was shooting.” A.A. testified he heard
shots and then saw defendant duck down as Dobynes fired at the blue Cutlass. Later, he
clarified that he did not see shots coming from the blue Cutlass, but there were gunshots
hitting their car.
A second witness in the defendant’s SUV, J.D., Dobynes’ cousin, testified at trial
he heard gunshots as the car went down Freeport Boulevard about a block or two from
the park. Shortly thereafter, he heard two more gunshots coming from right next to or
inside the car. J.D. denied telling a detective on the day of the shooting that he observed
a blue Cutlass following him, but admitted he did tell officers he did not see anyone in
that car fire a weapon. He also testified he told the detective, the only time he heard any
unusual noise was when the car first turned on to Freeport Boulevard from Land Park.
Another witness in the SUV, A.Q., testified he did not hear any gunshots after
Dobynes fired his gun out of the car while leaving Land Park. As they drove down
Freeport Boulevard, he noticed two cars behind the SUV. The blue Cutlass pulled up
beside them at the light where they were stopped. He heard a loud noise that sounded
like a backfire or gunshot from behind the SUV. He ducked down and heard a shot from
inside the SUV. When he looked up, the SUV was pulling off Freeport Boulevard. He
could not identify who fired the weapon from the SUV and did not see any of the
occupants of the SUV with a gun.
A.Q. testified a second blue Cutlass followed them when they made a turn from
the intersection of the shooting for about five minutes. Defendant pulled the car to the
side of the road and the second blue Cutlass passed them, made a U-turn and passed them
again, and made a second U-turn and as it was coming up; Dobynes fired a shot at the
Cutlass.
The prosecution also presented the jury with the preliminary hearing testimony
from S.K., the passenger in the victim’s car. S.K. testified he saw defendant’s white
SUV leave Land Park and a couple guys running after the SUV shooting at it. S.K. and
5
the victim got into their blue Cutlass and drove out of Land Park and turned south onto
Freeport Boulevard intending to go to the victim’s home in Oak Park. Because there
were too many cars trying to turn left on to Sutterville Road, they drove past that street
and got into the left-hand turn lane to make a U-turn to go back. S.K. had no idea how he
and the victim caught up to and passed the SUV. While they were stopped at a light
waiting to make a U-turn, the SUV pulled up beside them and started shooting at them.
The victim said, “I’m hit,” and slumped over.
A gang expert testified that gang members would retaliate for perceived acts of
disrespect by shooting at rival gang members or hurting members of their family. The
expert also opined that if a person were to go into another gang’s territory armed with a
weapon, they were attempting to protect themselves, to commit criminal activity or to
retaliate.
S.K. testified he threatened defendant when he confronted him in jail for his part
in the actions to let him know someone from the Oak Park Bloods would take revenge on
him.
As noted by A.Q.’s testimony, shortly after shooting the victim, defendant and his
friends happened upon another blue Cutlass driven by L.S., a former rival gang member.
L.S. testified he followed the SUV in this car for 10 or 15 minutes and then the SUV
pulled to the side of the road. As L.S. drove by, Dobynes shot at him.
The jury convicted defendant of second degree murder (§ 187, subd. (a)), two
counts of shooting at an occupied vehicle (§ 246), and three counts of permitting another
to shoot from a vehicle (§ 12034, subd. (b)). The jury also found true a principal was
armed with a firearm (§ 12022, subd. (a)) and the murder and shooting at a vehicle
offenses were gang related (§ 186.22, subd. (b)).
The trial court sentenced defendant to 15 years to life on the murder charges plus a
determinative term of eight years four months.
6
In 2020, defendant filed a petition under Senate Bill No. 1437 (2017-2018 Reg.
Sess.) to have his murder conviction vacated and to be resentenced. Senate Bill No. 1437
created a special procedural mechanism for those convicted under the former law to seek
retroactive relief under the law as amended. This provision was originally codified as
section 1170.95. In the wake of the Supreme Court’s decision in People v. Lewis (2021)
11 Cal.5th 952, the Legislature amended section 1170.95 to adopt certain of Lewis’s
holdings. (Stats. 2021, ch. 551, § 1, subd. (b).) The Legislature later renumbered the
provision section 1172.6 without substantive change, effective June 30, 2022. (Stats.
2022, ch. 58, § 10.) Unless otherwise noted, citations in this opinion are to former
section 1170.95, the section in place when the petition was filed and denied by the trial
court. Defendant attached a declaration from Dobynes stating that defendant did not
know Dobynes was going to shoot the victim, nor did defendant help or encourage him.
Dobynes averred he and defendant “were only on [the street] for a couple of minutes,
driving quickly, and in fear, fleeing the park.” Defendant submitted a brief where he
affirmed under penalty of perjury he did not know he was being chased after he left Land
Park until Dobynes fired at the vehicle that pulled up alongside his SUV.
The trial court issued an order to show cause (OSC) for the prosecution to
demonstrate why defendant should not be granted relief pursuant to former section
1170.95, subdivision (c). At the OSC hearing, the prosecution presented the clerk’s and
reporter’s transcripts for the underlying trial, the preliminary hearing testimony of S.K.
read to the jury (summarized above), and the transcripts of the police interview
statements of defendant and A.A. that were provided to the jury.
Although they did not testify at trial, defendant and Dobynes testified in support of
the petition. Dobynes testified he heard gunshots when he was getting into the car to
leave Land Park and heard bullets strike the SUV. Dobynes claimed he was scared so he
shot his gun twice in the air to try to get people to stop shooting at him. He heard more
gunshots and bullets hitting the SUV as they drove away. Dobynes testified he believed
7
they were being followed by a blue Cutlass and another car as they drove down Freeport
Boulevard. Dobynes claimed he was in fear for his life. Dobynes testified the SUV got
caught at a red light and had to stop. When the blue Cutlass pulled up on the left side,
Dobynes heard a couple of shots, so he reached out of the back driver’s side window of
the SUV and shot at the blue Cutlass two times.
Dobynes admitted he told the parole board he was angry when he committed this
crime. He also told them he had a fear of being rejected and losing respect in the gang
culture he was involved in at the time. When asked if he remembered telling the
commissioner, “In the moment, I feel disrespected, you know? I said, I’m gonna kill
these guys. I’m gonna make them pay[,]” Dobynes replied, “I don’t quite remember that
dialogue, but I do remember saying that I feel disrespected, yes.” He also told the parole
board, he made a conscious decision to kill.
Defendant testified he heard shots when he got into the SUV at Land Park. He
looked in his rear-view mirror and saw someone with a gun. While they were on
Freeport Boulevard, someone in the SUV said, “Man, here they go. They coming right
now.” Defendant testified he was still hearing shots, saw cars chasing him, and feared for
his life. When he stopped at the light, the blue Cutlass pulled up on the side of the SUV.
Just before he started to drive forward, he heard gunshots and then Dobynes fired the shot
that killed the victim. He testified three to five minutes passed between the time he left
Land Park and the time of the shooting. On cross-examination, defendant admitted he
knew Dobynes was armed in his SUV and he lied to officers about this at the time he was
interviewed.
The trial court considered the petition and the evidence submitted by the parties.
In its ruling, the trial court liberally cited our prior appellate opinion for the basic facts of
the events of the evening, but also focused on the underlying evidence submitted at the
original trial and the additional evidence submitted in support of the petition on the key
disputed point—did the defendant and Dobynes believe they were being chased by the
8
victim or had they escaped harm and killed in retaliation. The trial court reviewed the
relevant legal standards and found the prosecution met its burden of proving beyond a
reasonable doubt defendant could be convicted of murder under the new law.
The court’s findings rested on four key points. First, the trial court rejected the
self-serving and controverted testimony of Dobynes and defendant that they were being
chased and fired upon and found the testimony of A.A., who was in the SUV, and E.R.,
an independent witness, more credible. These witnesses established defendant was the
one who accelerated to catch up to the blue Cutlass to allow Dobynes to shoot and kill the
victim.
Second, the court found that while defendant and Dobynes might have been in fear
for their lives at the time they left Land Park, at the time they encountered the victims in
the blue Cutlass, they were no longer being shot at and they were no longer in fear,
reasonably or otherwise, but were the aggressors pursuing the victims.
Third, the trial court found Dobynes’s statements at the parole hearing about being
angry, his fear of loss of respect, and wanting to make the victims pay, demonstrated the
nature of the gang culture to which both Dobynes and defendant were a party. This was
further bolstered by the jury’s finding these crimes were undertaken for the benefit of,
and in support of a criminal street gang.
The court also stated a final compelling piece of evidence was the encounter later
that evening after the shooting where defendant maneuvered his car in a position to allow
Dobynes to shoot at L.S., another rival gang member.
The trial court found defendant knew Dobynes intended to commit the crime of
murder; defendant intended to aid and abet Dobynes in the commission of that crime; and
defendant did so by his words and acts. Specifically, defendant, who already had
problems with the Oak Park Bloods, brought Dobynes into Land Park (in Oak Park
Bloods territory) with a loaded firearm. Despite having escaped, defendant and Dobynes
identified the victim, defendant accelerated the SUV into position next to him and ducked
9
down to allow Dobynes to shoot them. The trial court found the prosecution proved
beyond a reasonable doubt defendant committed second degree murder.
Defendant filed this appeal.
DISCUSSION
Defendant contends the evidence was insufficient to find beyond a reasonable
doubt he could be convicted of murder because the prosecution did not prove that the
killing was not justified, and that defendant did not kill as a result of a sudden quarrel or
in the act of perfect or imperfect self-defense. In his reply, he further argues the trial
court erred in considering our prior opinion in his direct appeal.
A. Senate Bill No. 1437
Senate Bill No. 1437 (2017-2018 Reg. Sess.) was enacted “to amend the felony
murder rule and the natural and probable consequences doctrine, as it relates to murder,
to ensure that murder liability is not imposed on a person who is not the actual killer, did
not act with the intent to kill, or was not a major participant in the underlying felony who
acted with reckless indifference to human life.” (Stats. 2018, ch. 1015, § 1, subd. (f).)
As relevant here, the bill amended section 188, which defines malice. Section
188, subdivision (a), now provides, in relevant part: “(a) For purposes of Section 187,
malice may be express or implied. [¶] . . . [¶] (2) Malice is implied when no
considerable provocation appears, or when the circumstances attending the killing show
an abandoned and malignant heart. [¶] (3) Except as stated in subdivision (e) of Section
189, in order to be convicted of murder, a principal in a crime shall act with malice
aforethought. Malice shall not be imputed to a person based solely on his or her
participation in a crime.” (Stats. 2018, ch. 1015, § 2.) The import of the change to
section 188 requires “the prosecution to prove that all principals to a murder acted with
malice aforethought. (§ 188, subd. (a)(3).) Though this change abolished the natural and
probable consequences doctrine, it maintained the viability of murder convictions based
10
on implied malice, and the definition of implied malice remains unchanged. (§ 188.)”
(People v. Clements (2022) 75 Cal.App.5th 276, 298 (Clements).)
Senate Bill No. 1437 also added former section 1170.95, which provides the
procedure by which those convicted of murder premised on either a felony murder or
natural and probable consequences theory can petition for resentencing if they could not
be convicted of first or second degree murder because of changes to sections 188 or 189
by the bill. (Stats. 2018, ch. 1015, § 4; former § 1170.95, subd. (a).)
Upon the issuance of an OSC, the prosecution has the burden “to prove, beyond a
reasonable doubt, that the petitioner is ineligible for resentencing.” (Former § 1170.95,
subd. (d)(3).)
B. Substantial Evidence Standard of Review
In reviewing a trial court’s findings the prosecution has proven defendant is guilty
of murder under current law, “[w]e review the trial judge’s factfinding for substantial
evidence.” (Clements, supra, 75 Cal.App.5th at p. 298.) “We ‘ “examine the entire
record in the light most favorable to the judgment to determine whether it contains
substantial evidence—that is, evidence that is reasonable, credible, and of solid value that
would support a rational trier of fact in finding [the defendant guilty] beyond a reasonable
doubt.” ’ [Citation.] Our job on review is different from the trial judge’s job in deciding
the petition. While the trial judge must review all the relevant evidence, evaluate and
resolve contradictions, and make determinations as to credibility, all under the reasonable
doubt standard, our job is to determine whether there is any substantial evidence,
contradicted or uncontradicted, to support a rational fact finder’s findings beyond a
reasonable doubt.” (Ibid.)
C. Consideration of Appellate Opinion Facts
In his reply brief, defendant argues for the first time the trial court erred when it
considered the recital of facts contained in our prior opinion. We will not normally
11
consider arguments raised for the first time in a reply brief (People v. Duff (2014)
58 Cal.4th 527, 550, fn. 9), however, we requested supplemental briefing from the
Attorney General on this subject and granted its motion to augment the record to include
the clerk and reporter’s transcripts of the original jury trial submitted to the trial court in
conjunction with the petition. We disagree with defendant.
At the time of the evidentiary hearing in this case, former section 1170.95,
subdivision (d)(3) allowed “[t]he prosecutor and the petitioner [to] rely on the record of
conviction or offer new or additional evidence to meet their respective burdens.” (Stats.
2018, ch. 1015, § 4, subd. (d)(3).) It provided no definition as to what the record of
conviction included, or how items in that record could be used by the trial court. Our
Supreme Court had held an appellate opinion is generally “part of the record of
conviction that the trier of fact may consider in determining whether a conviction
qualifies under the sentencing scheme at issue.” (People v. Woodell (1998) 17 Cal.4th
448, 457.) Shortly after the trial court ruled in this case, our Supreme Court reaffirmed
appellate opinions are considered a part of the record of conviction in People v. Lewis,
supra, 11 Cal.5th at page 972, but cautioned an appellate opinion may not supply all the
answers.
Effective January 1, 2022, the Legislature amended former section 1170.95,
subdivision (d)(3) with Senate Bill No. 775 (2021-2022 Reg. Sess.) to clarify what
evidence can be admitted at the OSC hearing and to limit the use of the prior appellate
opinions to “the procedural history of the case recited.” (Stats 2021, ch. 551, § 2; now
codified at § 1172.6, subd. (d)(3).) As a result, a trial court is no longer allowed to rely
on the factual summaries in prior appellate court decisions when deciding a former
section 1170.95 petition after an evidentiary hearing. (Clements, supra, 75 Cal.App.5th
at p. 292.)
While the trial court cited our prior opinion in its recitation of facts, it had the full
trial record, and relevant exhibits before it. The record indicates the trial court reviewed
12
that record when making its ruling rather than blindly relying on the summary of facts in
our prior decision. The prosecution submitted the record as part of its opposition to the
petition and the parties cited that record during argument at the hearing on the former
section 1170.95 petition. Defendant points to no facts stated in the factual summary of
our prior opinion but not contained in the underlying record, and our independent review
of that record confirms the prior decision is in accord with the facts presented to the trial
court at the prior trial. We conclude the trial court did not ignore any relevant evidence
and its use of our opinion that summarized the facts does not invalidate its ruling.
D. Substantial Evidence Supports the Trial Court’s Determination
The key question defendant argues is whether the prosecution proved beyond a
reasonable doubt the killing was not the result of a sudden quarrel or committed in self-
defense (perfect or imperfect). The trial court’s finding the prosecution met its burden of
proving beyond a reasonable doubt defendant could still be convicted of murder is
supported by substantial evidence.
In response to a petition for resentencing, the trial judge need not hold a whole
new trial, rather, “the parties will focus on evidence made relevant by the amendments to
the substantive definition of murder.” (Clements, supra, 75 Cal.App.5th at p. 298.) To
prove second degree murder, the prosecution must demonstrate “ ‘the unlawful killing of
a human being with malice aforethought but without the additional elements, such as
willfulness, premeditation, and deliberation, that would support a conviction of first
degree murder.’ (People v. Knoller (2007) 41 Cal.4th 139, 151.)” (Clements, at p. 299.)
In this case, the elimination of the natural and probable consequences doctrine raises the
question whether the evidence supports a second degree murder verdict under an implied
malice theory beyond a reasonable doubt. Here, it does.
“[T]o be liable for an implied malice murder, the direct aider and abettor must, by
words or conduct, aid the commission of the life-endangering act, not the result of that
13
act. The mens rea, which must be personally harbored by the direct aider and abettor, is
knowledge that the perpetrator intended to commit the act, intent to aid the perpetrator in
the commission of the act, knowledge that the act is dangerous to human life, and acting
in conscious disregard for human life.” (People v. Powell (2021) 63 Cal.App.5th 689,
713, italics omitted.)
Substantial evidence supports the trial court’s finding the prosecution proved
beyond a reasonable doubt defendant knew Dobynes intended to shoot at the victim from
the car; intended to aid Dobynes in the commission of this act; knew that shooting into a
car is dangerous to human life; and acted in conscious disregard for that life.
The evidence before the trial court was defendant had preexisting problems with
the Oak Park Bloods when they shot up his car. There was an ongoing feud between
defendants’ gang and the Oak Park Bloods, and further, the Oak Park Bloods considered
Land Park in their territory. Despite this, defendant brought Dobynes into Land Park,
knowing Dobynes was armed with a .50-caliber handgun. After a fight broke out and
shots were fired, defendant left Land Park in his SUV. On the way out, defendant
allowed Dobynes to fire his weapon into the air from his SUV. After he escaped the
immediate threat and was a mile away from Land Park, he saw the victim’s blue Cutlass
and sped up to catch the car and said, “that’s the fool that was shooting.” Defendant
drove his SUV into a position to give Dobynes a clear shot and ducked down as Dobynes
fired his weapon.
Defendant also argues the trial court erred when it stated no one could identify the
shooters in Land Park when the testimony was “everyone” was shooting at the defendant
and his friends, including people in the blue Cutlass. The trial court’s statement was only
that no particular shooter was identified. This was true.
This does not end the analysis. The actual and reasonable belief a killing is
necessary for self-defense is a complete defense to murder. (People v. Humphrey (1996)
13 Cal.4th 1073, 1082.) Further, an intentional killing based on the honest belief in the
14
need for self-defense that is not objectively reasonable— “imperfect” or “unreasonable”
self-defense—operates to negate the element of malice and reduces the crime from
murder to manslaughter. (Ibid.) In addition, a killing committed in response to a sudden
quarrel or heat of passion negates malice and reduces a charge to manslaughter.
(People v. Najera (2006) 138 Cal.App.4th 212, 223.) “An unlawful homicide is upon
‘ “a sudden quarrel or heat of passion” ’ if the killer’s reason was obscured by a
‘ “provocation” ’ sufficient to cause an ordinary person of average disposition to act
rashly and without deliberation.” (Ibid.)
Defendant’s argument the prosecution did not meet its burden fails because the
trial court rejected defendant’s and Dobynes’ testimony about what happened between
the time they left Land Park and when the murder occurred. Instead, the trial court found
the evidence established defendant escaped the threat and became the aggressor when he
came upon the victims in the blue Cutlass.
The trial court was entitled to reject defendant’s and Dobynes’s testimony and
credit the other evidence. The trial court heard and saw their testimony, neither of whom
testified at the original trial, observed their demeanor as they testified, and certainly
appreciated their own bias in this case. Contrasted with these self-serving statements, the
trial court had evidence from an independent witness standing at the scene who said,
when the events were fresh in her mind, she heard a screech and then saw defendant pull
up to the car and shots fired from the SUV into the blue Cutlass. We reject defendant’s
argument the trial court was required to credit E.R.’s trial testimony that she heard a
boom before she looked up and saw the shooting. The trial court was entitled to credit
her statement that no loud boom occurred (or shots were fired) before defendant attacked
the blue Cutlass based on E.R.’s contemporaneous report to the police and prior
preliminary hearing testimony. (People v. Freeman (1971) 20 Cal.App.3d 488, 494.)
Moreover, the testimony and corroborated contemporaneous statements of S.K.
and A.A. further support the trial court’s findings. Given the trial court’s ability to see
15
and hear the testimonial witnesses’ demeanor and their manner of testimony and review
the contrary evidence in the record by persons without bias, the record provides
substantial evidence supporting the trial court finding the prosecution proved beyond a
reasonable doubt there was no self-defense or sudden quarrel here. (In re Corey (1964)
230 Cal.App.2d 813, 825-826 [the credibility of the witnesses is for the observation and
consideration of the trier of fact, and will not be disturbed unless the testimony is
inherently incredible].)
In addition, there was significant evidence of the gang culture from both
Dobynes’s testimony about his motivation in killing the victim and S.K.’s preliminary
hearing testimony about how he threatened defendant with gang vengeance. Dobynes
told the parole board about how he was angry; how he felt disrespected; how he was
concerned about losing respect; how he was going to kill these guys; and how he was
“gonna make them pay.” Further, S.K. said he told defendant the entire Oak Park Bloods
gang was going to keep an eye on him for killing his relative as a warning defendant
should watch his back.
This gang retaliation mindset was further supported by the evidence defendant
maneuvered his SUV in a place to where Dobynes could shoot at the second blue Cutlass
containing a rival gang member in retaliation, after the first shooting. The jury also
found this killing and the various shots fired by Dobynes were committed for the benefit
of, or in association with a criminal street gang.
We reject defendant’s claim there is no rational explanation as to how the blue
Cutlass got in front of defendant’s SUV as they raced down Freeport Boulevard after the
fight and shooting at Land Park. The traffic conditions described by S.K. are explanation
enough. In addition, this state of facts is equally explained by defendant’s statement he
stopped at the Kentucky Fried Chicken on Freeport to see if he had any bullet holes in his
car.
16
We conclude substantial evidence supports the trial court’s findings the
prosecution demonstrated beyond a reasonable doubt this killing was an intentional act of
gang revenge.
DISPOSITION
The judgment (order) is affirmed.
HULL, Acting P. J.
We concur:
HOCH, J.
RENNER, J.
17 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488336/ | Filed 11/21/22 P. v. Kloster 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
THE PEOPLE,
Plaintiff and Respondent, A164557
v. (City & County of San Francisco
STEPHEN KLOSTER, Super. Ct. No. 232289)
Defendant and Appellant.
Defendant Stephen Kloster appeals a judgment convicting him of
misdemeanor battery. Defendant contends his conviction must be reversed
because he was denied his federal Sixth Amendment and California
constitutional and statutory rights to a speedy trial. We find no prejudicial
error and affirm the judgment.
Background
On December 6, 2019, defendant was charged by information with,
among other things, one count each of assault with force likely to produce
great bodily injury (Pen. Code,1 § 245, subd. (a)(4)), elder abuse likely to
produce great bodily injury (§ 368, subd. (b)(1)) and false imprisonment of an
elder (§ 368, subd. (f)).2
1 All statutory references are to the Penal Code unless otherwise noted.
2 An additional charge of attempted criminal threats (§§ 422, 664) and
enhancement allegations for the infliction of great bodily injury (§ 12022.7,
subd. (a)) were dismissed prior to trial.
1
At his arraignment on December 16, defendant declined to waive his
speedy trial rights. The trial court determined that under section 1382, the
trial was required to commence by February 14, 2020.3 On February 10,
2020, the trial court found good cause to continue the trial to February 21 on
the prosecutor’s motion, based on the unavailability of a witness.4 Four days
later, defendant entered a general waiver of his speedy trial rights.
On August 4, defendant withdrew his general time waiver, and the
court set the latest trial date of October 5, 2020. Defendant, who had been in
custody since his arrest in November 2019, was released on his own
recognizance at this time.
On September 9, the trial court granted defendant’s request for mental
health diversion. Trial was continued during the pendency of defendant’s
diversion until it terminated unsuccessfully on February 3, 2021.
On February 5, defendant was remanded into custody and again
declined to enter a general time waiver. The court identified the last date for
trial under section 1382 as April 6, 2021.
3 Section 1382, subdivision (a) prescribes certain time periods within
which an accused must be brought to trial. The statute provides that, in a
felony case, “the court shall dismiss the action when a defendant is not
brought to trial within 60 days of his or her arraignment on an indictment or
information, unless (1) the defendant enters a general waiver of the 60-day
trial requirement, (2) the defendant requests or consents (expressly or
impliedly) to the setting of a trial date beyond the 60-day period (in which
case the defendant shall be brought to trial on the date set for trial or within
10 days thereafter), or (3) ‘good cause’ is shown.” (People v. Sutton (2010) 48
Cal.4th 533, 545; § 1382, subd. (a)(2).)
4 Defendant then moved to dismiss the charges, arguing that his speedy
trial rights were violated because the continuance was not based on good
cause. The court denied the motion. Defendant does not challenge the denial
of this motion on appeal.
2
On April 6, the court found good cause to continue the trial “due to
exceptional and extraordinary circumstances, under Federal, State and Local
emergency proclamations and in consideration of public health due to the
Covid-19 pandemic.” Trial was set for June 18, 2021. Continuing to rely on
the Covid-19 pandemic as good cause, the trial was continued twice more over
defendant’s objection, first to August 20, 2021, and then to December 15,
2021.
After the second continuance, defendant again filed a motion to dismiss
based on speedy trial grounds. Defendant argued that the pandemic no
longer constituted good cause for the continuance because the San Francisco
Superior Court was no longer under pandemic-related restrictions and
because the court was failing to move through its backlog of cases as
expeditiously as other local courts. The trial court denied the motion. The
court explained, “I appreciate that we’ve had some trial courtrooms that have
not been utilized, but I think if you go through the documents that I have
taken judicial notice of supplied by the Public Defender’s Office that it should
be noted that the sequence of those cases is in order of last days. And we are
going through in order of last days to have an orderly way of getting through
the backlog of no time waiver cases. [¶] And it should be noted that since we
reopened our trial courtrooms mid-June with the lifting of the social
distancing, we have sent out 97 cases, we’ve advanced them to go out to trial,
and 68 of those were settled, dismissed or continued at trial call. We did send
out another 18, and 13 of those were settled or dismissed or continued after
spending time in the courtroom, some for a considerable period of time. And
that meant that those trial courtrooms opened up, but because we’re
advancing them in an orderly way and . . . we are advancing them with two
weeks’ notice so everyone can be ready. [¶] There has been some delay in
3
getting them refilled because of the inordinate amount of cases that have
been settled, dismissed or continued. As a result of that, beginning in
September we started advancing even more cases on a two-week basis so that
we could get trial courtrooms filled up. [¶] So I understand the frustration,
but there is a reason why trial courtrooms are not being filled.” The court also
noted that part of the delay stemmed from the fact that defendant asserted
his speedy trial rights in February 2021, when the court was still in the
“throes of the pandemic.”
Trial commenced December 28, 2021.5 On December 30, 2021, the court
granted defendant’s motion for acquittal on the false imprisonment charge.
On January 5, 2022, the jury announced that it could not reach a verdict on
the aggravated assault charge, acquitted defendant of elder abuse, and
convicted him of the lesser included offense of simple battery (§ 242). The
trial court granted a mistrial on the aggravated assault charge and granted
the prosecutor’s subsequent motion to dismiss that charge.
Defendant was sentenced to six months in jail against which the court
applied 440 days of custody credits. Defendant timely filed a notice of appeal.
Discussion
Both the state and federal Constitutions guarantee criminal defendants
the right to a speedy trial “and both guarantees operate in state criminal
prosecutions.” (People v. Martinez (2000) 22 Cal.4th 750, 754, citing U.S.
Const., 6th Amend.; Cal. Const., art. I, § 15, cl. 1.) Additionally, “ ‘[t]o
implement an accused’s constitutional right to a speedy trial, the Legislature
enacted section 1382.’ ” (Burgos v. Superior Court (2012) 206 Cal.App.4th
817, 825; see also People v. Martinez, supra, at p. 766 [section 1382 is
5 The underlying facts are irrelevant to the issue on appeal.
4
“ ‘supplementary to and a construction of’ the state constitutional speedy trial
guarantee”].)
To determine whether a speedy trial violation has occurred under the
Sixth Amendment, we apply the balancing test set forth in Barker v. Wingo
(1972) 407 U.S. 514, 530 (Barker) which consists of “ ‘four separate enquiries:
whether delay before trial was uncommonly long, whether the government or
the criminal defendant is more to blame for that delay, whether, in due
course, the defendant asserted his right to a speedy trial, and whether he
suffered prejudice as the delay’s result.’ ” (People v. Williams (2013) 58
Cal.4th 197, 233 (Williams).) The burden of demonstrating a speedy trial
violation lies with the defendant. (Ibid.)
Defendant incorrectly contends that it is the People’s burden to
establish that the violation of his speedy trial right under the federal
Constitution was harmless beyond a reasonable doubt under Chapman v.
California (1967) 386 U.S. 18. Prejudice resulting from a delay in bringing a
case to trial is an element of the speedy trial violation on which defendant
bears the burden of proof. Although an uncommonly long delay in bringing a
case to trial may give rise to a “presumption of prejudice” sufficient “to
trigger the Barker enquiry,” in balancing the Barker factors, the trial court
must nonetheless consider whether defendant suffered unjustified prejudice
as a result of the delay. (Williams, supra, 58 Cal.4th at pp. 234, 235–236.)6
6 Once “a Sixth Amendment speedy trial violation has been established,
reversal of a subsequent judgment of conviction and dismissal of the charge
are necessary in every case. When unjustified prejudice to the defendant’s
ability to defend has been established there can be no question that reversal
and dismissal are required.” (Serna v. Superior Court (1985) 40 Cal.3d 239,
263.)
5
Defendant’s claim under the federal Constitution may be rejected
rather summarily. Defendant was brought to trial just over two years after
the filing of the information in this case. The record establishes that a
significant portion of the delay was at defendant’s request or caused by the
Covid-19 pandemic. Within three months of the filing of the information,
defendant waived time so that his suitability for mental health diversion
could be evaluated. The evaluation took approximately six months. Then, for
five months, the matter was continued so that defendant, who was then
released from custody, could participate in mental health diversion. When
defendant’s diversion was terminated in February 2021, the courts were
operating at reduced volume due to the pandemic. After the courts were fully
opened in late June 2021, defendant’s case was tried within six months.
Thus, aside from the portion of the delay caused by defendant’s participation
in mental health diversion and the approximately five months during which
the courts were operating under pandemic restrictions, the delay in bringing
the case to trial is at most six months. And some portion of that period was
justified as the court worked through the backlog of cases that had
accumulated during the pandemic. Defendant has not established that he
suffered any significant prejudice as a result of that minimal delay.
“Whether defendant suffered prejudice as a result of the delay must be
assessed in light of the interests the speedy trial right was designed to
protect: ‘(i) to prevent oppressive pretrial incarceration; (ii) to minimize
anxiety and concern of the accused; and (iii) to limit the possibility that the
defense will be impaired.’ ” (Williams, supra, 58 Cal.4th at p. 235, quoting
Barker, supra, 407 U.S. at p. 532.) Defendant argues the delay was
prejudicial because his pretrial incarceration was oppressive and anxiety
inducing as a result of the risk of illness and pandemic restrictions, and
6
because the total time he served in custody before trial was more than the
maximum sentence for the offense of which he was convicted. Defendant’s
pretrial incarceration during the pandemic was likely anxiety inducing, but
six months of pretrial incarceration is far less than detentions that have been
considered oppressive. (See Williams, supra, 58 Cal.4th at p. 235 [no speedy
trial violation despite oppressive seven-year pretrial incarceration]; People v.
Tran (2021) 62 Cal.App.5th 330, 353 [no speedy trial violation despite
oppressive 11-year pretrial incarceration].) The fact that defendant served
more time in custody than that to which he was ultimately sentenced is
unfortunate, but defendant was facing three felony charges and was not held
in custody longer than the period for which he faced potential imprisonment.
Finally, and most importantly, defendant does not claim that he suffered any
of “the ‘most serious’ type of prejudice, the inability to adequately prepare his
defense.” (Williams, supra, at p. 236.) Accordingly, on balance there was no
violation of defendant’s right to a speedy trial under the federal Constitution.
Defendant’s challenge under the California Constitution and
section 1382 fares no better. “Although a defendant seeking pretrial relief for
a speedy trial violation is not required to make an affirmative showing of
prejudice [citation], the situation is different after judgment. [Citations.]
‘Upon appellate review following conviction, . . . a defendant who seeks to
predicate reversal of a conviction upon denial of his right to speedy trial must
show that the delay caused prejudice: this court, in reviewing the judgment of
conviction, must “weigh the effect of the delay in bringing defendant to trial
or the fairness of the subsequent trial itself.” ’ ” (People v. Lomax (2010) 49
Cal.4th 530, 557.) As discussed above, defendant makes no such showing.
(See People v. Lowe (2007) 40 Cal.4th 937, 946 [A “defendant claiming a
speedy trial violation under the California Constitution must show that the
7
delay has impaired the ability to defend against the charged crime because,
for instance, a witness has become unavailable, evidence has disappeared, or
the memory of a potential witness has faded.”].) Accordingly, we find no
prejudicial violation of defendant’s state speedy trial rights.
Disposition
The judgment is affirmed.
POLLAK, P. J.
WE CONCUR:
BROWN, J.
GOLDMAN, J.
8 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488333/ | Filed 10/24/22; Certified for Publication 11/21/22 (order attached)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(Sacramento)
----
DEPARTMENT OF FINANCE et al., C092139
Plaintiffs, Cross-defendants and (Super. Ct. No.
Appellants, 34201080000604CUWMGDS)
v.
COMMISSION ON STATE MANDATES,
Defendant and Respondent;
COUNTY OF SAN DIEGO et al.,
Defendants, Cross-complainants and
Appellants.
The California Constitution requires the state to provide a subvention of funds to
compensate local governments for the cost of a new program or higher level of service
mandated by the state. (Cal. Const., art. XIII B, § 6 (Section 6).) Subvention is not
1
available if the local governments have the authority to levy service charges, fees, or
assessments sufficient to pay for the mandated program or higher level of service. (Gov.
Code, § 17556, subd. (d) (section 17556 (d)).) Defendant and respondent Commission on
State Mandates (the Commission) adjudicates claims for subvention. (Gov. Code,
§§ 17525, 17551.)
This appeal concerns whether Section 6 requires the state to reimburse the
defendant local governments (collectively permittees or copermittees) for costs they
incurred to satisfy conditions which the state imposed on their stormwater discharge
permit. The Commission determined that six of the eight permit conditions challenged in
this action were reimbursable state mandates. They required permittees to provide a new
program. Permittees also did not have sufficient legal authority to levy a fee for those
conditions because doing so required preapproval by the voters.
The Commission also determined that the other two conditions requiring the
development and implementation of environmental mitigation plans for certain new
development were not reimbursable state mandates. Permittees had authority to levy a
fee for those conditions.
On petitions for writ of administrative mandate, the trial court in its most recent
ruling in this action upheld the Commission’s decision in its entirety and denied the
petitions.
Plaintiffs, cross-defendants and appellants State Department of Finance, the State
Water Resources Board, and the Regional Water Quality Board, San Diego Region
(collectively the State) appeal. They contend the six permit conditions found to be
reimbursable state mandates are not mandates because the permit does not require
permittees to provide a new program and permittees have authority to levy fees for those
conditions without obtaining voter approval.
Defendant, cross-complainant, and appellant permittees cross appeal. They
contend the other two conditions found not to be reimbursable state mandates are
2
reimbursable because permittees do not have authority to levy fees for those conditions.
Specifically, they cannot develop fees that would meet all constitutional requirements for
an enforceable fee. 1
The Commission has filed a respondent’s brief. As part of its brief, it claims it
erred in concluding that part of one of the challenged conditions, which mandates street
sweeping, was a reimbursable mandate. The Commission now agrees with the State that
permittees have authority to levy a fee to recover the cost of complying with that
condition and it is not reimbursable under Section 6.
Except to hold that the street sweeping condition is not a reimbursable mandate,
we affirm the judgment.
FACTS AND PROCEEDINGS
For a fuller discussion of the stormwater discharge permitting system and the
constitutional mandate subvention system, please see the discussion in Department of
Finance v. Commission on State Mandates (2017) 18 Cal.App.5th 661, 668-675 (San
Diego Mandates I). For our purposes, it is sufficient to state that the federal Clean Water
Act (33 U.S.C. § 1251 et seq.) prohibits pollutant discharges into the nation’s waters
unless they comply with a permit, established effluent limitations, or standards of
performance. The Clean Water Act created the National Pollutant Discharge Elimination
System (NPDES) to permit water pollutant discharges that comply with all statutory and
administrative requirements. (San Diego Mandates I, at pp. 668-669.)
Pursuant to federal approval granted under the Clean Water Act, California under
the Porter-Cologne Water Quality Control Act (Wat. Code, § 13000 et seq.) operates the
1 The permittees are the County of San Diego and the Cities of Carlsbad, Chula
Vista, Coronado, Del Mar, El Cajon, Encinitas, Escondido, Imperial Beach, La Mesa,
Lemon Grove, National City, Oceanside, Poway, San Diego, San Marcos, Santee, Solana
Beach, and Vista.
3
NPDES permitting system and regulates discharges within the state under state and
federal law. (San Diego Mandates I, supra, 18 Cal.App.5th at pp. 669-670.)
The Clean Water Act requires an NPDES permit for any discharge from a
municipal separate storm sewer system (MS4) serving a population of 100,000 or more.
(33 U.S.C. § 1342 (p)(2)(C), (D).) “ ‘[A] permit may be issued either on a system- or
jurisdiction-wide basis, must effectively prohibit non-stormwater discharges into the
storm sewers, and must “require controls to reduce the discharge of pollutants to the
maximum extent practicable.” (33 U.S.C. § 1342 (p)(3)(B), italics [omitted].)’ ” (San
Diego Mandates I, supra, 18 Cal.App.5th at p. 670.)
In 2007, the Regional Water Quality Control Board, San Diego Region (San Diego
Regional Board), issued an NPDES permit to permittees for the operation of their MS4.
(San Diego Mandates I, supra, 18 Cal.App.5th at p. 670.) “The permit was actually a
renewal of a nation pollutant discharge elimination system (NPDES) permit first issued in
1990 and renewed in 2001. The San Diego Regional Board stated the new permit
‘specifies requirements necessary for the Co-permittees to reduce the discharge of
pollutants in urban runoff to the maximum extent practicable (MEP).’ The San Diego
Regional Board found that although the permittees had generally been implementing the
management programs required in the 2001 permit, ‘urban runoff discharges continue to
cause or contribute to violations of water quality standards. This [permit] contains new
or modified requirements that are necessary to improve Co-permittees’ efforts to reduce
the discharge of pollutants in urban runoff to the MEP and achieve water quality
standards.’
“The permit requires the permittees to implement various programs to manage
their urban runoff that were not required in the 2001 permit. It requires the permittees to
implement programs in their own jurisdictions. It requires the permittees in each
watershed to collaborate to implement programs to manage runoff from that watershed,
and it requires all of the permittees in the region to collaborate to implement programs to
4
manage regional runoff. The permit also requires the permittees to assess the
effectiveness of their programs and collaborate in their efforts.
“The specific permit requirements involved in this case require the permittees to
do the following:
“(1) As part of their jurisdictional management programs:
“(a) Sweep streets at certain times, depending on the amount of debris they
generate, and report the number of curb miles swept and tons of material collected;
“(b) Inspect, maintain, and clean catch basins, storm drain inlets, and other
stormwater conveyances at specified times and report on those activities;
“(c) Collaboratively develop and individually implement a
hydromodification management plan to manage increases in runoff discharge rates and
durations;
“(d) Collectively update the best management practices requirements listed
in their local standard urban stormwater mitigation plans (SUSMP’s) and add low impact
development best management practices for new real property development and
redevelopment;
“(e) Individually implement an education program using all media to
inform target communities about [MS4s] and impacts of urban runoff, and to change the
communities’ behavior and reduce pollutant releases to MS4s;
“(2) As part of their watershed management programs, collaboratively develop
and implement watershed water quality activities and education activities within
established schedules and by means of frequent regularly scheduled meetings;
“(3) As part of their regional management programs:
“(a) Collaboratively develop and implement a regional urban runoff
management program to reduce the discharge of pollutants from MS4s to the maximum
extent practicable;
5
“(b) Collaboratively develop and implement a regional education program
focused on residential sources of pollutants;
“(4) Annually assess the effectiveness of the jurisdictional, watershed, and
regional urban runoff management programs, and collaboratively develop a long-term
effectiveness assessment to assess the effectiveness of all of the urban runoff
management programs; and
“(5) Jointly execute a memorandum of understanding, joint powers authority, or
other formal agreement that defines the permittees’ responsibilities under the permit and
establishes a management structure, standards for conducting meetings, guidelines for
workgroups, and a process to address permittees’ noncompliance with the formal
agreement.
“The permittees estimated complying with these conditions would cost them more
than $66 million over the life of the permit.” (San Diego Mandates I, supra,
18 Cal.App.5th at pp. 670-672, fn. omitted.) (We note the parties and the trial court
consolidated four of the conditions stated above into two for purposes of their arguments,
resulting in a total of eight challenged conditions instead of ten. They considered the
requirements to sweep streets and clean stormwater conveyances as one condition and the
two requirements for developing educational programs as one condition. For purposes of
consistency and argument, we will assume there are the same eight challenged permit
conditions before us, although we will discuss the street sweeping condition separately.)
In 2008, permittees filed a test claim with the Commission to seek subvention
under Section 6 for the eight challenged conditions. In 2010, the Commission issued its
ruling. It first determined that the challenged conditions were not federal mandates.
Subvention is not available if the state imposes a requirement that is mandated by the
federal government, unless the state mandates costs that exceed those incurred under the
federal mandate. (Gov. Code, § 17556, subd. (c).)
6
Relevant here, the Commission further determined that six of the eight challenged
conditions, all of the conditions except the two requiring development of a
hydromodification management plan and low impact development requirements, were
reimbursable state mandates. The permit required permittees to provide a new
government program of abating water pollution, and the permit conditions were unique to
governmental agencies. The Commission also determined that permittees did not have
authority to levy fees for complying with the six conditions because such fees would
require voter approval under the state constitution. However, permittees had authority to
levy fees to recover costs for the other two conditions. Permittees had police power to
levy such fees as well as statutory authority to levy development fees, and because those
fees would be imposed only on new real property development, they were not subject to
voter approval. As a result, the Commission found that those two conditions were not
reimbursable state mandates.
The State filed a petition for writ of administrative mandate against the
Commission’s decision. Permittees filed a cross-petition. The trial court found that the
Commission had applied the wrong test in determining whether the challenged conditions
were federal mandates. (San Diego Mandates I, supra, 18 Cal.App.5th at pp. 674-675.)
In San Diego Mandates I, a panel of this court reversed the trial court’s judgment, held
that the Commission had applied the correct test, and concluded the challenged permit
conditions were not federal mandates. Because the trial court had rested its judgment
exclusively on the federal mandates ground, we remanded the matter so the trial court
could consider the parties’ other arguments for and against the Commission’s decision.
(Id. at pp. 667-668.)
The trial court on remand upheld the Commission’s decision in its entirety and
denied both petitions for writ of mandate. It found that six of the conditions were
reimbursable mandates, and the hydromodification management plan and low impact
development conditions were not. The NPDES permit mandated permittees to provide a
7
new program for purposes of Section 6, permittees lacked authority to levy fees to pay for
the six conditions, and permittees had authority to levy fees for the other two conditions.
The State contends the trial court erred. It asserts the permit did not mandate a
new program, and permittees have authority to levy fees for the six permit conditions. In
their cross-appeal, permittees contend the trial court erred, and that they do not have fee
authority for the other two conditions. The Commission claims that contrary to its and
the trial court’s rulings, the street sweeping condition is not a reimbursable mandate
because permittees have authority to levy fees for that condition.
DISCUSSION
I
Law of the Case and Standard of Review
In San Diego Mandates I, this court stated that the permit conditions were state
mandates. (San Diego Mandates I, supra, 18 Cal.App.5th at pp. 667, 684-689.)
However, the doctrine of law of the case does not apply because whether the conditions
were state mandates was not essential to our decision in San Diego Mandates I.
(Gyerman v. United States Lines Co. (1972) 7 Cal.3d 488, 498.) Concluding the
conditions were state mandates was premature since the only issue determined by the trial
court and resolved by us was whether the conditions were federal mandates. Our
determining the conditions were not federal mandates did not result in the conditions
automatically being reimbursable state mandates, and, thus, stating they were state
mandates was not necessary to our decision. We recognized these points because we
remanded for the trial court to address the other issues raised by the parties which neither
we nor the trial court had addressed. (San Diego Mandates I, at p. 668.) Those issues
included whether the conditions were a new program or higher level of service for
purposes of Section 6 and whether the permittees had fee authority to fund the conditions.
8
(San Diego Mandates I, at p. 674.) The trial court addressed those issues on remand, and
the parties have fully briefed them. We now address those issues on their merits.
Whether a statute or executive order imposes a reimbursable mandate under
Section 6 is a question of law. We review the entire record before the Commission and
independently determine whether it supports the Commission’s conclusion that six
conditions here were reimbursable state mandates and two were not. (Department of
Finance v. Commission on State Mandates (2016) 1 Cal.5th 749, 762 (Los Angeles
Mandates I).)
II
New Program
Under Section 6, if the state by statute or executive order requires a local
government to provide a “new program” or a “higher level of service” in an existing
program, it must “provide a subvention of funds to reimburse that local government for
the costs of the program or increased level of service[.]” (Section 6, subd. (a); County of
San Diego v. Commission on State Mandates (2018) 6 Cal.5th 196, 201.)
For purposes of Section 6, a “program” refers to either “ ‘[(1)] programs that carry
out the governmental function of providing services to the public, or [(2)] laws which, to
implement a state policy, impose unique requirements on local governments and do not
apply generally to all residents and entities in the state.’ [Citation.]” (San Diego Unified
School Dist. v. Commission on State Mandates (2004) 33 Cal.4th 859, 874 (San Diego
Unified).) The term “higher level of service” refers to “ ‘state mandated increases in the
services provided by local agencies in existing “programs.” ’ ” (Ibid.)
The Commission and the trial court determined that the permit conditions
constituted a new program for purposes of Section 6 because the conditions satisfied both
definitions of a program. First, they required permittees to implement a new program of
9
providing pollution abatement services to the public in addition to the stormwater
drainage services.
Second, the conditions also imposed unique requirements on permittees regarding
how they would provide the required pollution abatement services. The State required
permittees to reduce water pollution by implementing best management practices to the
maximum extent practicable, a standard that purportedly applies exclusively to
government entities and not to all other state residents or entities who must also obtain
NPDES permits to discharge into the nation’s waters. The latter entities who obtain
NPDES permits must satisfy numeric effluent limitations.
Neither the Commission nor the trial court determined whether the permit
conditions triggered subvention under Section 6 on the ground that they required
permittees to provide a higher level of service in an existing program.
The State claims the conditions are not a new program for purposes of Section 6.
We agree with the trial court and the Commission that the permit conditions required
permittees to provide a new program. Permittees were providing stormwater drainage
systems, and the permit required them to provide a new program of water pollution
abatement services in forms which permittees had not provided before and which
benefited the public.
The State contends the permit conditions do not satisfy the definitions of a new
program under Section 6. Regarding the first definition of a program, carrying out the
governmental function of providing services to the public, the State argues that the permit
conditions were not imposed to provide a service to the public; they were imposed to
enforce a general ban on pollution. Federal and state laws prohibit all persons, including
municipalities that discharge stormwater and urban runoff, from discharging pollutants
from point sources into waters of the United States without an NPDES permit.
(33 U.S.C. §§ 1311(a), 1342, 1362(5); 40 C.F.R. §§ 122.21, 122.22, 123.25; Wat. Code,
§§ 13376, 19, 13050, subd. (c).) Thus, permittees had to obtain a permit because they
10
discharge pollution, not because they are local governments. Local governments that do
not discharge pollutants into United States waters are not required to have a permit.
The distinction the State attempts to draw is not persuasive. The State cites no
authority for the proposition that a mandatory permit condition cannot constitute a
reimbursable mandate under Section 6 because it is imposed to enforce a government ban
on pollution. Section 6 requires reimbursement whenever any state law or executive
order mandates a new program on a local government. Nothing in the constitutional
requirement distinguishes between new programs imposed directly by law and new
programs imposed as a condition of a required regulatory permit.
Indeed, when the Legislature attempted to exclude NPDES permit conditions from
Section 6’s scope by statute, the court of appeal held the statute was unconstitutional.
Originally, the statutory definition of an “executive order” for purposes of Section 6
expressly excluded any order or requirement issued by the State Water Board or any
regional water boards pursuant to the Porter-Cologne Water Quality Control Act (Wat.
Code, § 13000 et seq.), such as an NPDES permit. (Gov. Code, former § 17516, subd.
(c) [Stats. 1984, ch. 1459, § 1].) The court of appeal in County of Los Angeles v.
Commission on State Mandates (2007) 150 Cal.App.4th 898, held that the statutory
exclusion of NPDES permit conditions imposed on local governments was contrary to the
express terms of Section 6 and thus unconstitutional. “This exclusion of any order issued
by any Regional Water Board contravenes the clear, unequivocal intent of article XIII B,
[S]ection 6 that subvention of funds is required ‘[w]henever . . . any state agency
mandates a new program or higher level of service on any local government . . . .’ ”
(County of Los Angeles v. Commission on State Mandates, at p. 920, fn. omitted.)
Section 6 requires subvention whether the new program is imposed directly by law or as
a condition of a regulatory permit required by a state agency.
The court of appeal reached the same conclusion in Department of Finance v.
Commission on State Mandates (2021) 59 Cal.App.5th 546 (Los Angeles Mandates II).
11
The State argued there that NPDES permit conditions to require trash receptacles at
transit stops and to inspect business sites were not a new program for purposes of Section
6 because they were imposed to prevent pollution, not to provide a public service. The
court disagreed: “This view . . . ignores the terms of the Regional Board’s permit; the
challenged requirements are not bans or limits on pollution levels, they are mandates to
perform specific actions—installing and maintaining trash receptacles and inspecting
business sites—that the local governments were not previously required to perform.
Although the purpose of requiring trash collection at transit stops and business site
inspections was undoubtedly to reduce pollution in waterways, the state sought to achieve
that goal by requiring local governments to undertake new affirmative steps resulting in
costs that must be reimbursed under section 6.” (Id. at p. 560.) So it is here.
Continuing to assert that the NPDES permit does not impose a new program, the
State argues the trial court ignored a distinction for purposes of Section 6 between a law
that requires local governments to provide a public service and one that regulates conduct
and applies to local governments because they choose to engage in that conduct. For
example, as opposed to requiring a local government to sweep streets at regular intervals
(which would be a mandated program), when the state requires a local government to
sweep streets as a condition of operating an MS4 that discharges pollutants, the state is
regulating the local government as a polluter, not requiring it to provide a public service.
That is because the permit does not require permittees to operate an MS4. If they choose
to operate one, they must mitigate pollutant discharges, like all other polluters. Because
the permit implements a general law that applies to all polluters, public and private, and
because permittees chose to develop an MS4, the State claims the permit does not require
permittees to provide a new public service or program.
Generally, “if a local government participates ‘voluntarily,’ i.e., without legal
compulsion or compulsion as a practical matter, in a program with a rule requiring
increased costs, there is no requirement of state reimbursement.” (Department of
12
Finance v. Commission on State Mandates (2009) 170 Cal.App.4th 1355, 1365-1366.)
However, that “an entity makes an initial discretionary decision that in turn triggers
mandated costs” does not by itself preclude reimbursement under Section 6. (San Diego
Unified, supra, 33 Cal.4th at pp. 887-888.) The discretionary decision may have been the
result of compulsion “as a practical matter.”
Being compelled “as a practical matter” may arise, among other instances, when
an entity or its constituents face certain and severe penalties or consequences for not
participating in or complying with an optional state program. For example, in City of
Sacramento v. State of California (1990) 50 Cal.3d 51 (City of Sacramento), the
California Supreme Court determined that a state statute that required state and local
governments to provide unemployment insurance benefits to their employees for the first
time was a federal mandate and not a reimbursable state mandate. The case is instructive
here for describing how a local government could be mandated or compelled as a
practical matter to provide a service. The federal government had not required the state
to enact the statute, but if the state did not enact it, state private employers would lose a
federal tax credit and would face double unemployment taxation by the state and federal
governments. (Id. at pp. 58, 74.) Much of cost-producing federal influence on state and
local governments is “by inducement or incentive rather than direct compulsion.” (Id. at
p. 73.) California could have terminated its own unemployment insurance system to
eliminate the double taxation, but the Supreme Court could not imagine that the drafters
and adopters of article XIII B and Section 6 intended to force the state “to such draconian
ends.” (City of Sacramento, at p. 74.) The alternatives to not adopting the statute “were
so far beyond the realm of practical reality that they left the state ‘without discretion’ to
depart from federal standards.” (Ibid.)
Here, the alternative to not obtaining an NPDES permit was for permittees not to
provide a stormwater drainage system. If permittees chose to operate an MS4, they were
required by the State to obtain a permit. (33 U.S.C. § 1342 (p)(2)(C), (D).) While
13
permittees at some point in the past chose to provide a stormwater drainage system,
“[t]he drainage of a city in the interest of the public health and welfare is one of the most
important purposes for which the police power can be exercised.” (New Orleans
Gaslight Co. v. Drainage Com. of New Orleans (1905) 197 U.S. 453, 460.) In urbanized
cities and counties such as permittees, deciding not to provide a stormwater drainage
system is no alternative at all. It is “so far beyond the realm of practical reality” that it
left permittees “without discretion” not to obtain a permit. (City of Sacramento, supra,
50 Cal.3d at p. 74.) Permittees were thus compelled as a practical matter to obtain an
NPDES permit and fulfill the permit’s conditions. Permittees “ ‘[did] not voluntarily
participate’ in applying for a permit to operate their stormwater drainage systems; they
were required to do so under state and federal law and the challenged requirements were
mandated by the Regional Board.” (Los Angeles Mandates II, supra, 59 Cal.App.5th at
p. 561).)
Despite the State’s emphasis on the point, it is irrelevant to our analysis that both
public and private parties who discharge pollution from point sources into waters must
obtain an NPDES permit to do so. “[T]he applicability of permits to public and private
discharges does not inform us about whether a particular permit or an obligation
thereunder imposed on local governments constitutes a state mandate necessitating
subvention under article XIII B, [S]ection 6.” (County of Los Angeles v. Commission on
State Mandates, supra, 150 Cal.App.4th at p. 919.) What matters is that permittees were
compelled by state law to obtain a permit and comply with its conditions, including the
provision of a different public program—water pollution abatement.
The State argues that even if the permit conditions mandate a program, the
program is not new. As required by the Clean Water Act, this permit and permittees’ two
prior permits required permittees to prohibit non-stormwater discharges into their MS4s
and to reduce the discharge of pollutants in stormwater from MS4s to the maximum
extent practicable. (33 U.S.C. § 1342 (p)(3)(B)(ii), (iii).) New permit conditions did not
14
change that obligation. The State claims that a condition that did not appear in prior
permits or has been updated to require additional expenditures is not new because it does
not increase permittees’ underlying obligation to eliminate or reduce the discharge of
pollutants from their MS4s to the maximum extent practicable. Rather, the condition
ensures compliance with the same standard that has applied since 1990 when permittees
obtained their first permit.
The application of Section 6, however, does not turn on whether the underlying
obligation to abate pollution remains the same. It applies if any executive order, which
each permit is, required permittees to provide a new program or a higher level of existing
services. (Gov. Code, § 17514.) Exercising its discretionary authority with each permit,
the State imposed specific conditions it found were necessary in order for permittees to
satisfy the maximum extent practicable standard. If those conditions required permittees
to provide a new program or to increase services in an existing program, they triggered
Section 6.
To determine whether a program imposed by the permit is new, we compare the
legal requirements imposed by the new permit with those in effect before the new permit
became effective. (See San Diego Unified, supra, 33 Cal.4th at p. 878; Lucia Mar
Unified School Dist. v. Honig (1988) 44 Cal.3d 830, 835.) This is so even though the
conditions were designed to satisfy the same standard of performance.
Here, it is without dispute that the challenged permit conditions impose new
requirements when compared to the prior permit. Because those new requirements
constitute a new program for purposes of Section 6, Section 6 requires the State to
reimburse permittees for the costs of the new program, subject to certain exceptions
discussed next.
Because we have determined that the challenged permit conditions required
permittees to provide a new program for purposes of Section 6, we need not address the
parties’ arguments under the second definition of a program, whether the permit
15
conditions impose unique requirements on local governments to implement a state policy
that do not apply generally to all residents and entities in the state. Nor need we discuss
arguments concerning whether the permit conditions required permittees to provide a
higher level of existing services.
III
State’s Appeal Regarding Fee Authority
Even if a statute or executive order requires a local government to provide a new
program, the mandate does not require subvention under Section 6 if the local
government “has authority to levy service charges, fees, or assessments sufficient to pay
for the mandated program or increased level of service.” (Section 17556(d)).)
Section 6’s subvention for “costs” excludes expenses that are recoverable from
sources other than taxes. (County of Fresno v. State of California et al. (1991) 53 Cal.3d
482, 488.) “Section 6 was included in article XIII B in recognition that article XIII A of
the Constitution severely restricted the taxing powers of local governments. [Citation.]
The provision was intended to preclude the state from shifting financial responsibility for
carrying out governmental functions onto local entities that were ill equipped to handle
the task. [Citations.] Specifically, it was designed to protect the tax revenues of local
governments from state mandates that would require expenditure of such revenues. Thus,
although its language broadly declares that the ‘state shall provide a subvention of funds
to reimburse . . . local government for the costs [of a state-mandated new] program or
higher level of service,’ read in its textual and historical context [S]ection 6 of article XIII
B requires subvention only when the costs in question can be recovered solely from tax
revenues.” (County of Fresno v. State of California et al., at p. 487.)
The Commission and the trial court determined that whether permittees had
authority to levy fees for the eight conditions depended on whether fees for stormwater
drainage services would have to be preapproved by the voters under article XIII D of the
16
state constitution. The Commission and the trial court found that six of the eight
challenged permit conditions were reimbursable mandates because permittees did not
have the authority to levy a fee for those conditions that was not subject to voter
preapproval. The other two challenged conditions requiring the creation and
implementation of a hydromodification management plan and low impact development
requirements for certain new development were not reimbursable mandates because
permittees could levy a fee for those conditions without voter approval.
The State contends in its appeal that the Commission and the trial court erred in
determining the six challenged conditions were reimbursable. Despite published
authority holding otherwise at the time, the State claims that fees to fund stormwater
drainage systems were not subject to voter approval under article XIII D. According to
the State, the published authority was wrongly decided, and a later-enacted statute
declaring that fees for stormwater drainage services were not subject to voter approval
applies here. The State argues that even if the fees were subject to voter approval,
permittees still had authority to levy the fees regardless.
In its briefing, the Commission agrees with the State that, contrary to its earlier
decision, the condition requiring street sweeping would be within permittees’ fee
authority as it would not be subject to voter approval.
A. Background
Permittees have authority pursuant to their constitutional police powers to levy
regulatory and development fees. (Cal. Const., art. XI, § 7.) “[P]revention of water
pollution is a legitimate governmental objective, in furtherance of which the police power
may be exercised.” (Freeman v. Contra Costa County Water Dist. (1971) 18 Cal.App.3d
404, 408.)
However, the state constitution imposes procedural and substantive requirements
on property-related fees adopted by local governments. Article XIII D, enacted by the
17
voters in 1996 as part of Proposition 218 (as approved by voters, Gen. Elec. (Nov. 5,
1996), subjects all fees imposed by a local government upon a parcel or upon a person as
an incident of property ownership, including a user fee for a property-related service, to a
two-step approval process. (Cal. Const., art. XIII D, §§ 1, 6.) The first step is a property
owner protest procedure. If a majority of the affected property owners file a written
protest against the proposed fee, “the agency shall not impose the fee or charge.” (Id.,
§ 6, subd. (a)(2).)
The second step requires the proposed fee to be approved by the voters. If a
property owner protest does not succeed, a property-related fee must be approved by
either a majority of the property owners subject to the fee or by a two-thirds vote of the
electorate residing in the affected area. (Cal. Const., art. XIII D, § 6, subd. (c).) Of
significance here, this voter approval requirement is subject to exceptions. The
requirement does not apply to “fees or charges for sewer, water, and refuse collection
services[.]” (Ibid., italics added.) And no part of article XIII D, including its owner
protest and voter approval requirements, applies to fees levied on real property
development or fees that result from a property owner’s voluntary decision to seek a
government benefit. (Cal. Const., art. XIII D, § 1; Richmond v. Shasta Community
Services Dist. (2004) 32 Cal.4th 409, 425-428.)
In the test claim and after determining permittees had authority under their police
power to impose fees for the permit conditions, the Commission had to determine
whether permittees had sufficient authority to levy a fee for purposes of section 17556(d)
if the fee first had to be approved by voters under article XIII D. Relying on Howard
Jarvis Taxpayers Assn. v. City of Salinas (2002) 98 Cal.App.4th 1351 (City of Salinas), a
decision by the Sixth Appellate District, the Commission determined that a fee to fund
six of the eight permit conditions (all of the conditions except those requiring creation of
a hydromodification plan and low impact development requirements) was required to be
preapproved by the voters under article XIII D. The fee would be a property-related fee,
18
and it would not be exempt from the voter approval requirement as a fee for sewer or
water services.
In City of Salinas, the court of appeal determined that a fee to fund a city’s
program to bring its stormwater drainage system into compliance with the Clean Water
Act was not a sewer or water fee for purposes of article XIII D, and thus was required to
be adopted by voters. (City of Salinas, supra, 98 Cal.App.4th. at pp. 1356-1358.) The
court of appeal determined the word “sewer” as used in article XIII D was ambiguous
and could not be interpreted under the plain meaning rule. (City of Salinas, at p. 1357.)
The court interpreted the term “sewer services” as excluding stormwater drainage
systems and as narrowly referring to “sanitary sewerage” which carries “putrescible
waste” from residences and businesses and discharges it into the sanitary sewer line for
treatment. (Id. at p. 1358, fn. 8.)
Because under City of Salinas a fee to fund stormwater drainage systems did not
constitute a fee for sewer or water services and was thus subject to voter preapproval
under article XIII D, the Commission determined that fees for the six permit conditions
would also be subject to voter approval under article XIII D. Further, the voter approval
requirement denied permittees sufficient authority to levy a fee for purposes of section
17556(d). As a result, the six conditions were reimbursable state mandates under
Section 6.
The Commission also reasoned that denying reimbursement for those six
conditions would defeat the purpose of Section 6. It was possible that permittees’ voters
would never approve the proposed fee, but permittees would still be required to comply
with the state mandate.
The Commission applied a different analysis to the condition requiring street
sweeping. The Commission found that a fee to fund street sweeping was expressly
exempt from article XIII D’s voting requirement because it was a fee for refuse
collection. However, such a fee would still be subject to article XIII D’s owner protest
19
procedure. On that basis, the Commission determined permittees did not have sufficient
authority to levy a fee to recover the costs of the street sweeping condition, and it was
thus a reimbursable mandate.
Approximately seven months after the Commission issued its decision in March
2010, the Legislature broadened the scope of section 17556(d). The amendments,
enacted by Senate Bill No. 856 (2009-2010 Reg. Sess.) (Sen. Bill 856), and effective
October 19, 2010, declared that section 17556(d)’s prohibition of reimbursement under
Section 6 if the local agency can fund the mandated costs through fees or assessments
“applies regardless of whether the authority to levy charges, fees, or assessments was
enacted or adopted prior to or after the date on which the statute or executive order was
enacted or issued.” (Stats. 2010, ch. 719, § 31; Gov. Code, § 17556, subd. (d).)
Sen. Bill 856 also provided a procedure to address the effect of newly enacted fee
authority. The statute authorizes the state and local agencies to request the Commission
to adopt a new test claim decision due to a subsequent change in law that modifies the
state’s liability for that test claim under Section 6. (Stats. 2010, ch. 719, § 33; Gov.
Code, § 17570, subds. (b), (c).) If the Commission adopts a new test claim decision, it
may revise the subvention requirements effective as of the fiscal year preceding the fiscal
year in which the request for redetermination was filed. (Gov. Code, § 17570, subd. (f).)
More than seven years after the Commission issued its decision, the Legislature
enacted legislation to overrule City of Salinas. It adopted Senate Bill No. 231 (2017-
2018 Reg. Sess.) (Sen. Bill 231), in which the Legislature for the first time defined a
“sewer” for purposes of article XIII D and defined it to include stormwater drainage
systems. (Stats. 2017, ch. 536, § 1; Gov. Code § 53750, subd. (k), part of the Proposition
218 Omnibus Implementation Act (Gov. Code, § 53750 et seq., added by Stats. 1997,
ch 38, eff. July 1, 1997) (the Implementation Act).)
Enacting Sen. Bill 231, the Legislature stated the court in City of Salinas
disregarded the plain meaning of “sewer.” (Gov. Code, § 53751, subds. (e), (f).) The
20
common meaning of “sewer services” was not “sanitary sewerage.” (Gov. Code,
§ 53751, subd. (g).) Numerous sources predating the enactment of article XIII D defined
“sewer” as more than just sanitary sewers and sanitary sewerage. One source was Public
Utilities Code section 230.5, enacted in 1970. Sen. Bill 231’s definition of sewer
mirrored that statute’s definition. (Gov. Code, § 53751, subd. (i).)
Sen. Bill 231 states: “The Legislature reaffirms and reiterates that the definition
found in Section 230.5 of the Public Utilities Code is the definition of ‘sewer’ or ‘sewer
service’ that should be used in the Proposition 218 Omnibus Implementation Act.” (Gov.
Code, § 53751, subd. (l).) “Sewer” should be interpreted to include services necessary to
dispose surface or storm waters. (Gov. Code, § 53751, subd. (m).)
At trial, the State contended that Sen. Bill 231 overturned City of Salinas, and that
under the new statute, fees for the six conditions were sewer fees exempt from voter
approval under article XIII D, and thus within permittees’ authority to levy. The trial
court disagreed. It stated that even if Sen. Bill 231 overturned City of Salinas, it found
“nothing ‘mistaken’ about the Commission’s reliance on that case when it issued its
decision. The Commission issued its decision in 2010, and it was not free to disregard
relevant case law—including [City of Salinas]—on the theory that the Legislature might
change that law in the future. [Sen. Bill 231] was enacted in 2017 and went into effect
January 1, 2018. How can a law that went into effect in 2018 retroactively invalidate a
decision issued in 2010? The State never addresses this question, and the short answer is
that it cannot.”
The State attempted to argue Sen. Bill 231 was retroactive in a supplemental brief,
but the trial court found the argument was insufficient to rebut the presumption that
statutes operate prospectively only. The court stated that Sen. Bill 231 “ ‘cannot
retroactively apply to invalidate the Commission’s decision’ and ‘cannot form the basis
for a writ reversing [that decision].’ ”
21
B. Analysis
The State contends that fees for the six permit conditions do not require voter
approval; thus, permittees have authority to levy such fees, and, as a result, under section
17556(d), Section 6 does not require the State to reimburse permittees for the costs
incurred to comply with the six conditions. The fees do not require voter approval
because the Commission’s authority that they do require voter approval, City of Salinas,
was wrongly decided, and we should not follow it. That court expressly disregarded the
plain meaning of the term “sewer” as including storm sewers. The Legislature in Sen.
Bill 231 criticized City of Salinas on that point and declared the plain meaning of “sewer”
was to include storm drainage systems.
The State also argues that Sen. Bill 231 and its definition of “sewer” govern this
case. The Legislature adopted Sen. Bill 231 to clarify the meaning of “sewer” in article
XIII D. Statutes that clarify existing law or are retroactive apply to cases such as this that
were pending and in which no final judgment had been entered when the statute was
enacted. Additionally, the State argues that under Sen. Bill 856’s amendment to section
17556(d), newly adopted fee authority such as Sen. Bill 231 applies to this case.
The State further argues that even if fees to fund the challenged permit conditions
are subject to voter approval, that fact does not deprive permittees of adequate authority
to adopt fees for purposes of Section 6. For authority to support this argument, the State
relies on Paradise Irrigation Dist. v. Commission on State Mandates (2019)
33 Cal.App.5th 174 (Paradise Irrigation Dist.), in which a panel of this court held that
article XIII D’s owner protest procedure did not deprive a local agency of authority to
impose a property-related fee, and thus the mandated expenses in that case were not
reimbursable due to section 17556(d). (Paradise Irrigation Dist., at pp. 194-195.) The
state argues the same reasoning should apply to article XIII D’s voter approval
requirement.
22
The Commission agrees with the State on one point: its determination that the
street sweeping condition was a reimbursable mandate and the trial court’s affirmance of
that finding should be reversed. A fee for this condition is exempt from article XIII D’s
voter approval requirement because the fee would be for refuse collection. On that basis,
and also because this court in Paradise Irrigation Dist. determined that article XIII D’s
owner protest procedure did not deny a local government of authority to levy a fee, the
Commission agrees with the State that permittees have authority to levy a fee to recover
the costs of street sweeping, and the condition is thus not a reimbursable mandate under
Section 6.
1. Definition of “sewer” at the time of the Commission’s decision
We are asked to interpret the term “sewer” as that term was used in the exemption
of fees for sewer services from article XIII D’s voter approval requirement at the time the
Commission issued its decision. (Cal. Const., art. XIII D, § 6, subd. (c).) We do not
dispute permittees’ point that under stare decisis the Commission and the trial court were
required to follow City of Salinas when they made their decisions. However, while they
may have been bound by City of Salinas at the time they ruled, we are not. (Auto Equity
Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455.) Even without considering Sen.
Bill 231, we may disagree with City of Salinas and not apply it in this direct appeal if we
find it unpersuasive. (See County of Kern v. State Dept. of Health Care Services (2009)
180 Cal.App.4th 1504, 1510.) Nonetheless, we reach the same holding, setting aside for
the moment Sen. Bill 231’s possible application.
“ ‘When we interpret a statute, “[o]ur fundamental task . . . is to determine the
Legislature’s intent so as to effectuate the law’s purpose. We first examine the statutory
language, giving it a plain and commonsense meaning. We do not examine that language
in isolation, but in the context of the statutory framework as a whole in order to
determine its scope and purpose and to harmonize the various parts of the enactment. If
23
the language is clear, courts must generally follow its plain meaning unless a literal
interpretation would result in absurd consequences the Legislature did not intend. If the
statutory language permits more than one reasonable interpretation, courts may consider
other aids, such as the statute’s purpose, legislative history, and public policy.”
[Citation.] “Furthermore, we consider portions of a statute in the context of the entire
statute and the statutory scheme of which it is a part, giving significance to every word,
phrase, sentence, and part of an act in pursuance of the legislative purpose.” ’ (Sierra
Club v. Superior Court (2013) 57 Cal.4th 157, 165-166.)” (City of San Jose v. Superior
Court (2017) 2 Cal.5th 608, 616-617 (City of San Jose).)
We apply these same principles to interpreting voter initiatives, except we do so to
determine the voters’ intent. (Professional Engineers in California Government v.
Kempton (2007) 40 Cal.4th 1016, 1037.) We turn first to the initiative’s language, giving
the words their ordinary meaning as understood by “the average voter.” (People v.
Adelmann (2018) 4 Cal.5th 1071, 1080.) “ ‘The [initiative’s] language must also be
construed in the context of the statute as a whole and the [initiative’s] overall
. . . scheme.’ (People v. Rizo (2000) 22 Cal.4th 681, 685.) ‘Absent ambiguity, we
presume that the voters intend the meaning apparent on the face of an initiative measure
[citation] and the court may not add to the statute or rewrite it to conform to an assumed
intent that is not apparent in its language.’ (Lesher Communications, Inc. v. City of
Walnut Creek (1990) 52 Cal.3d 531, 543.) Where there is ambiguity in the language of
the measure, ‘[b]allot summaries and arguments may be considered when determining the
voters’ intent and understanding of a ballot measure.’ (Legislature v. Deukmejian (1983)
34 Cal.3d 658, 673, fn. 14.)” (Professional Engineers in California Government v.
Kempton, at p. 1037.) Ambiguities in initiatives may also be resolved by referring to “the
contemporaneous construction of the Legislature.” (Los Angeles County Transportation
Com. v. Richmond (1982) 31 Cal.3d 197, 203, italics added.)
24
Systems that collect water from a residence’s toilets and sinks and treat the waste
water at a water treatment plant are commonly referred to as sewers or sanitary sewers.
(City of Salinas, supra, 98 Cal.App.4th at p. 1357.) Stormwater drainage systems usually
deposit stormwater into the surface waters of the state. These are commonly referred to
as storm sewers, storm drains, “storm drain systems,” and “storm sewer systems.” (Los
Angeles Mandates I, supra, 1 Cal.5th at pp. 754, 757.) The question is whether voters
intended the word “sewer” in article XIII D to exempt fees for only sanitary sewers or
both sanitary and stormwater sewers from the measure’s voting requirement.
We may look to dictionary definitions to determine the usual and ordinary
meaning of a statutory term. (MCI Communications Services, Inc. v. California Dept. of
Tax & Fee Admin. (2018) 28 Cal.App.5th 635, 644.) Dictionary definitions of “sewer”
indicate the word can refer to both sanitary sewers and storm drainage systems. The
Merriam-Webster’s Unabridged Dictionary defines a sewer as “a ditch or surface drain”
or “an artificial usually subterranean conduit to carry off water and waste matter (such as
surface water from rainfall, household waste from sinks or baths, or waste water from
industrial works).” (Merriam-Webster Unabridged Dict. Online (2022)
[as of Aug. 23,
2022], archived at: .)
The Oxford English Dictionary defines sewer as an “artificial watercourse for
draining marshy land and carrying off surface water into a river or the sea,” and an
“artificial channel or conduit, now usually covered and underground, for carrying off and
discharging waste water and the refuse from houses and towns.” (Oxford English Dict.
Online (2022)
[as of Aug. 23, 2022], archived at: .)
But we do not start and end statutory interpretation with dictionary definitions.
“[T]he ‘plain meaning’ rule does not prohibit a court from determining whether the literal
25
meaning of a statute comports with its purpose or whether such a construction of one
provision is consistent with other provisions of the statute. The meaning of a statute may
not be determined from a single word or sentence; the words must be construed in
context, and provisions relating to the same subject matter must be harmonized to the
extent possible. [Citation.] Literal construction should not prevail if it is contrary to the
legislative intent apparent in the statute. The intent prevails over the letter, and the letter
will, if possible, be so read as to conform to the spirit of the act.” (Lungren v.
Deukmejian (1988) 45 Cal.3d 727, 735.)
Analyzing Proposition 218’s use of the word “sewer” in context renders its
meaning clear. In the initiative, we find a clause - the measure’s only other use of the
word “sewer” - in which the voters distinguished the word “sewer” from a drainage
system. Section 4 of article XIII D established procedures and voter approval
requirements for creating assessments. Section 5 of article XIII D imposed those
requirements on all existing, new, or increased assessments with exceptions. Of
relevance here, one of the exempt existing assessments is: “Any assessment imposed
exclusively to finance the capital costs or maintenance and operation expenses for
sidewalks, streets, sewers, water, flood control, drainage systems or vector control.”
(Cal. Const., art. XIII D, § 5, subd. (a), italics added.)
If possible, we construe statutes and constitutional provisions to give meaning to
every word, phrase, sentence, and part of an act. (City of San Jose, supra, 2 Cal.5th at
p. 617.) Thus, when the Legislature, or in this case the voters, use different words in the
same sentence, we assume they intended the words to have different meanings. (K.C. v.
Superior Court (2018) 24 Cal.App.5th 1001, 1011, fn. 4.) By using “sewers” and
“drainage systems” in the same sentence, the voters intended the words to have different
meanings. Were it not so, the use of the terms to convey the same meaning would render
them superfluous, an interpretation courts are to avoid. (Klein v. United States of
America (2010) 50 Cal.4th 68, 80.)
26
Additionally, under the maxim expressio unius est exclusio alterius, “[w]hen
language is included in one portion of a statute, its omission from a different portion
addressing a similar subject suggests that the omission was purposeful,” and that the
Legislature intended a different meaning. (In re Ethan C. (2012) 54 Cal.4th 610, 638;
Klein v. United States of America, supra, 50 Cal.4th at p. 80.)
Section 5 of article XIII D addresses “sewers” and “drainage systems,” but section
6 of article XIII D, the section that contains the exemption from the measure’s voter
approval requirement, exempts only fees for sewer, water, and refuse collection services.
It does not exempt fees for drainage systems. Storm drainage systems generally are a
means to provide surface water drainage. (See Biron v. City of Redding (2014)
225 Cal.App.4th 1264, 1269.) And although article XIII D and the Implementation Act
at the time of the Commission’s decision did not define “sewer,” the Implementation Act
did define a “drainage system” as “any system of public improvements that is intended to
provide for erosion control, for landslide abatement, or for other types of water
drainage.” (Gov. Code, § 53750, subd. (d), italics added.) Given that the voters intended
to differentiate between “sewers” and “drainage systems,” and that storm drainage
systems provide water drainage, we conclude the voters did not intend the exemption of
“sewer” service fees from article XIII D’s voter-approval requirement to include fees for
stormwater drainage systems
This interpretation is strengthened by Proposition 218’s purposes. The voters
adopted Proposition 218 to “limit[] the methods by which local governments exact
revenue from taxpayers without their consent.” (Prop. 218, § 2, reprinted at 1 Stats.
1996, p. A-295.) To that end, the voters declared that the measure’s provisions “shall be
liberally construed to effectuate its purposes of limiting local government revenue and
enhancing taxpayer consent.” (Prop. 218, § 5, reprinted at 1 Stats. 1996, p. A-299.)
Thus, required as we are to interpret any exception to the measure’s purpose
narrowly, we conclude, based on a contextual and narrow reading of the exception of fees
27
for sewer services and not drainage services, that the term sewer in the voter approval
exception provision of article XIII D’s section 6 referred only to sanitary sewers at the
time of the Commission’s decision. Because we have determined the term’s meaning is
clear in its context, we need not rely on other interpretive aids. (Lungren v. Deukmejian,
supra, 45 Cal.3d at p. 735.)
2. Sen. Bill 231
Having determined that article XIII D’s exception of sewer fees from voter
approval did not include fees for stormwater drainage systems at the time of the
Commission’s decision, we must determine the effect, if any, of Sen. Bill 231. The State
contends the statute applies to this case either as a clarification of existing law or as a
retroactive statute.
a. Background
Following the enactment of Proposition 218, the Legislature enacted the
Implementation Act to prescribe specific procedures and parameters for local
jurisdictions in complying with the initiative. (Gov. Code, § 53750 et seq.; Leg.
Counsel’s Dig., Sen. Bill No. 218 (1997-1998 Reg. Sess.) Stats. 1997.) Government
Code section 53750 (section 53750), part of the Implementation Act, defined terms used
in articles XIII C and XIII D. At the time of its enactment in 1997, section 53750 did not
include a definition of the term “sewer.” (Stats. 1997, ch. 38, § 5.) An amendment to the
statute in 1998 also did not define the term. (Stats. 1998, ch. 876, § 10.)
After City of Salinas was decided, the Legislature amended section 53750 in 2002.
This legislation was filed with the Secretary of State three months after the court of
appeal filed City of Salinas. (Stats. 2002, ch. 395; City of Salinas, supra, 98 Cal.App.4th
1351.) Yet again, the Legislature did not add a definition of the word “sewer” to the
statute. (Stats. 2002, ch. 395, § 3.) Another amendment in 2014 also did not define the
term. (Stats. 2014 ch. 78, § 2.)
28
In 2017, 15 years after City of Salinas was published, the Legislature enacted Sen.
Bill 231 to define “sewer” in article XIII D and to overrule City of Salinas. Sen. Bill 231
amended section 53570 by defining “sewer,” for purposes of article XIII D’s exemption
of sewer fees from its voter approval requirement, to include stormwater drainage
systems. “Sewer” includes “systems, all real estate, fixtures, and personal property . . . to
facilitate sewage collection, treatment, or disposition for sanitary or drainage purposes,
including . . . sanitary sewage treatment or disposal plants or works, drains, conduits,
outlets for surface or storm waters, and any and all other works, property, or structures
necessary or convenient for the collection of sewage, industrial waste, or surface or storm
waters.” (Gov. Code, § 53750, subd. (k).)
Also as part of Sen. Bill 231, the Legislature enacted a new statute, Government
Code section 53751 (section 53571), to overrule City of Salinas. 2 The Legislature
2 Section 53751 reads in full: “The Legislature finds and declares all of the
following:
“(a) The ongoing, historic drought has made clear that California must invest in a 21st
century water management system capable of effectively meeting the economic, social,
and environmental needs of the state.
“(b) Sufficient and reliable funding to pay for local water projects is necessary to improve
the state’s water infrastructure.
“(c) Proposition 218 was approved by the voters at the November 5, 1996, statewide
general election. Some court interpretations of the law have constrained important tools
that local governments need to manage storm water and drainage runoff.
“(d) Storm waters are carried off in storm sewers, and careful management is necessary
to ensure adequate state water supplies, especially during drought, and to reduce
pollution. But a court decision has found storm water subject to the voter-approval
provisions of Proposition 218 that apply to property-related fees, preventing many
important projects from being built.
“(e) The court of appeal in [City of Salinas, supra,] 98 Cal.App.4th 1351 concluded that
the term ‘sewer,’ as used in Proposition 218, is ‘ambiguous’ and declined to use the
29
statutory definition of the term ‘sewer system,’ which was part of the then-existing law as
Section 230.5 of the Public Utilities Code.
“(f) The court in [City of Salinas, supra,] 98 Cal.App.4th 1351 failed to follow long-
standing principles of statutory construction by disregarding the plain meaning of the
term ‘sewer.’ Courts have long held that statutory construction rules apply to initiative
measures, including in cases that apply specifically to Proposition 218 (see People v.
Bustamante (1997) 57 Cal.App.4th 693; Keller v. Chowchilla Water Dist. (2000)
80 Cal.App.4th 1006). When construing statutes, courts look first to the words of the
statute, which should be given their usual, ordinary, and commonsense meaning (People
v. Mejia (2012) 211 Cal.App.4th 586, 611). The purpose of utilizing the plain meaning
of statutory language is to spare the courts the necessity of trying to divine the voters’
intent by resorting to secondary or subjective indicators. The court in [City of Salinas,
supra,] 98 Cal.App.4th 1351 asserted its belief as to what most voters thought when
voting for Proposition 218, but did not cite the voter pamphlet or other accepted sources
for determining legislative intent. Instead, the court substituted its own judgment for the
judgment of voters.
“(g) Neither the words ‘sanitary’ nor ‘sewerage’ are used in Proposition 218, and the
common meaning of the term ‘sewer services’ is not ‘sanitary sewerage.’ In fact, the
phrase ‘sanitary sewerage’ is uncommon.
“(h) Proposition 218 exempts sewer and water services from the voter-approval
requirement. Sewer and water services are commonly considered to have a broad reach,
encompassing the provision of clean water and then addressing the conveyance and
treatment of dirty water, whether that water is rendered unclean by coming into contact
with sewage or by flowing over the built-out human environment and becoming urban
runoff.
“(i) Numerous sources predating Proposition 218 reject the notion that the term ‘sewer’
applies only to sanitary sewers and sanitary sewerage, including, but not limited to:
“(1) Section 230.5 of the Public Utilities Code, added by Chapter 1109 of the Statutes of
1970.
“(2) Section 23010.3, added by Chapter 1193 of the Statutes of 1963.
“(3) The Street Improvement Act of 1913.
“(4) L.A. County Flood Control Dist. v. Southern Cal. Edison Co. (1958) 51 Cal.2d 331,
where the California Supreme Court stated that ‘no distinction has been made between
sanitary sewers and storm drains or sewers.’
30
criticized the City of Salinas court for “disregarding the plain meaning of the term
‘sewer’ ” and “substitute[ing] its own judgment for the judgement of the voters.” (Gov.
Code, § 53751, subd. (f).) The Legislature found that sewer and water services are
commonly considered to include “the conveyance and treatment of dirty water, whether
“(5) Many other cases where the term ‘sewer’ has been used interchangeably to refer to
both sanitary and storm sewers include, but are not limited to, County of Riverside v.
Whitlock (1972) 22 Cal.App.3d 863, Ramseier v. Oakley Sanitary Dist. (1961)
197 Cal.App.2d 722, and Torson v. Fleming (1928) 91 Cal.App. 168.
“(6) Dictionary definitions of sewer, which courts have found to be an objective source
for determining common or ordinary meaning, including Webster’s (1976), American
Heritage (1969), and Oxford English Dictionary (1971).
“(j) Prior legislation has affirmed particular interpretations of words in Proposition 218,
specifically Assembly Bill 2403 of the 2013-14 Regular Session (Chapter 78 of the
Statutes of 2014).
“(k) In Crawley v. Alameda Waste Management Authority (2015) 243 Cal.App.4th 396,
the Court of Appeal relied on the statutory definition of ‘refuse collection services’ to
interpret the meaning of that phrase in Proposition 218, and found that this interpretation
was further supported by the plain meaning of refuse. Consistent with this decision, in
determining the definition of ‘sewer,’ the plain meaning rule shall apply in conjunction
with the definitions of terms as provided in Section 53750.
“(l) The Legislature reaffirms and reiterates that the definition found in Section 230.5 of
the Public Utilities Code is the definition of ‘sewer’ or ‘sewer service’ that should be
used in the Proposition 218 Omnibus Implementation Act.
“(m) Courts have read the Legislature’s definition of ‘water’ in the Proposition 218
Omnibus Implementation Act to include related services. In Griffith v. Pajaro Valley
Water Management Agency (2013) 220 Cal.App.4th 586, the Court of Appeal concurred
with the Legislature’s view that ‘water service means more than just supplying water,’
based upon the definition of water provided by the Proposition 218 Omnibus
Implementation Act, and found that actions necessary to provide water can be funded
through fees for water service. Consistent with this decision, ‘sewer’ should be
interpreted to include services necessary to collect, treat, or dispose of sewage, industrial
waste, or surface or storm waters, and any entity that collects, treats, or disposes of any of
these necessarily provides sewer service.”
31
that water is rendered unclean by coming into contact with sewage or by flowing over the
built-out human environment and becoming urban runoff.” (Gov. Code, § 53571, subd.
(h).) The Legislature cited to numerous statutes and cases that it claimed rejected the
notion that “sewer” applies only to sanitary sewers. (Gov. Code, § 53751, subd. (i).)
Section 53751 declared that the plain meaning rule shall apply when interpreting
the definitions set forth in section 53750. (Gov. Code, § 53751, subd. (k).) The statute
concluded, “The Legislature reaffirms and reiterates that the definition found in Section
230.5 of the Public Utilities Code is the definition of ‘sewer’ or ‘sewer service’ that
should be used in the Proposition 218 Omnibus Implementation Act. . . . ‘[S]ewer’
should be interpreted to include services necessary to collect, treat, or dispose of sewage,
industrial waste, or surface or storm waters, and any entity that collects, treats, or
disposes of any of these necessarily provides sewer service.” (Gov. Code, § 53751,
subds. (l), (m).)
b. Analysis
The State contends Sen. Bill 231 applies here because this matter was pending as
of the statute’s enactment, and the Legislature intended the statute either to be a
clarification of existing law or to apply retroactively to all pending cases.
Permittees and the Commission argue Sen. Bill 231 does not apply here because
the Legislature adopted the statute to change the law, and it did not clearly express its
intent that the measure applied retroactively. They also claim the statute does not apply
because at the time the Commission made its decision in this matter, it was required to
follow City of Salinas, and the Commission’s decision is now final.
Initially, we disagree with the Commission and permittees that Sen. Bill 231
cannot apply here because the Commission’s decision is final. That argument confuses
administrative finality with finality that binds parties to a fully litigated final judgment.
The Commission’s decision was administratively final and thus subject to judicial review.
32
However, to be final so as to be binding on the parties and immune from retroactive or
clarifying legislation, the decision must be free from direct attack by a petition for writ of
administrative mandate either because a judgment resolving such a petition has become
final and conclusive or because a petition was not timely filed. (California School
Boards Assn. v. State of California (2009) 171 Cal.App.4th 1183, 1201; see Long Beach
Unified School Dist. v. State of California (1990) 225 Cal.App.3d 155, 169.) The
Commission’s decision obviously is still under judicial review and subject to direct
attack. Thus, despite the length of time since the Commission’s decision was made, due
to the decision’s prolonged and ongoing judicial review, it is not final for purposes of
determining whether a retroactive or clarifying statute applies to it.
“A basic canon of statutory interpretation is that statutes do not operate
retrospectively unless the Legislature plainly intended them to do so. (Evangelatos v.
Superior Court (1988) 44 Cal.3d 1188, 1207-1208; Aetna Cas[ualty] & Surety Co. v.
Ind[dustrial] Acc. Com. (1947) 30 Cal.2d 388, 393.) . . . Of course, when the
Legislature clearly intends a statute to operate retrospectively, we are obliged to carry out
that intent unless due process considerations prevent us. (In re Marriage of Bouquet
(1976) 16 Cal.3d 583, 587, 592.)
“A corollary to these rules is that a statute that merely clarifies, rather than
changes, existing law does not operate retrospectively even if applied to transactions
predating its enactment. We assume the Legislature amends a statute for a purpose, but
that purpose need not necessarily be to change the law. (Cf. Williams v. Garcetti (1993)
5 Cal.4th 561, 568.) Our consideration of the surrounding circumstances can indicate
that the Legislature made material changes in statutory language in an effort only to
clarify a statute’s true meaning. [Citations.] Such a legislative act has no retrospective
effect because the true meaning of the statute remains the same.” (Western Security Bank
v. Superior Court (1997) 15 Cal.4th 232, 243 (Western Security Bank).)
33
We turn first to the State’s argument that Sen. Bill 231 merely clarified existing
law. “A statute that merely clarifies, rather than changes, existing law is properly applied
to transactions predating its enactment. (Western Security Bank, [supra,] 15 Cal.4th 232,
243.) However, a statute might not apply retroactively when it substantially changes the
legal consequences of past actions, or upsets expectations based in prior law. ([Id. at
p. 243]; see also Landgraf v. USI Film Products (1994) 511 U.S. 244, 269 [] (Landgraf).)
“ ‘[T]he interpretation of a statute is an exercise of the judicial power the
Constitution assigns to the courts.’ (Western Security Bank, supra, 15 Cal.4th at p. 244.)
When [the California Supreme Court] ‘finally and definitively’ interprets a statute, the
Legislature does not have the power to then state that a later amendment merely declared
existing law. (McClung v. Employment Development Dept. (2004) 34 Cal.4th 467, 473
(McClung).)
“However, ‘if the courts have not yet finally and conclusively interpreted a statute
and are in the process of doing so, a declaration of a later Legislature as to what an earlier
Legislature intended is entitled to consideration. [Citation.] But even then, “a legislative
declaration of an existing statute’s meaning” is but a factor for a court to consider and “is
neither binding nor conclusive in construing the statute.” [Citation.]’ (McClung, supra,
34 Cal.4th at p. 473 and cases cited.) . . . .
“A legislative declaration that an amendment merely clarified existing law ‘cannot
be given an obviously absurd effect, and the court cannot accept the Legislative statement
that an unmistakable change in the statute is nothing more than a clarification and
restatement of its original terms.’ (California Emp.[loyment Stabilization] etc. Com. v.
Payne (1947) 31 Cal.2d 210, 214.) Material changes in language, however, may simply
indicate an effort to clarify the statute’s true meaning. (Western Security Bank, supra,
15 Cal.4th at p. 243.) ‘One such circumstance is when the Legislature promptly reacts to
the emergence of a novel question of statutory interpretation[.]’ (Ibid.) ‘ “ ‘An
amendment which in effect construes and clarifies a prior statute must be accepted as the
34
legislative declaration of the meaning of the original act, where the amendment was
adopted soon after the controversy arose concerning the proper interpretation of the
statute. . . . [¶] If the amendment was enacted soon after controversies arose as to the
interpretation of the original act, it is logical to regard the amendment as a legislative
interpretation of the original act—a formal change—rebutting the presumption of
substantial change.’ [Citation.]” ’ (Ibid.)” (Carter v. California Dept. of Veterans
Affairs (2006) 38 Cal.4th 914, 922-923.)
“We look to ‘the surrounding circumstances’ as well as the Legislature’s intent
when determining whether a statute changed or merely clarified the law.” (In re
Marriage of Fellows (2006) 39 Cal.4th 179, 184.)
Sen. Bill 231 did not merely clarify the law; it changed the law. Since 2002, City
of Salinas had defined the term “sewer” in Proposition 218 as referring only to sanitary
sewers. Nothing in the record indicates any other court had interpreted the term as used
in Proposition 218 or was interpreting the term when the Legislature adopted Sen. Bill
231. Sen. Bill 231 overruled City of Salinas and changed the law to define “sewer” to
include stormwater drainage systems. “[A]lthough the Legislature may amend a statute
to overrule a judicial decision, doing so changes the law . . . .” (McClung, supra,
34 Cal.4th at pp. 473-474.)
In addition, this was not a case where the Legislature adopted an amendment soon
after a controversy arose concerning the proper interpretation of Proposition 218. Indeed,
there is nothing in the record indicating any controversy arose immediately prior to Sen.
Bill 231’s adoption. The statute mentions only City of Salinas as its reason, and that
decision was issued 15 years before Sen. Bill 231 was enacted. The Commission issued
its decision in this case seven years before the Legislature adopted Sen. Bill 231. We are
not required to accept as a legislative declaration or clarification of the original statute’s
meaning an amendment which was adopted so long after any controversy arose from City
35
of Salinas’s interpretation of Proposition 218. (See Carter v. California Dept. of
Veterans Affairs, supra, 38 Cal.4th at p. 923.)
Having concluded Sen. Bill 231 did not merely clarify the law, we turn to
determine whether the Legislature intended the statute to operate retroactively. “[A] new
law operates ‘retroactively’ when it changes ‘ “ ‘the legal consequences of past conduct
by imposing new or different liabilities based upon such conduct.’ ” ’ [Citation.] We
have asked whether the new law ‘ “ ‘substantially affect[s] existing rights and
obligations.’ ” ’ [Citation.]” (McHugh v. Protective Life Ins. Co. (2021) 12 Cal.5th 213,
229.)
“[U]nless there is an ‘express retroactivity provision, a statute will not be applied
retroactively unless it is very clear from extrinsic sources that the Legislature . . . must
have intended a retroactive application’ (Evangelatos [v. Superior Court], supra,
44 Cal.3d at p. 1209 []). . . . [A] statute’s retroactivity is, in the first instance, a policy
determination for the Legislature and one to which courts defer absent ‘some
constitutional objection’ to retroactivity. (Western Security Bank, [supra,] 15 Cal.4th [at
p.] 244.) But ‘a statute that is ambiguous with respect to retroactive application is
construed . . . to be unambiguously prospective.’ (I.N.S. v. St. Cyr [(2001)] 533 U.S.
[289,] 320-321, fn. 45 []); Lindh v. Murphy (1997) 52 U.S. 320, 328, fn. 4 []
[‘ “retroactive” effect adequately authorized by a statute’ only when statutory language
was ‘so clear that it could sustain only one interpretation’].)” (Myers v. Philip Morris
Companies, Inc. (2002) 28 Cal.4th 828, 841.)
The State claims the Legislature’s statements in section 53751 constitute a legally
sufficient expression that the Legislature intended Sen. Bill 231 to apply retroactively.
The State also contends that Sen. Bill 856’s provision, that an agency’s authority to levy
fees prevents subvention under Section 6 regardless of whether the authority was adopted
prior to or after the date the Commission issued its decision, further supports the
Legislature’s intent to apply Sen. Bill 231 retroactively.
36
It is not clear that the Legislature intended Sen. Bill 231 to apply retroactively.
Sen. Bill 231 contains no express statement that the Legislature intended the bill to apply
retroactively. There is no statement that the bill merely declared existing law. Sen. Bill
231 overruled City of Salinas, but the length of time between that case and Sen. Bill
231’s enactment suggests the Legislature did not necessarily intend for Sen. Bill 231 to
be retroactive. The measure’s strongest statement of retroactive intent is the statement in
section 53751 that the Legislature “reaffirms and reiterates that the definition found in
Section 230.5 of the Public Utilities Code is the definition of ‘sewer’ or ‘sewer service”
that should be used in the Proposition 218 Omnibus Implementation Act.” (Gov. Code,
§ 53751, subd. (l).) “Reaffirms and reiterates” is incorrect language when the Legislature
had never before declared, affirmed, or iterated the meaning of “sewer” in the
Implementation Act.
As discussed above, Proposition 218, enacted in 1996, distinguished between
sewers and drainage systems. The Legislature adopted the Implementation Act in 1997,
but it did not then nor in a 1998 amendment define the term “sewer.” City of Salinas
defined the term in 2002. The Legislature amended the Implementation Act three months
later, but it did not define “sewer” or otherwise respond to City of Salinas. Fifteen years
later, the Legislature overruled City of Salinas in Sen. Bill 231 and defined “sewer” in the
Implementation Act for the first time. Where the statement that the Legislature
reaffirmed and reiterated a prior position is erroneous, especially when the new
legislation changed the law, the statement is insufficient to establish a very clear
expression of retroactive intent. (See McClung, supra, 34 Cal.4th at pp. 475-476
[erroneous statement that an amendment merely declared existing law where it actually
changed the law was insufficient to overcome the strong presumption against
retroactivity].)
Sen. Bill 856 also does not indicate Sen. Bill 231 should apply retroactively. That
bill amended section 17556(d), the statute that prevents subvention if the local agency has
37
fee authority, to provide that the limitation applied regardless of whether the authority to
levy fees was enacted or adopted prior to or after the date on which the mandate was
issued. However, Sen. Bill 856 also provided a process whereby a party may request the
Commission to reconsider a prior decision based on a subsequent change of law. (Gov.
Code, §§ 17514, 17570, subds. (b)-(d), (f), 17556, subd. (d).) If the Commission
determines that a change of law reduces the State’s subvention obligation, the
Commission can revise the subvention requirements but starting no earlier than the fiscal
year preceding the fiscal year in which the request for reconsideration was filed. (Gov.
Code, § 17556, subd. (b).) Here, there is no evidence the State pursuant to Sen. Bill 856
has sought reconsideration of the Commission’s decision based on Sen. Bill 231. And
even if it had, Sen. Bill 856 would not render Sen. Bill 231 retroactive to the point in time
in 2007 when the Commission issued its decision in this matter.
It is obvious that the Legislature intended Sen. Bill 231 to overrule City of Salinas.
It is not obvious, however, that the Legislature intended Sen. Bill 231 to apply
retroactively. We therefore conclude Sen. Bill 231 does not apply to this case.
3. Application of Paradise Irrigation Dist.
The State contends that even if Sen. Bill 231 is not retroactive, we still may
conclude permittees have authority to levy fees for the six permit conditions. In Paradise
Irrigation Dist., supra, 33 Cal.App.5th 174, a panel of this court ruled that “the
possibility of a protest” under article XIII D did not eviscerate the local agencies’ ability
to levy fees to comply with the state mandate. (Paradise Irrigation Dist. at p. 194.) The
State argues that our reasoning in Paradise Irrigation District applies equally here, that
the required voter approval under article XIII D, like the protest procedure, does not
extinguish a local agency’s ability to raise fees.
In Paradise Irrigation Dist., a group of irrigation and water districts contended
they were entitled to subvention under Section 6 because they did not have sufficient
38
legal authority to levy fees to pay for water service improvements mandated by the Water
Conservation Act of 2009 (Stats. 2009-2010, 7th Ex. Sess. 2009-2010, ch. 4, § 1.) The
districts claimed they did not have fee authority because under article XIII D, although
the fees would not require voter approval, they could be defeated by a majority of water
customers filing written protests. (Paradise Irrigation Dist., supra, 33 Cal.App.5th at
p. 182.)
We disagreed with the districts. We based our opinion on the analysis in Bighorn-
Desert View Water Agency v. Verjil (2006) 39 Cal.4th 205 (Bighorn). That case
concerned the validity of a proposed initiative that sought to reduce a local water
district’s charges and require any future charges to be preapproved by the voters. The
California Supreme Court held the initiative could do the former but not the latter. State
statutes had delegated exclusive authority to the districts to set their fees, and such
legislative actions made under exclusive authority generally are not subject to initiatives.
(Id. at pp. 210, 219; see DeVita v. County of Napa (1995) 9 Cal.4th 763, 775-777.)
However, article XIII C, section 3 of the state constitution states the initiative power may
not be prohibited or otherwise limited in matters of reducing or repealing any local tax,
assessment, fee, or charge. The district’s water charges were fees subject to article XIII
C, and thus an initiative could seek to reduce the districts’ rates. (Bighorn, at pp. 212-
217.) But nothing in article XIII C authorized initiative measures to impose voter-
approval requirements for new or increased fees and charges. And article XIII D
expressed the voters’ intent that water service fees do not need to be approved by voters.
Thus, the exclusive delegation rule barred the proposed initiative’s attempt to subject the
district’s exercise of its fee-setting authority to voter approval. (Bighorn, at pp. 215-216,
218-219.)
In a long passage, the Supreme Court commented, “[B]y exercising the initiative
power voters may decrease a public water agency’s fees and charges for water service,
but the agency’s governing board may then raise other fees or impose new fees without
39
prior voter approval. Although this power-sharing arrangement has the potential for
conflict, we must presume that both sides will act reasonably and in good faith, and that
the political process will eventually lead to compromises that are mutually acceptable and
both financially and legally sound. (See DeVita v. County of Napa, supra, 9 Cal.4th at
pp. 792-793 [‘We should not presume . . . that the electorate will fail to do the legally
proper thing.’].) We presume local voters will give appropriate consideration and
deference to a governing board’s judgments about the rate structure needed to ensure a
public water agency’s fiscal solvency, and we assume the board, whose members are
elected . . . will give appropriate consideration and deference to the voters’ expressed
wishes for affordable water service. The notice and hearing requirements of subdivision
(a) of section 6 of California Constitution article XIII D [the owner protest procedures]
will facilitate communications between a public water agency’s board and its customers,
and the substantive restrictions on property-related charges in subdivision (b) of the same
section should allay customers’ concerns that the agency’s water delivery charges are
excessive.” (Bighorn, supra, 39 Cal.4th at pp. 220-221, fns. omitted.)
Deciding Paradise Irrigation Dist., we found in Bighorn “an approach to
understanding how voter powers to affect water district rates affect the ability of the
water districts to recover their costs.” (Paradise Irrigation Dist., supra, 33 Cal.App.5th
at p. 191.) Like the water district in Bighorn, the districts in Paradise Irrigation Dist. had
statutory authority to set their fees for water service improvements, and those fees were
not subject to prior voter approval. We held the districts thus had sufficient authority to
set fees to recover the costs of complying with the state mandate. (Id. at pp. 192-193.)
Article XIII D’s protest procedure and similar statutory protest procedures, like the
limited initiative power affirmed in Bighorn, did not divest the districts of their fee
authority. Rather, the protest procedures created a power-sharing arrangement similar to
that in Bighorn where presumably voters would appropriately consider the state
mandated requirements imposed on the districts. (Paradise Irrigation Dist., at pp. 194-
40
195.) “[T]he possibility of a protest under article XIII D, section 6, does not eviscerate
[the districts’] ability to raise fees to comply with the [Water] Conservation Act.” (Id. at
p. 194.)
The State contends the reasoning in Paradise Irrigation Dist. applies equally here
where article XIII D requires the voters to preapprove fees. It argues that as with the
voter protest procedure, under article XIII D permittees’ governing bodies and the voters
who elected those officials share power to impose fees. The governing bodies propose
the fee, and the voters must approve it. The “fact that San Diego property owners could
theoretically withhold approval—just as a majority of the governing body could
theoretically withhold approval to impose a fee—does not ‘eviscerate’ San Diego’s
police power; that power exists regardless of what the property owners, or the governing
body, might decide about any given fee.”
The State’s argument does not recognize a key distinction we made in Paradise
Irrigation Dist.: water service fees were not subject to voter approval. We contrasted
article XIII D’s protest procedure with the voter-approval requirement imposed by
Proposition 218 on new taxes. Under article XIII C, no local government may impose or
increase any general or special tax “unless and until that tax is submitted to the electorate
and approved” by a majority of the voters for a general tax and by a two-thirds vote for a
special tax. (Cal. Const., art. XIII C, § 2, subds. (b), (d).) Under article XIII D, however,
water service fees do not require the consent of the voters. (Cal. Const., art. XIII D, § 6,
subd. (c).) (Paradise Irrigation Dist., supra, 33 Cal.App.5th at p. 192.) The implication
is the voter approval requirement would deprive the districts of fee authority.
Since the fees in Paradise Irrigation Dist. were not subject to voter approval, the
protest procedure created a power sharing arrangement like that in Bighorn which did not
deprive the districts of their fee authority. In Bighorn, the power-sharing arrangement
existed because voters could possibly bring an initiative or referendum to reduce charges,
but the validity of the fee was not contingent on the voters preapproving it. In Paradise
41
Irrigation Dist., the power-sharing arrangement existed because voters could possibly
protest the water fee, but the validity of the fee was not contingent on voters
preapproving the fee. The water fee was valid unless the voters successfully protested, an
event the trial court in Paradise Irrigation Dist. correctly described as a “speculative and
uncertain threat.” (Paradise Irrigation Dist., supra, 33 Cal.App.5th at p. 184.)
Here, a fee for stormwater drainage services is not valid unless and until the voters
approve it. For property-related fees, article XIII D limits permittees’ police power to
proposing the fee. Like article XIII C’s limitation on local governments’ taxing
authority, article XIII D provides that “[e]xcept for fees or charges for sewer, water, and
refuse collection services, no property related fee or charge shall be imposed or increased
unless and until that fee or charge is submitted and approved by a majority vote of the
property owners of the property subject to the fee or charge or, at the option of the
agency, by a two-thirds vote of the electorate residing in the affected area.” (Cal. Const.,
art. XIII D, § 6, subd. (c).) The State’s argument ignores the actual limitation article XIII
D imposes on permittees’ police power. Permittees expressly have no authority to levy a
property-related fee unless and until the voters approve it. There is no power sharing
arrangement.
This limitation is crucial to our analysis. The voter approval requirement is a
primary reason Section 6 exists and requires subvention. As stated earlier, the purpose of
Section 6 “is to preclude the state from shifting financial responsibility for carrying out
governmental functions to local agencies, which are ‘ill equipped’ to assume increased
financial responsibilities because of the taxing and spending limitations that articles
XIII A and XIII B impose.” (County of San Diego v. State of California (1997)
15 Cal.4th 68, 81.) And what are those limitations? Voter approval requirements, to
name some.
Articles XIII A and XIII B “work in tandem, together restricting California
governments’ power both to levy and to spend for public purposes.” (City of
42
Sacramento, supra, 50 Cal.3d at p. 59, fn. 1.) Article XIII A prevents local governments
from levying special taxes without approval by two-thirds of the voters. (Cal. Const.,
art. XIII A, § 4.) It also prevents local governments from levying an ad valorem tax on
real and personal property. (Cal. Const., art. XIII A, § 1.) Article XIII B, adopted as the
“next logical step” to article XIII A, limits the growth of appropriations made from the
proceeds of taxes. (Cal. Const., art. XIII B, §§ 1, 2, 8; City Council v. South (1983)
146 Cal.App.3d 320, 333-334.) And, as stated above, article XIII C extends the voter
approval requirement to local government general taxes. (Cal. Const., art. XIII C, § 2,
subd. (b).)
Subvention is required under Section 6 because these limits on local governments’
taxing and spending authority, especially the voter approval requirements, deprive local
governments of the authority to enact taxes to pay for new state mandates. They do not
create a power-sharing arrangement with voters. They limit local government’s authority
to proposing a tax only, a level of authority that does not guarantee resources to pay for a
new mandate. Section 6 provides them with those resources.
Article XIII D’s voter approval requirement for property-related fees operates to
the same effect. Unlike the owner protest procedure at issue in Paradise Irrigation Dist.,
the voter approval requirement does not create a power sharing arrangement. It limits a
local government’s authority to proposing a fee only; again, a level of authority that does
not guarantee resources to pay for a state mandate. Section 6 thus requires subvention
because of Article XIII D’s voter approval requirement. Contrary to the State’s argument,
Paradise Irrigation Dist. does not compel a different result.
4. Street sweeping condition
The Commission originally determined that permittees lacked sufficient authority
to levy a fee for the street sweeping condition, and thus it was a reimbursable mandate.
The Commission found that although permittees had authority to levy a fee for street
43
sweeping pursuant to Public Resources Code section 40059, and that such a fee would be
exempt from article XIII D’s voter approval requirement as a refuse collection fee, the
fee would not be exempt from article XIII D’s owner protest procedure. (Cal. Const., art.
XIII D, § 6.) The Commission concluded that the owner protest procedure denied
permittees sufficient authority to levy a fee for the street sweeping condition, and the
condition was a reimbursable mandate.
After the Commission issued its decision, this court issued Paradise Irrigation
Dist. and, as already explained, determined that article XIII D’s owner protest procedure
did not deprive local governments of authority to levy water service fees. (Paradise
Irrigation Dist., supra, 33 Cal.App.5th at pp. 192-195.) In its respondent’s brief, the
Commission now agrees with the State that, as a result of Paradise Irrigation Dist.,
permittees have authority to levy fees for the street sweeping condition, and that the
condition is not a reimbursable mandate. The fee is not subject to voter approval, and
voter protest requirements applicable to refuse service fees do not deprive permittees of
their authority to levy fees for that service.
Permittees disagree with the Commission’s new position. They claim Paradise
Irrigation Dist. does not affect the issue. Public Resources Code section 40059
authorizes a fee for solid waste handling, but the street sweeping condition was imposed
to prevent and abate pollution in waterways and on beaches, not to collect solid waste.
The State and the Commission also have not established that street sweeping qualifies as
solid waste handling under Public Resources Code section 40059, or that a fee for such
activity qualifies as “refuse collection” for purposes of article XIII D. In addition, the
State has not established how a fee for street sweeping can satisfy article XIII D’s
substantive requirements which apply to all property-related fees.
Before reaching its original holding, the Commission concluded the street
sweeping fees qualified as refuse collection fees for purposes of article XIII D’s voter
approval exemption. The Commission determined that permittees had authority to adopt
44
street cleaning fees pursuant to their authority to adopt fees for solid waste handling.
Public Resources Code section 40059 grants local agencies the authority to determine
fees and charges for “solid waste handling.” (Pub. Resources Code, § 40059, subd.
(a)(1).) “ ‘Solid waste handling’ ” means “the collection, transportation, storage, transfer,
or processing of solid wastes.” (Pub. Resources Code, § 40195.) “ ‘Solid waste’ ”
includes “all putrescible and nonputrescible solid, semisolid, and liquid wastes” including
garbage, trash, refuse, paper, rubbish, ashes, and the like. (Pub. Resources Code,
§ 40191.) The Commission determined that “ ‘[g]iven the nature of material swept from
city streets, street sweeping falls under the rubric of “solid waste handling,” ’ ” and
permittees thus had authority to adopt fees for street sweeping.
Article XIII D exempts “refuse collection” fees from its voter approval
requirement, but neither it nor the Implementation Act define “refuse collection.” The
Commission determined the plain meaning of refuse collection is the same as solid waste
handling. “Refuse is collected via solid waste handling.” As a result, the Commission
concluded that street cleaning fees would qualify as refuse collection fees and were
therefore expressly exempt from article XIII D’s voter approval requirement.
Permittees assert that “no one” has demonstrated that a fee for street sweeping
qualifies as refuse collection for purposes of article XIII D. Yet permittees offer no
alternative to the Commission’s interpretation that street sweeping is waste handling, and
that waste handling is refuse collecting. We independently review the Commission’s
interpretation of the permit and statutory provisions. (Los Angeles Mandates I, supra,
1 Cal.5th at p. 762.) Giving the language a plain and commonsense meaning as we are
required to do (City of San Jose, supra, 2 Cal.5th at p. 616), we agree with the
Commission’s interpretation that street sweeping, as required by the permit, is refuse
collecting for purposes of article XIII D.
The permit requires each permittee to implement a program “to sweep improved
(possessing a curb and gutter) municipal roads, streets, highways, and parking facilities.”
45
Frequency depends on the volume of trash each street generates. Roads “consistently
generating the highest volumes of trash and/or debris shall be swept at least two times per
month.” Roads that generate “moderate” or “low” “volumes of trash and/or debris” are
to be swept less frequently.
As part of their reporting responsibilities, permittees must annually identify the
total distance of curb miles of roads identified “as consistently generating the highest
volumes of trash and/or debris,” and also the curb miles of roads identified as
“consistently generating moderate volumes of trash and/or debris” and “low volumes of
trash and/or debris[.]” Additionally, permittees must annually report the “[a]mount of
material (tons) collected from street and parking lot sweeping.”
It is obvious that the street sweeping condition expressly requires permittees to
collect refuse. Refuse means “rubbish, trash, garbage.” (Merriam-Webster- Unabridged
Dict. Online (2022) < https://unabridged.merriam-webster.com/unabridged/refuse, par.3>
[as of Aug. 25, 2022], archive at:.) Permittees must
collect and record the volumes of trash removed by street sweeping. Thus, a fee for
collecting that refuse and charged pursuant to Public Resources Code section 40059
would as a fee for refuse collection services be exempt from article XIII D’s voter
approval requirement.
Permittees claim the street sweeping requirement was not imposed to collect solid
waste as contemplated by Public Resources Code section 40059 but was intended to
prevent or abate pollution. We rejected this type of argument earlier when the State made
it. Recall that for purposes of Section 6, the State’s purpose for imposing a mandate does
not determine whether the mandate is a new program. Similarly, if street sweeping
qualifies as waste handling for purposes of Public Resources Code section 40059, then
permittees have authority to levy a fee for it, regardless of why the state imposed the
street sweeping condition.
46
Relying on Los Angeles Mandates II, supra, 59 Cal.App.5th at page 568,
permittees claim the State has the burden of proving their fee authority, and specifically
that a fee for street sweeping would satisfy article XIII D’s substantive requirements for
property-related fees. Permittees assert the State has not met its burden. Los Angeles
Mandates II is distinguishable. There, the court of appeal determined that an NPDES
permit condition requiring the local governments to install and maintain trash receptacles
at public transit stops owned by other public entities required subvention under Section 6
because the local agencies did not have sufficient authority to levy fees for the
requirement. (Los Angeles Mandates II, at p. 561.) The local governments did not have
authority to install equipment on another public entity’s property and then charge that
entity for installation and ongoing maintenance. (Id. at pp. 565-567.)
The state in that case contended the local agencies could impose a fee on private
property owners, and that such a fee would survive limitations imposed by article XIII D.
Assuming for purposes of argument that the fee would overcome all of article XIII D’s
procedural hurdles, such as the owner protest and voter approval requirements, the court
of appeal determined the state had not shown the fee would meet article XIII D’s
substantive requirements for property-related fees. (Los Angeles Mandates II, supra,
59 Cal.App.5th at pp. 567-568.) The state did not cite to the record or to authority
showing such a fee could satisfy the substantive requirements, and common sense
dictated it could not. (Id. at p. 568.)
Three of the substantive requirements permit a property-related fee only if the
amount of the fee does not exceed the proportional cost of that attributable to the parcel,
the fee is imposed for a service that is actually used by, or immediately available to, the
owner of the property in question, and the fee is not imposed for general governmental
services where the service was available to the public at large in substantially the same
manner as it was to property owners. (Cal. Const., art. XIII D, § 6, subd. (b)(3)-(5).) The
state could not satisfy the requirements because the vast majority of persons who would
47
use trash receptacles at transit stops would be pedestrians, transit riders, and other
members of the public, not the owners of adjacent properties. Any benefit to them would
be incidental. Moreover, the placement of the receptacles at public transit stops would
make the service available to the public at large in the same manner as it would to
property owners. (Los Angeles Mandates II, supra, 59 Cal.App.5th at pp. 568-569.)
The state claimed two other statutes, including Public Resources Code section
40059, gave the local agencies sufficient fee authority. The court of appeal did not
dispute that the statutes authorized the agencies to impose fees, including waste
management fees under Public Resources Code section 40059, but the statutes did not
exempt such fees from the constitutional requirements imposed by article XIII D. (Los
Angeles Mandates II, supra, 59 Cal.App.5th at pp. 569-570.)
There is no dispute that any fee permittees may charge for the street sweeping
condition will be subject to article XIII D’s substantive requirements. Permittees,
however, citing Los Angeles Mandate II, claim the State, as the party seeking to establish
an exception to subvention under Section 6, has the burden at this stage to establish that
any fee permittees may adopt will meet all of the substantive requirements, and the state
has not met that burden. “Typically, the party claiming the applicability of an exception
bears the burden of demonstrating that it applies.” (Los Angeles Mandates I, supra,
1 Cal.5th at p. 769.)
The State argues that this typical approach should not apply to the burden of
showing fee authority under section 17556(d). It claims the inherent flexibility in
permittees’ police power means permittees may develop fees in any number of ways.
Also, local governments like permittees have significantly more expertise and experience
than the State agencies before us in designing, implementing, and defending local
government fees. The State asserts that permittees’ expertise means they should bear the
burden on this point.
48
We agree the State has the burden of establishing that permittees have fee
authority, but that burden does not require the State also to prove permittees as a matter
of law and fact are able to promulgate a fee that satisfies article XIII D’s substantive
requirements. The sole issue before us is whether permittees have “the authority, i.e., the
right or power, to levy fees sufficient to cover the costs of the state-mandated program.”
(Connell v. Superior Court (1997) 59 Cal.App.4th 382, 401.) The inquiry is an issue of
law, not a question of fact. (Ibid.)
“The lay meaning of ‘authority’ includes ‘the power or right to give commands
[or] take action . . . .’ (Webster’s New World Dictionary (3d college ed.1988) p. 92.)
Thus, when we commonly ask whether a police officer has the ‘authority’ to arrest a
suspect, we want to know whether the officer has the legal sanction to effect the arrest,
not whether the arrest can be effected as a practical matter. [¶] Thus, the plain language
of the statute precludes reimbursement where the local agency has the authority, i.e., the
right or the power, to levy fees sufficient to cover the costs of the state-mandated
program.” (Connell v. Superior Court, supra, 59 Cal.App.4th at p. 401.)
The State has established that permittees have the right or power to levy a fee for
the street cleaning condition pursuant to Public Resources Code section 40059. Implicit
in that determination is that permittees have the right or power to levy a fee that complies
with article XIII D’s substantive requirements. Unless it can be shown on undisputed
facts in the record or as a matter of law that a fee cannot satisfy article XIII D’s
substantive requirements, as was found in Los Angeles Mandates II, the establishment by
the State of the local agencies’ power or authority to levy a fee without voter approval or
without being subject to other limitations establishes that a local government has
sufficient fee authority for purposes of section 17556(d).
Although the court of appeal in Los Angeles Mandates II stated the state bore the
burden to show that a fee for public trash receptacles could satisfy the substantive
requirements, and that the state did not satisfy its burden, the court actually ruled that the
49
local governments could not establish a fee that could meet the substantive requirements
as a matter of law or undisputed fact. (Los Angeles Mandates II, supra, 59 Cal.App.5th
at pp. 568-569 [“common sense dictates” that fee would not meet requirements].) To
require the State to show affirmatively how permittees can create a fee that meets the
substantive requirements where no fee yet exists requires the State effectively to engage
in the rulemaking process itself. That asks the State to do more than establish permittees
have the lawful authority to enact a fee, which is the sole issue. To the extent Los
Angeles Mandates II requires the State to prove more, we respectively disagree with its
interpretation.
Here, the State has established that permittees have sufficient fee authority to levy
a fee for the street sweeping condition. As a result, the condition does not trigger
subvention under Section 6. We will reverse the trial court’s contrary holding on this
issue.
IV
Permittees’ Cross-Appeal
A. Background
Permittees’ cross appeal challenges the Commission’s decision that permittees
have sufficient authority to levy fees to recover the costs for two of the challenged
conditions: the development and implementation of a hydromodification management
plan (HMP) and low impact development (LID) requirements, both for use on “priority
development projects.”
Under the permit, priority development projects in general are certain new
developments that increase pollutants in stormwater and in discharges from MS4s. These
include certain residential, commercial, and industrial uses along with parking lots and
roads that add impervious surfaces or are built on hillsides or in environmentally
sensitive areas.
50
The permit requires permittees to develop and implement an HMP to mitigate
increases in runoff discharge rates and durations from priority development projects.
Hydromodification refers to the change in natural hydrologic processes and runoff
characteristics caused by urbanization or other land use changes that result in increased
stream flows and sediment transport. The plan would apply where increased runoff rates
and durations from priority development projects would likely cause increased erosion of
channel beds and banks, sediment pollutant generation, or other impacts to beneficial
uses and stream habitat.
LID requirements are stormwater management and land development strategies to
minimize directly-connected impervious areas and promote ground infiltration at priority
development projects. They emphasize conservation and the use of on-site natural
features, integrated with engineered, small-scale hydrologic controls to reflect pre-
development hydrologic functions more closely. The permit requires permittees to add
LID requirements to their local Standard Urban Storm Water Mitigation Plans.
The Commission determined that permittees had authority to levy fees to recover
the costs of developing and implementing the HMP and the LID requirements because
fees for those actions would not require voter approval under article XIII D. The purpose
of the two conditions “is to prevent or abate pollution in waterways and beaches in San
Diego County.” Permittees have authority to impose the fees for this purpose under their
police power, and article XIII D does not apply to fees imposed under the police power as
a condition of property development or as a result of a property owner’s voluntary
decision to seek a government benefit. Additionally, the Mitigation Fee Act (Gov. Code,
§ 66000, et seq.) grants permittees statutory authority to impose development fees to
recover the costs for complying with the HMP and LID conditions which, again, are
exempt from article XIII D. Because permittees had the authority to levy fees to recover
the costs of the HMP and LID conditions without having to obtain voter approval, the
Commission concluded the conditions were not reimbursable mandates under Section 6.
51
The trial court upheld the Commission’s determinations on the same grounds.
B. Analysis
Permittees contend the Commission and the trial court erred. They do not dispute
that they may enact regulatory fees pursuant to their police power. They focus their
argument on recovering only the costs of creating the HMP and the LID requirements,
and they claim that fees to recover those costs cannot meet the “substantive
requirements” to be exempt from the voter approval requirements found in section 6 of
article XIII D or article XIII C, section 1, subdivision (e)(2) of the state constitution.
They also contend that fees to recover those costs cannot satisfy the substantive
requirements of the Mitigation Fee Act.
Before addressing permittees’ authority to levy a fee for the HMP and LID
conditions, we refute an assumption underlying their argument. Section 6 of article XIII
D and its voter approval requirements do not apply in this instance. The Commission
found that permittees had authority to recover the costs of preparing the HMP and the
LID requirements by imposing a fee as a condition for approving new priority
development projects. Article XIII D does not apply to fees imposed on real property
development. (Cal. Const., art. XIII D, § 1.) Article XIII D also does not apply to fees
imposed on property owners for their voluntary decision to apply for a government
benefit. (Richmond v. Shasta Community Services Dist., supra, 32 Cal.4th at pp. 425-
428.) The proposed fee at issue here would be imposed as a condition for approving new
real property development and based on the developer’s application for government
approval to proceed with the development. Article XIII D does not apply in this
circumstance.
Also, at the time the Commission issued its decision, the state constitution did not
expressly define taxes and fees or their differences. In November 2010, shortly after the
Commission issued its decision, voters approved Proposition 26, which amended section
52
1 of article XIII C by adding subdivision (e), the provision cited by permittees. (Prop. 26,
Cal. Const., art.§ 3, approved by voters, Gen. Elec. (Nov. 2, 2010), eff. (Nov. 3, 2010).)
Proposition 26 defined a local tax subject to voter approval as “any levy, charge, or
exaction of any kind imposed by a local government” except for certain enumerated
charges and fees. (Cal. Const., art. XIII C, §§ 1, subd. (e), 2.) Proposition 26 is not
retroactive, and thus its definitions of a tax and fee do not apply to the Commission’s
decision. (Brooktrails Township Community Services Dist. v. Board of Supervisors
(2013) 218 Cal.App.4th 195, 205-207.) However, Proposition 26 codified much, but not
all, of the relevant case authority that existed at the time of the measure’s enactment
regarding the requirements for a valid fee. (City of San Buenaventura v. United Water
Conservation Dist. (2017) 3 Cal.5th 1191, 1210.) In determining whether permittees can
levy a fee or whether a fee they enact would be valid, we will restrict ourselves to
authority and rules established before Proposition 26 was adopted or which the measure
codified.
In general, all taxes imposed by local governments must be approved by the
voters, but development fees and regulatory fees that meet certain requirements are not
required to be approved by the voters. (Cal. Const., arts. XIII C, § 2; XIII D, § 1, subd.
(b); Sinclair Paint Co. v. State Bd. of Equalization (1997) 15 Cal.4th 866, 875-876.) A
levy qualifies as a regulatory fee if “(1) the amount of the fee does not exceed the
reasonable costs of providing the services for which it is charged, (2) the fee is not levied
for unrelated revenue purposes, and (3) the amount of the fee bears a reasonable
relationship to the burdens created by the feepayers’ activities or operations. ([Sinclair
Paint Co. v. State Bd. of Equalization, supra, 15 Cal.4th at p. 881].) If those conditions
are not met, the levy is a tax.” (California Building Industry Assn v. State Water
Resources Control Bd. (2018) 4 Cal.5th 1032, 1046.)
These are the substantive requirements that permittees claim a fee for the HMP
and LID conditions cannot satisfy. Specifically, they claim that a fee to recover the cost
53
of creating the HMP and the LID requirements cannot meet the first and third required
elements of a valid regulatory fee. They assert that any fee revenue they collected from
developers of priority development projects would exceed the cost of creating the HMP
and the LID requirements. They incurred $1.1 million in drafting the plans, and the plans
were drafted before any development projects could be charged a fee. They argue that if
they collected fees from all applicable developers, eventually the fees collected would
exceed the $1.1 million cost to write the plans. If they stopped charging fees after
collecting $1.1 million, developers who paid the fee would have paid more than they
should for their benefit or burden.
Permittees also claim that the amount of a fee for recovering the costs of creating
the HMP and the LID requirements would not have a fair or reasonable relationship to
the burdens created by future developers’ activities or operations. Permittees assert they
lack any means of reasonably allocating the costs of creating the HMP and the LID
requirements among particular development projects and their proponents. Case
authority requires the fee to be based on a project’s contribution to the impact being
addressed, but permittees assert they cannot monitor pollutants from all future
development projects to establish an emissions-based formula for allocating the fee. (See
San Diego Gas & Electric Co. v. San Diego County Air Pollution Control Dist. (1988)
203 Cal.App.3d 1132, 1146 (San Diego Gas).) Permittees argue that case authority also
prevents them from allocating a fee based on the physical characteristics of individual
properties. (See City of Salinas, supra, 98 Cal.App.4th at p. 1355.)
Whether a levy constitutes a fee or tax is a question of law determined upon an
independent review of the record. (California Building Industry Assn v. State Water
Resources Control Bd., supra, 4 Cal.5th at p. 1046.) Here, of course, there is no adopted
fee to which we could apply the substantive requirements. And permittees direct us to no
evidence in the record supporting their claim that, in effect, it is factually and legally
54
impossible for them to adopt a valid regulatory fee to recover the cost of creating the
HMP and the LID requirements.
As with the street sweeping condition, the sole issue before us is whether
permittees have the authority, i.e., “the right or power, to levy fees sufficient to cover the
costs.” (Connell v. Superior Court, supra, 59 Cal.App.4th at p. 401.) There is no dispute
that permittees’ police power vests them with the legal authority to levy fees that will
satisfy the substantive requirements to avoid being considered as taxes. That fact ends
our analysis unless permittees can establish they cannot levy a regulatory or development
fee as a matter of law.
There is no evidence in the record that permittees cannot levy a fee in an amount
that will not exceed their costs for creating the HMP and the LID requirements. “The
scope of a regulatory fee is somewhat flexible and is related to the overall purposes of the
regulatory governmental action. ‘ “A regulatory fee may be imposed under the police
power when the fee constitutes an amount necessary to carry out the purposes and
provisions of the regulation.” [Citation.] “Such costs . . . include all those incident to the
issuance of the license or permit, investigation, inspection, administration, maintenance
of a system of supervision and enforcement.” [Citation.] Regulatory fees are valid
despite the absence of any perceived “benefit” accruing to the fee payers. [Citation.]
Legislators “need only apply sound judgment and consider ‘probabilities according to the
best honest viewpoint of informed officials’ in determining the amount of the regulatory
fee.” [Citation.]’ ([California Assn. of Prof. Scientists v. Department of Fish & Game
(2000)] 79 Cal.App.4th [935,] 945 [(Prof. Scientists)].) ‘Simply because a fee exceeds
the reasonable cost of providing the service or regulatory activity for which it is charged
does not transform it into a tax.’ (Barratt American, Inc. v. City of Rancho Cucamonga
(2005) 37 Cal.4th 685, 700.)” (California Farm Bureau Federation v. State Water
Resources Control Bd. (2011) 51 Cal.4th 421, 438.)
55
Creating the HMP and the LID requirements constitute costs incident to the
development permit which permittees will issue to priority development projects and the
administration of permittees’ pollution abatement program. Setting the fee will not
require mathematical precision. Permittees’ legislative bodies need only “consider
‘probabilities according to the best honest viewpoint of [their] informed officials’ ” to set
the amount of the fee. (California Farm Bureau Federation v. State Water Resources
Control Bd., supra, 51 Cal.4th at p. 438.) “No one is suggesting [permittees] levy fees
that exceed their costs.” (Connell v. Superior Court, supra, 59 Cal.App.4th at p. 402.)
There is also no evidence in the record indicating permittees cannot levy a fee that
will bear a reasonable relationship to the burdens created by future priority development.
“A regulatory fee does not become a tax simply because the fee may be disproportionate
to the service rendered to individual payors. (Brydon v. East Bay Mun. Utility Dist.
(1994) 24 Cal.App.4th 178, 194.) The question of proportionality is not measured on an
individual basis. Rather, it is measured collectively, considering all rate payors. (Prof.
Scientists, supra, 79 Cal.App.4th at p. 948.) [¶] Thus, permissible fees must be related to
the overall cost of the governmental regulation. They need not be finely calibrated to the
precise benefit each individual fee payor might derive [or the precise burden each payer
may create]. What a fee cannot do is exceed the reasonable cost of regulation with the
generated surplus used for general revenue collection. An excessive fee that is used to
generate general revenue becomes a tax.” (California Farm Bureau Federation v. State
Water Resources Control Bd., supra, 51 Cal.4th at p. 438.) Again, no one is suggesting
permittees levy a fee to generate general revenue.
Permittees cite to San Diego Gas, supra, 203 Cal.App.3d at pages 1145-1149, and
City of Salinas, supra, 98 Cal.App.4th at page 1355, to claim they lack any means of
fairly or reasonably allocating the costs of creating the HMP and the LID requirements
among priority development project proponents. Those cases, however, concern only the
56
facts before them and do not establish that permittees as a matter of law cannot enact a
fee that meets the substantive requirements for regulatory fees.
In San Diego Gas, the court of appeal upheld an air pollution control district’s
imposition of a regulatory fee to cover the administrative cost of its permit program for
industrial polluters. The fee was apportioned based on the amount of emissions
discharged by a stationary pollution source. The record showed that the allocation of
costs based on emissions fairly related to the permit holder’s burden on the district’s
programs. (San Diego Gas, supra, 203 Cal.App.3d. at p. 1146.) The district’s
determination that a fee based on the labor costs incurred in the permit program would
result in small polluters paying fees greater than their proportionate share of pollution
reasonably justified using the emissions-based fee schedule to divide the costs more
equitably. (Id. at pp. 1146-1147.)
Permittees contend that, similar to the labor-based fee in San Diego Gas that was
not imposed, allocating the costs of preparing the HMP and the LID requirements
pursuant to a formula unrelated to an individual project’s contribution to pollution would
not provide a fair or reasonable relationship to the payor’s burdens on or benefits from
the regulatory activity. However, San Diego Gas does not stand for the proposition that
an emissions-based, or discharge-based fee requiring direct monitoring is the only lawful
fee for funding a pollution mitigation program. The case is limited to its facts, and the
court in that case determined that the emissions-based fee before it met the substantive
requirements for regulatory fees.
The substantive test is “a flexible assessment of proportionality within a broad
range of reasonableness in setting fees.” (Prof. Scientists, supra, 79 Cal.App.4th at
p. 949.) This flexibility would be particularly appropriate where an obvious or accepted
method such as an emissions-based fee is impractical. Indeed, “[r]egulatory fees, unlike
other types of user fees, often are not easily correlated to a specific, ascertainable cost.”
(Id. at p. 950.) In those cases, even a flat-fee system may be a reasonable means of
57
allocating costs. (Id. at pp. 939, 950-955 [flat fee schedule to defray costs of performing
environmental review was valid regulatory fee as long as the cumulative amount of the
fee did not surpass the cost of the regulatory service and the record discloses a reasonable
basis to justify distributing the cost among payors].) Permittees have not shown they
cannot meet this flexible test.
Relying on City of Salinas, permittees also claim that charges based on the
physical characteristics of a property, such as the amount of impervious surface area as a
proxy for actual discharges, are not proportional to the amount of services requested or
used and thus must be approved by the voters. (City of Salinas, supra, 98 Cal.App.4th at
p. 1355.) Permittees misread the court’s statement. The particular issue in City of
Salinas was whether a fee charged by a city on all developed parcels to finance
improvements to storm and surface water facilities was a property-related fee subject to
article XIII D’s voter approval requirements or a user fee comparable to the metered use
of water or the operation of a business. The fee was calculated according to the degree to
which the property contributed runoff to the city’s drainage facilities, and a property’s
contribution was to be measured by the amount of “impervious area” on the parcel. (City
of Salinas, at p. 1353.)
The city had argued the fee was a user fee because a property owner could
theoretically opt out of paying it by maintaining its own stormwater management facility
on the property. The court disagreed, finding the fee was appliable to each developed
parcel in the city. (City of Salinas, supra, 98 Cal.App.4th at pp. 1354-1355.) One
indicator the fee was not a user fee was the fact that any reduction in the fee based on
lack of contribution of water was “not proportional to the amount of services requested or
used by the occupant but on the physical properties of the parcel.” (Id. at p. 1355.) The
statement concerned the limited issue of whether the fee was a user fee. Contrary to
permittees’ interpretation, the court of appeal’s statement does not mean that charges
based on a property’s physical characteristics, such as the amount of impervious surface
58
area as a proxy for actual discharges, are as a matter of law not proportional to the
amount or level of services provided and must be approved by voters as a tax.
Permittees also raise an argument based on Proposition 26. They assert they
cannot legally levy a fee to recover the cost of preparing the HMP and LID conditions
because those planning actions benefit the public at large, citing Newhall County Water
Dist. v. Castaic Lake Water Agency (2016) 243 Cal.App.4th 1430, 1451 (Newhall).
Permittees misapply Newhall. Newhall concerned rates that a public water wholesaler of
imported water charged to four public retail water purveyors. Part of the wholesaler’s
rates consisted of a fixed charge based on each retailer’s rolling average of demand for
the wholesaler’s imported water and for groundwater which was not supplied by the
wholesaler. Although the wholesaler was required to manage groundwater supplies in
the basin, it did not sell groundwater to the retailers. (Id. at pp. 1434-1440.)
The court of appeal determined the rates did not qualify as fees under Proposition
26. Proposition 26 states a levy is not a tax where, among other uses, it is imposed “for a
specific government service provided directly to the payor that is not provided to those
not charged . . . .” (Cal. Const., art. XIII C, § 1, subd. (e)(2).) The only specific
government service the wholesaler provided to the retailers was imported water. It did
not provide groundwater, and the groundwater management activities it provided were
not services provided just to the retailers. Instead, those activities “redound[ed] to the
benefit of all groundwater extractors in the Basin[.]” (Newhall, supra, 243 Cal.App.4th
at p. 1451.) The wholesaler could not base its fee and allocate its costs based on
groundwater use because the wholesaler’s groundwater management activities were
provided to those who were not charged with the fee. (Ibid.; see also Los Angeles
Mandates II, supra, 59 Cal.App.5th at p. 569 [article XIII D prohibits MS4 permittees
from charging property owners for the cost of providing trash receptacles at public transit
locations in part because service was made available to the public at large].)
59
Permittees argue that, as in Newhall, the costs of preparing the HMP and the LID
requirements are part of their stormwater management programs. Although only
proponents of priority development projects will be required to comply with the plans,
the plans will “redound to the benefit of all” property owners, residents, and visitors in
the region by improving water quality. Thus, a charge to recover the costs of creating the
plan would not qualify as a fee and would be subject to voter approval, and as a result,
permittees do not have authority to levy a fee for that purpose.
Assuming only for purposes of argument that Proposition 26 applies here, we
disagree with permittees. Article XIII C, section 1, subdivision (e) defines a local tax
subject to voter approval as “any levy, charge, or exaction of any kind imposed by a local
government,” with the express exception of seven different types of charges. Satisfying
any one of those exceptions removes the charge from being a tax. The proposed fee
permittees may impose satisfies two of those exceptions: a charge imposed for the
reasonable regulatory cost to a local government for issuing permits, and a charge
imposed as a condition of property development. (Cal. Const., art. XIII C, § 1, subd.
(e)(3), (6).)
Under the exception at issue in Newhall, a charge is not a tax if it is “imposed for a
specific government service or product provided directly to the payor that is not provided
to those not charged . . . .” (Cal. Const., art. XIII C, § 1, subd. (e)(2).) The focus is on a
service or product “provided directly” to the payor that is not provided to those not
charged. Here, the service provided directly to developers of priority development
projects is the preparation, implementation, and approval of water pollution mitigations
applicable only to their projects. Unlike in Newhall, that service is not provided to
anyone else, and only affected priority project developers will be charged for the service.
The service will not be provided to those not charged. To interpret the provision as
permittees do, that the exception from being a tax excludes fees for services that
60
ultimately but not directly redound to the public benefit,—which is not what Newhall
held—is contrary to the statutory exception’s express wording.
Separately, the County of San Diego raises another argument. It notes that under
existing law, if a local agency has some fee authority, but not sufficient fee authority to
cover the entire cost of a mandated activity, the mandate is reimbursable under Section 6
to the extent the cost cannot be recovered through fees. (See Clovis Unified School Dist.
v. Chiang (2010) 188 Cal.App.4th 794, 812 (Clovis Unified).) The County contends the
same principle should be true if a local agency only has fee authority contingent on the
actions of third parties, in this case the prospective developers, whom the County and
permittees do not control. Such a “contingent” mandate, so labeled by the County, is not
“sufficient to pay for” the mandate, as required by section 17556(d), and should be
deemed a reimbursable mandate.
The County misunderstands the principle. The County describes a situation where
whether it collects revenue from the fee is contingent not on its legal authority to levy a
fee, but on developers seeking permits for priority development projects. The latter is not
relevant to our analysis. The authority the County cites, Clovis Unified, acknowledges
this distinction and undercuts the County’s argument. In Clovis Unified, community
college districts who provided health care services were mandated to provide those
services in the future at the level of care they had provided in the 1986-1987 fiscal year.
The districts were required to maintain this level of care even if, as they were permitted
to do, they eliminated a student health fee they were authorized by statute to charge.
Auditing the districts’ approved claims for reimbursement under Section 6, the state
controller determined the districts would be reimbursed for their health service costs at
the level of service they provided in 1986-87 subject to a reduction by the amount of
student fees the districts were statutorily authorized to charge, even if the districts chose
not to charge the fee. (Clovis Unified, supra, 188 Cal.App.4th at pp. 810-811.)
61
A panel of this court upheld the controller’s auditing rule as consistent with
section 17556(d). We stated that section 17556(d)’s fee authority exception to Section
6’s subvention requirement embodied a basic principle underlying the state mandate
process: “To the extent a local agency or school district ‘has the authority’ to charge for
the mandated program or increased level of service, that charge cannot be recovered as a
state-mandated cost.” (Clovis Unified, supra, 188 Cal.App.4th at p. 812, fn. omitted.) In
other words, the issue turns on the local agency’s authority to levy a fee, not on whether
the agency actually imposed the fee.
This holding does not support the County’s argument. The issue raised by the
County is not that permittees do not have fee authority. It is that after they exercise that
authority and enact a fee, the fee may not be paid if no developers apply for permits. The
County’s authority to levy a fee is not contingent on future developers, only the actual
collection of the fee is contingent. The authority to levy the fee is derived from police
power, and nothing in the County’s argument, or permittees’ arguments, indicates
permittees do not have the authority to levy fees for the HMP and the LID requirements.
62
DISPOSITION
We reverse the judgment only to the extent it holds that the street sweeping
condition is a reimbursable mandate under Section 6. In all other respects, the judgment
is affirmed. Each party shall bear its own costs. (Cal. Rules of Court, rule 8.278(a)(5).)
HULL, Acting P. J.
We concur:
MAURO, J.
DUARTE, J.
63
Filed 11/21/22
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(Sacramento)
----
DEPARTMENT OF FINANCE et al., C092139
Plaintiffs, Cross-defendants and (Super. Ct. No.
Appellants, 34201080000604CUWMGDS)
v. ORDER CERTIFYING
OPINION FOR
COMMISSION ON STATE MANDATES, PUBLICATION
Defendant and Respondent;
COUNTY OF SAN DIEGO et al.,
Defendants, Cross-complainants and
Appellants.
APPEAL from a judgment of the Superior Court of Sacramento County, Laurie M.
Earl, J. Reversed and affirmed.
Rob Bonta, Attorney General, Matthew Rodriquez, Acting Attorney General,
Thomas S. Patterson, Senior Assistant Attorney General, Anthony R. Hakl and Paul
1
Stein, Supervising Deputy Attorneys General, Nelson R. Richards, Natasha A. Saggar
Sheth and Ryan R. Davis, Deputy Attorneys General for Plaintiffs and Appellants.
Best Best & Krieger, Shawn David Hagerty and Rebecca Andrews; Lounsbery
Ferguson Altona & Peak, Helen Holmes Peak for Defendants, Cross-complainants, and
Appellants City of San Diego et al.; Frederick Michael Ortlieb, Senior Deputy City
Attorney for Defendant, Cross-complainant, and Appellant City of San Diego.
Office of County Counsel, Christina Rea Snider, Senior Deputy for Defendant,
Cross-complainant, and Appellant County of San Diego.
Camille S. Shelton, Chief Legal Counsel for Defendant and Respondent.
THE COURT:
The opinion in the above-entitled matter filed October 24, 2022, was not certified
for publication in the Official Reports and it is so ordered.
BY THE COURT:
HULL, Acting P.J.
MAURO, J.
DUARTE, J.
2 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488330/ | USCA11 Case: 21-13942 Date Filed: 11/21/2022 Page: 1 of 8
[DO NOT PUBLISH]
In the
United States Court of Appeals
For the Eleventh Circuit
____________________
No. 21-13942
Non-Argument Calendar
____________________
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
versus
MICHAEL FRANK BURGESS,
Defendant-Appellant.
____________________
Appeal from the United States District Court
for the Middle District of Florida
D.C. Docket No. 6:10-cr-00161-ACC-GJK-1
____________________
USCA11 Case: 21-13942 Date Filed: 11/21/2022 Page: 2 of 8
2 Opinion of the Court 21-13942
Before ROSENBAUM, JILL PRYOR, and BRANCH, Circuit Judges.
PER CURIAM:
Michael Frank Burgess appeals the district court’s denial of
his motion for compassionate release under 18 U.S.C.
§ 3582(c)(1)(A), which grants courts discretion to reduce a defend-
ant’s sentence if warranted by “extraordinary and compelling rea-
sons.” The court found that Burgess’s age and medical conditions
did not constitute extraordinary and compelling reasons for com-
passionate release and, even if they had, the 18 U.S.C. § 3553(a)
sentencing factors weighed against his early release. After careful
review, we affirm.
In November 2011, Burgess was sentenced to 180 months of
imprisonment after he pled guilty to conspiracy to commit wire
fraud, in violation of 18 U.S.C. § 371, and money laundering, in vi-
olation of 18 U.S.C. §§ 1957 and 2. Initially, Burgess’s presentence
investigation report (“PSR”) recommended a guideline range of 63
to 78 months. But he failed to appear for his first sentencing date,
which led to a two-hour standoff with a SWAT team. And so his
guideline range increased substantially to 168 to 210 months. The
district court applied an enhancement for obstruction of justice, re-
moved a reduction for acceptance of responsibility, and found that
he was accountable for $94 million in losses to fifteen victims. Ul-
timately, the district court imposed the statutory maximum term
for both counts, running consecutively, to reach a total of 180
months.
USCA11 Case: 21-13942 Date Filed: 11/21/2022 Page: 3 of 8
21-13942 Opinion of the Court 3
At the time of his sentencing, Burgess was 69 years old and
was already experiencing health issues. Just a year before his sen-
tencing, Burgess had been diagnosed with colon cancer and under-
went a colon and large intestine resection to treat it. He also suf-
fered from high cholesterol for which he took numerous medica-
tions and was dependent on Oxycodone for pain management.
In May 2021, Burgess filed a motion for compassionate re-
lease pro se that focused on the risk that COVID-19 could pose to
his health because of his various health conditions. Then, in July
2021, with counsel, Burgess supplemented his initial motion to as-
sert that notwithstanding the dangers posed by COVID-19, his age
and health constituted extraordinary and compelling reasons for
compassionate release under U.S.S.G. § 1B1.13, cmt. n.1(B).
In his motion, Burgess claimed (and the Government
agreed) that at the time of his filing, he was 79 years old and had
served 75% of his sentence. Burgess also explained that he suffers
from various severe chronic medical conditions, including heart
conditions for which he has undergone surgery, hypertension and
cardiac murmurs, high cholesterol, diverticulitis, anemia, and glau-
coma. Finally, Burgess argued that release was warranted based on
the § 3553(a) factors for various reasons: he had demonstrated re-
habilitation through his positive involvement in the prison and
nearly spotless disciplinary record, his last year in prison was par-
ticularly punitive due to the COVID-19 conditions, he had a stable
release plan, and his previous approval for transfer to home
USCA11 Case: 21-13942 Date Filed: 11/21/2022 Page: 4 of 8
4 Opinion of the Court 21-13942
confinement demonstrated that he was not a danger to the com-
munity.
The district court denied Burgess’s motion in October 2021.
The court found that although he proved that he met the necessary
criteria for age and length of time served, he failed to establish that
he was experiencing deterioration in his physical or mental health
due to the aging process. The court found that many of his present
medical conditions were diagnosed before his sentencing and that
his own records showed that he was in stable medical condition
and had satisfactory access to medical care. Additionally, the court
found that even if he had established extraordinary and compelling
reasons to warrant his release, the § 3553(a) factors ultimately
weighed against his release. Specifically, the court noted the grav-
ity of Burgess’s crimes, considering the amount of restitution he
owed, the number of victims he impacted, and his attempt to ab-
scond. The court also found his argument regarding his rehabilita-
tion unpersuasive, given that he was found with a contraband cell-
phone right before he was to be released to home confinement.
We review de novo a determination about a defendant’s el-
igibility for a § 3582(c) sentence reduction. United States v. Bryant,
996 F.3d 1243, 1251 (11th Cir. 2021). We review the denial of an
eligible prisoner’s § 3582(c)(1)(A) motion for an abuse of discretion.
Id.; United States v. Harris, 989 F.3d 908, 911 (11th Cir. 2021). A
district court retains a “range of choice,” so long as it does not apply
an incorrect legal standard, rely on clearly erroneous facts, or com-
mit a clear error of judgment. Harris, 989 F.3d at 911–12.
USCA11 Case: 21-13942 Date Filed: 11/21/2022 Page: 5 of 8
21-13942 Opinion of the Court 5
District courts have limited authority to reduce a prison sen-
tence for compassionate release only when “extraordinary and
compelling reasons” warrant such a modification. 18 U.S.C. §
3582(c)(1)(A)(i). In Bryant, we held that all motions for compas-
sionate release that claim extraordinary and compelling reasons
must adhere to the Sentencing Commission’s applicable policy
statement, U.S.S.G. § 1B1.13. Bryant, 996 F.3d at 1262. Therefore,
to grant a sentence reduction for extraordinary and compelling rea-
sons, the court must first find three things: (1) an extraordinary and
compelling reason exists under § 1B1.13’s policy statement; (2) the
defendant is not a danger to the community according to 18 U.S.C.
§ 3142(g); and (3) the § 3553(a) factors support the reduction.
United States v. Tinker, 14 F.4th 1234, 1237 (11th Cir. 2021). Alt-
hough the court may conduct the analysis in any order, all three
conditions must be met for a court to grant a sentence reduction.
Id. at 1238.
An extraordinary and compelling reason exists under §
1B1.13’s policy statement if the court finds that the defendant’s
medical condition, age, or family circumstances amount to it. A
non-terminal medical condition or declining health qualifies as an
extraordinary and compelling reason if it substantially diminishes
the defendant’s ability to provide self care in custody, and the de-
fendant is not expected to recover. U.S.S.G. § 1B1.13, cmt. n.1(A).
Age presents an extraordinary and compelling reason when a de-
fendant is at least 65 years old, is experiencing a serious deteriora-
tion in their physical or mental health because of the aging process,
USCA11 Case: 21-13942 Date Filed: 11/21/2022 Page: 6 of 8
6 Opinion of the Court 21-13942
and has served at least ten years or 75% of their term of imprison-
ment (whichever is less). U.S.S.G. § 1B1.13, cmt. n.1(B).
The weight to give any particular § 3553(a) factor, whether
great or slight, is committed to the district court’s sound discretion.
Tinker, 14 F.4th at 1241. “Even so, [a] district court abuses its dis-
cretion when it (1) fails to afford consideration to relevant factors
that were due significant weight, (2) gives significant weight to an
improper or irrelevant factor, or (3) commits a clear error of judg-
ment in considering the proper factors.” Id. (quotation marks
omitted). But “a district court need not exhaustively analyze each
§ 3553(a) factor or articulate its findings in great detail,” and an
acknowledgement by the court that it has considered the § 3553(a)
factors and the parties’ arguments is ordinarily sufficient. Id. (quo-
tation marks omitted). Nevertheless, the court “must provide
enough analysis that meaningful appellate review of the factors’ ap-
plication can take place.” Id. (quotation marks omitted).
On appeal, Burgess argues that the district court abused its
discretion in several ways. He claims that the district court used
flawed reasoning and an improper legal standard in deciding that
Burgess was not experiencing a serious deterioration in physical or
mental health because of the aging process. Specifically, Burgess
argues that the court incorrectly applied language that is required
for claims based on medical conditions under § 1B1.13, cmt. n.1(A),
but is not required for his claim, which was based mainly on his age
under § 1B1.13, cmt. n.1(B). Burgess also claims that the district
court abused its discretion when it failed to consider several
USCA11 Case: 21-13942 Date Filed: 11/21/2022 Page: 7 of 8
21-13942 Opinion of the Court 7
relevant factors that were due more significant weight and that it
committed clear error by unreasonably weighing the factors. 1
We need not resolve whether the district court erred in find-
ing that Burgess was ineligible for a sentence reduction based on §
1B1.13, cmt. n.1(B) because the court found that even if Burgess
had met the requirements of § 1B1.13, cmt. n.1(B), consideration
of the § 3553(a) factors warranted the denial of compassionate re-
lease. Therefore, we may affirm on that discretionary ground,
even assuming he established an extraordinary and compelling rea-
son within the meaning of § 1B1.13. See Tinker, 14 F.4th at 1239
(“[A] district court does not necessarily err when it assumes that a
defendant is eligible for a sentence reduction but exercises its dis-
cretion to deny it.”); see also United States v. Giron, 15 F.4th 1343,
1347 (11th Cir. 2021) (stating that “[i]f any one of the necessary find-
ings cannot be made,” including that the § 3553(a) factors favor
early release, “then compassionate release is not permissible”).
Here, the district court did not abuse its discretion when it
concluded that the § 3553(a) factors did not support a sentence re-
duction. Burgess argues that the court failed to consider his miti-
gating factors, such as his release plans, ties to the community, and
COVID-19 risks. But the district court was not required to
1 Burgess also argues that the district court has the authority to define extraor-
dinary and compelling reasons on its own and is not bound by U.S.S.G. §
1B1.13, but that argument is foreclosed by binding precedent. See Bryant, 996
F.3d at 1262 (holding that district court are bound by § 1B1.13 when resolving
motions under § 3582(c)(1)(A)).
USCA11 Case: 21-13942 Date Filed: 11/21/2022 Page: 8 of 8
8 Opinion of the Court 21-13942
expressly discuss all of Burgess’s mitigating evidence or every §
3553(a) factor. The court did acknowledge that Burgess is a non-
violent offender with no prior criminal history, but it found that
the nature of the offense, the number of victims it impacted, and
the millions owed in restitution outweighed those circumstances.
As for Burgess’s health, the court noted that although Burgess was
suffering from various medical conditions, several of them, includ-
ing his colon cancer, were diagnosed before his sentencing, and the
court considered them during Burgess’s original sentencing. The
court also acknowledged Burgess’s argument about his rehabilita-
tion but found it unpersuasive, considering he was found with a
contraband cellphone after he had been approved for home con-
finement.
Based on its consideration of these factors, the district court
concluded that Burgess’s sentence reflects the seriousness of his
crime, deters criminal conduct, protects the public, and provides
just punishment. It is for the district court to decide what weight
to attribute to the factors, and Burgess has not shown that the court
abused its discretion in its consideration of the § 3553(a) factors or
its finding that they did not warrant a reduction in his sentence.
For these reasons, we affirm the denial of Burgess’s motion
for early release under § 3582(c)(1)(A)(i).
AFFIRMED. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488332/ | United States Tax Court
T.C. Memo. 2022-111
BRYANT D. TILLMAN-KELLY AND MELANIE TILLMAN-KELLY,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 6127-20. Filed November 21, 2022.
—————
Bryant D. Tillman-Kelly and Melanie Tillman-Kelly, pro se.
Monica I. Cendejas, for respondent.
MEMORANDUM OPINION
URDA, Judge: Petitioners, Bryant and Melanie Tillman-Kelly,
challenge the Internal Revenue Service’s (IRS) determination of a
deficiency of $67,322 in their 2017 federal income tax. 1 Mr. Tillman-
Kelly received $230,671 to settle an Illinois state court action against
Chicago State University (CSU), its board of trustees, and Dr. Justin
Akujieze (Defendants) in 2017. Mr. Tillman-Kelly alleged that the
Defendants had retaliated against him for reporting the misuse of grant
funds, resulting in “emotional distress, humiliation, and lost income.”
The sole remaining question (in the wake of a stipulation of settled
issues) is whether the settlement proceeds should be excluded from the
Tillman-Kellys’ gross income under section 104(a)(2), which shields
damages received “on account of personal physical injuries or physical
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C. or I.R.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 amounts are rounded to the nearest dollar.
Served 11/21/22
2
[*2] sickness” from inclusion in gross income. We conclude that the
settlement proceeds do not qualify for this exclusion and will sustain the
deficiency determination, subject to certain concessions made by the
Commissioner.
Background
The parties have moved to submit this case for decision without
trial under Rule 122. All facts relevant to this case have been stipulated
or otherwise included in the record. See Rule 122(a). The Tillman-
Kellys lived in California when they timely filed their petition.
I. Mr. Tillman-Kelly’s Lawsuit
In September 2009 CSU hired Mr. Tillman-Kelly as project
director of a federal grant that CSU had received. Mr. Tillman-Kelly
reported directly to Dr. Akujieze, a dean at CSU, and Robert Warner,
the dean’s executive assistant. A few months into his employment Mr.
Tillman-Kelly expressed concerns to the U.S. Department of Education
and CSU’s Ethics Office that certain grant funds were being
misappropriated. On June 17, 2010, CSU terminated Mr. Tillman-
Kelly’s employment.
Mr. Tillman-Kelly thereafter filed suit against the Defendants in
Illinois state court, alleging that they retaliated against him for his
complaints of misuse of funds. 2 He stated that he “was subjected to
humiliation, isolation, harsher discipline and different and
comparatively more negative terms and standards of employment,
[than] other university employees, denial of benefits, demotions, and
ultimately, termination.” Specifically, Mr. Tillman-Kelly asserted that
Dr. Akujieze threatened to “do what he had to do” in response to Mr.
Tillman-Kelly’s ethics complaints, which (again, according to the
complaint) consisted primarily of eliminating Mr. Tillman-Kelly’s job
responsibilities culminating with his termination.
Mr. Tillman-Kelly contended that these actions violated Illinois
state whistleblower protections and sought “damages included but not
limited to emotional distress and humiliation and lost income and
2 Mr. Tillman-Kelly originally had filed suit against CSU and its board of
trustees in the U.S. District Court for the Northern District of Illinois, but he moved
to dismiss that action a few months later.
3
[*3] benefits.” His complaint did not allege that he suffered any physical
injuries, nor did he seek compensation for physical injuries.
Mr. Tillman-Kelly and the Defendants settled the state court case
in 2017. Under the terms of the settlement agreement, Mr. Tillman-
Kelly received a payment of $230,671 in exchange for ending his suit.
The settlement agreement described this payment as being for “alleged
non-wage injuries, as non-economic emotional distress damages.”
II. IRS Examination and Notice of Deficiency
Although the Tillman-Kellys did not include the settlement
payment on their 2017 federal income tax return, CSU reported it to the
IRS on Form 1099-MISC, Miscellaneous Income. The IRS later issued
a notice of deficiency to the Tillman-Kellys, determining a deficiency of
$67,322 and an accuracy-related penalty of $13,423. 3 As most relevant
here, the notice adjusted the Tillman-Kellys’ gross income to reflect
receipt of the CSU settlement payment.
Discussion
I. Burden of Proof
The Commissioner’s determinations in a notice of deficiency are
generally presumed correct, and the taxpayer bears the burden of
proving those determinations erroneous. See Rule 142(a)(1); Welch v.
Helvering, 290 U.S. 111, 115 (1933); Merkel v. Commissioner, 192 F.3d
844, 852 (9th Cir. 1999), aff’g 109 T.C. 463 (1997). The U.S. Court of
Appeals for the Ninth Circuit, to which an appeal in this case would
ordinarily lie, see I.R.C. § 7482(b)(1)(A), has held that that the
Commissioner must establish “some evidentiary foundation” linking the
taxpayer to an alleged income-producing activity before the
presumption of correctness attaches to the deficiency determination,
Weimerskirch v. Commissioner, 596 F.2d 358, 361–62 (9th Cir. 1979),
rev’g 67 T.C. 672 (1977). Once the Commissioner has established such
a foundation, the burden of proof shifts to the taxpayer to prove by a
preponderance of the evidence that the Commissioner’s determinations
3 The deficiency determined in the notice reflected several other adjustments
to the Tillman-Kellys’ income, but those adjustments are not in dispute. We further
note that the Commissioner has conceded the accuracy-related penalty determined in
the notice.
4
[*4] are arbitrary or erroneous. See Hardy v. Commissioner, 181 F.3d
1002, 1004–05 (9th Cir. 1999), aff’g T.C. Memo. 1997-97.
The Tillman-Kellys have stipulated that they received the
settlement proceeds at issue, and the Commissioner has established an
evidentiary foundation linking them to the unreported income. The
Commissioner’s determination is accordingly presumed correct, and the
Tillman-Kellys have the burden of proving that the determination is
erroneous. See Rule 142(a)(1); Welch v. Helvering, 290 U.S. at 115. 4
II. Analysis
A. Legal Background
Gross income includes all income from whatever source derived.
See I.R.C. § 61(a); see also Commissioner v. Glenshaw Glass Co., 348
U.S. 426, 429 (1955); Helvering v. Clifford, 309 U.S. 331, 334 (1940).
Exclusions from gross income “must be narrowly construed.”
Commissioner v. Schleier, 515 U.S. 323, 328 (1995) (quoting United
States v. Burke, 504 U.S. 229, 248 (1992) (Souter, J., concurring in the
judgment)).
Settlement proceeds constitute gross income unless the taxpayer
proves that such proceeds fall within a specific statutory exception. See
id.; Save v. Commissioner, T.C. Memo. 2009-209, 2009 WL 2950838,
at *1. Section 104(a)(2) supplies one such exception, excluding from
gross income “any damages (other than punitive damages) received
(whether by suit or agreement . . . ) on account of personal physical
injuries or physical sickness.”
For the purposes of this exception, “emotional distress shall not
be treated as a physical injury or physical sickness.” I.R.C. § 104(a)
(flush text). 5 Treasury Regulation § 1.104-1(c)(1) further explains that
“[e]motional distress is not considered a physical injury or physical
sickness” unless it is “attributable to a physical injury or physical
sickness.” See Rivera v. Baker W., Inc., 430 F.3d 1253, 1256 (9th
4 We note that Mr. Tillman-Kelly did not seek a shift in the burden of proof
under section 7491(a) and that the submission of a case under Rule 122(a) does not
shift the burden of proof. See Rule 122(b).
5 The flush text of section 104(a) provides that the general rule against
exclusion of emotional-distress damages does not apply to “the amount paid for medical
care” attributable to emotional distress. The Tillman-Kellys neither raised this issue
nor introduced evidence regarding amounts for any medical care.
5
[*5] Cir. 2005) (“[O]nly damages for physical injuries or sickness, and
not damages for emotional distress, [are] excluded from . . . income.”);
see also Barbato v. Commissioner, T.C. Memo. 2016-23, at *7–9 (finding
that damages for emotional distress attributable to workplace
discrimination and not a physical injury or physical sickness do not fall
within the exclusion from income granted by section 104(a)(2)); Hawkins
v. Commissioner, T.C. Memo. 2007-286, 2007 WL 2736219, at *2 (“In
this context, the terms ‘physical injury’ and ‘physical sickness’ do not
include emotional distress . . . .”), aff’d, 386 F. App’x 697 (9th Cir. 2010).
“For a taxpayer to fall within [the section 104(a)(2)] exclusion, he
must show that there is ‘a direct causal link between the damages and
the personal injuries sustained.’” Doyle v. Commissioner, T.C.
Memo. 2019-8, at *11 (quoting Rivera, 430 F.3d at 1257); see also Blum
v. Commissioner, T.C. Memo. 2021-18, at *7, aff’d, No. 21-71113, 2022
WL 1797334 (9th Cir. June 2, 2022). When a taxpayer receives damages
pursuant to a settlement agreement, the nature of the claim that was
the actual basis for the settlement controls whether the damages are
excludable under section 104(a)(2). See Burke, 504 U.S. at 237; see also
Bagley v. Commissioner, 105 T.C. 396, 406 (1995) (“[T]he critical
question is, in lieu of what was the settlement amount paid[?]”), aff’d,
121 F.3d 393 (8th Cir. 1997); Blum, T.C. Memo. 2021-18, at *8; Smith v.
Commissioner, T.C. Memo. 2018-127, at *18, aff’d without published
opinion, No. 19-1050, 2020 WL 8368297 (D.C. Cir. 2020).
The nature of the claim is typically determined by looking to “the
underlying agreement to determine whether it expressly states that the
damages compensate for ‘personal physical injuries or physical sickness’
under § 104(a)(2).” Rivera, 430 F.3d at 1257; see also Ghadiri-Asli v.
Commissioner, T.C. Memo. 2019-142, at *38, aff’d sub nom. Najle-
Rahim v. Commissioner, No. 20-72031, 2022 WL 2869776 (9th Cir.
July 21, 2022). Should an agreement fail to answer the question, we
inquire as to “the intent of the payor.” Devine v. Commissioner, T.C.
Memo. 2017-111, at *11 (quoting Longoria v. Commissioner, T.C. Memo.
2009-162, 2009 WL 1905040, at *7); see also Rivera, 430 F.3d at 1257;
Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), aff’g T.C.
Memo. 1964-33; Ahmed v. Commissioner, T.C. Memo. 2011-295, 2011
WL 6440130, at *3, aff’d, 498 F. App’x 919 (11th Cir. 2012).
The payor’s intent may be discerned by taking into account “all
the facts and circumstances of the case,” including the amount paid, the
allegations in the injured party’s complaint, and the factual
circumstances that led to the agreement. Rivera, 430 F.3d at 1257
6
[*6] (quoting Allum v. Commissioner, T.C. Memo. 2005-177, 2005 WL
1692488, at *4, aff’d, 231 F. App’x 550 (9th Cir. 2007)); see Green v.
Commissioner, 507 F.3d 857, 868 (5th Cir. 2007), aff’g T.C. Memo. 2005-
250; see also Bent v. Commissioner, 87 T.C. 236, 245 (1986), aff’d, 835
F.2d 67 (3d Cir. 1987). “Ultimately, the character of the payment hinges
on the payor’s dominant reason for making the payment.” Green, 507
F.3d at 868. “[T]he nature of underlying claims cannot be determined
from a general release [of claims] that is broad and inclusive.” Ahmed
v. Commissioner, 2011 WL 6440130, at *3.
B. Mr. Tillman-Kelly’s Settlement Payment
The settlement agreement establishes that the payment is not
excludable under section 104(a)(2). The parties expressly agreed that
the $230,671 payment to Mr. Tillman-Kelly was for “non-wage injuries,
as non-economic emotional distress damages.” The parties do not
reference physical injuries or sickness in the agreement, much less tie
the settlement payment to any such physical injuries or sickness.
The Tillman-Kellys respond that the retaliation claim was
actually rooted in a heated altercation between Mr. Tillman-Kelly and
Mr. Warner, which resulted in physical injury from the slamming of a
door, and that the settlement proceeds were meant to compensate Mr.
Tillman-Kelly for that injury. The Tillman-Kellys assert that their
treatment of the proceeds was thus consistent with IRS
Publication 4345, which states in relevant part that “proceeds you
receive for emotional distress or mental anguish attributable to a
personal physical injury or physical sickness are treated the same as
proceeds received for Personal physical injuries or physical sickness.”
I.R.S. Publication 4345 (Revised Nov. 2022), Settlements—Taxability,
at 1.
The settlement agreement belies the Tillman-Kellys’ position. In
that agreement, the parties characterized the payment as one for
“emotional distress damages” and did not reference any physical injury
whatsoever.
Even if we were to expand our focus beyond the settlement
agreement, the Tillman-Kellys would fare no better. As an initial
matter, Mr. Tillman-Kelly’s claim against the Defendants does not
relate to compensation for physical injuries. The state court claim
alleges violation of an Illinois whistleblower statute, describing a
retaliatory campaign involving improper removal of job responsibilities
7
[*7] and ultimately termination, not physical injury. Nor did Mr.
Tillman-Kelly’s complaint seek damages for physical injury, instead
pursuing damages for “emotional distress and humiliation and lost
income and benefits.”
The only clear reference in the record to any physical injury comes
in Mr. Tillman-Kelly’s responses to interrogatories in the state court
action. 6 In the context of a lengthy description of the events at issue and
his complaints, Mr. Tillman-Kelly stated he reported to CSU ethics
officials an incident in which Mr. Warner “slammed a door on [him]
injuring [him].” Mr. Tillman-Kelly, however, did not identify this
purported injury in response to an interrogatory asking for “the basis
for any damages you claim to be entitled to, including the compensatory
and punitive damages articulated in your Prayer for Relief.” Nor does
the record explain the precise nature or extent of Mr. Tillman-Kelly’s
purported physical injury from the door.
In short, we return to the plain text of the settlement agreement
that the payment was made for “alleged non-wage injuries, as non-
economic emotional distress damages.” This text is clear on its face, but
even if there were some doubt, the nature of the state court litigation
supports the conclusion that the dominant reason for the payment was
to compensate for emotional distress and was altogether unrelated to
physical injury.
III. Conclusion
In sum, we hold that the settlement payment is not excludable
from Mr. Tillman-Kelly’s gross income under section 104(a)(2) for tax
year 2017. We accordingly sustain the IRS’s deficiency determination,
subject to the Commissioner’s concessions.
To reflect the foregoing,
Decision will be entered for respondent as to the deficiency and
for petitioners as to the accuracy-related penalty under section 6662(a).
6 We note that during his deposition in the state court litigation, Mr. Tillman-
Kelly referenced a hospital visit in August 2010 in response to panic attacks.
According to Mr. Tillman-Kelly’s own testimony, however, the hospital sent him home
because “physically nothing was wrong with [him].” | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494509/ | *304OPINION1
CHRISTOPHER S. SONTCHI, Bankruptcy Judge.
Why is there a preference law? The answer lies in the answer to another question — why is there a bankruptcy law?2
Creditor remedies outside of bankruptcy are based on the principle of “first come; first served.” The creditor first staking a claim to a debtor’s asset generally is entitled to be paid first from the asset. But, when there are insufficient assets to pay all creditors in full, the “first come; first served” rule will define winners and losers. The first creditor may be paid 100% of its claim with the second, slower creditor recovering 10%.
The basic problem that bankruptcy law is designed to address is that the system of individual creditor remedies, i.e. “first come; first served,” may harm creditors as a whole when there are insufficient assets to pay all of them in full. This is a variant of the prisoner’s dilemma or common pool problem. The “first come; first served” rules create an incentive on the part of individual creditors — when they fear that a debtor may be insolvent — to get in line today because, if the creditor doesn’t, it risks getting nothing. Bankruptcy addresses this problem by imposing a compulsory, collective proceeding. For example, the automatic stay ceases individual creditor collection efforts and the bankruptcy law generally maximizes the return to creditors (either through liquidation, reorganization of the business or a combination of the two). In addition, it ensures pro rata distribution of a debtor’s assets to its similarly situated creditors.
Preference law enters the picture because the descent of a company into bankruptcy takes time. This allows the more diligent, individual creditor to opt-out of the compulsory, collective proceeding of bankruptcy by exercising its individual, state law remedies or, at the least, by pressuring a potential debtor to pay the creditor’s claim ahead of other claims. Allowing such opt-out behavior may harm creditors as whole for the reasons discussed above.3 Moreover, it is contrary to the bankruptcy policy of equal treatment for similarly situated creditors and is inequitable.4
Bankruptcy law has addressed this problem by creating a bright line rule allowing a debtor to recover from its creditors payments it made to those creditors in the 90 days prior to the filing of bankrupt*305cy. Like any bright line rule, it is both under and over inclusive. The point, however, is to reduce costs and promote judicial efficiency by eliminating an inquiry into the individual creditors’ motivations.
The law, however, provides for exceptions to the bright line rule — the resolution of which require the consideration of evidence unique to the creditor that received the preferential payment.5 The relevant exceptions here are the “ordinary course of business” and “subsequent new value” affirmative defenses. The point of these defenses is to ameliorate the over inclusive nature of the bright line rule by excluding transactions that, in all likelihood, were not the result of opt-out behavior by the creditor. Indeed, in all probability, these transactions provided a net benefit to the debt- or’s business and, thus, creditors as a whole.
The ordinary course of business defense removes from preference attack routine payments to creditors. These are payments that are made in ordinary course on debts incurred in ordinary course according to ordinary business terms.. Without this defense the trustee would have the power to avoid many routine transactions. For example, you receive your phone bill on the 5th day of the month and you regularly pay on the 20th day of the month.6 Without the ordinary course of business defense, there might be a preference action against the phone company. The transfer occurs on the day you make the payment. The debt, however, is incurred when you use the phone service, which is during the prior month. It is a transfer on account of an antecedent debt, but there is no opt-out behavior. It is the ordinary way you go about paying bills.
Whether debts were incurred in the ordinary course of business and whether payments were made in the ordinary course of business are necessarily questions involving facts. The previous example involving a telephone bill paid at the same time in the same way as the debtor and others in the same position pay such bills falls within the ordinary course of business exception. A late payment by certified check after several dunning phone calls is not made in the ordinary course.
The subsequent new value defense protects creditors who provide new credit after an old invoice is paid off. Suppose a supplier ships $1,000 of goods with payment due within 30 days and the debtor pays the invoice at the end of those 30 days. Because the debtor is timely paying its debts, the supplier continues to provide goods with payment due in 30 days.7 Suppose further that, at the time the debtor files its bankruptcy petition, the creditor has shipped $1,000 worth of goods three times and has been paid for those goods all three times. Under the bright line preference rule, each of the transactions would be preferential as each was made on account of an antecedent debt and each made the creditor better off than it would have been if it not been repaid and everything else remained the same. It makes no sense, however, to allow recovery of all three $1,000 payments. The purpose of the creditor’s supply arrangement was to limit its risk to $1,000 or so at any one time. The creditor made subsequent shipment of goods only because the debtor was *306paying for the earlier shipments. The transfers made the creditor better off only to the extent of $1,000, the most it would have lost if any of the transfers had not been made. Thus, one looks at the net result — the extent to which the creditor was preferred, taking account of the new value the creditor extended to the debtor after repayment of old credit, i.e., loans.
An understanding of these basic principles is necessary to interpret the somewhat confusing preference statute correctly. It simply doesn’t make sense to interpret the statute in a manner that would be contrary to its fundamental purpose. When keeping these principles in mind, interpretation of the preference statute becomes much simpler.
A. The Ordinary Course of Business Defense8
To establish the ordinary course of business defense the creditor must first prove that there was, indeed, an ordinary course of business between the parties or in the industry prior to the 90 day preference period. Key factors to consider in connection with the parties’ behavior are the length of the parties’ relationship, the number of transactions that occurred prior to preference, the method of payment, the timing of payment, and the behavior relating to payment, i.e., did the creditor have to make dunning calls or otherwise push the debtor to make its payments. Admissible evidence relating to industry practice, rather obviously, is required to establish the industry standard.
Having established the existence of an ordinary course of business (either among the parties or in the industry), the creditor must prove that the transactions in the 90 day preference period materially complied with that pre-preference behavior. The factors to be considered are those discussed above. No one factor, however, is determinative. The Court must consider the entirety of the parties’ post-preference conduct in making its determination.
In this case, the parties’ pre-preference relationship was insufficient to establish the existence of an ordinary course of business. The parties relationship prior to the preference period consisted of 17 checks covering approximately 68 invoices over an 11 month period.9 This is simply insufficient evidence for the creditors/defendants to meet their burden. Moreover, the defendants submitted insufficient evidence to establish the ordinary course of business in the industry, providing a one-paragraph, conclusory allegation in their supporting affidavit.10
Even were the defendants’ allegations sufficient to establish a pre-preference ordinary course of business, the creditors/defendants are not entitled to summary judgment. The activity between the parties in the 90 day preference period was inconsistent but generally showed a tightening of credit terms throughout the period and a modification of the parties’ pre-preference communications and method of delivering payments, i.e., the creditors were providing more and more pressure on the debtor to accelerate its payments. This is exactly the type of opt-out behavior the preference law is intended to thwart.
*307B. The Subsequent New Value Defense
In order to invoke successfully the subsequent new value defense in this Circuit the creditor must establish two elements: (1) after receiving the preferential transfer, the creditor must have advanced “new value” to the debtor on an unsecured basis; and (2) the debtor must not have fully compensated the creditor for the “new value” as of the date that it filed its bankruptcy petition.11 This Court recently interpreted the Third Circuit’s use of the “as of the date that it filed its bankruptcy petition” language to close the analysis of the subsequent new value defense as of the petition date.12 This is consistent with the underlying purpose of the preference law—to reduce damaging, pre-petition opt-out behavior and to level the pre-bankrupt-cy playing field for all creditors. Once the bankruptcy is filed the preference law becomes unnecessary. The automatic stay steps in to stop the race to the assets and the supervision of the case by the court, among other things, ensures that similar claims receive similar treatment. The Court did not, however, decide the manner in which the subsequent new value test should be applied. It only decided the end-point of the analysis.
Section 547(c)(4), which codifies the subsequent new value defense, provides that “[t]he trustee may not avoid under this section a transfer ... to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor ... on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.”13 The statute’s language is difficult to decipher containing, among other things, a double negative. Nonetheless, it correctly invokes the underlying economic principle—the creditor made subsequent shipment of goods only because the debtor was paying for the earlier shipments. Thus, one should and does look at the net result—the extent to which the creditor was preferred, taking account of the new value the creditor extended to the debtor after repayment on old loans.
In making this analysis, one need not link specific invoices to specific payments. Rather, one need only track the debits and credits generally. In addition, one cannot lose sight of the fact that the subsequent new value test is an affirmative defense. It makes no sense to apply the test in such a way to give the creditor a “credit” for new value in excess of its preference exposure.
Thus, based on the underlying economic principles and the statute’s plain meaning, the proper way to apply the subsequent new value defenses is:
Date_Preference Payment_New Value Preference Exposure
January 1_$1,000_— $1,000_
January 5_—_$1000 _$0_
January 10 $1000 — $1,000
*308January 15_=_$2,000_$0 (not-$1,000)
January 30_$3,000_ —_$3,000
February 5_=_$1,000_$2,000
February 10_$1,500 —_$3,500
Net Result=;;;;$3,500
In the case before this Court, the net result after applying the subsequent new value defense results in a preference exposure for the creditor of $108,084.71.14
C. Conclusion
The defendants’ motion for summary judgment will be denied in part and granted in part.15 The defendants have failed to establish that they are entitled to summary judgment under the ordinary course of business defense. In addition, the defendants have established that, upon application of the subsequent new value defense, their preference liability is limited to $108,084.71. An order will be issued.
. "The court is not required to state findings or conclusions when ruling on a motion under Rule 12...." Fed. R. Bankr.P. 7052(a)(3). Accordingly, the Court herein makes no findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure. This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2). This Court has the judicial power to enter a final order. Venue is proper pursuant to 28 U.S.C. § 1409.
. See generally, Thomas A. Jackson, The Logic And Limits Of Bankruptcy Law Chapters 1 and 6 (1986).
. A harmful by-product of this incentive is to increase the cost of credit to compensate the creditor for the expense of its increased diligence.
. See, e.g., Charles Seligson, The Code And The Bankruptcy Act, 42 N.Y.U. L.Rev. 292 (1967) ("A cornerstone of the bankruptcy structure is the principle that equal treatment for those similarly situated must be achieved. It would be highly inequitable to disregard what transpires prior to the filing of the bankruptcy petition; to do so would encourage a race among creditors, and engender favoritism by the debtor, and result in inequality of distribution. At bankruptcy, the bankrupt would be left with only tag ends and remnants of unencumbered assets.”).
.Obviously, this significantly reduces the efficiency and increases the cost of applying the preference law.
. This is Professor Douglas G. Baird’s excellent example from his book, Elements Of Bankruptcy, pp. 179-80 (5th ed. 2010).
. Id. at 178-79.
. 11 U.S.C. § 547(c)(2).
. See Affidavit of Jeoffrey L. Burtch in Support of Trustees Answering Brief in Opposition to Defendant's Motion for Summary Judgment ¶ 14 [Docket No. 22].
.See Certification of Douglas L. Dennis in Support of Defendant's Motion for Summary Judgment ¶ 8 [Docket No. 19].
.New York City Shoes, Inc. v. Bentley Int'l Inc., 880 F.2d 679, 680 (3d Cir.1989). The test is articulated by the Third Circuit as including proof that the creditor must have received a transfer that is otherwise voidable as a preference under section 547(b). Proving that element, however, is the debtor's burden as part of making its prima facie case.
. In re Friedman’s Inc., 2011 WL 5975283 (Bankr.D.Del. Nov. 30, 2011)
. 11 U.S.C. § 547(c)(4).
. See Affidavit of Jeoffrey L. Burtch, supra, at Exhibit 9.
. The standard governing a motion for summary judgment is well-established. Suffice it to say that Rule 7056 of the Federal Rules of Bankruptcy Procedure directs that 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.” There is no dispute that this matter is ripe for summary judgment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494510/ | MEMORANDUM DECISION
MICHAEL B. KAPLAN, Bankruptcy Judge.
I. INTRODUCTION
This matter comes before the Court upon the motion (the “Motion”) of Luigi Seotto-DiClemente’s (the “Debtor”) for Reconsideration of the Order of Dismissal of his Chapter 13 case entered on November 18, 2011, pursuant to 11 U.S.C. § 109(e). The circumstances underlying this case were set forth in the Court’s November 18, 2011 opinion, In re Scotto-DiClemente, 459 B.R. 558 (Bankr.D.N.J.2011). The Court incorporates by reference the relevant facts from that decision. The Debtor contends that the Court committed a clear error of law by ruling that the in rem liabilities which survived the Debtor’s prior Chapter 7 discharge should be included in the § 109(e) tabulation of *310unsecured debt. The Court has reviewed the pleadings submitted and heard oral argument on January 10, 2011. For the reasons which follow, the Debtor’s Motion for Reconsideration is denied.
II. JURISDICTION
The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. §§ 157(b)(2)(A), (B), (K), and (0). Venue is proper in this Court pursuant to 28 U.S.C. § 1408. The following constitutes the Court’s findings of fact and conclusions of law as required by Fed. R. Bankr.P. 7052.1
III. DISCUSSION
A. Motion for Reconsideration to Correct Clear Error of Law
1. Federal Rule of Civil Procedure 59(e) Reconsideration Standard, Applicable to Bankruptcy Cases pursuant to Fed. R. Bankr.P. 9023.
A motion for reconsideration is governed by Federal Rule 59(e) and is applicable to Bankruptcy eases under Rule 9023 of the Federal Rules of Bankruptcy Procedure. See, Prudential Ins. Co. v. Farley (In re Farley), 158 B.R. 48, 52 (E.D.Pa.1993); see also, McDowell Oil Serv., Inc. v. Interstate Fire & Cas. Co., 817 F.Supp. 538, 541 (M.D.Pa.1993). Pursuant to Federal Rule 59(e), a party can move to alter or amend a judgment within ten days [now fourteen] of its entry. McDowell Oil Serv., Inc., 817 F.Supp. at 541. The purpose of a motion for reconsideration is to correct manifest errors of law or fact or to present newly discovered evidence. Harsco Corp. v. Zlotnicki 779 F.2d 906, 909 (3d Cir.1985). Accordingly, a judgment may be altered or amended if the party seeking reconsideration shows at least one of the following grounds: “(1) an intervening change in controlling law; (2) the availability of new evidence not available previously; or (3) the need to correct clear error of law or prevent manifest injustice.” Walzer v. Muriel Siebert & Co., Inc., 2010 WL 4366197, at *8, 2010 U.S. Dist. LEXIS 115245, *24 (D.N.J.2010) (citing North River Ins. Co. v. CIGNA Reins. Co., 52 F.3d 1194, 1218 (3d Cir.1995)).
A court should “only entertain a motion to reconsider, if the alleged overlooked controlling decision of law or dis-positive factual matter was of a nature that, if considered by the Court, might reasonably have resulted in a different conclusion.” Davis v. Spirit of N.J., 2000 WL 33302241, at *2, 2000 U.S. Dist. LEXIS 19903, *5 (D.N.J.2000). Nonetheless, “[i]n exercising its discretion in ruling on a motion for reargument or reconsideration, the Court must keep an open mind ... the Court should not hesitate to grant the motion when compelled to prevent manifest injustice or to correct clear legal error.” Brambles USA, Inc. v. Blocker, 735 F.Supp. 1239, 1241 (D.Del.1990). However, “[a] motion for reconsideration is not to be used as a means to reargue matters already argued and disposed of or as an attempt to relitigate a point of disagreement between the Court and the litigant.” Ogden v. Keystone Residence, 226 F.Supp.2d 588, 606 (M.D.Pa.2002) (quoting Abu-Jamal v. Horn, No. CIV. A. 99-5089, 2001 WL 1609761, at *9, 2001 U.S. Dist. *311LEXIS 208 (E.D.Pa. December 18, 2011) (citations and internal quotation marks omitted)). Lastly, reconsideration of judgment is an extraordinary remedy, and such motions should be granted sparingly. D’Angio v. Borough of Nescopeck, 56 F.Supp.2d 502, 504 (M.D.Pa.1999).
After reviewing the submissions, the Court finds that none of the above three grounds for reconsideration has been sufficiently satisfied so as to warrant reconsideration of the Court’s prior decision.
2. The Court Did Not Commit an Error of Law by Including the In Rem Liabilities, Which Survived the Debtor’s Prior Chapter 7 Case, in Calculating the Debtor’s Unsecured Debt Under 11 U.S.C. § 109(e).
The Debtor asserts that the Court committed a clear error of law by including the amount of Amboy Bank F/K/A Amboy National Banks’ (the “Creditor” or “Amboy”) surviving post Chapter 7 in rem claims when calculating the Debtor’s total unsecured debts under 11 U.S.C. § 109(e). Specifically, the Debtor contends that because the Court ruled that the Second and Third Mortgages2 are wholly unsecured, Amboy’s remaining in rem claims are unenforceable against the Debtor and must be disallowed under § 502(b)(1). Accordingly, the Debtor maintains that a disallowed claim cannot be counted as a “debt” pursuant to § 109(e). The Debtor cites to In re Shenas, 2011 WL 3236182, 2011 Bankr.LEXIS 2907 (Bankr.N.D.Cal.2011) and Cavaliere v. Sapir, 208 B.R. 784 (D.Conn.1997) in support of his position.
In In re Shenas, the debtors’ Chapter 13 plan provided for the avoidance of Green Tree Servicing, LLC’s (“Green Tree”) junior lien because it was wholly unsecured. In re Shenas, 2011 WL 3236182 at *1, 2011 Bankr.LEXIS 2907 at *2. Green Tree contended that the debtors were ineligible to proceed under Chapter 13 of the Bankruptcy Code because their debts exceeded the $360,475 unsecured debt limit set by 11 U.S.C. § 109. In re Shenas, 2011 WL 3236182 at *1, 2011 Bankr.LEXIS 2907 at *1. In support of its argument, Green Tree relied upon the decision in Scovis v. Henri-chsen, 249 F.3d 975, 982-84 (9th Cir.2001), which held that “eligibility for chapter 13 should be determined by the debtor’s originally filed schedules, and that the un-dersecured portion of a secured debt is to be counted as unsecured debt for purposes of the § 109(e) calculation.” 2011 WL 3236182 at *1, 2011 Bankr.LEXIS 2907 at *2. (citing Scovis, 249 F.3d at 982-84). Therefore, Green Tree urged the court to *312apply the holding in Scovis and include its unsecured $392,927 claim in the court’s § 109(e) calculation, and thus, hold that the debtors were ineligible for relief under Chapter 13 of the Code. Id.
The court disagreed with Green Tree’s application of Scovis, stating that the debtors’ prior Chapter 7 discharge extinguished the debtors’ personal liability as to the debt owed to Green Tree, rendering the debt unenforceable against the debtors under § 524(a). Id. at *1-2, 2011 Bankr.LEXIS 2907 at *3-4. Therefore, the court concluded — albeit with little explanation — that because Green Tree’s claim was unenforceable as to the debtors’ personally, it was not an allowable unsecured claim under §§ 502(b) and 506(a), and therefore could not be included in the court’s § 109(e) eligibility calculation. Id.
As in Shenas, the debtors in Cavaliere contended that Bankruptcy court erred in its § 109(e) eligibility calculation by including debts that were discharged in the debtors’ prior Chapter 7 case. Cavaliere, 208 B.R. at 785-786. The court explained that “[a]lthough liens may pass through Chapter 7 undisturbed, a discharge serves to eliminate the debtor’s personal liability for the debt.” 208 B.R. at 785-786 (citing See Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991)). The court further noted that by the time the Chapter 13 case was commenced, the discharged claims were only enforceable through an in rem action against the debtors’ property. Id. Therefore, having determined that the claims were wholly unsecured under § 506(a), and thus unenforceable against the debtor personally, the court concluded that the claims were not allowed under § 502(b)(1). Id. As a result, the court held that the discharged claims were disallowed because they were unenforceable against both the debtors (pursuant to the Chapter 7 discharge) and their property (pursuant to the § 506(a) determination), and therefore, should not have been included in the § 109(e) unsecured debt limit calculation. Id.
This Court disagrees respectfully with the Shenas and Cavaliere courts’ treatment of surviving in rem claims with respect to § 109(e) debt eligibility requirements, and must therefore challenge the Debtor’s reliance upon these cases as the legal support for his Motion for Reconsideration. As stated in the Court’s prior opinion, Amboy’s in rem claims must be included in calculating the unsecured debts of the Debtor under § 109(e). Section 109(e) states in full:
(e) Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $ 360,475 and noncontingent, liquidated, secured debts of less than $ 1,081,400 or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $ 360,475 and noncontingent, liquidated, secured debts of less than $ 1,081,400 may be a debtor under chapter 13 of this title [11 USCA §§ 1301 et seq.].
11 U.S.C. § 109(e) (emphasis added). As of the date of the Debtor’s filing of the within Chapter 13 Petition on June 14, 2011, the total amount due on Amboy’s Second and Third Mortgages were $86,095.87 and $478,141.87 respectively.
The Debtor contends that Amboy has no right to payment on its Second and Third Mortgages because he had obtained a pri- or Chapter 7 discharge, and thus, such liabilities cannot be considered unsecured “debt” as defined in the Bankruptcy Code. *313Section 109(e) speaks in terms of “debts,” which is defined under 11 U.S.C. § 101(12), as “liability on a claim.” 11 U.S.C. § 101(5) defines “claim” to mean:
(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
(B) 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.
II U.S.C. § 101(5)(A) & (B) (emphasis added). While the Court recognizes that the Debtor’s in personam liability has been discharged in the prior Chapter 7 case, the Debtor has failed to fully address the issue of enforceability of the remaining in rem claims with respect to the amounts due on the Second and Third Mortgages.
The U.S. Supreme Court in Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991), reaffirmed that an undischarged in rem claim remaining after a Chapter 7 discharge is subject to the treatment in a subsequent Chapter 13 case. Johnson, 501 U.S. at 84, 111 S.Ct. 2150. Significantly, the Court noted that Congress intended the language in § 101(5) to “adopt the broadest available definition of ‘claim.’ ” 501 U.S. at 84, 111 S.Ct. 2150. As such, the Court stated that a “ ‘right to payment’ [means] nothing more nor less than an enforceable obligation .... ” Id. Accordingly, the Court held that a “mortgage interest that survives the discharge of a debtor’s personal liability is a ‘claim’ within the terms of § 101(5).” Id. Therefore, Amboy retains a “right to payment” to the proceeds from the sale of the Debtor’s property, even though the Debtor obtained a Chapter 7 discharge on the underlying debt. Id. To put it another way, Amboy’s surviving right to foreclose on the Debtor’s property can be viewed as a “right to an equitable remedy” for the Debtor’s default on the underlying Mortgages. Id. Regardless of how the claim is characterized, the Johnson decision makes it clear that Amboy’s surviving mortgage interest constitutes an “enforceable obligation” of the Debtor.
The Supreme Court in Johnson goes as far as to emphasize that while § 502(b)(1) provides that the bankruptcy court “shall determine the amount of [a disputed] claim ... and shall allow such claim in such amount, except to the extent that ... such claim is unenforceable against the debtor and property of the debtor[,]” § 502(b)(1) nonetheless contemplates that courts must allow the claim if it is enforceable against either the debtor or his property. Johnson, 501 U.S. at 85, 111 S.Ct. 2150 (emphasis added). The Supreme Court further stated that “§ 102(2) establishes, as a ‘rule of construction,’ that the phrase ‘claim against the debtor’ includes [a] claim against property of the debtor. A fair reading of § 102(2) is that a creditor ... has a claim enforceable only against the debtor’s property nonetheless has a ‘claim against the debtor’ for purposes of the Code.” 501 U.S. at 85, 111 S.Ct. 2150. Consequently, this Court sees no reason to reconsider its previous holding that § 502(b)(1) anticipates the enforceability of an in rem claim, such as a remaining mortgage hen for which the underlying obligation has been discharged in a prior a Chapter 7 proceeding. Accordingly, while the Chapter 7 discharge extinguished the Debtor’s in personam liability, it did not compromise any of Amboy’s in rem rights against the Debtor’s property in the current Chapter 13. Therefore, Amboy’s in rem claim, while wholly unse*314cured3, nonetheless remains enforceable against the Debtor’s property under § 502(b)(1).
The Debtor submits that the Court errs by focusing on “claims,” and seeks to distinguish “claim” from “debt”, noting that § 109(e) refers only to an “individual ... that owes ... debts.” The Court regards the Debtor’s proposed construction of “debt” and “liability” as too narrow. Put simply, if there is a “claim,” there is a “debt.” See e.g., Laws v. United Mo. Bank, N.A., 188 B.R. 263, 267 (W.D.Mo.1995) (“The Bankruptcy Code treats ‘debt’ as the converse of a ‘claim.’ ”); see also In re Morton, 43 B.R 215, 219-20 (Bankr.E.D.N.Y.1984) (“Consequently, for purposes of the Bankruptcy Code, if UMB had a claim against KBDC, KBDC owed a debt to UMB.”). In other words, “a debt and claim are essentially ‘flip sides of the same coin.’ ” In re Pensignorkay, Inc., 204 B.R. 676, 683 (Bankr.E.D.Pa.1997). As a result, when a creditor possesses a claim against a debtor, that debtor owes a debt to the creditor. See In re Glance, 487 F.3d 317, 320 (6th Cir.2007).
With respect to the issue before the Court, it is clear that the equitable rights inherent in an in rem claim constitute a “claim” for the purposes of § 101(5). Indeed, the in rem claim gives rise to the right to foreclose out a debtor’s right of redemption, forcing the debtor to pay the full amount of the claim to redeem the property from the foreclosing in rem claimant. In the Court’s view, that obligation, which remains after discharge of an in personam liability, is certainly a debt. That is, a debtor has the Hobson’s choice to either lose their property or pay the full amount of the in rem claim.
IV. CONCLUSION
Therefore, the Court reaffirms its prior holding that Amboy’s in rem claims for the amounts due under the Second and Third Mortgages constitute enforceable unsecured “debts” owed by the Debtor. In short, the Court denies the Debtor’s Motion for Reconsideration for failing to demonstrate that the Court made a clear error of law.
. To the extent that any of the findings of fact might constitute conclusions of law, they are adopted as such. Conversely, to the extent that any conclusions of law constitute findings of fact, they are adopted as such.
. On April 27, 2005, the Debtor executed and delivered a Choice Equity Line of Credit to Amboy, in the principal amount of $75,000 (the "Equity Line”). As security for the Equity Line, on April 27, 2005, the Debtor executed and delivered to Amboy a second mortgage (the "Second Mortgage”) on the Property. On October 9, 2008, A & T, Inc., d/b/a Rom-er’s Restaurant & Pizza ("Romer's”) executed and delivered to Amboy an Installment Note, in the principal amount of $363,279.57. In connection with the Installment Note, on October 9, 2008, the Debtor executed and delivered to Amboy a General and Continuing Guarantee. With respect to this Installment Note, the Debtor executed and delivered a third mortgage (the "Third Mortgage”) to Am-boy on the Property. At the time of filing his first bankruptcy case, the Debtor listed the value of the subject Property at $200,000.00. Amboy's amended proof of claim in the current case reflects a total secured claim in the amount of $761,380.80, with arrears totaling $540,854.97 as of the petition date. The breakdown of the $761,380.80 is as follows: (1) $191,447.64 due in connection with Am-boy’s First Mortgage; (2) $86,095.87 due with on Amboy's Second Mortgage; (3) $478,141.87 due with respect to Amboy’s Third Mortgage, in addition to pre-petition legal fees and costs in the amount of $5,695.42. The parties concede that Amboy's Second and Third Mortgages are wholly unsecured and that the Debtor at the time of filing the Chapter 13 case owed in excess of $564,237.74 in unsecured debt.
. The Court takes issue with the conclusions reached in Shenas and Cavaliere, wherein the courts summarily posited that the surviving in rem claims are not enforceable under § 506(a). First, § 506(a) merely fixes the amount of a secured claim based upon valuation of the underlying collateral. Section 506(a) is not a claim disallowance provision. Second, these courts do not explain how in rem claims (which by definition are claims against property), can be viewed as "unenforceable against the debtor or property of the debtor” so as to be disallowed under § 502(b). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494511/ | *316ORDER
ERIC L. FRANK, Bankruptcy Judge.
AND NOW, the debtor, Michael Ginaldi (“the Debtor”) having filed an Application for an Order Approving the Retention of Addison Wolfe Real Estate as Real Estate Broker (“the Application”) on August 12, 2011 (Doc. # 20);
AND, TD Bank having filed an objection to the Application asserting that Addison Wolfe Real Estate (“Addison Wolfe”) is a creditor of the bankruptcy estate, is not a disinterested person and therefore, is ineligible for retention under 11 U.S.C. § 327(a) (see Doc. # 21);
AND, a hearing on the Application having been held on September 7, 2011;
AND, as a result of the hearing, the court having entered the Order dated September 7, 2011 (Doc. # 41):
A. setting forth a briefing schedule on the Application; and,
B. allowing the parties to file stipulated facts and submit documents relevant to the dispute;
AND, the parties having filed a Stipulation of Facts (Doc. # 45), and mem-oranda of law in support of them respective legal positions (Doc. #’s 57, 58, 62);1
:|: * * :|:
AND, the following facts being undisputed, based either on the parties’ Stipulation of Facts or the court record:
1.Addison Wolfe Real Estate is a Pennsylvania Licensed Real Estate Brokerage firm with its principal office at 550 Union Square Drive, New Hope, PA 18938.
2. On March 9, 2011, Addison Wolfe entered into a Listing Contract with the Debtor and his spouse, Leigh Ann Ginaldi (collectively, “the Ginaldis”), for the marketing of the residence at 9 Great Hills Road, Upper Makefield, Bucks County, Pennsylvania (“the Property”) with a term ending September 8, 2011.
3. Paragraph 7 of the Listing Agreement, (Listing Agreement ¶ 7) (Doc. # 45)., provides that Addison Wolfe is entitled to a broker’s fee upon the occurrence of certain conditions quoted below:
A. Seller will pay Broker’s Fee if Property, or any ownership interest in it, is sold or exchanged during the term of this Contract by Broker, Broker’s salespersons, Seller, or any other person or broker, at the listed price or any price acceptable to Seller.
B. Seller will pay Broker’s Fee if a ready, willing, and able buyer is found by Broker or by anyone, included Seller. A willing buyer is one who will pay the listed price or more for the Property, or one who has submitted an offer accepted by Seller.
C. Seller will pay Broker’s Fee if negotiations that are pending at the Ending Date of this Contract result in a sale.
D. Seller will pay Broker’s Fee for a sale that occurs after the Ending Date of this Contract IF:
(1) The sale occurs within 30 [days] of the Ending Date, AND
(2) The buyer was shown or negotiated to buy the Property during the term of this contract, AND
(3) The Property is not listed under an “exclusive right to sell eon-*317tract” with another broker at the time of the sale.
4. Addison Wolfe found an interested buyer for the Property after which the Ginaldis entered into an agreement of sale (“the Agreement of Sale”) with James and Kathy Russell (collectively, “the Russells”), on May 29, 2011.
5. The scheduled Settlement Date for closing on the sale of the Property was July 18, 2011.
6. The Debtor filed a chapter 11 bankruptcy petition on July 12, 2011.
7. Settlement did not occur on July 18, 2011 due to the inability of the Ginaldis to convey clear title caused by their inability to satisfy all liens on the property from the sales proceeds or otherwise.2
8. No agreement, written or otherwise, to extend the Settlement Date was made on or before July 18, 2011.
9. Addison Wolfe continued its efforts to market the property after July 18, 2011.
10. On August 12, 2011, the Debtor filed the Application to Employ Addison Wolfe Real Estate as real estate broker on behalf of the bankruptcy estate.
11. On August 15, 2011, the Ginaldis and the Russells executed a written agreement renewing the Agreement of Sale dated May 29, 2011.
12. Neither Addison Wolfe, nor any person associated with Addison Wolfe, has an association or affiliation with either the Ginaldis or the Russells, other than in connection with the real estate transaction described above.
13. Neither Addison Wolfe nor any person associated with Addison Wolfe has any claim against the Debtor other than any claim that may have existed under the Listing Contract or as a result of the Agreement of Sale.
AND, 11 U.S.C. § 327(a) providing that a trustee or a debtor in possession,3 may employ one or more professional persons to represent or assist the trustee in carrying out the trustee’s duties to the estate;4
AND, before a professional may be approved by the court, § 327(a) imposing a two-part test that requires that a professional: (1) must not hold or represent an interest adverse to the estate,5 and (2) must be a disinterested person;
*318AND, a “disinterested person” being defined as a person who “is not a creditor, an equity security holder, or an insider” of the debtor, 11 U.S.C. § 101(14);
AND, a “creditor” being defined as an “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor,” 11 U.S.C. § 101(10) (emphasis added);
AND, a “claim” being defined as “a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, disputed, undisputed, legal, equitable, secured, or unsecured, 11 U.S.C. § 101(5) (emphasis added);”6
AND, Fed. R. Bank. P. 2014 requiring the applicant to state the specific facts showing inter alia, the necessity of the employment,7 the reasons for the selection, the professional services to be rendered and disclosure of all the person’s connections with the debtor, creditors, and other parties in interest;
AND, Fed. R. Bankr.P. 2014 also requiring that the professional to be employed submit as part of the retention application, a verified statement “setting forth the person’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any other person to be employed in the office of the United States trustee.”8
AND, the applicant bearing the burden of establishing, by a preponderance of the evidence, that a professional should be employed, In re Bigler, LP, 422 B.R. 638, 643 (Bankr.S.D.Tex.2010);
AND, TD Bank having objected to the Application of Addison Wolfe, arguing that Addison Wolfe is not “disinterested” within the meaning of 11 U.S.C. § 101(14);
AND, more specifically, TD Bank arguing that when the bankruptcy case was filed, Addison Wolfe was a creditor holding a contingent claim against the bankruptcy estate;9 AND, Addison Wolfe asserting *319that it does not hold a contingent claim;10
AND, the court concluding that Addison Wolfe is a contingent creditor of the Debt- or pursuant to the pre-petition Listing Agreement and therefore, is not disinterested as required by 11 U.S.C. § 327(a);11
AND, it appearing that Addison Wolfe has not waived its pre-petition claim12 and therefore, continues to be “not disinterested” within the meaning of § 101(14) and § 327(a), see United States Trustee v. Price Waterhouse, 19 F.3d 138 (3d Cir.1994) (absent waiver of pre-petition claim, applicant is not disinterested and may not be employed pursuant to § 327(a));
It is therefore ORDERED that the Debtor’s Application for an Order Approving the Retention of Addison Wolfe Real Estate as Real Estate Broker is DENIED WITHOUT PREJUDICE.13
. Although not a party to the dispute, Addison Wolfe filed a Memorandum of Law in support of the Debtor’s Application. I have broad discretion to permit an amicus curiae to participate in a pending action. E.g., Liberty Resources, Inc. v. Phila. Housing Authority, 395 F.Supp.2d 206, 209 (E.D.Pa.2005); Waste Mgmt., Inc. v. City of York, 162 F.R.D. 34, 36 (M.D.Pa.1995).
. This fact is taken verbatim from the Stipulation of Facts. However, I consider it extremely likely that the filing of the bankruptcy case itself and the absence of a bankruptcy court order authorizing the sale independently prevented the transaction from closing on July 18, 2011.
. Pursuant to § 1107(a), a debtor in possession is entrusted with the rights and powers of a trustee and is required to perform all the functions and duties of a trustee subject to certain exceptions.
. Section 327(a) provides:
Except as otherwise provided in this section, the trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.
11 U.S.C. § 327(a).
.The Bankruptcy Code does not define the term "adverse interest" but it has been interpreted to mean "(1) possession or assertion of an economic interest that would tend to lessen the value of the bankruptcy estate; or (2) possession or assertion of an economic interest that would create either an actual or potential dispute in which the estate is the rival claimant; or (3) possession of a predisposition under circumstances that create a bias against the estate.” In re Shat, 2009 WL 7809004, *5 (9th Cir. BAP 2009).
. A claim is "contingent as to liability if the debt is one which the debtor will be called upon to pay only upon the occurrence or happening of an extrinsic event which will trigger the liability of the debtor to the alleged creditor and if such triggering event or occurrence was one reasonably contemplated by the debtor and creditor at the time the event giving rise to the claim occurred.” In re Ford, 125 B.R. 735, 736 (E.D.Tex.1991).
. Thus, the bankruptcy court has the obligation to determine whether retention of the professional is in the best interest of the estate. See In re Camann, 2000 WL 33679428, *3 (Bankr.D.N.H. May 2, 2000); In re Leslie Fay Cos., 175 B.R. 525, 533 (Bankr.S.D.N.Y. 1994).
. "Full disclosure is an essential prerequisite for both employment and compensation.” Shat, 2009 WL 7809004, at *6. The professional is charged with the duty to make a full and candid disclosure of all connections with the debtor and its creditors regardless of how insignificant they may appear. Id.; Jacques H. Geisenberger, Jr., P.C. v. DeAngelis, 2011 WL 4458779, *6 (M.D.Pa. Sept. 23, 2011). Failure to disclose all pertinent facts may result in disqualification of the professional. In re Kings River Resorts, Inc., 342 B.R. 76, 86 (Bankr.E.D.Cal.2006).
.TD Bank argues that the Debtor’s entry into an Agreement of Sale with the buyers (with a scheduled closing date of July 18, 2011), rendered Addison Wolfe a creditor holding a contingent claim against the bankruptcy estate because die Listing Agreement provided that Addison Wolfe would be paid a brokerage commission if Addison Wolfe found a "ready, willing and able buyer” whose offer was accepted by the Debtor, {see Listing Agreement ¶ 7B). Consequentiy, according to TD Bank, Addison Wolfe cannot satisfy the “disinterestedness” requirement under § 327(a).
TD Bank also asserts that Addison Wolfe withheld from the court certain material facts *319relevant to its retention. TD Bank contends that the Debtor failed to disclose that Addison Wolfe found a buyer who entered into an Agreement of Sale and argues that these facts should have been disclosed to the court in the Application as it is material to the analysis of whether Addison Wolfe meets the requirements for retention under § 327(a). I do not decide, at this time, whether the non-disclosure mandates denial of Addison Wolfe’s retention.
. Addison Wolfe contends that the buyers were not "ready, willing, and able” because the buyers agreed to purchase the Property only if the Property was sold free and clear of any liens and until then, the buyers were not willing purchasers. Addison Wolfe asserts that, notwithstanding the apparent plain language of the Agreement, in common practice, paragraph 7(B) creates a right to payment of the broker’s commission only where (1) there are no conditions precedent to settlement and (2) the seller has wrongfully defaulted on the transaction. Addison Wolfe argues that the Debtor's ability to convey clear title was a condition precedent to completion of the sales transaction and because the Debtor was unable to do so, no right to payment arose in this case.
. I find it unnecessary to resolve the debate as to whether a present right to payment under ¶ 7B of the Listing Agreement exists. See nn. 10, 11. It is immaterial which interpretation is correct because under either reading of the contract, Addison Wolfe has at least a contingent claim under ¶ 7C the Listing Agreement.
When the Debtor filed his bankruptcy petition, a closing was scheduled. At that point, if Addison Wolfe did not have a present right to payment, its right to payment of the commission was at least dependent upon a future event (i.e., the closing). See Ford, 125 B.R. at 736 ("contingent claims are claims which depend either as to their existence or their amount on some future event which may not occur at all or may not occur until some uncertain time”). Further, even though the July 18th closing did not occur, Addison Wolfe's contingent right to payment under Paragraph 7(C) of the Listing Agreement continued to exist. For example, if, at any time in the future, the Debtor were to close the transaction with the buyer found by Addison Wolfe, the commission rights could be triggered. See generally In re Griffin, 313 B.R. 757, 763 n. 4 (Bankr.N.D.Ill.2004) (dependency of post-petition event does not prevent a debt from arising pre-petition). In these circumstances, I conclude that Addison Wolfe’s holds a contingent claim and is not disinterested.
. To become disinterested, a professional may waive its pre-petition claims. See In re Pillowtex, Inc., 304 F.3d 246, 253 (3d Cir.2002); In re Am. Home Mortg. Holdings, Inc., 411 B.R. 169, 172 & 180 n. 41 (Bankr.D.Del.2008); In re LKM Indus., 252 B.R. 589, 595 (Bankr.D.Mass.2000).
. The Application has been denied without prejudice because the defect in the Application is potentially curable by a formal waiver of Addison Wolfe’s pte-petition claim. However, should the Debtor file a renewed appli*320cation to retain Addison Wolfe, he should be prepared to address two issues.
First, the Debtor should consider whether there is any benefit to the estate in retaining Addison Wolfe where it appears that all of the material services provided by Addison Wolfe were performed pre-petition. If the Debtor does not retain Addison Wolfe and closes the transaction with the existing buyer, Addison Wolfe will have a pre-petition claim against the estate based on its commission rights under the Listing Agreement, i.e., a general unsecured claim, rather than a priority administrative expense. Depending upon whether a plan is confirmed and the amount of the distribution made to general unsecured creditors, I realize that this may result in, little or no payment to Addison Wolfe and therefore, may be perceived as a harsh result from its perspective. However, any professional compensation arrangement based on a right to a commission carries an inherent risk of nonpayment if the professional's client files a bankruptcy case after the professional has provided all of the material services in the engagement, but before payment of the commission. Such a professional is in no different position than any other unpaid vendor and the Bankruptcy Code contains no provision granting priority status to such a professional. To the extent this may be unfair, it is an issue that only Congress can address.
Second, the Debtor should consider whether the disclosure in the Application by the Debtor and Addison Wolfe acts as an independent bar to employment. See nn. 8-9 supra. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494512/ | MEMORANDUM OPINION REGARDING Burr’s Motion to Dismiss
CRAIG A. GARGOTTA, Bankruptcy Judge.
Crescent Resources, LLC, Crescent Holdings, LLC, and their affiliated debtors and debtors in possession (collectively “Crescent Resources,” “Crescent,” or “Debtors”), filed a petition under Chapter 11 of the Bankruptcy Code on June 10, 2009. Prior to filing for bankruptcy, Crescent was a real estate development and management organization which developed, owned, leased, managed, and sold real estate since 1969. On December 20, 2010, this Court signed the Order Confirming Debtors’ Revised Second Amended Joint Plan of Reorganization (Case No. 09-11507, docket no. 1534).
On February 16, 2011, the Crescent Resources Litigation Trust (the “Trust”) filed an adversary complaint against Edward E. Burr (Case No. 11-01013-CAG). The complaint states that Mr. Burr was the manager and co-owner of LandMar Group LLC (“LandMar”) until November 19, 2007. Mr. Burr was also an officer of Crescent. LandMar is a debtor in this Court and a subsidiary of Crescent. The complaint seeks to avoid three alleged transfers arising out of two transactions between Mr. Burr and Crescent and Land-Mar. The first transaction in the complaint alleges that in April 2007, LandMar Group borrowed money from Crescent so that LandMar could give Burr $1.925 million to cover Burr’s personal income tax liabilities (the “April 2007 Tax Transfer”). The second transaction allegedly occurred in November 2007 and consisted of an employment separation agreement between Crescent and Mr. Burr, whereby Burr’s employment was terminated and his 20% interest in LandMar was conveyed to Crescent in exchange for $4.5 million in cash plus the forgiveness of over $71 million debt owed to Crescent (the “November 2007 Transfers”). The complaint alleges three counts. Count 1 seeks to avoid the November 2007 Transfer pursuant to Sections 548 and 550 of the Bankruptcy Code. Count 2 seeks to avoid the November 2007 Transfer pursuant to state fraudulent transfer law and Sections 544 and 550 of the Bankruptcy Code. Count 3 seeks to avoid the April 2007 Tax Transfer under state fraudulent transfer law and Sections 544 and 550 of the Bankruptcy Code.
On April 14, 2011, Burr filed a Motion to Dismiss and.Brief in Support (docket no. 6). The Trust filed its Response to Defendant’s Motion to Dismiss on May 9, 2011 (docket no. 13). On May 19, 2011, Defendant filed a Reply in Support of Motion to Dismiss (docket no. 15).
On May 20, 2011, the Court heard oral arguments on the Motion to Dismiss. The Court has reviewed the briefs of the Trust *426and Burr, and has considered the arguments and evidence of counsel. Based on the foregoing, the Court finds that Burr’s Motion to Dismiss should be denied in part and granted in part.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (0) on which this Court can enter a final judgment. This matter is referred to the Court under the District’s Standing Order of Reference. Venue is proper under 28 U.S.C. §§ 1408 and 1409. The following represents the Court’s findings of fact and conclusions of law made pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014.
Issues
After the hearing, several issues were taken under advisement: (A) does the Plan of Reorganization “specifically and unequivocally” retain the causes of action alleged in the Complaint and (B) does the Complaint state facts sufficient to satisfy the heightened pleading standards required by Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), F.R.C.P. 9(b) and 12(b). The Court will discuss each issue in turn.
A. Does the Plan of Reorganization “Specifically and Unequivocally” Retain the Causes of Action Alleged in the Complaint
In Dynasty Oil & Gas, LLC v. Citizens Bank (In re United Operating), the Fifth Circuit discussed how, during a Chapter 11 case, a debtor, operating as a debtor-in-possession, has most of the powers of a bankruptcy trustee to pursue claims on behalf of the estate. 540 F.3d 351, 355 (5th Cir.2008) (citing 11 U.S.C. § 1107(a)). Once a plan is confirmed, the debtor loses its status as debtor-in-possession, and the debtor’s authority to pursue claims as though it were a trustee also expires. Id. (citing 11 U.S.C. § 1101(1); Ice Cream Liquidation, Inc. v. Calip Dairies, Inc. (In re Ice Cream Liquidation, Inc.), 319 B.R. 324, 333 (Bankr.D.Conn.2005); In re Grinstead, 75 B.R. 2, 3 (Bankr.D.Minn.1985)). However, Section 1123(b)(3) allows a reorganized debtor to bring a post-confirmation action if the debtor preserves its standing to bring such a claim, but only if the plan of reorganization expressly provides for the claim’s “retention and enforcement by the debtor.” Id. (quoting 11 U.S.C. § 1123(b)(3)(B)). Once the plan is confirmed, “the ability of the [debtor] to enforce a claim once held by the estate is limited to that which has been retained in the plan.” Id. (quoting Paramount Plastics v. Polymerland (In re Paramount Plastics, Inc.), 172 B.R. 331, 333 (Bankr.W.D.Wash.1994)).
The Fifth Circuit has held that for a debtor to preserve a claim, the plan must expressly retain the right to pursue that action, and such reservation must be “specific and unequivocal.” Id. (internal citations omitted). If the plan does not make an effective reservation of the claim, “the debtor has no standing to pursue such a claim that the estate owned before it was dissolved.” Id.
In short, United Operating holds that in order for a debtor to have standing to bring an action post-confirmation, the plan of reorganization must contain “specific and unequivocal” language retaining that cause of action. The question now for this Court to decide is whether Crescent’s Plan of Reorganization specifically and unequivocally retained the causes of action alleged in the Complaint.
1. The Relevant Plan Language
The most specific retention language is found in the Plan of Reorganization at *427section 8.5, describing the Litigation Trust Assets to be transferred to the Litigation Trust. The sentence in full states:
The Litigation Trust Assets shall include, but are not limited to, those Causes of Action arising under Chapter 5 of the Bankruptcy Code including those actions which could be brought by the Debtors under §§ 544, 547, 548, 549, 550, and 551 against any Person or Entity other than the Litigation Trust Excluded Parties.
“Litigation Trust Assets” is defined in the Plan to mean “the Litigation Trust Claims, the Litigation Trust Funds, and any other assets acquired by the Litigation Trust after the Effective Date or pursuant to the Plan” (docket no. 880, Section 1.78). “Causes of Action” is defined in the Plan to mean “any and all Claims, Avoidance Actions, and rights of the Debtors, including claims of a Debtor against another Debtor or other affiliate” {Id., Section 1.21). As will be discussed later, there is no mention of “Section 542” or “turnover” in the Plan of Reorganization, the Disclosure Statement, or the Litigation Trust Agreement (the “Plan Documents”).
The other Plan language cited by the Trust which the Court finds relevant is Section 1.7(d) of the Litigation Trust Agreement:
The Litigation Trustee shall have, retain, reserve, and be entitled to assert all such Claims, Causes of Action, rights of setoff and other legal or equitable defenses which the Debtors had immediately prior to the Commencement Date fully as if the Chapter 11 Cases had not been commenced or the Litigation Trust Claims had not been transferred to the Litigation Trust in accordance with the Plan and this Litigation Trust Agreement ...
Additionally, the Trust cites to portions of the Disclosure Statement for the proposition that the language advised the Debtors’ creditors that the Litigation Trust would be prosecuting avoidance actions such as that asserted against Burr:
The liquidation of the Litigation Trust Assets may be accomplished either through the prosecution, compromise and settlement, abandonment, or dismissal of any or all claims, rights, or causes of action, or otherwise ... [T]he Debtors anticipate the Litigation Trustee will investigate and pursue any such Avoidance Actions ... Any and all proceeds generated from the Litigation Trust Assets will be the property of the Litigation Trust.
(Case No. 09-11507, docket no. 879, p. 81.)
2. Parties’ Contentions
Burr cites to United Operating for the proposition that the Plan must expressly retain the right to pursue a cause of action and that reservation must be “specific and unequivocal.” 540 F.3d at 355 (citations omitted). Burr then makes the distinction between two approaches within the Fifth Circuit for how to interpret “specific and unequivocal”; the “Categorical Approach” and the “Specific Approach.” Burr argues for the “Specific Approach,” citing to In re MPF Holding U.S. LLC for the proposition that a Chapter 11 plan must set forth “absolutely who will be sued and on what basis — or no suit will be allowed.” 443 B.R. 736, 756 (Bankr.S.D.Tex.2011). Burr additionally cites to TXCO Resources Inc. v. Peregrine Petroleum, LLC (In re TXCO Resources Inc.), No. 09-05125, (Bankr.W.D.Tex. October 27, 2010), in support of the “Specific Approach.” Burr argues that in that case, the court dismissed all claims against two putative defendants because such defendants were not specifically listed by name in the debtors’ plan or accompanying documents, even though the plaintiff argued that prior to confirmation it had no *428evidence to support a claim against the defendants. Burr states that the issue before the court in that case was whether creditors received sufficient notice of the potential claims and causes of action in order to vote on the plan, where creditors were paid in full from the sale of assets, and none of the potential litigation recoveries would be used .to satisfy creditor claims. The court in TXCO, in applying the Specific Approach, held that in order to preserve claims under the “specific and unequivocal” standard applied by United Operating, the plaintiff was required to list the defendants by name.
Burr argues against using the Categorical Approach, stating that the entire foundation of the Categorical Approach rests upon the Fifth Circuit’s citation to and subsequent parenthetical description of Ice Cream.1 Burr argues that nowhere in United Operating, outside the parenthetical discussing Ice Cream, does the Fifth Circuit use the term “categorical reservation,” or any other similar term; instead, Burr argues, the actual holding uses the words “express” and “specific and unequivocal” to describe the required standing. United Operating, 540 F.3d at 355.
Burr additionally argues for this Court to adopt the reasoning of MPF concerning the “see also ” signal preceding the Ice Cream citation. The court in MPF held that
Ice Cream’s holding is merely a supporting citation, not a direct citation like Harstad ... [T]his phrase means that the holding in Ice Cream merely supports the Fifth Circuit’s requirement that the reservation be “specific and unequivocal,” not that the Fifth Circuit adopted the holding in Ice Cream as its own. The Fifth Circuit could have easily directly cited to Ice Cream, but instead used it as a supporting citation after a case (i.e., Harstad) that it quoted within the body of its opinion (rather than in a parenthetical to a citation)
443 B.R. at 746 (emphasis in original). Burr argues that, because of the signal preceding the Fifth Circuit’s citation to Ice Cream, such case merely provides support for the United Operating holding, and therefore the “Specific Approach,” and not the “Categorical Approach,” should be adopted by this Court.
As will be discussed below, one of the main focuses in United Operating is the concept of notice to creditors. Burr additionally argues for the “Specific Approach,” stating that only by listing putative defendants in the Plan Documents would creditors have sufficient notice of the contents of the Plan and the creditors’ treatment thereunder. Burr argues that a categorical reservation of causes of action such as that contained in the Plan Documents does not provide unsecured creditors any additional knowledge or insight into their potential recovery, and in such a scenario, unsecured creditors are essentially voting blind. Burr also argues that this sort of notice is important because a creditor must know whether the debtor believes the creditor to be potentially liable for future claims in order to make an informed vote on the plan.
Burr additionally argues that without this notice, he was prejudiced because the *429plan failed to provide him with sufficient notice to file a proof of claim or indemnification. Burr argues that because of Burr’s employment and involvement with Crescent, LandMar, and LandMar Management, LLC, Burr is entitled to indemnification for any acts or omissions arising out of, or related, to his employment and his status as a member and manager of the respective companies.
Burr makes a policy argument for the Specific Approach as well, arguing that the approach “furthers the policy of complete disclosure, which is the cornerstone of the Bankruptcy Code, and promotes the finality of confirmation orders which thereby increases certainty, discourages multiple litigation, and conserves judicial resources.” The Official Comm. Of Unsecured Creditors of Crowley, Milner and Co. v. Callahan (In re Crowley, Milner and Co.), 299 B.R. 830, 852 (Bankr.E.D.Mich.2003) (discussing why the court chose to require the Specific Approach, as opposed to the Categorical Approach, and finding that a plan of reorganization containing specific Code sections to be insufficient).
Burr argues that the Plan does not “expressly” retain any causes of action against Mr. Burr, nor does the Plan make “specific and unequivocal” reservations as to any particular causes of action against Mr. Burr. Burr points out that Mr. Burr is not referenced anywhere in the Plan, Disclosure Statement, or Confirmation Order. Burr also states that the allegedly fraudulent transfers to Burr are not referenced in the Schedules or Statement of Financial Affairs of either Crescent Resources or LandMar.
Burr then argues that, if the Court determines the Categorical Approach is correct, the Trust lacks standing to pursue any claim to recover on the allegedly forgiven debt. Burr argues that if this Court ultimately determines that the debt release is an avoidable transfer, the Trust would lack standing to pursue an action under Section 542. Therefore, Burr argues, since the underlying claim to recover on the debt under section 542 is not actionable, any claim seeking to avoid the alleged forgiveness of such debt is moot.
The Trust argues that the Court should adhere to the Categorical Approach, arguing that with one exception, courts of the Fifth Circuit have followed United Operating and Texas Gen. Petroleum and held that (a) a Chapter 11 plan and/or disclosure statement need only state that the debtor or litigation trustee will be pursuing avoidance actions post-confirmation; and (b) identifying the defendant by name is not required.2 The Trust argues that the one outlier case, MPF, was incorrectly decided. The Trust argues that in order to come to its conclusion, the court in MPF used a “strained Blue Book-based analysis” to reach its conclusion regarding the importance of Ice Cream. The Trust argues that the court in MPF misconstrues other cases cited by United Operating and would lead to a rule protecting potential defendants, not creditors entitled to vote on the plan.
The Trust argues that creditors were given sufficient notice that claims such as the claim against Burr would be pursued post-confirmation. Finally, the Trust argues that following MPF would render large cases such as Crescent impossible to administer.
There is no dispute that Burr is not specifically mentioned in the Plan Documents, nor is Section 542 or “turnover” mentioned in the Plan documents. The issue then is whether the Court finds the *430language in the Plan to sufficiently retain the causes of action alleged against Burr.
3. Review of Case Law
Since United Operating was decided, there have been several cases attempting to interpret what the Fifth Circuit meant by “specific and unequivocal.” Although there has been no binding case to define definitively what the court meant by that phrase, other courts have attempted to determine if a reorganized debtor retained standing on a case-by-case basis. In order to make a determination if the Plan language in this case is sufficiently “specific and unequivocal,” this Court finds it useful to go through the cases interpreting this phrase.
In McFarland v. Leyh (In re Texas Gen. Petroleum Corp.), the Fifth Circuit was tasked with determining if a post-confirmation debtor retained the right to pursue an avoidance action. 52 F.3d 1330 (5th Cir.1995). The plan language the court looked at stated that “[t]he reorganized debtor shall retain that property described on Exhibit F. Among the property of the estate hereby distributed to the trust are those claims and causes of action listed or described on Exhibit B (including causes of action created or sanctioned by §§ 542-553).” Id. at 1336. The Fifth Circuit agreed with the bankruptcy and district courts, and found the parenthetical language to be ambiguous when read in conjunction with other sections of the plan and employed parol evidence to determine the intent of the parties. Id. The court looked at the general policy behind the assertion of avoidance actions — “the proceeds recovered in avoidance actions should not benefit the reorganized debtor; rather, the proceeds should benefit the unsecured creditors” — and determined that the debtor had standing to pursue an avoidance action. Id. (citing to 5 Collier on Bankruptcy 1123.02, at 1123-23 (Lawrence P. King ed., 15th ed. 1994)).
This Court has already discussed United Operating, but it is useful to look at the specific plan language the Fifth Circuit found was sufficient as well as the language the court found was not specific and unequivocal. The court was making the determination whether the reorganized debtor retained standing to pursue certain common law claims. United Operating, 540 F.3d at 354. The court’s only mention of specific language from the debtor’s plan of reorganization is in the court’s holding that the plan did not retain the cause of action for the common law claims:
Neither the Plan’s blanket reservation of “any and all claims” arising under the Code, nor its specific reservation under various Code provisions are sufficient to preserve the common-law claims Dynasty now brings for, inter alia, fraud, breach of fiduciary duty, and negligence.
Id. at 356. The Fifth Circuit merely held in this case that a blanket reservation of claims under the Code and specific reservations of Code provisions was not a specific and unequivocal reservation of a common-law claim. Id.
This makes sense, particularly given the reasoning the Fifth Circuit used in concluding that in order to retain causes of action, the reservation must be specific and unequivocal. Id. at 355. The court looked to one of the purposes of bankruptcy, namely that bankruptcy is “designed primarily to ‘secure prompt, effective administration and settlement of all debtor’s assets and liabilities within a limited time.’ ” Id. (quoting In re Kroh Bros. Dev. Co., 100 B.R. 487, 495 (Bankr.W.D.Mo.1989)). In order to facilitate a “timely, comprehensive resolution of an estate, a debtor must put its creditors on notice of any claim it wishes to pursue after confirmation.” Id. (citing Harstad v. First *431American Bank, 39 F.3d 898, 903 (8th Cir.1994)). Only with proper notice can a creditor determine whether a proposed plan effectively resolves matters satisfactorily before they vote to approve the plan. Id. The whole point of requiring “specific and unequivocal” retention language is so that a creditor, after voting on a plan, is not suddenly blind-sided by litigation or surprised if the reorganized debtor attempts to pursue a claim which would only benefit the reorganized debtor, not creditors. See id. at 355-56.
In sum, United Operating stands for the rule that a blanket reservation is insufficient to retain a cause of action, and that the purpose of requiring “specific and unequivocal” retention language is so that creditors are on notice of what causes of action the reorganized debtor is planning on pursuing before the creditor votes on the plan.
The next Fifth Circuit case dealing with this issue is Nat’l Benevolent Ass’n of the Christian Church v. Weil, Gotshal & Manges, LLP (In re Nat’l Benevolent Ass’n of the Christian Church), 333 Fed.Appx. 822 (5th Cir.2009) (unpub.). This case did little to refine what the court meant by “specific and unequivocal,” ultimately determining that the debtor did not have standing to pursue a claim based on the plan language. The case does, however, reiterate general concepts about plan interpretation, stating that the court will “interpret the Plan using traditional tools of contractual interpretations.” Id. at 828 (quoting Advisory Comm. Of Major Funding Corp. v. Sommers (In re Advisory Comm. Of Major Funding Corp.), 109 F.3d 219, 222 (5th Cir.1997)) (internal modifications omitted). The Fifth Circuit also cited to Brown v. Fin. Serv. Corp., Int’l for the contractual interpretation rule that “conflicting provisions should be reconciled in order to give meaning to all parts of the contract.” Id. (quoting Brown v. Fin. Serv. Corp., Int’l, 489 F.2d 144, 151 (5th Cir.1974)).
Before turning to bankruptcy court opinions in the Fifth Circuit interpreting United Operating, the Court believes it will be helpful to look at the cases cited by United Operating. The first such case the Court will examine is In re Paramount Plastics, Inc., 172 B.R. 331. The Fifth Circuit relied on this case for the proposition that there was no standing to pursue preference actions where preference actions were not preserved in the plan. United Operating, 540 F.3d at 356 (citing Paramount, 172 B.R. at 335). The court in Paramount stated that
the plan contains no reference to preference actions, either in the description of creditor treatment, the means for implementing the plan, the liquidating analysis, or the retention of jurisdiction. The most specific language in the jurisdictional paragraph relates to “allowance or disallowance of claims and interests,” which the Court concludes does not encompass avoidance actions.
Paramount, 172 B.R. at 335. The Fifth Circuit in United Operating relied on a case which held that a generic blanket reservation (“allowance or disallowance of claims and interests”) was insufficient to preserve a claim post confirmation.
The next case requiring an in-depth discussion is In re Ice Cream Liquidation, 319 B.R. 324. As previously discussed, the Fifth Circuit cited Ice Cream for the proposition that there was “no standing to pursue turnover actions because the plan ‘made no mention’ of them.” United Operating, 540 F.3d at 356 (quoting Ice Cream, 319 B.R. at 333). This case is useful in setting guideposts for interpreting “specific and unequivocal” because this case held that the reorganized debtor did retain standing to prosecute some claims, while *432also holding that the debtor did not retain standing to prosecute others. Ice Cream, 319 B.R. 324.
The court quoted relevant parts of section 5.2 of the plan:
The Plan confers certain “powers and duties” on the post confirmation Debtor, including:
(a) to liquidate all of its property to cash; ...
(c) to prosecute any claims under Sections 544, 547, 548 and 550 [collectively, “Avoidance Actions”] of the [Bankruptcy] Code; [and] ...
(f) other powers and duties described in th[e] Plan or conferred upon it by operation of law.
Id. at 327-28. The court also quoted section 8.1 of the plan, which authorized the debtor to “ ‘compromise or settle’ any ‘Chapter 5 litigation.’” Id. at 328. The court additionally looked to a portion of the debtor’s disclosure statement which said “The Debtor shall prosecute all preference and other actions to recover funds for the estate under Chapter 5 of the Bankruptcy Code ...” Id. The court then held that “[t]he Plan makes no mention of Bankruptcy Code § 542, turnover actions, actions to recover accounts receivable or the invalidation of set-offs, although Plan § 5.2 specifically mentions Sections 544, 547, 548 and 550” and found that the debt- or lacked standing to bring the Section 542(b) claims. Id. at 333-34.
In a footnote, the court discussed the debtor’s argument that the reference in section 8.1 of the debtor’s power to settle or compromise “Chapter 5 litigation” was an “other power[] or dut[y] described in th[e] Plan” within the purview of section 5.2(f) of the plan. Id. at 333, n. 14. The court determined that section 8.1 was ambiguous as to whether section 8.1 referred to actions such as 542(b), because the phrase “Chapter 5 litigation” was not defined in the plan and “could be interpreted merely as a reference to the materially incomplete list of chapter 5 causes of action (ie., the Avoidance Actions) contained in Plan § 5.2.” Id. at 333-34, n. 14. The court then determined that the disclosure statement language quoted above did not resolve the plan ambiguity either because “the Avoidance Actions do include ‘preference actions’ and other chapter 5 actions (e.g., fraudulent transfer actions under Section 548) even if the Avoidance Actions do not include Section 542(b) actions.” Id. at 334, n. 14.
The Ice Cream court did find that the debtor retained standing to pursue its preference claims. Id. at 337. The plan language the court considered specifically authorized the debtor to prosecute claims under Sections 547 and 550. Id. The court rejected the argument that a reference in the plan to specific code sections was not sufficiently specific, stating that this “gave notice of the Debtor’s intention to commence postconfirmation preference actions” and further holding that “[t]he court adopts as the better-reasoned view those cases which hold that a Section 1123(b)(3) reservation need not be as specific as the Defendants argue in order to be enforceable.” Id. (citing The Elk Horn Coal Co., LLC v. Conveyor Mfg. & Supply, Inc. (In re Pen Holdings, Inc.), 316 B.R. 495, 504-OS (Bankr.M.D.Tenn.2004) (“It is not practicable, especially in larger cases, for the debtor to identify by name in the plan or disclosure statement every entity that may have received a preferential payment ... Nothing in [Bankruptcy Code] § 1123(b)(3) suggests such specificity is required.”)). In a footnote, the court cautions against a more stringent rule — that debtors must list all known causes of action — stating that “the issue of what the debtor and/or its professionals knew and when it/they knew it potentially could be *433raised defensively in every postconfirmation preference action when the defendant was not specifically named in the plan.” Id. at 337, n. 21.
At its core, Ice Cream stands for the proposition that listing causes of action by code section is “specific and unequivocal,” but that granting the reorganized debtor authority “to prosecute any claims under Sections 544, 547, 548 and 550 of the [Bankruptcy] Code; [and] ... other powers and duties described in th[e] Plan or conferred upon it by operation of law” in conjunction with the authority to “compromise or settle” any “Chapter 5 litigation” is not “specific and unequivocal.” See Id. As will be discussed more below, this language is different than the language at issue in the present case. The language at issue before the Court grants the Trust the authority to pursue “Causes of Action arising under Chapter 5 of the Bankruptcy Code including those actions which could be brought by the Debtors under §§ 544, 547, 548, 549, 550, and 551” (docket no. 880, Section 8.5).
The Court now moves to discussing other bankruptcy court cases construing the holding of United Operating. The first case is Moglia v. Keith (In re Manchester, Inc.), 2009 WL 2243592 (Bankr.N.D.Tex., July 16, 2009). In Manchester, the plan of reorganization established a litigation trust similar to the Trust established in the present case. Id. The plan of reorganization transferred to the litigation trust “Causes of Action,” which was a defined term in the plan and included “any and all claims, rights, defenses, third-party claims, [etc.]” and “Avoidance Actions,” another defined term. Id. at *4. “Avoidance Actions” in turn were defined to mean “any and all Causes of Action which a trustee, the Debtors, the Estates or other appropriate party in interest may assert under sections 502, 510, 522(f), 522(h), 542, 543, 544, 545, 547, 548, 549, 550, 551, 553 and 724(a) of the Bankruptcy Code.” Id. at *5. The litigation trust in the case was pursuing both avoidance actions under Sections 547, 548, 550, 502(d), and 510(c) of the Code and non-avoidance state and common law claims, including breach of fiduciary duty, payment of illegal dividends, and negligent misrepresentation. Id. at *1. The defendants in the case argued that the litigation trust lacked standing because the plan did not contain “specific and unequivocal retention language.” Id. at *2.
The court in Manchester determined that, based on United Operating and the Fifth Circuit’s reliance on Ice Cream, the plan language was sufficient to retain the avoidance causes of action, stating “creditors must be told in the plan of reorganization that avoidance actions will be pursued post-confirmation by the representative of the estate, the individual prospective defendants do not have to be identified in the plan.” Id. at *5. The court then determined that the plan language did not specifically and unequivocally retain the non-avoidance state and common law claims, holding that:
While the Plan’s definition of Causes of Action is certainly broad enough to include them as claims the Debtors intended to preserve and transfer to the Litigation Trust, the Plan does not expressly identify these claims; nor does the Plan specifically and unequivocally transfer them to the Litigation Trust for pursuit by the Litigation Trustee post-confirmation.
Id. So this case stands for the proposition that listing causes of action by code section is sufficient to retain those causes of action, but transferring “any and all actions, claims, [etc.]” is insufficient to retain a common or state law cause of action if that *434specific cause of action (i.e. breach of fiduciary duty) is not specifically mentioned.3
The next case is Spicer v. Laguna Madre Oil & Gas, LLC (In re Texas Wyoming Drilling, Inc.), 422 B.R. 612 (Bankr.N.D.Tex.2010). That case involved two different debtors — TWD and Ranzino-Renda — and two different plans. Id. At the outset of determining whether the debtors’ plans contained specific and unequivocal retention language, the court stated that:
It does not seem to the court consistent with the objectives of the appellate courts to apply the applicable precedents in so draconian a fashion as to disserve the interests of creditors and frustrate pursuit of claims which may have merit. The court thus approaches the issues presented to it assuming that it was not the intention of the courts deciding the cases cited by the TWD Defendants and the Cook Defendants that their opinions would be too readily usably by defendants to defeat the legitimate expectations of a debtor’s creditors for recovery.
Id. at 624. The court went on to discuss United Operating in more detail, concluding that United Operating “stands for the proposition that creditors must be able to view a proposed plan and properly evaluate the creditors’ benefits and potential liabilities so that they may then consider that information when they vote to approve or disapprove a plan.” Id. at 625.
The court determined that “nowhere does United Operating state that the specific and unequivocal language must include identification of specific claims against specific defendants” before concluding that the Fifth Circuit’s favorable citation to Ice Cream shows that a categorical reservation is sufficient to preserve standing for such claims. Id. at 626-27. The court ultimately concluded that:
The purpose of the specific and unequivocal language requirement is not to put potential defendants (at least those not voting on the plan) on notice of lawsuits that may be brought against them; rather it is to put creditors that are entitled to vote on notice that there may be assets in the form of potential lawsuits so that they may pass on the plan with sufficient knowledge of the assets that are available to pay the claims held by the creditors against the debtor.
Id. at 627 (citing United Operating, 540 F.3d at 855). The court then established a test based on United Operating, determining that the question of whether a reorganized debtor preserved standing “turns on whether the language in the [pjlan was sufficient to put creditors on notice that [the debtor] anticipated pursuing the [cjlaims after confirmation.” Id. at 627-28.
The relevant plan language from the TWD plan defined “Estate Actions” as:
any and all claims, causes of action and enforceable rights of the Debtor against third parties, or assertable by the Debt- or on behalf of creditors, its estate, or itself ... for recover or avoidance of obligations, transfers of property or interests in property ... and other types or kinds of property or interests in property ... recoverable or avoidable pursu*435ant to Chapter 5 or other sections of the Bankruptcy Code or any applicable law.
Id. at 620. Using the test discussed above, the court determined that TWD had standing because the plan provided a categorical reservation of avoidance claims and was sufficient to put creditors on notice that avoidance claims would be pursued. Id. at 628.
The relevant plan language from the Ranzino-Renda plan transferred “all real and personal property of the estate ... including but not limited to all causes of action ... and any avoidance actions ...” Id. at 620-21. The claims Ranzino-Renda wished to pursue were for common and state law claims (i.e., breach of contract, breach of duty of care, and legal malpractice). Id. at 620. The court determined that the plan language was a “clear example of a blanket reservation that was deemed in United Operating to be insufficient to preserve for the reorganized debt- or claims that belonged to the bankruptcy estate.” Id. at 629. The court, applying contract rules of interpretation that a contract should be construed to effect the intent of the parties, looked beyond the plan to the disclosure statement. Id. (citing United States Brass Corp. v. Travelers Ins. Group, Inc. (In re United States Brass Corp.), 301 F.3d 296, 307 (5th Cir.2002); Neal v. Hardee’s Food Sys., Inc., 918 F.2d 34, 37 (5th Cir.1990); Newby v. Enron Corp. (In re Enron Corp. Secs.), 391 F.Supp.2d 541, 567-68 (S.D.Tex.2005)). The court looked to the disclosure statement, and determined that creditors would have read the disclosure statement and expected the reorganized debtor to pursue those claims. Id. at 630. Additionally, the court stated that if the court, upon an examination of the plan and disclosure statement, determined that the debtor was required to pursue a claim in order to perform on the plan, the court could order the debtor to pursue that claim. Id. (citing 11. 11 U.S.C. § 1142(a)). If the court found that the debtor was under a duty to pursue such a claim, “the revesting and reservation provision on which that performance rests would be sufficient to support standing, despite any relevant want of specificity of description in the plan itself.” Id.
In sum, Texas Wyoming Drilling establishes a test, based on the importance of providing notice to creditors, to determine if plan language meets the “specific and unequivocal” requirement. If the plan language does not, the court can look outside the plan to the disclosure statement to determine the expectation of creditors.4
*436In Blue Water Endeavors, LLC v. AC & Sons, Inc. (In re Blue Water Endeavors, LLC), 2011 WL 52525 (Bankr.E.D.Tex. Jan. 6, 2011), the court found that the reorganized debtor lacked standing to pursue certain common law claims. The court discussed that there must be an identifiable intent to bring such an action in order to reserve or retain that cause of action. Id. at *6 (discussing United Operating, 540 F.3d 351). The court determined the language the debtor cited to contained only-generic language (i.e. “lawsuits or other claims against third-parties”) and found the reorganized debtor lacked standing. Id.
In In re TXCO, the court found that certain claims against some defendants were not effectively retained in the plan of reorganization (Case No. 09-05125, docket no. 176 & 177). The court discusses the relevant plan language in the court’s Order Granting the Motion to Dismiss, first discussing Section 7.13 of the plan and stating that it was a “general retention provision which purported to retain all causes of action of the debtors for the benefit of the reorganized debtor.” Id. at 4. The court then discussed Section 7.15 of a purchase and sale agreement discussed in the plan of reorganization. The purchase and sale agreement defined “Peregrine Claims” (one of the defendants) as “certain claims or causes of action relating to certain potential breaches of one or more confidentiality agreements between one or more sellers and one or more third parties” relating to oil and gas leases in Maverick County, Texas. Id. The court found that this language, and similar language in the plan documents, did not expressly retain standing for the plaintiff to pursue a cause of action against a defendant not specifically named. Looking at the court’s Order, the most specific retention language appeared in a purchase and sale agreement and included “certain claims or causes of action relating to certain potential breaches of one or more confidentiality agreements.” Id. This appears to be more along the lines of a blanket reservation which other courts in the Fifth Circuit have determined to be ineffective. It appears to be in line with the other cases discussed above.
The one outlier of all the 5th Circuit bankruptcy cases is In re MPF Holding U.S. LLC, 443 B.R. 736 (Bankr.S.D.Tex.2011). In that case, the court, after discussing Manchester and Texas Wyoming, concluded that “the Fifth Circuit requires that the parties to be sued after confirmation must be individually identified in the plan, and that failure to do so necessarily means that the bright-line test [from United Operating ] is not satisfied.” Id. at 744. In other words, the plan must go further than reciting code provisions; it must state that a specific cause of action will be brought against a specific defendant. See id. at 746. This Court declines to adopt the holding of the case and believes that the other cases in the Fifth Circuit are more in line with the holding of United Operating,5
4. Analysis
Having done an exhaustive discussion of the relevant case law on this issue, it ap*437pears that, while the Fifth Circuit has not defined what “specific and unequivocal” means, cases have interpreted different plan language on case-by-case bases which this Court can use as guideposts with which to judge the plan language at issue here. Courts have held that listing causes of action by code section is sufficiently “specific and unequivocal.” See Texas Wyoming Drilling, 422 B.R. 612; Manchester, 2009 WL 2243592; Ice Cream, 319 B.R. 324. The courts have also held that a generic blanket reservation is insufficient. Blue Water, 2011 WL 52525, *6 (“lawsuits or other claims”); Manchester, 2009 WL 2243592, *4 (“any and all actions, claims, rights, [etc.]”); Ice Cream, 319 B.R. 324, 328 (granting the authority to “compromise or settle” any “Chapter 5 litigation”).
The cases in the Fifth Circuit all cited United Operating. United Operating, in making its holding, also discussed that one of the purposes of bankruptcy is to “secure prompt, effective administration and settlement of all debtor’s assets and liabilities within a limited time.” 40 F.3d at 355 (quoting In re Kroh Bros. Dev. Co., 100 B.R. at 495). In order to facilitate this resolutioñ of the estate, “a debtor must put its creditors on notice of any claim it wishes to pursue after confirmation.” Id. (citing Harstad, 39 F.3d at 903). It is for this reason — notice to creditors — that the Fifth Circuit determined that the retention language needed to be “specific and unequivocal.” Id.
This Court agrees with the reasoning behind those cases applying what has been referred to as the “Categorical Approach,” and adopts the test established in Texas Wyoming Drilling to determine if the plan language meets the “specific and unequivocal” requirement. 422 B.R. at 627-28. That test, again, was to make a determination “whether the language in the [p]lan was sufficient to put creditors on notice that [the debtor] anticipated pursuing the [c]laims after confirmation.” Id. at 627-28. If so, the language meets the “specific and unequivocal” requirement. With this test in mind, the Court will now determine if the Plan retained the causes of action alleged by the Trust in the Complaint and if so, does the Plan retain a cause of action for turnover.
a. The Causes of Action in the Complaint
The complaint alleges three counts. Count 1 seeks to avoid the November 2007 Transfer pursuant to Sections 548 and 550 of the Bankruptcy Code. Count 2 seeks to avoid the November 2007 Transfer pursuant to state fraudulent transfer law and Sections 544 and 550 of the Bankruptcy Code. Count 3 seeks to avoid the April 2007 Tax Transfer under state fraudulent transfer law and Sections 544 and 550 of the Bankruptcy Code. The relevant language the Court will look at is from Section 8.5 of the Plan:
The Litigation Trust Assets shall include, but are not limited to, those Causes of Action arising under Chapter 5 of the Bankruptcy Code including those actions which could be brought by the Debtors under §§ 544, 547, 548, 549, 550, and 551 against any Person or Entity other than the Litigation Trust Excluded Parties.
This language clearly includes Sections 544, 548 and 550, which were alleged by the Trust in the Complaint against Burr. It is clear, based on the above test and the cases cited above, that this is sufficient to put those voting on the Plan on notice that the Trust intended to pursue those claims under Sections 544, 548, and 550.
Neither side discussed whether the language in the Plan Documents sufficiently retained the “state fraudulent transfer law” causes of action in the Complaint. In *438the Plan, Causes of Action is defined to include “Avoidance Actions,” which is defined in the Plan at Section 1.12 to mean “any actions commenced, or that may be commenced before or after the Effective Date, pursuant to sections 544, 547, 548, 549, 550, or 551 of the Bankruptcy Code” (Case No. 09-11507, docket no. 880). While this bolsters the argument that Section 544, 548, and 550 were specifically and unequivocally retained in the Plan, it does not further the argument that the state fraudulent transfer law claims were specifically and unequivocally retained. Any other language discussing “Claims” or “Causes of Action” in the Plan Documents is only generic, blanket reservations, deemed by the Fifth Circuit to be insufficient to preserve those claims. For this reason, the Court finds that the Trust does not have standing to bring the “state fraudulent transfer law” claims against Burr.
b. Turnover
Burr argues that even if this Court determines the Trust has standing to pursue the causes of action under Sections 544, 548, and 550 (which it has), the issue is still moot because the Trust lacks standing to pursue turnover of those claims. Looking at the Plan language, it appears this language falls somewhere between “any and all claims” and listing turnover claims by statute number. The one case dealing with “Chapter 5 litigation” held that phrase alone to be insufficient. See Ice Cream, 319 B.R. at 328. However, in that case, the reference to Chapter 5 was in isolation. Id. Here, Chapter 5 is referenced as well as six specific code sections. So the question before the Court becomes whether a reference to Chapter 5 of the Bankruptcy Code, in conjunction with Sections 544, 547, 548, 549, 550, and 551 is “specific and unequivocal” to retain a turnover cause of action under Section 542. Based on the above discussion, this Court finds that a cause of action for turnover was specifically and unequivocally retained by this language in the Plan.
Using the test from Texas Wyoming, it seems far-fetched to believe that a creditor would not be on notice that the Trust anticipated pursuing turnover claims after confirmation. Looking at the language of the Plan, a creditor could not feign surprise that the Trust would pursue a claim under Section 542. This is additionally bolstered by looking at the table of contents of the Bankruptcy Code. Chapter 5 is titled “Creditors, the Debtor, and the Estate” and is further broken up into three different subchapters. See generally 11 U.S.C. 101, et seq. Subchapter III is entitled “The Estate” and includes Sections 541-562. As discussed, the Plan specifically includes six code sections, Sections 544, 547, 548, 549, 550, and 551. These are all from Subchapter III of Chapter 5. While the Plan language is more generic than language considered in other cases, this Court finds that it was sufficient to put creditors voting on the Plan on notice that 542 turnover claims may be pursued.
5. Does the Complaint Survive the Heightened Pleading Standards
Burr argues that the Complaint does not state facts sufficient to satisfy the heightened pleading standards required by Iqbal, Twombly, and F.R.C.P. 9(b) and 12(b). Without ruling on the merits of this portion of Burr’s Motion to Dismiss, the Court will grant the Plaintiffs request that it be granted leave to amend. The Federal Rules of Civil Procedure provide that leave to amend should be freely granted when justice so requires. Fed.R.Civ.P. 15(a). Defendant’s Motion to Dismiss lists this as an alternative request for relief, asking the Court to “require the Trust to replead such claims” (docket no. 6, p. 13). Additionally, “[gjranting leave to amend is es*439pecially appropriate ... when the trial court has dismissed the complaint for failure to state a claim.” Griggs v. Hinds Junior Coll. 563 F.2d 179 (5th Cir.1977). The Court therefore finds that leave should be granted to the Plaintiff in order to replead their Complaint, consistent with this Memorandum Opinion.
Conclusion
Having gone through the facts of the case and considered the arguments made by the parties, this Court finds that (1) the Plan preserved the claims made in the Complaint under Sections 544, 548, and 550 and turnover claims with language which was specific and unequivocal, (2) the Plan does not preserve the claims made in the Complaint under “state fraudulent transfer law,” and (3) the Court grants leave for the Plaintiff to amend the Complaint consistent with this Opinion.
IT IS THEREFORE ORDERED that Defendant’s Motion to Dismiss filed on April 14, 2011 (docket no. 6) is denied for the purposes of objecting to the Trust’s standing to pursue claims under 544, 548, and 550 of the Bankruptcy Code.
IT IS FURTHER ORDERED that the Trust lacks standing to pursue its claims under “state fraudulent transfer law.”
IT IS FURTHER ORDERED that Defendant’s Motion to Dismiss is denied without prejudice to re-urge the arguments that the Complaint should be dismissed pursuant to Iqbal, Twombly, and F.R.C.P. 9(b) and 12(b).
IT IS FURTHER ORDERED that the Trust is granted leave to amend the Complaint. The Trust will have 45 days from the date of entry of this Opinion, and for good cause shown, that date may be extended.
. The complete quote and citation from United Operating is:
For a debtor to preserve a claim, “the plan must expressly retain the right to pursue such actions.” Paramount, 172 B.R. at 333. The reservation must be "specific and unequivocal.” Harstad, 39 F.3d at 902; see also Ice Cream, 319 B.R. at 337-38 (holding that the plan's categorical reservation of "preference” claims was sufficiently specific; plan need not itemize individual transfers that may be pursued as preferential).
United Operating, 540 F.3d at 355.
. All the cases cited by the Trust will be discussed below.
. It is also worth mentioning that, in making the determination that the debtor lacked the standing to pursue these common and state law claims, the court entered a lengthy footnote examining the holding in United Operating, stating that the plan language gave creditors sufficient notice to be able to vote on the plan and the court's belief that United Operating ultimately led to a result which "unnecessarily prejudices the Debtors’ creditors and provides a needless windfall to the Defendants.” Id., n. 6.
. This case was recently upheld on appeal to the Fifth Circuit. Spicer v. Laguna Madre Oil & Gas, LLC (In re Texas Wyoming Drilling, Inc.), 647 F.3d 547 (5th Cir.2011). The Fifth Circuit upheld the Bankruptcy Court’s finding that the TWD plan contained specific and unequivocal retention language, holding that "where the plan and disclosure statement reserved the right to pursue the Avoidance Actions against pre-petition shareholders of TWD, the reorganized debtor specifically and unequivocally retained these claims under In re United Operating.” Id. at 552. The Fifth Circuit reached this conclusion while holding that the court “need not decide whether a debtor whose plan fails to identify any prospective defendants has standing to pursue post-conformation [sic] claims against subsequently-named defendants.” Id. Additionally, the Fifth Circuit held that a court may look at the disclosure statement to determine whether a post-confirmation debtor has standing. Id. at 551. The court found this to be consistent with the purpose of United Operating, "to put ‘creditors on notice of any claim [the debtor] wishes to pursue after confirmation’ and enable 'creditors to determine whether a proposed plan resolves matters satisfactorily before they vote to approve it.’ ” Id. at 550 (quoting United Operating, 540 F.3d at 355). The court also "observed that In re United Operating focused exclusively on the retention of claims ” as opposed to specific causes of actions against specific defendants. Id. at 552 (emphasis in original). Therefore, while *436the Fifth Circuit did not specifically define "specific and unequivocal,” this Court interprets the Fifth Circuit’s ruling to be in line with the findings presented herein.
. Additionally, this Court finds that following the holding in MPF would be overly burdensome in a case such as the present case. This case involves 122 debtors, billions of dollars in debt, and over 5,000 creditors. To require the specificity outlined in MPF would lead to an unwieldy plan of reorganization and unduly delay the plan confirmation process. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494513/ | MEMORANDUM OPINION
ALAN C. STOUT, Bankruptcy Judge.
This matter came before the Court for trial on January 10, 2012. Both the Defendant, Norman S. O’Nan (“O’Nan”) and the Plaintiff, Bank of Henderson (the “Bank”) appeared with counsel. The parties presented testimony and exhibits for the Court to consider. The Court enters the following Findings of Fact and Conclusions of Law pursuant to Fed. R. Bank. P. 7052.
FINDINGS OF FACT
At some point in time prior to 2008, O’Nan purchased a business enterprise being operated at the time in Henderson, Kentucky from a Mr. Anthony Dunn. The business was known as Shelby Tire & Wheel of Henderson (“Shelby Tire & Wheel”). The purchase included various tools and equipment that were located at the premises in Henderson, Kentucky. For whatever reason, O’Nan and Mr. Dunn never memorialized the agreement. Due to eventual failure of the business, O’Nan never completed making payments to Mr. Dunn for the purchase of the property.
In March 2008, O’Nan opened an account with the Bank in the name of Shelby Tire & Wheel of Henderson, LLC. Although the business name included the term “LLC,” the business entity was never incorporated either as a corporation or a limited liability company. The account was funded with a draw on a line of credit from the Bank in the amount of $14,700.00. John Phillips, a Senior Vice President at the Bank, characterized this account as a demand note. O’Nan and the Bank renewed this debt in 2009 and 2010.
As of July 31, 2009, the business bank account had a balance of $4.04 with a debt to the Bank in the amount of $14,191.29 plus interest. The balance on the account with the Bank did not change for the remainder of 2009, with O’Nan maintaining a $4.04 balance. On February 25, 2010, after O’Nan failed to make several monthly payments, Mr. Phillips visited O’Nan and requested that O’Nan execute several loan documents, including a Promissory Note and Commercial Guaranty Agreement. (Bank’s Exh. 1-4). The Promissory Note was for the sum of $11,722.01. Pursuant to the debt instruments, the Bank was given a security interest in “collateral,” defined to include, but not be limited to:
All inventory, equipment, accounts (including but not limited to all health-care-insurance receivables), chattel paper, instruments (including but not limited to all promissory notes), letter-of-credit rights, letters of credit, documents, deposit accounts, investment property, money, other rights to payment and performance, and general intangibles (including but not limited to all software and all payment intangibles); all oil, gas and other minerals before extraction; all oil, gas, other minerals and accounts constituting as extracted collateral; all fixtures; all timber to be cut; all attachments, accessions, accessories, fittings, increases, tools, parts, repairs, supplies, and commingled goods relating to the foregoing property, and all additions, replacements of and substitutions for all or any part of the foregoing property; all insurance refunds relating to the foregoing property; all good will relating to the foregoing property; all records and data and embedded software relating to the foregoing property, and all equipment, inventory and software to utilize, create, maintain and process any such records and data on electronic media; *442and all supporting obligations relating to the foregoing property; all whether now existing or hereafter arising, whether now owned or hereafter acquired or whether now or hereafter subject to any rights in the foregoing property; and all products and proceeds (including but not limited to all insurance payments) of or relating to the foregoing property
(Bank’s Exh. 3). No collateral is specifically mentioned or otherwise described in the documents. While Mr. Phillips testified that O’Nan represented to him at that time that he owned all the assets of Shelby Tire & Wheel, the Debtor disputed this testimony. O’Nan testified that he never told Mr. Phillips he owned the property, just like he never told Mr. Owens, the Bank officer he dealt with when he opened the account in 2008, that he did not own the collateral. O’Nan testified that he told Mr. Phillips that Mr. Dunn, the previous owner/operator of Shelby Tire & Wheel still owned the property in question. No evidence was presented that the Bank ever inspected the property or took any other actions to verify that the O’Nan owned any of the property associated with Shelby Tire & Wheel.1
The Bank did not advance any new funds upon the execution of these documents in 2010, but did agree to remove O’Nan’s wife as a guarantor on the original 2008 debt.2 The bank statement issued on February 26, 2010 does not show a deposit to the account for any new funds and in fact reflects an account balance of the same $4.04.
The business did not improve and O’Nan closed the business on May 10, 2010. At that time, he simply removed himself, along with a computer, from the premises. All the remaining equipment, tools, and inventory were left at the business premises, which O’Nan claimed was required by the terms of the Commercial Security Agreement. (Bank’s Exh. 3). O’Nan never informed the Bank he was shutting down the business. After the close of Shelby Tire & Wheel, the Bank tried to repossess the assets of the business, but was told that the property belonged to someone other than O’Nan. Even though O’Nan offered to surrender the computer, the one asset he owned outright, the Bank did not collect any funds or property through its repossession efforts.
On January 18, 2011, O’Nan filed a voluntary petition for bankruptcy relief under Chapter 7 of Title 11 of the Bankruptcy Code. On April 29, 2011, the Bank commenced this adversary proceeding against O’Nan seeking to except the loan balance from discharge pursuant to 11 U.S.C. § 523(a)(2) and (a)(6). The Bank contends that when O’Nan executed the documents in 2010, he pledged all the property of Shelby Tire & Wheel of Henderson, when in fact he owned none of the collateral pledged.
CONCLUSIONS OF LAW
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(I) and venue is proper under 28 U.S.C. § 1409(a). The parties have submitted to the jurisdiction of this Court.
Section 523 provides in pertinent part:
*443(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—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.
In order to except a debt from discharge under § 523(a)(2)(A), a creditor must prove the following elements: (1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of the loss. Rembert v. AT & T Universal Card Servs. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir.1998) (footnote omitted). See also In re Looney, 453 B.R. 252 (6th Cir. BAP 2011). The creditor bears the burden of proving by a preponderance of the evidence each of the above-mentioned elements in order to find a debt nondischargeable under this section. Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); In re Kennedy, 249 F.3d 576 (6th Cir.2001). Furthermore, exceptions to discharge are strictly construed against creditors. Rembert at 281. In this case, the Bank failed to meet its burden of proof in several separate areas. First, the Bank failed to present evidence that O’Nan made a false statement or material misrepresentation in 2008 when he opened the account or in 2010 when he executed the commercial loan documents. While Mr. Phillips testified that in 2010, O’Nan told him he owned all of Shelby Tire & Wheel’s assets, the Court does not find this testimony credible. Instead, the Court believes that O’Nan told Mr. Phillips the same thing he told Mr. Owens in 2008 that he did not own the assets of Shelby Tire & Wheel and that Mr. Dunn still owned the assets of the business. The Court cannot find from the evidence presented that O’Nan ever falsely represented to the Bank that he owned the assets of Shelby Tire & Wheel.
The Bank also failed to present evidence that it justifiably relied on any representation made by O’Nan. The Bank and O’Nan entered into their original transaction in 2008. It is at this time that the Bank advanced the funds to the Defendant. Not only did the Bank offer no evidence that O’Nan made a material misrepresentation at that time, it also offered absolutely no evidence that, at that time, it justifiably relied upon any allegedly false representations. Even assuming arguen-do that O’Nan made a false statement in 2010, which the Court does not believe, subsequent misrepresentations have no effect on dischargeability. The law is clear on this point. “[I]f the property was obtained prior to the making of any false representation, subsequent misrepresentation will have no effect upon the discharge of the debt ... The plaintiff must prove that the claimed fraud existed at the inception of the debt and that [he] relied upon it.” In re Gennaro, 12 B.R. 4 (Bankr.W.D.Pa.1981). See also In re Vissers, 21 B.R. 638, 640 (Bankr.E.D.Wis.1982) (“[t]he fraud necessary to make a debt nondis-chargeable must exist at the inception of the debt”); In re DeRosa, 20 B.R. 307, 312 (Bankr.S.D.N.Y.1982) (“the requisite fraudulent intent must be shown to have existed at the time the debtor obtained the money, property, services or extension, renewal or refinance of credit”); and In re Shepherd, 13 B.R. 367, 372 (Bankr.*444S.D.Ohio 1981) (“§ 523(a)(2)(A) requires that the false representation be the reason for the creditor’s extension of credit”).
The Bank, as an experienced lending institution, certainly had the knowledge and ability to secure protection for itself at the time the loan was made. It is not often that a bank would lend $14,700.00 to a person without receiving any type of security in return for the loan. However, it is not for the Court to intervene on behalf of the Bank and now offer it an escape from its own mistake. “[A plaintiff cannot conduct business without due care and then maintain that as a result of deception it extended credit”. Shepherd, supra, at 372. The discharge provided by 11 U.S.C. § 727 is to be granted to an honest debtor filing for protection under Chapter 7 unless the debtor is guilty of the conduct set forth in the § 523 exceptions. Here, the Bank has failed to meet its burden of showing O’Nan guilty of the conduct set forth in 11 U.S.C. § 523.
Turning to the 11 U.S.C. § 523(a)(6) count, for the discharge exception under § 523(a)(6) to apply, a debtor must: (1) “will or desire harm[;]” or (2) “believe injury is substantially certain to occur as a result of his behavior.” Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 465 n. 10 (6th Cir.1999). See also In re Musilli, 379 Fed.Appx. 494 (6th Cir.2010). Nondischargeability “takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998).
The Court is not exactly sure how the Bank is arguing that the debt should be excepted from discharge under this subsection of 11 U.S.C. § 523(a). From the Bank’s trial brief, it appears the Bank is arguing that O’Nan was obligated to notify the Bank before closing the business and obligated to inform the Bank of the location of the collateral. The Bank alleges O’Nan intentionally failed to make these notifications in order to keep the Bank from recovering the collateral.
The Court disagrees. While evidence was presented that O’Nan failed to notify the Bank of the business’s closing, no evidence was presented that this was done to intentionally harm the Bank. Indeed, considering the ownership status of the business’s assets, it would not seem to have mattered if O’Nan informed the Bank of the closing of the business. Furthermore, with respect to the location of the collateral, O’Nan did inform the Bank of the location for the only piece of collateral that he did own, the computer. In any event, the Court finds that the Bank failed to present sufficient evidence showing a “deliberate or intentional injury.” A judgment accompanying this Memorandum will be entered this same date.
JUDGMENT
Pursuant to the Court’s Memorandum entered this date and incorporated herein by reference, and the Court being otherwise sufficiently advised,
IT IS ORDERED that judgment be entered in favor of the Defendant and against the Plaintiff and the complaint filed by the Plaintiff is DISMISSED.
This is a final and appealable order and there is no just reason for delay.
. Evidence was presented that O’Nan did claim an interest in this property on his 2010 tax returns as he claimed a depreciation deduction for numerous pieces of Shelby Tire & Wheel assets. (Bank’s Exh. 6). However, nothing of this nature was presented to the Bank at the time of the loan transactions.
. Neither the Bank nor O’Nan introduced the 2008 loan documents reflecting the terms and conditions of the original debt. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494514/ | OPINION REGARDING LAKE TRUST CREDIT UNION’S MOTION FOR RELIEF FROM AUTOMATIC STAY TO ALLOW SETOFF PURSUANT TO 11 U.S.C. § 553(a)
MARCI B. McIVOR, Bankruptcy Judge.
On September 8, 2011, Lake Trust Credit Union (f/k/a Detroit Edison Credit Union) filed a Motion for Relief from the Automatic Stay to Allow Setoff Pursuant to 11 U.S.C. § 553(a). For the reasons set forth below, this Court denies the Credit Union’s Motion subject to the Credit Union’s right to file an affidavit regarding the parties’ net contributions to the Survivor-ship Account.
I.
FACTUAL BACKGROUND
Kathryn Houston-Nedd opened an account at Lake Trust Credit Union sometime prior to or in June 1993. The form used to open the account is titled “Surviv-orship Account”. Ms. Houston-Nedd states in her Affidavit that she opened the “Survivorship Account” with the intention that her son, Gregory A. Houston, would receive any funds remaining in this account upon her death. The top portion of the form is signed only by Kathryn Houston-Nedd. The bottom portion of the Survivorship Account form is titled “Application — Multiple Name Share Deposit Account With Survivorship”. It is signed by *455Kathryn Houston-Nedd as the “member” and by Gregory Houston as the “joint member.”
Below the signature lines, the Application contains the following statements:
The Aforementioned are hereby made parties to this share-deposit account and on proper withdrawal demand, the Credit Union will pay all sums due on account of payment on share-deposits and any accumulations or benefits added thereof, less any setoff allowed by law to any one or more of said parties. The survivor or survivors from time to time of the parties shall be the only persons who shall be entitled to demand payments of balances in the account. The interest of any of the parties in this account, any requirements of this signature incident to a withdrawal demand, his status as a party to this share-deposit account contract and his right to make withdrawals as aforesaid cease upon his death if one or more of the other parties survives such death.
Furthermore, the master member, referenced to as “Member”, has the right to add, delete or otherwise change, at any time, the names of the persons designated as joint members, without notification or consent of said joint members.
The Survivorship Account application signed by Ms. Houston-Nedd was not dated. However, the back of the document indicates that the information was “Rev. To Change Joint” and verified by the Credit Union on June 24, 1993 and subsequently approved in July of 1993.
In her sworn Affidavit, Kathryn Houston-Nedd states that she is the only person who has ever placed any monies in this account or who has withdrawn monies from this account. She further states that Gregory A. Houston neither deposited nor withdrew any amounts from this account. In addition, Gregory A. Houston’s name never appeared on any of the account statements for the Survivorship Account and all the statements for the Survivorship Account were addressed and mailed to Kathryn Houston-Nedd only.
On November 29, 1999, Gregory Houston applied to become a Member of the Credit Union. He was assigned an account number ending in the digits 5228. Gregory Houston appears to have established both a checking account and a savings account with the Credit Union. On November 19, 2000, Gregory Houston applied for a Visa Classic card, seeking a credit limit of $1,500. Subsequently, Gregory Houston was approved for this Visa card. On September 22, 2005, Gregory Houston applied for a Platinum Preferred Visa through the Credit Union, seeking a credit limit of $50,000. The Credit Union approved Gregory Houston’s Platinum Preferred Visa application on September 30, 2005. The Visa contracts between Gregory Houston and the Credit Union state, in part, “Your account is secured by all shares you have in any individual or joint account with the Credit Union.”
On August 2, 2011, Gregory Houston (“Debtor”) filed a Chapter 7 bankruptcy. At the time of his filing, Debtor had an outstanding obligation to the Credit Union for the two Visa Accounts in the amount of $42,087.67.
On September 8, 2011, the Credit Union filed a Motion for Relief from Stay to Allow Setoff Pursuant to ' 11 U.S.C. § 553(a). The Credit Union seeks to set-off the amount it is owed by Debtor against the funds held in the Survivorship Account established by Kathryn Houston-Nedd. The Credit Union argues that the statutes governing credit unions give it the right to effectuate such a set-off. The Credit Union relies on Mich. Comp. Laws *456490.64 (which provides a right to set-off against multiple party accounts); and Mich. Comp. Laws 490.361 (which provides a lien against accounts held by members of the credit union). Specifically, the Credit Union argues: (1) the Credit Union has a lien on the Survivorship Account and may enforce its lien by setting-off the funds in that account against the debt owed to it by Debtor pursuant to Mich. Comp. Laws § 490.361(4); and (2) the Credit Union is entitled to set-off against the Survivorship Account because (a) the presumptions set forth in Mich. Comp. Laws § 490.52 do not apply when the Credit Union is the creditor seeking payment of a debt and (b) Mich. Comp. Laws § 490.64 exempts the Credit Union from the presumptions regarding ownership.
II.
ANALYSIS
Section 553 of the Bankruptcy Code preserves the right to set-off as a widely recognized common law right that “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). Section 553 provides, in part:
Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debt- or 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 this case[.]
In other words, the right to set-off is preserved where: (1) there are mutual, pre-petition obligations owing between the debtor and the creditor; and (2) a right to set-off the obligations exists under non-bankruptcy law. In re Holder, 182 B.R. 770, 775 (Bankr.M.D.Tenn.1995). “State law governs the substance of a set off claim under § 553.” In re New Haven Foundry, Inc., 285 B.R. 646, 648 (Bankr.E.D.Mich.2002) (citation omitted).
Because the right to set-off is based in state law, this Court must discuss the state statutes relating to set-off and credit unions. Mich. Comp. Laws § 490.51 defines the types of accounts which may be held at a credit union. Mich. Comp. Laws § 490.51 states, in part:
490.51. Definitions
Sec. 1. As used in this act:
(a) “Account” means a contract of deposit of funds between depositors and credit unions, and includes deposit accounts, members or share accounts and other like arrangements whether or not they may be characterized as refundable capital investments.
(d) “Multiple-party account” means' an account in the names of 2 or more persons, 1 or more or all of whom may make withdrawals, or an account in the name of 1 or more parties as trustee for 1 or more beneficiaries even though no mention is made of a right of withdrawal by a beneficiary.... At least 1 party to a multiple-party account shall be a member of the credit union in which the account is established.
Based on the definitions of “account” and “multiple-party account”, it is clear that a multiple-party account encompasses accounts in which multiple members are parties to the accounts, accounts in which there are multiple parties but only one party is a member, deposit accounts, sur-vivorship accounts, and share accounts.
*457A. Mich. Comp. Laws § Ji.90.S61
The Credit Union’s first argument is that it has a lien on the Survivorship Account opened by Kathryn Houston-Nedd and may enforce its lien by setting off the funds in that account against the debt owed to it by Debtor. Mich. Comp. Laws § 490.361(4) provides, in part,
490.361. Composition of capital; charging of entrance fee; use of secondary capital other than capital stock; liability of member for acts, debts, or obligations of credit union; lien of credit union on shares or accounts of members
(4) Except as provided in this subsection or where prohibited by applicable state or federal law or otherwise agreed by contract, a domestic credit union has a lien on any share of a member, or any deposit account from which a member may withdraw for his or her own benefit without the consent of another person, for any obligation owed to the domestic credit union by that member or for any loan cosigned or guaranteed by that member ... A domestic credit union may refuse to allow a withdrawal from any account on which it has a lien if the member is delinquent in any outstanding obligation to the domestic credit union at the time of the withdrawal.
Thus, by its express terms, Mich. Comp. Laws § 490.361(4) provides a credit union with a lien under two scenarios, both of which apply when a member is indebted to the credit union. The statute provides a credit union with a lien (1) “on any share of a member” or (2) “any deposit account from which a member may withdraw for his or her own benefit without consent of another person.”
Debtor was not a member of the Credit Union at the time the Survivorship Account was formed. Instead, pursuant to Mich. Comp. Laws § 490.51, Debtor was a “party” to a multiple-party account. Until Debtor became a member, the Credit Union had a lien only against Kathryn Houston-Nedd. However, once Debtor became a member of the Credit Union, the statute provides that the Credit Union has a lien on “any deposit account from which a member may withdraw for his or her own benefit without the consent of another person ...” Mich. Comp. Laws § 490.361(4). Assuming Debtor had an ability to withdraw funds from the Survivorship Account,1 the Credit Union’s lien attached to the Survivorship Account once Debtor became a member of the Credit Union.
While this Court finds that the Credit Union has a lien against the Surviv-orship Account, that finding does not automatically lead to the conclusion that the Credit Union has a right to set-off all of the funds in the Survivorship Account. The only enforcement right provided to the Credit Union in Mich. Comp. Laws § 490.361(4) is the right to “refuse to allow a withdrawal from any account on which it has a lien if the member is delinquent in any outstanding obligation to the domestic credit union at the time of the withdrawal.” Mich. Comp. Laws § 490.361(4). In this case, the Credit Union is not seeking to block the withdrawal of funds from this account; it is seeking to withdraw the funds itself. This statute does not address any rights of the Credit Union to make such a withdrawal.
*458In order to determine what rights a credit union might have to enforce its lien, the Court must look at the nature of the account against which a credit union seeks to enforce its lien. In this case, the account against which the Credit Union seeks to enforce the lien is a multiple-party deposit account in which Kathryn Houston-Nedd is the member and Debtor is a party to the account. This type of account is a multiple-party account governed by Mich. Comp. Laws § 490.51. Thus, this Court must look to the statutes which govern multiple-party accounts to determine the respective rights of the Credit Union and the parties to the multiple-party account.
This Court’s conclusion, that the existence of a lien is insufficient to permit a credit union to seize the entire balance in a multiple-party account, is contrary to a bench opinion issued in In re Rohde, Case No. 09-48829 (Bankr.E.D.Mich.) (Rhodes, J.).2 In the Rohde case, the debtor was a member of the credit union and a party to a multiple-party account. The credit union sought to enforce its lien against the multiple-party account to satisfy an obligation of the debtor to the credit union, even though the evidence demonstrated that the funds in the account did not belong to the debtor. The Rohde court ruled in favor of the credit union, holding that the existence of the lien was sufficient to require a turnover of funds to the credit union.
This Court disagrees with that conclusion for the following reason. The Credit Union’s lien remedy is found in a subsection of a statute titled “Composition of capital”3. The clear purpose of giving a credit union a lien right is to protect the capital of the credit union and to prevent a credit union member from withdrawing funds when the member has an obligation to the credit union. The question of what law governs when a credit union seeks to set-off an obligation owed by a member against funds in a multiple-party account is not answered by Mich. Comp. Laws § 490.361. To determine the respective rights of the parties to a multiple-party account and a credit union, the Court must rely on the statutes governing multiple-party accounts, those being Mich. Comp. Laws §§ 490.53-490.57.
B. Mich. Comp. Laws §§ 4-90.51 to 490.64
The definition of multiple-party account is set forth in Mich. Comp. Laws § 490.51, supra. The following section, Mich. Comp. Laws § 490.52, governs the respective rights of members and credit unions. Mich. Comp. Laws § 490.52 states:
490.52. Presumptions; liability of credit unions
Sec. 2. The presumptions created by sections 3 to 7[FN1] concerning beneficial ownership as between parties, or as between parties and beneficiaries, of multiple-party accounts are relevant only to controversies between these persons or their creditors and other successors, and shall have no bearing on the rights of withdrawal of such persons as determined by the terms of account contracts. The provisions of sections 11 to 16 govern the liability of credit unions *459who make payments pursuant thereto, and their set-off rights.4
[FN1] M.C.L.A. §§ 490.53 to 490.57.
Mich. Comp. Laws § 490.52 addresses three subjects: (1) presumptions regarding ownership of multiple-party accounts; (2) credit unions’ liability to their members; and (3) credit unions’ set-off rights.
Mich. Comp. Laws §§ 490.53 to 490.57 (“sections 3 to 7”) set forth the presumptions of ownership which govern multiple-party accounts. The relevant statutes state:
490.53. Presumptions; demand accounts, ownership in proportion to net contributions
Sec. 3. During the lifetime of all parties, a multiple-party account which provides that sums on deposit or in shares may be paid on the demand of either of 2 or more parties is presumed to belong to the parties in proportion to the net contributions by each to the sums on deposit.
490.54. Presumptions; ownership in equal undivided interests
Sec. 4. In the absence of satisfactory proof of the net contributions, those who are parties from time to time shall be presumed to own a multiple-party account in equal undivided interests.
The provisions of Mich. Comp. Laws §§ 490.61 to 490.64 (“sections 11 to 16”) govern the liability of credit unions and the right of credit unions to set-off a liability owed to them. The section relevant to the dispute between the parties in the instant case is Mich. Comp. Laws § 490.64, which states:
490.64. Set-off
Sec. 14. Without qualifying any other statutory right to set-off or lien and subject to any contractual provision, when a party to a multiple-party account is indebted to a credit union, the credit union has a right to set-off against the entire amount of the account.
The Credit Union argues that it is entitled to set-off the amount owed to it by the Debtor against the Survivorship Account for two reasons. First, the Credit Union argues that the presumptions regarding the ownership of an account, as set forth in Mich. Comp. Laws § 490.52, do not apply when the Credit Union is the creditor seeking payment of a debt because Mich. Comp. Laws § 490.52 references controversies “between parties, or as between parties and beneficiaries, of multiple-party accounts ...”
The Court disagrees with the Credit Union’s interpretation of Mich. Comp. Laws § 490.52. “It is a fundamental rule of statutory construction that where the language of a statute is clear and unambiguous, no judicial interpretation is warranted.” Victorson v. Dept. of Treasury, 439 Mich. 131, 482 N.W.2d 685, 687-688 (1992). However, judicial construction is permitted when the language of a statute is susceptible to more than one interpretation. Id. at 688. When the wording of a statute is ambiguous, courts must seek to discern the intent of the legislature in light of the purpose sought to be accomplished. Dept. of Treasury v. Comerica Bank, 201 Mich.App. 318, 506 N.W.2d 283, 285 (1993) citing Energetics, Ltd. v. Whitmill, 442 Mich. 38, 497 N.W.2d 497 (1993).
*460As already noted, Mich. Comp. Laws § 490.52 is not a model of clarity. In titling the statute “Presumptions; liability of credit unions,” this Court assumes that the legislature intended to set forth the presumptions regarding ownership of multiple-party accounts, and the liability (or lack thereof) of credit unions to their members. This Court will discuss the relevant state statutes with that intention in mind.
The first sentence of Mich. Comp. Laws § 490.52 states, in part:
[t]he presumptions created by sections 3 to 7 ... concerning beneficial ownership as between parties ... of multiple-party accounts are relevant only to controversies between these persons or their creditors ... and shall have no bearing on the rights of withdrawal of such persons as determined by the terms of account contracts, (emphasis added).
The statute distinguishes between when the presumptions of ownership apply and when they do not apply. The first clause of the sentence provides that the presumptions apply to controversies between parties or between parties and creditors. The last clause of the sentence provides that the presumptions set forth in Mich. Comp. Laws §§ 490.53-490.57 do not apply to prevent a party from withdrawing funds. In other words, if the account contract allows a party to withdraw 100% of the funds in an account, the party may withdraw the funds without the credit union having to ascertain the net contributions to the accounts. In the instant case, the first clause of Mich. Comp. Laws § 490.52 applies. The Credit Union is a creditor, and the matter before the Court is a controversy between a creditor and the parties to a multiple-party account regarding ownership of the account. Accordingly, this Court finds that the presumptions set forth in Mich. Comp. Laws § 490.52 apply to the Credit Union.
The Credit Union’s second argument is that the language of Mich. Comp. Laws § 490.64 exempts the Credit Union from the presumptions regarding ownership. The Credit Union argues that it has the right to set-off the entire balance in a multiple-party account against an obligation owed by any one of the parties to the account, and the parties have no right to offer proof of ownership as a defense to the set-off. The Credit Union relies on the following language to support its position: “the credit union has a right to set-off against the entire amount of the account.” Mich. Comp. Laws § 490.64.
Again, this Court disagrees with the conclusion drawn by the Credit Union. The language found in Mich. Comp. Laws § 490.64 merely codifies the Credit Union’s right of set-off. The Credit Union has the right to set-off the entire balance in the multiple-party account. However, that right is then subject to the parties’ rights to prove actual ownership of the funds in the account, based on their net contributions to the account.
This Court’s conclusion, that the Credit Union’s set-off rights against a multiple-party account are subject to the presumption of ownership set forth in Mich. Comp. Laws §§ 490.353-57, is contrary to a bench opinion and a published opinion from this district. See In re Pamela M. Crawford, Case No. 09-58228 (Bankr.E.D.Mich.) (Shapero, J.); In re Hess, 456 B.R. 309 (Bankr.E.D.Mich.2011).
In the Crawford case, the debtor was the joint owner on two accounts with her sons. The debtor argued that each account belonged to her sons and that her sons were the only ones to deposit or withdraw any money from the accounts. The credit union argued that it was entitled to set-off the funds in the subject *461account under Mich. Comp. Laws § 490.64. The debtor raised the presumptions (i.e. ownership presumed to belong to parties in proportion to their net contributions) as a defense to the credit union’s set-off rights. The Crawford court concluded that the presumptions did not apply. Crawford, pp. 5-6.
This Court disagrees with the Crawford decision. The Crawford court seems to hold that the presumptions only apply if the credit union is claiming to have an ownership interest in the account and if there is a dispute about the size of that ownership interest. This Court cannot conceive of such a controversy. As discussed in detail above, the only logical way to interpret Mich. Comp. Laws § 490.52 is to hold that the presumption of ownership applies to controversies between parties to a multiple-party account or to controversies between a party to a multiple-party account and a creditor seeking to attach a party’s interest in the account.
In addition, the Crawford case found that “M.C.L. § 490.64, which by reason of being specific, governs the issue of set-off ... and precludes [the court] from engaging in a factual inquiry as to whose monies went into the accounts in question ...” Crawford, pp. 5-6. This Court disagrees with that conclusion, finding that Mich. Comp. Laws § 490.64 is no more specific than the sections that concern the presumptions, Mich. Comp. Laws §§ 490.53 to 490.57. In addition, this Court finds that Mich. Comp. Laws § 490.64 merely codifies a credit union’s right to set-off the entire amount in the account; it does not grant the credit union any extra privileges with respect to set-off. In the case of a single party account, there would be no question that a credit union would be entitled to the entire amount because the presumptions only apply to multiple-party accounts. With respect to multiple-party accounts, the presumptions do apply, and set-off is limited to a party’s net contributions to the account.
The other decision which concludes that a party to a multiple-party account is not entitled to assert the presumptions of ownership as a defense to a set-off is In re Hess, 456 B.R. 309 (Bankr.E.D.Mich.2011). In Hess, Mary Hess (the debtor’s mother), a member of credit union, added the debt- or and his sister to her “account”. At the time, Mary Hess had three separate accounts: a savings account, a checking account, and a money market account. Based on the documents presented to the court, the Hess court found that the debtor and his sister were added as parties to their mother’s checking account only. The Hess court found that the checking account was a multiple-party account (those parties being the debtor, the debtor’s sister and the debtor’s mother) and then held that the credit union could set-off sums owing to the credit union by the debtor against that one account. The Hess court did not allow set-off against the debtor’s mother’s savings account or money market account on the grounds that those were not multiple-party accounts. The Hess court stated:
In light of the Court’s determination that the only multiple-party account
established under the Application was limited to the Debtor’s mother’s checking account, it is not necessary for the Court to address the Debtor’s second argument about the presumptions that exist under Mich. Comp. Laws § 490.52 to § 490.58.
In re Hess, 456 B.R. at 318.
The Hess court provides no explanation for its conclusion that it did not need to consider the presumptions set forth in Mich. Comp. Laws §§ 490.52 to 490.57 and *462this Court declines to follow the Hess court’s ruling.
This Court’s conclusion that a credit union’s set-off rights are subject to the parties’ right to establish ownership of the account, is supported by several cases from other jurisdictions. See, In re Cullen, 329 B.R. 52, 54 (Bankr.N.D.Iowa, 2005) (Under Iowa law, “the presumption that joint tenants hold the property in equal shares is rebuttable by clear and convincing evidence”); In re Kleinsmith, 361 B.R. 504, 508 (Bankr.S.D.Iowa, 2006) (Considering Iowa law, the court finds that debtor’s daughter’s joint account is not liable for the debts of debtor to the credit union and, therefore, the credit union may not use set-off to reach the funds in the joint account.); In re Davis, 29 B.R. 652, 654 (Bankr.W.D.N.Y.1983)(credit union’s right of set-off against joint account is subject to party’s right to rebut presumption that entire account is owned by party owing debt to credit union).
This Court acknowledges that none of the aforementioned decisions turned on the interpretation of a state statute dealing specifically with credit unions. However, these cases provide authority for the general proposition that a credit union’s right of set-off against a multiple-party account is subject to a party to the account’s right to establish ownership of the funds in the account.
C. The Credit Union’s contractual right of set-off is limited by state law.
In addition to the remedies provided by statute, the Credit Union has contractual remedies against Debtor based on the documents signed by Debtor. Debtor signed four separate applications. On or about June 24, 1993, Debtor signed an application titled “Application — Multiple Name Share Deposit Account with Survivorship.” The Application stated in very small print:
The Aforementioned are hereby made parties to this share-deposit account and on proper withdrawal demand, the Credit Union will pay all sums due on account of payment on share-deposits and any accumulations or benefits addressed thereof, less any setoff allowed by law to any one or more of said parties ...
The Application for the multiple-party account does provide the Credit Union with a right of set-off, although the set-off language in the Application appears to be limited to preventing a party from withdrawing funds if that party owes a debt to the Credit Union. Even if the Application provides a broad right of set-off, that right of set-off is allowed only to the extent “allowed by law.” Since Michigan law provides that the Credit Union’s right of set-off is subject to the parties’ rights to establish ownership of the account, the language in the Application does not permit an automatic set-off of one hundred percent of the funds in the Survivorship Account.
Debtor also signed an Application for Membership on November 29, 1999. The Application for Membership does not appear to have any language with respect to the Credit Union’s set-off rights.
In addition, Debtor signed an Application when he applied for a Classic Visa Card on November 19, 2000 and again when he applied for a Platinum Preferred Visa on September 30, 2005. The Visa application states ‘Tour account is secured by all shares you have in any individual or joint account.” When Debtor became a member on November 29, 1999, he was assigned an account in which he unquestionably holds shares. However, it is unclear whether Debtor has any shares in the Survivorship Account opened by Kathryn Houston-Nedd. Debtor was not a *463member at the time the Survivorship Account was established and thus had no membership interest or “shares” in that account at that time. The Credit Union has not explained how the language in Debtor’s Visa application would give it the right to apply funds in the Survivorship Account to satisfy a debt owed by Debtor. In the absence of any explanation, the Court finds that the Credit Union has no contractual right to set-off the funds in the Survivorship Account to satisfy an obligation owed by Debtor to the Credit Union.
While this Court’s conclusion that the Credit Union’s set-off rights are subject to the parties rights to establish ownership of a multiple-party account is based on a careful reading of the relevant statutes, there are also strong policy reasons supporting this Court’s conclusions. By statute, creditors’ rights to attach the funds in a joint bank account are subject to proof of ownership of the funds in the account. Mich. Comp. Laws 487.718.5 See also, Danielson v. Lazoski, 209 Mich.App. 623, 531 N.W.2d 799, 802 (1995) (presumption that holders of joint accounts share equal ownership could be rebutted to show the actual interest in the funds held in the account); Comerica Bank, 201 Mich.App. 318, 506 N.W.2d 283 (Department of Treasury could levy upon the entire amount of account held jointly by a delinquent taxpayer and an innocent third party subject to third party’s right to prove ownership of the account). While the instant case is of a slightly different nature than the bank cases, because the Credit Union itself is the creditor, this Court can discern no reason why a party to a multiple-party credit union account would not be entitled to the same protections as a joint owner of a joint bank account. There may be a context in which a credit union is entitled to special protections, but when the credit union is collecting on credit card debt, the credit union is a creditor and credit union members are entitled to the same protections as parties to a joint bank account. See, Cullen, 329 B.R. 52; Kleinsmith, 361 B.R. 504; Davis, 29 B.R. 652.
In this case, Debtor owes the Credit Union $42,087.67 on Visa cards issued to him by the Credit Union. The Credit Union has a lien on Debtor’s member account and may set-off against the entire amount of that account, assuming that Debtor’s member account (ending in 5228) is a single party account. With respect to the multiple-party account, the Credit Union is only entitled to an amount proportionate to the net contributions of the Debtor. Kathryn Houston-Nedd has affirmed in an affidavit that all of the funds in the account were her funds. The Credit Union until January 6, 2012 to file a responsive affidavit. If a responsive affidavit is filed, this Court will schedule an evidentiary hearing. If no such affidavit is filed, this Court will find that the amounts in the subject account are attributable entirely to the contributions made by Kathryn Houston-Nedd, and, thus, not subject to set-off by the Credit Union.
III.
CONCLUSION
In conclusion, this Court finds that the Credit Union’s right to set-off the debt owed to it by Debtor against funds in the Survivorship Account is subject to the presumptions of ownership set forth in *464Mich. Comp. Laws § 490.53. The Credit Union has until January 6, 2012 to file an affidavit to rebut the affidavit of Kathryn Houston-Nedd as to the parties’ net contributions to the Survivorship Account. If a responsive affidavit is filed, this Court will schedule an evidentiary hearing on this matter. If no such affidavit is filed, this Court will find that the amounts in the Survivorship Account are attributable entirely to the contributions made by Kathryn Houston-Nedd, and, thus, not subject to set-off by the Credit Union. Accordingly, this Court denies the Lake Trust Credit Union’s Motion for Relief from Stay to Allow Set-off Pursuant to 11 U.S.C. § 553 subject to the Credit Union’s Right to File an Affidavit Regarding the Parties’ Net Contributions to the Surviv-orship Account.
. Kathryn Houston-Nedd’s affidavit states that Debtor did not withdraw funds from the Survivorship Account. The affidavit does not say that Debtor could not withdraw funds. The Credit Union has presented no conclusive evidence that Debtor had a right of withdrawal although the Application appears to suggest that Debtor had that right.
. Bench opinions have no precedential or binding effect. However, the Credit Union's brief cited scant authority and this Court finds it necessary to address the cited authority.
. The full title of Mich. Comp. Laws § 490.361 reads as follows:
490.361. Composition of capital; charging of entrance fee; use of secondary capital other than capital stock; liability of member for acts, debts, or obligations of credit union; lien of credit union on shares or accounts of members
. This statute is poorly drafted. The language, "sections 3 to 7”, refers to Mich. Comp. Laws §§ 490.53 to 490.57, which is confirmed in a footnote found within the statute. It appears that the language “sections 11 to 16" refers to Mich. Comp. Laws §§ 490.51 to 490.64, even though the statute does not explicitly define those sections, as it did with the previous sections. In addition, section 15 was repealed and section 16 appears never to have existed.
. 487.718. Deposits; rights of creditors, claims against deceased owner’s estate
Sec. 8. Deposits in a statutory joint account shall be subject to the rights of creditors of the persons designated in the statutory joint account contract as owners of the funds to the extent of the ownership, ... | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488323/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA
Case Number: DA 22-0445
DA 22-0445
_________________
N.B., K.M.B., K.R.B., and K.R.B.,
Plaintiffs and Appellants,
v.
MONTANA DEPARTMENT OF PUBLIC ORDER
HEALTH AND HUMAN SERVICES, a Montana
State Agency, VALLEY COUNTY, a Montana
county, CYNDI BAILLARGEON, individually
and as a DPHHS employee, and DOES 1-X,
Defendants and Appellees.
_________________
On October 19, 2022, the mediator for this appeal filed a report stating that the
case has settled. Nothing further has been filed.
Therefore, and pursuant to M. R. App. P. 7(7)(b),
IT IS ORDERED that this appeal is DISMISSED.
Electronically signed by:
Mike McGrath
Chief Justice, Montana Supreme Court
November 21 2022 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488324/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 21-0580
No. DA 21-0580
IN THE MATTER OF:
C.M.,
A Youth.
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 January 27, 2023, within which to prepare, file,
and serve Appellant’s opening brief on appeal.
Electronically signed by:
Mike McGrath
Chief Justice, Montana Supreme Court
November 21 2022 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488325/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0395
INGE and MARK CAHILL, RANDY
and KERIN GAYNER, WILLIAM
and NANNETTE REED, and Cause No. DA-22-0395
IRVING ERICKSON,
ORDER
Petitioners and Appellants,
v.
CITY OF COLUMBIA FALLS,
COLUMBIA FALLS BOARD OF
ADJUSTMENT,
Respondents and Appellees,
CNS PROPERTY DEVELOPMENT,
LLC, a Montana Limited Liability
Company,
Respondent.
Upon consideration of Appellees’ motion for extension to file the response
brief, and good cause appearing,
Appellees are granted an extension of time until December 30, 2022, to
prepare, file, and serve the response brief.
Order Granting Appellee’s Second Unopposed Motion
Electronically signed by:
Mike McGrath
Chief Justice, Montana Supreme Court
November 21 2022 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488318/ | Case: 22-50394 Document: 00516551817 Page: 1 Date Filed: 11/21/2022
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
No. 22-50394
FILED
November 21, 2022
Summary Calendar
Lyle W. Cayce
Clerk
United States of America,
Plaintiff—Appellee,
versus
Samuel Beltran-Castillo,
Defendant—Appellant.
Appeal from the United States District Court
for the Western District of Texas
USDC No. 4:21-CR-1063-1
Before Wiener, Elrod, and Engelhardt, Circuit Judges.
Per Curiam:*
Samuel Beltran-Castillo appeals his conviction and sentence for illegal
reentry into the United States under 8 U.S.C. § 1326(a) and (b)(2). For the
first time on appeal, Beltran-Castillo contends that the recidivism
enhancement in § 1326(b) is unconstitutional because it permits a sentence
*
Pursuant to 5th Circuit Rule 47.5, the court has determined that this
opinion should not be published and is not precedent except under the limited
circumstances set forth in 5th Circuit Rule 47.5.4.
Case: 22-50394 Document: 00516551817 Page: 2 Date Filed: 11/21/2022
No. 22-50394
above the otherwise-applicable statutory maximum established by § 1326(a),
based on facts that are neither alleged in the indictment nor found by a jury
beyond a reasonable doubt. While Beltran-Castillo acknowledges this
argument is foreclosed by Almendarez-Torres v. United States, 523 U.S. 224
(1998), he nevertheless seeks to preserve it for possible Supreme Court
review. In addition, Beltran-Castillo has filed an unopposed motion for
summary disposition.
This court has held that subsequent Supreme Court decisions such as
Alleyne v. United States, 570 U.S. 99 (2013), and Apprendi v. New Jersey, 530
U.S. 466 (2000), did not overrule Almendarez-Torres. See United States v.
Pervis, 937 F.3d 546, 553-54 (5th Cir. 2019). Thus, Beltran-Castillo is correct
that his argument is foreclosed, and summary disposition is appropriate. See
Groendyke Transp., Inc. v. Davis, 406 F.2d 1158, 1162 (5th Cir. 1969).
Beltran-Castillo’s motion is GRANTED, and the district court’s
judgment is AFFIRMED.
2 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488327/ | RECOMMENDED FOR PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 22a0251p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
┐
UNITED STATES OF AMERICA,
│
Plaintiff-Appellee, │
> No. 21-3881
│
v. │
│
SETH T. WINDHAM, │
Defendant-Appellant. │
┘
Appeal from the United States District Court for the Northern District of Ohio at Akron.
No. 5:21-cr-00160-1—James S. Gwin, District Judge.
Decided and Filed: November 21, 2022
Before: COLE, CLAY, and MATHIS, Circuit Judges.
_________________
COUNSEL
ON BRIEF: Agnes Trujillo, TRUJILLO & ASSOCIATES, PLLC, Strawberry Plains,
Tennessee, for Appellant. Damoun Delaviz, UNITED STATES ATTORNEY’S OFFICE,
Akron, Ohio, for Appellee.
_________________
OPINION
_________________
CLAY, Circuit Judge. In May 2021, Defendant Seth Windham pleaded guilty to federal
kidnapping in violation of 18 U.S.C. § 1201. Windham now argues on appeal that no factual
basis supported his guilty plea, and that he was unaware of the nature of the charges against him.
For the reasons set forth below, the Court AFFIRMS Windham’s conviction based on the
district court’s acceptance of Windham’s guilty plea.
No. 21-3881 United States v. Windham Page 2
I. BACKGROUND
In March 2021, a grand jury charged Windham with one count of kidnapping in violation
of 18 U.S.C. § 1201(a)(1) and 18 U.S.C. § 2. The grand jury charged that Windham “did
willfully and unlawfully . . . kidnap, abduct, and carry away a person” referred to as M.S., and
held M.S. “for ransom and reward and otherwise, and did use a means, facilities, and
instrumentalities of interstate and foreign commerce, namely, a cellular telephone and a motor
vehicle, in committing and in furtherance of such offense . . . .”
Windham’s attorney told the district court at the arraignment that he had gone over the
indictment “word by word” with Windham. The court then advised Windham that in the first
and only count, he was “charged with kidnapping and with aiding and abetting kidnapping” in
violation of the federal kidnapping statute, 18 U.S.C. § 1201(a)(1). In a pro se motion, Windham
later wrote that he had “been indicted [on] one count of ‘kidnapping[,]’” confirming that he
understood that he had been charged with a single count.
Despite initially pleading not guilty, Windham pleaded guilty in May of 2021 pursuant to
a negotiated plea agreement. Windham’s plea agreement provided that he pleaded guilty to a
single count of kidnapping. The ninth paragraph of that agreement listed the elements of the
offense to which he pleaded guilty, listing the elements of both 18 U.S.C. § 1201(a)(1) and of
aiding and abetting under 18 U.S.C. § 2. The plea agreement also included a written factual
basis for the crime. By signing that section, Windham stipulated that he willfully and unlawfully
kidnapped M.S. and held him “for ransom and reward and otherwise . . . .” According to the
plea, during the kidnapping, Windham and his accomplices “demanded of M.S. where the money
was and demanded that M.S. return the money.” In addition, Windham admitted that he and his
accomplices held M.S. at gunpoint for an extended period of time. Importantly, Windham also
confirmed that he used a cell phone and a motor vehicle in furtherance of that offense.
At his change of plea hearing, the district court asked Windham about the plea
agreement. Windham confirmed to the court that he: (1) signed the plea agreement; (2) initialed
each page; and (3) read and reviewed each paragraph with his attorney. Subsequently, the court
told Windham, “in Count 1, you are charged with kidnapping in violation, and with aiding and
No. 21-3881 United States v. Windham Page 3
abetting the same, in violation of 18 United States Code § 1201(a)(1) and § 2.” Shortly
thereafter, Windham pleaded guilty. Several months later, the court sentenced Windham to 120
months in prison.
II. DISCUSSION
A. Factual Basis for the Guilty Plea
1. Standard of Review
When, as in this case, a defendant pleads guilty before a district court and fails to
challenge the factual sufficiency of that plea, the Court reviews the record for plain error. See
United States v. Mobley, 618 F.3d 539, 544 (6th Cir. 2010); United States v. Berryhill, 587 F.
App’x 310, 312 (6th Cir. 2014); United States v. Taylor, 627 F.3d 1012, 1017 (6th Cir. 2010).
“To show plain error, a defendant must show (1) error (2) that was obvious or clear, (3) that
affected defendant’s substantial rights and (4) that affected the fairness, integrity, or public
reputation of the judicial proceedings.” United States v. Wallace, 597 F.3d 794, 802 (6th Cir.
2010) (citing United States v. Vonner, 516 F.3d 382, 386 (6th Cir. 2008)).
This appeal also involves questions of statutory interpretation and constitutional law.
The Court reviews such questions de novo. United States v. Young, 533 F.3d 453, 460 (6th Cir.
2008); First Choice Chiropractic, LLC v. DeWine, 969 F.3d 675, 681 (6th Cir. 2020).
2. Analysis
Federal Rule of Criminal Procedure 11(b)(3) requires a district court to determine
whether a factual basis supports a defendant’s guilty plea. Fed. R. Crim. P. 11(b)(3). That
requirement exists “to ensure the accuracy of the plea through some evidence that a defendant
actually committed the offense.” Mobley, 618 F.3d at 545 (quotation and citations omitted). In
determining whether a plea agreement satisfies Rule 11(b)(3), this Court may consider “the
entire record . . . .” United States v. Pitts, 997 F.3d 688, 697 (6th Cir. 2021) (quotation and
citations omitted). In this case, Windham contends that there was not sufficient evidence to
establish that he committed the federal crime of kidnapping.
No. 21-3881 United States v. Windham Page 4
A person may be guilty of federal kidnapping if he: (1) unlawfully kidnaps a person;
(2) holds that person “for ransom or reward or otherwise”; and (3) “travels in interstate or foreign
commerce or uses the mail or any means, facility, or instrumentality of interstate or foreign
commerce in committing or in furtherance of the commission of the offense . . . .” 18 U.S.C.
§ 1201(a)(1).
a. Ransom or Reward or Otherwise
Windham incorrectly contends that the record fails to set forth a sufficient factual basis
that he held M.S. for ransom, reward, or otherwise.
Section 1201(a) of the federal kidnapping statute makes it a crime to unlawfully confine
“and hold[] for ransom or reward or otherwise any person . . . .” 18 U.S.C. § 1201(a). This Court
interprets the word “otherwise” broadly. United States v. Small, 988 F.3d 241, 250 (6th Cir.
2021) (citations omitted). Indeed, the Court has recognized that “Congress intended the statute
to apply to persons who had been held not only for reward, but for any other reason.” Id.
(emphasis added) (quotation and citation omitted). Thus, the word “otherwise” refers to “any
objective of a kidnaping which the defendant may find of sufficient benefit to induce him to
commit the kidnaping.” United States v. Sensmeier, 2 F. App’x 473, 476 (6th Cir. 2001). In this
case, Windham admitted in his plea agreement that he and his accomplices kidnapped M.S. and
repeatedly demanded money from him. That admission is more than sufficient to serve as a
factual basis that he unlawfully held M.S. “for ransom or reward or otherwise . . . .” 18 U.S.C.
§ 1201(a); see also Small, 988 F.3d at 250.
b. Instrumentalities of Interstate Commerce
In 2006, Congress amended the federal kidnapping statute. See Adam Walsh Child
Protection and Safety Act of 2006, Pub. L. No. 109-248, § 213, 120 Stat. 587, 616 (codified at
18 U.S.C. § 1201(a)(1)). The statute now applies “when ‘the offender travels in interstate or
foreign commerce or uses the mail or any means, facility, or instrumentality of interstate or
foreign commerce in committing or in furtherance of the commission of the offense.’” Small,
988 F.3d at 251 (emphasis removed) (quoting 18 U.S.C. § 1201(a)(1)). Thus, the statute now
reaches “kidnappings in which the defendant crosses state lines or channels or facilities of
No. 21-3881 United States v. Windham Page 5
interstate commerce were used to commit the crime, even when the physical kidnapping
occurred within the borders of a single state.” Id. (citation omitted). In this case, neither party
contests that the kidnapping took place intrastate. Similarly, neither party challenges that
Windham pleaded guilty to using both a cell phone and an automobile while committing the
crime. The issue is whether, where the record does not establish that Windham used the cell
phone or automobile to conduct interstate activity, the cell phone and automobile constitute
instrumentalities of interstate commerce under § 1201(a)(1). In what appears to be a question of
first impression for this Court, the Court finds that Windham’s intrastate use of a cell phone and
automobile satisfies § 1201(a)(1)’s interstate commerce requirements.
The Commerce Clause of the United States Constitution “delegates to Congress the
power ‘[t]o regulate Commerce with foreign Nations, and among the several States, and with the
Indian Tribes.’” United States v. Lopez, 514 U.S. 549, 552 (1995) (alteration in original)
(quoting U.S. Const. art. I, § 8, cl. 3). That clause “contemplates congressional efforts ‘to keep
the channels of interstate commerce free from immoral and injurious uses.’” Small, 988 F.3d at
252 (quoting Heart of Atlanta Motel, Inc. v. United States, 379 U.S. 241, 256 (1964)). To that
end, the Commerce Clause empowers Congress to regulate some activities that occur entirely
intrastate. See United States v. Morrison, 529 U.S. 598, 609 (2000). However, even under the
Supreme Court’s “modern, expansive interpretation of the Commerce Clause, Congress’
regulatory authority is not without effective bounds.” Id. at 608 (citing Lopez, 514 U.S. at 557).
Thus,
the scope of the interstate commerce power must be considered in the light of our
dual system of government and may not be extended so as to embrace effects
upon interstate commerce so indirect and remote that to embrace them, in view of
our complex society, would effectually obliterate the distinction between what is
national and what is local and create a completely centralized government.
Lopez, 514 U.S. at 557 (quotation and citations omitted).
With those limitations in mind,
modern Commerce Clause jurisprudence has identified three broad categories of
activity that Congress may regulate under its commerce power . . . . First,
Congress may regulate the use of the channels of interstate commerce . . . .
Second, Congress is empowered to regulate and protect the instrumentalities of
No. 21-3881 United States v. Windham Page 6
interstate commerce, or persons or things in interstate commerce, even though the
threat may come only from intrastate activities . . . . Finally, Congress’ commerce
authority includes the power to regulate those activities having a substantial
relation to interstate commerce . . . .
Morrison, 529 U.S at 609 (quotations and citations omitted). Congress may not, however,
“regulate noneconomic, violent criminal conduct based solely on that conduct’s aggregate effect
on interstate commerce.” Id. at 617. That is because “[t]he regulation and punishment of
intrastate violence that is not directed at the instrumentalities, channels, or goods involved in
interstate commerce has always been the province of the States.” Id. at 618.
Windham contends that Congress does not have power to regulate the kidnapping to
which he pleaded guilty. Beyond citing the Supreme Court’s broad language from Morrison and
Lopez, however, Windham cites no authority to support his argument. As discussed below, this
Court has repeatedly found that Congress may regulate crimes that occur entirely intrastate if the
offender uses an instrumentality of interstate commerce “in committing or in furtherance of the
commission of the offense.” 18 U.S.C. § 1201(a)(1).
In Small, this Court held that a defendant who used a car to cross state lines and then
commit an unlawful kidnapping satisfied “the interstate commerce element” of federal
kidnapping. Small, 988 F.3d at 251–52. However, it appears that this Court has never ruled on
whether the statute’s interstate commerce element is satisfied when, as in this case, no evidence
in the record shows that a car or cell phone was used interstate in committing or in furtherance of
the kidnapping.
The government points to Sixth Circuit cases that it suggests are dispositive. It makes
reference to United States v. McHenry, where the Court upheld a federal carjacking statute as a
legitimate exercise of Congress’ power to regulate interstate commerce. United States v.
McHenry, 97 F.3d 125, 126–27 (6th Cir. 1996). However, McHenry is not dispositive. In
McHenry, the Court upheld the statute because Congress designed it “to regulate and protect” an
instrumentality of interstate commerce. Id. Unlike the carjacking statute, the kidnapping statute
is meant to protect people, not an instrumentality of interstate commerce such as cars.
No. 21-3881 United States v. Windham Page 7
The government also relies upon United States v. Faasse, 265 F.3d 475 (6th Cir. 2001).
In Faasse, the Court observed that “Congress may . . . regulate the instrumentalities of
commerce, such as automobiles or planes . . . .” Id. at 483 n.6. But in Faasse, this Court
addressed a child support bill that Congress passed to address “a dilemma it considered national
in scope and whose resolution had defied the authority of the individual states.” Id. at 485. In
the instant case, the government fails to explain whether Congress passed the statute for similar
reasons. The government additionally fails to identify any relevant similarities between the child
support act and the kidnapping act at issue in this case.
Neither party points to a case in which a federal court directly addresses whether a car or
cell phone that is not used on an interstate basis satisfies the statute’s interstate commerce
element. The Seventh Circuit appears to be the only circuit to have examined this question. See
United States v. Protho, 41 F.4th 812 (7th Cir. 2022), Petition for Writ of Certiorari on other
grounds docketed Oct. 21, 2022 (No. 22-5875). In Protho, the Seventh Circuit held that the
statute does not ask courts “to consider each automobile’s specific use in interstate commerce.
Instead, it’s the nature of the regulated object’s class (here, automobiles) rather than the
particular use of one member of that class (Protho’s Ford Explorer) that matters.” Id. at 828. To
support its position, the Seventh Circuit examined its precedent regarding the federal murder-for-
hire statute, 18 U.S.C. § 1958(a). Id. at 828–29. This Court agrees with the Seventh Circuit that
in interpreting the federal kidnapping statute, it may be helpful to consider another federal statute
concerning a crime that is traditionally regulated by states.
In United States v. Weathers, this Court examined the federal murder-for-hire statute and
determined that the defendant’s murder-for-hire scheme, which involved telephone usage, fell
within the statute’s purview. United States v. Weathers, 169 F.3d 336, 342 (6th Cir. 1999). The
Court observed that “[i]t is well established that telephones, even when used intrastate, constitute
instrumentalities of interstate commerce.” Id. at 341 (citation omitted). Most relevant to the
instant inquiry, the Court concluded that “a statute that speaks in terms of an instrumentality in
interstate commerce rather than an instrumentality of interstate commerce is intended to apply to
interstate activities only.” Id. (emphasis in original) (citing United States v. Barry, 888 F.2d
No. 21-3881 United States v. Windham Page 8
1092, 1095 (6th Cir. 1989)). Conversely, therefore, statutes that refer to instrumentalities of
interstate commerce apply to intrastate activities. See id.
In this case, the federal kidnapping statute refers to instrumentalities “of interstate or
foreign commerce.” 18 U.S.C. § 1201(a)(1) (emphasis added). The issue is therefore whether
cars and cell phones are instrumentalities of interstate commerce, not whether they were used
interstate. This Court has held repeatedly and unambiguously that cars and phones are
instrumentalities of interstate commerce. See, e.g., Weathers, 169 F.3d at 341 (“It is well
established that telephones, even when used intrastate, constitute instrumentalities of interstate
commerce.” (emphasis in original)); McHenry, 97 F.3d at 126 (“[C]ars are themselves
instrumentalities of commerce . . . .” (citation omitted)). Thus, the Seventh Circuit’s reasoning
in Protho coheres with Sixth Circuit precedent. See Protho, 41 F.4th at 828–29. When a car or a
cell phone is used “in committing or in furtherance of” a kidnapping for ransom, reward, or
otherwise, the federal kidnapping statute applies. 18 U.S.C. § 1201(a)(1).
Finally, Windham presents a meritless argument that there is no factual basis for the
proposition that he intended to violate the federal kidnapping statute. As discussed above,
Windham admitted in his plea agreement that he purposefully and willfully participated in
holding M.S. at gunpoint and demanding money from him. The district court did not err in
finding that the record contained a sufficient factual basis that Windham intended to participate
in M.S.’s kidnapping.
B. Knowing and Voluntary
1. Standard of Review
Federal Rule of Criminal Procedure 11 “requires that a district court verify the
defendant’s plea is voluntary and that the defendant understands his or her applicable
constitutional rights, the nature of the crime charged, the consequences of the guilty plea, and the
factual basis for concluding that the defendant committed the crime charged.” Pitts, 997 F.3d at
701 (quoting United States v. Webb, 403 F.3d 373, 378–79 (6th Cir. 2005)). When, as in this
case, “a defendant fails to object contemporaneously to the district court’s alleged failure to
comply with the requirements of Rule 11,” this Court reviews for plain error. Webb, 403 F.3d at
No. 21-3881 United States v. Windham Page 9
378 (citing United States v. Vonn, 535 U.S. 55, 59 (2002)). “To show plain error, a defendant
must show (1) error (2) that was obvious or clear, (3) that affected defendant's substantial rights
and (4) that affected the fairness, integrity, or public reputation of the judicial proceedings.”
United States v. Wallace, 597 F.3d 794, 802 (6th Cir. 2010) (citation omitted).
2. Analysis
In his brief on appeal, Windham avers that he was “wrongly informed throughout
proceedings that he was charged with two substantive crimes . . . .” Those two separate crimes,
according to Windham, were federal kidnapping and aiding and abetting. He then asserts that
“the plea agreement clearly indicates that Windham is pleading guilty to aiding and abetting
kidnapping,” and not kidnapping. Therefore, he contends, his plea was induced by a
misunderstanding. Windham is wrong and his argument borders on frivolous. The record, from
the complaint to the indictment to the arraignment to the guilty plea, demonstrates that Windham
was only ever charged with a single count: federal kidnapping. Furthermore, Windham himself
acknowledged in his pro se motion that he was charged with a single count. The district court
therefore did not commit an error, let alone a plain error.
“A criminal defendant is bound by the answers he gives when the ‘court has scrupulously
followed the required procedure’ for a properly conducted plea colloquy.” Pitts, 997 F.3d at 701
(quoting Baker v. United States, 781 F.2d 85, 90 (6th Cir. 1986)). In this case, the district court
complied with Rule 11. The record, moreover, reflects that Windham was well aware of, and
understood, the charges against him. The district court did not err in accepting his guilty plea.
CONCLUSION
For the reasons stated above, the Court AFFIRMS Windham’s conviction pursuant to the
district court’s acceptance of his guilty plea. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488326/ | NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 21-2369
_____________
MARCOS ANTONIA CASTILLO HIDALGO,
Petitioner
v.
ATTORNEY GENERAL UNITED STATES OF AMERICA
_______________
On Petition for Review of an Order of the
Board of Immigration Appeals
(BIA 1:A043-249-202)
Immigration Judge: Jason L. Pope
_______________
Submitted Under Third Circuit L.A.R. 34.1(a)
November 7, 2022
Before: JORDAN, SCIRICA and RENDELL, Circuit Judges
(Filed: November 21, 2022)
_______________
OPINION ∗
_______________
∗
This disposition is not an opinion of the full court and, pursuant to I.O.P. 5.7,
does not constitute binding precedent.
JORDAN, Circuit Judge.
Petitioner Marcos Castillo Hidalgo, 1 a native and citizen of the Dominican
Republic, conceded his removability before an Immigration Judge (“IJ”). He did so on
the basis of his earlier guilty plea to a drug offense, though he contested whether that
conviction barred him from seeking cancellation of removal. When the IJ concluded that
the conviction did create such a bar and ordered him removed, Castillo Hidalgo sought
review by the Board of Immigration Appeals. Meanwhile, a state court concluded on
collateral review that Castillo Hidalgo had made a prima facie case that his guilty plea
was the result of ineffective assistance of counsel. With that ruling in hand, Castillo
Hidalgo moved to remand his case to the IJ with instructions to reinstate his application
for cancellation of removal and to calendar a merits hearing. The BIA nevertheless
affirmed the IJ’s decision and, in the process, denied his motion to remand. Before us
now, Castillo Hidalgo seeks only review of the denial of his motion to remand. We will
deny his petition for review.
I. BACKGROUND
Castillo Hidalgo was admitted to United States as a lawful permanent resident in
1992 at the age of nine. In October 2019, he pled guilty to manufacturing, distributing, or
1
While there are a few instances in which the Petitioner’s name is given as
Castillo-Hidalgo, we have used the spelling that appears more frequently, including in his
petition for review.
2
possessing with intent to distribute a controlled dangerous substance, in violation of N.J.
Stat. Ann. §§ 2C:35-5A(1) and -5B(2), and was sentenced to three years’ imprisonment. 2
The Department of Homeland Security commenced removal proceedings against
him in July 2020. He was served with a Notice to Appear charging that his conviction
rendered him subject to removal because it was an offense relating to a federally
controlled substance under 8 U.S.C. § 1227(a)(2)(B)(i), and also because it was an
aggravated felony under 8 U.S.C. § 1227(a)(2)(A)(iii).
Before the IJ, Castillo Hidalgo admitted the factual allegations against him and
conceded his removability on the first ground. He contested the second ground, as a
conviction for an aggravated felony would render him ineligible for cancellation of
removal under 8 U.S.C. § 1229b. And, indeed, he filed an application for cancellation of
removal.
After an interim decision from the IJ holding that his conviction is an aggravated
felony, Castillo Hidalgo declined to seek any other form of relief or protection from
removal. Instead, he indicated his intent to appeal the aggravated felony ruling and
pursue cancellation of removal. The IJ then issued an oral decision incorporating the
interim decision and ordering Castillo Hidalgo’s removal to the Dominican Republic. On
appeal to the BIA, Castillo Hidalgo argued only that his conviction was not for an
aggravated felony.
The Judgment of Conviction & Order for Commitment notes the substance as
2
“HEROIN/COCAINE.” (A.R. at 424.)
3
While his BIA appeal was pending, Castillo Hidalgo filed a petition for post-
conviction relief in the Superior Court of New Jersey, seeking to vacate his conviction.
He claimed that he would have contested the charges against him had he not been
erroneously advised by his criminal defense attorney that he would not be subject to
deportation if he pled guilty, successfully completed the requirements set by a “drug
court,” and had his conviction expunged. (Opening Br. at 10-11; A.R. at 34.) The State
opposed this petition and urged that his case be dismissed without an evidentiary hearing.
On June 7, 2021, the Superior Court issued an order, stating that Castillo Hidalgo
had made a prima facie case of ineffective assistance of counsel under both prongs of
Strickland v. Washington, 466 U.S. 668 (1984), because it appeared defense counsel had
failed to adequately advise him of the immigration consequences of his plea. On that
same day, Castillo Hidalgo asked the BIA to remand the matter to the IJ with instructions
to reinstate the application for cancellation of removal and to calendar a merits hearing,
“[i]n light of the finding of a prima facie case of ineffective assistance counsel[.]” (A.R.
at 10.)
The BIA ultimately denied the motion to remand and instead adopted and affirmed
the IJ’s decision. Regarding remand, the BIA said:
Because the respondent has not shown that his conviction has been vacated,
nor has he shown that he seeks to vacate his conviction on the basis of a
procedural or substantive defect in the underlying proceedings, he has not
established that the evidence presented with his motion is likely to change
the result in this case. Therefore, we deny the respondent’s motion to
remand.
(A.R. at 5 (citations omitted).)
4
This timely petition for review followed. 3
II. DISCUSSION
Castillo Hidalgo now concedes that his state conviction constitutes an aggravated
felony for immigration purposes; that, if he is to avoid the immigration consequences
attendant to that fact, his conviction would have to be vacated; and that his motion to
remand did not demonstrate his conviction had been vacated. Nevertheless, he argues
that we should grant his petition because two legal errors underlie the denial of his
motion to remand. First, he says, the BIA erred in concluding that vacatur of his
conviction is necessary to demonstrate the requisite likelihood of a different outcome in
his criminal case. He believes the New Jersey Superior Court’s prima facie ruling is
enough to warrant remand to the IJ for further proceedings on an application for
cancellation of removal. Second, he says, the BIA erred in concluding that a conviction
vacated for ineffective of assistance of counsel would nevertheless remain a conviction
for immigration purposes under Matter of Pickering, 23 I. & N. Dec. 621 (BIA 2003),
rev’d on other grounds, 465 F.3d 263 (6th Cir. 2006). As he did before the BIA, he asks
that his case be remanded to the BIA with instructions for the IJ to reinstate his
application for cancellation of removal and to calendar a merits hearing.
The government argues that we do not have jurisdiction to reach the merits of
those arguments, given Castillo Hidalgo’s concessions and the BIA’s discretion to deny
motions for remand. Furthermore, the government argues, even if we had jurisdiction,
3
Additionally, he filed a motion for stay of removal, which was denied.
5
we should deny the petition because Castillo Hidalgo is categorically ineligible for
cancellation of removal until his aggravated felony conviction is vacated. While we
disagree with the government as to our jurisdiction, we agree on the second point and will
deny the petition on that basis.
A. Jurisdiction 4
As a threshold matter, we must determine whether we have jurisdiction to consider
the two issues Castillo Hidalgo has raised. Although § 1252(a)(2)(C) of title 8 generally
strips our jurisdiction to review final orders of removal for aliens convicted of an
aggravated felony under § 1227(a)(2)(A)(iii), we nevertheless have jurisdiction under
§ 1252(a)(2)(D) to review “colorable legal or constitutional issues that [the petition for
review] raises.” Cruz v. Att’y Gen., 452 F.3d 240, 247 (3d Cir. 2006). “To determine
whether a claim is colorable, we ask whether ‘it is immaterial and made solely for the
purpose of obtaining jurisdiction or is wholly insubstantial and frivolous.’” Pareja v.
Att’y Gen., 615 F.3d 180, 186-87 (3d Cir. 2010) (quoting Arbaugh v. Y & H Corp., 546
U.S. 500, 513 n.10 (2006)). “The question of our jurisdiction over a colorable legal claim
does not turn on whether that claim is ultimately meritorious.” Id. at 187.
The two supposed legal errors Castillo Hidalgo has identified do raise colorable
issues and are sufficient to establish our jurisdiction. 5 Contrary to the government’s
4
The BIA had jurisdiction pursuant to 8 C.F.R. §§ 1003.1(b)(3) and 1003.2. As
discussed herein, we have jurisdiction under 8 U.S.C. § 1252(a)(2)(D).
As we have determined we have jurisdiction under 8 U.S.C. § 1252(a)(2)(D), the
5
government’s motion to dismiss will be denied.
6
suggestion, this is so even though they relate to a motion seeking a discretionary
determination on a motion to remand. Pareja, 615 F.3d at 187-88 (explaining that even
where an ultimate determination is discretionary, we have jurisdiction to review when the
BIA is alleged to have made that determination based on “an erroneous legal standard” or
“fact-finding which is flawed by an error of law”); see also Huang v. Att’y Gen., 620 F.3d
372, 390 (3d Cir. 2010) (“We review the denial of a motion to remand or to reopen for
abuse of discretion[.]”).
B. The Motion to Remand 6
It was not an abuse of discretion to deny Castillo Hidalgo’s motion to remand if he
“would not be entitled to relief [on his application for cancellation of removal] even if the
motion was granted.” Huang, 620 F.3d at 389. And that is the case here. Castillo
Hidalgo is categorically ineligible for cancellation of removal unless and until his
aggravated felony conviction is vacated. See Singh v. Att’y Gen., 807 F.3d 547, 550 (3d
Cir. 2015) (explaining that “[f]or a lawful permanent resident to be eligible for
cancellation of removal, he or she must satisfy three requirements[,]” including
“establish[ing] that he has not been convicted of an ‘aggravated felony’”) (quoting 8
U.S.C. § 1229b(a)). His motion to remand did not (and could not) demonstrate that his
conviction had been vacated, because, as far as we know, it has not been. See Paredes v.
6
A motion to remand to pursue an application for discretionary relief, such as
cancellation of removal, Pareja, 615 F.3d at 186, may be denied on the basis that, “the
alien would not be entitled to [the discretionary] relief [sought] even if the motion was
granted,” Huang, 620 F.3d at 389. A denial on that basis is reviewed for abuse of
discretion. Korytnyuk v. Ashcroft, 396 F.3d 272, 284 (3d Cir. 2005).
7
Att’y Gen., 528 F.3d 196, 198-99 (3d Cir. 2008) (adopting the rule that “the pendency of
post-conviction motions or other forms of collateral attack” do “not vitiate finality, unless
and until the convictions are overturned as a result of the collateral motions”).
We may deny a petition for review of an agency decision if the decision was
correct; indeed, we may do so even if the agency “relied upon a wrong ground or gave a
wrong reason.” Helvering v. Gowran, 302 U.S. 238, 245 (1937) (articulating the general
rule in connection with review of decision of the Board of Tax Appeals); see also Sec. &
Exch. Comm’n v. Chenery Corp., 318 U.S. 80, 88 (1943) (same in connection with
review of an order of the Securities and Exchange Commission). Here, it was no abuse
of discretion to deny the relief Castillo Hidalgo sought in his motion to remand (and now
seeks in his petition) namely, reinstatement of his application for cancellation of removal
and calendaring a merits hearing on it, because, until he demonstrates that his conviction
has been vacated, he is still categorically ineligible for cancellation of removal. So, we
will deny his petition. 7
Judicial economy, however, prompts us to address a point that may arise if
Castillo Hidalgo’s conviction is vacated. “A petitioner whose criminal conviction was
vacated is no longer ‘convicted’ [for immigration purposes] where the conviction was
vacated on the basis of a substantive or procedural defect in the underlying criminal
7
The government correctly observes, however, that if his aggravated felony
conviction is ultimately vacated, he may file a motion to reopen. See Cruz, 452 F.3d at
246 (“A motion to reopen is the proper means for an alien who has been ordered removed
due to a conviction to challenge his removal after that conviction is vacated.”).
8
proceedings.” Rodriguez v. Att’y Gen., 844 F.3d 392, 396 (3d Cir. 2016) (citing Matter
of Pickering, 23 I. & N. Dec. at 624). The BIA’s discussion on this point can plausibly
be read to suggest that a conviction vacated due to a Sixth Amendment violation under
Strickland, 466 U.S. 668, and Padilla v. Kentucky, 559 U.S. 356 (2010), would not be
sufficient under Matter of Pickering, 23 I. & N. Dec. 621, to warrant revisiting by
immigration authorities. If that is what the BIA meant to convey, it was error. Pinho v.
Gonzales, 432 F.3d 193, 210 (3d Cir. 2005) (“[A]n alien whose conviction is vacated on
collateral attack because the alien’s [criminal defense] counsel was ineffective under the
Sixth Amendment, no longer stands ‘convicted’ for immigration purposes.”). Further
discussion on this point is unwarranted now, however, as the basis for vacatur can be
determined only if and when the conviction has actually been vacated. Id. at 215 (“To
determine the basis for a vacatur order, the agency must look first to the order itself.”).
III. CONCLUSION
For the foregoing reasons, we will deny the petition for review, and the
government’s motion to dismiss will be denied.
9 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488328/ | RECOMMENDED FOR PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 22a0250p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
┐
SAFETY SPECIALTY INSURANCE COMPANY; SAFETY
│
NATIONAL CASUALTY COMPANY,
│
Plaintiffs-Appellees (22-1189), │
Plaintiffs-Appellants (22-1196), │ Nos. 22-1189/1196
>
v. │
│
GENESEE COUNTY BOARD OF COMMISSIONERS;
│
DEBORAH CHERRY,
│
Defendants-Appellants (22-1189), │
│
THOMAS A. FOX; TAMMY PUCHLAK, as Trustee of the │
Walter Puchlak Revocable Trust Agreement dated │
February 24, 2010, │
Defendants-Appellees (22-1196). │
┘
Appeal from the United States District Court for the Eastern District of Michigan at Bay City.
No. 1:20-cv-13290—Thomas L. Ludington, District Judge.
Argued: October 19, 2022
Decided and Filed: November 21, 2022
Before: SUTTON, Chief Judge; BOGGS and KETHLEDGE, Circuit Judges.
_________________
COUNSEL
ARGUED: Jeffrey C. Gerish, PLUNKETT COONEY, Bloomfield Hills, Michigan, for Genesee
County and Deborah Cherry. John D. Hackett, CASSIDAY SCHADE, LLP, Chicago, Illinois,
for Safety Specialty Insurance Company and Safety National Casualty Company. Philip L.
Ellison, OUTSIDE LEGAL COUNSEL PLC, Hemlock, Michigan, for Thomas Fox and Tammy
Puchlack. ON BRIEF: Jeffrey C. Gerish, PLUNKETT COONEY, Bloomfield Hills, Michigan,
for Genesee County and Deborah Cherry. John D. Hackett, Adam H. McCabe, CASSIDAY
SCHADE, LLP, Chicago, Illinois, Richard C.O. Rezie, GALLAGHER SHARP LLP, Cleveland,
Ohio, for Safety Specialty Insurance Company and Safety National Casualty Company.
Philip L. Ellison, OUTSIDE LEGAL COUNSEL PLC, Hemlock, Michigan, for Thomas Fox and
Tammy Puchlack.
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 2
Genesee Cnty. Bd. of Comm’rs, et al.
_________________
OPINION
_________________
BOGGS, Circuit Judge. This insurance-coverage dispute springs from two class-action
lawsuits against several Michigan counties that retained surplus proceeds from the tax-
foreclosure sales of private property. Genesee County was named as a defendant in the lawsuits
and claimed coverage under two liability-insurance policies. The County’s insurers, Safety
National Casualty Company and Safety Specialty Insurance Company (together, “Safety”),
denied the claim and filed this declaratory-judgment action in federal court against both the
County and the underlying class representatives. The district court agreed with Safety that it has
no duty to defend or indemnify the County from the lawsuits, but dismissed Safety’s case against
the class representatives for lack of federal jurisdiction. We affirm.
I. BACKGROUND
A. The Fox and Puchlak Lawsuits
In November 2018, Tammy Puchlak filed a class-action complaint in Michigan state
court against five Michigan counties and their treasurers, including Genesee County and
Deborah Cherry. She alleges that St. Clair County seized trust property to satisfy a $9,600
property-tax delinquency, sold the property at auction for $150,000—far below its fair-market
value—and then kept the $140,400 difference. Seeking to represent a class of property owners
who had their property seized and sold without receiving the surplus proceeds, Puchlak asserts
that these counties committed takings without just compensation or imposed excessive fines in
violation of the Michigan and federal constitutions.
In June 2019, Thomas A. Fox filed a class-action complaint in federal district court
against fourteen Michigan counties and their treasurers. He later amended his complaint to add
thirteen more counties and their treasurers, including Genesee County and Deborah Cherry. Fox
claims that Gratiot County seized his property to satisfy a property-tax delinquency of $3,091.23,
sold the property at auction for $25,500.00, then kept the $22,408.77 difference between what
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 3
Genesee Cnty. Bd. of Comm’rs, et al.
Fox owed and what Gratiot County received. Like Puchlak, Fox asserts that the counties named
in his lawsuit committed takings without just compensation and imposed excessive fines; he also
alleges unjust enrichment and violations of substantive and procedural due process. In October
2020, the district court certified Fox’s class. Fox v. County of Saginaw, 2020 WL 6118487, at
*11 (E.D. Mich. 2020).
B. The Insurance Policies
In 2018, Safety issued a Public Officials and Employment Practices Liability policy
(“PO&EPL Policy”) to Genesee County. The insurance policy is subject to a $2,000,000
liability limit and a $350,000 retention. Under the policy, Safety agreed to defend and indemnify
Genesee County and its employees from covered claims alleging certain “wrongful acts.” The
policy includes two exclusions, among others. One precludes coverage for claims “[a]rising out
of . . . [t]ax collection, or the improper administration of taxes or loss that reflects any tax
obligation.” The second excludes claims “[a]rising out of eminent domain, condemnation,
inverse condemnation, temporary or permanent taking, adverse possession, or dedication by
adverse use.”
Safety also issued Genesee County a separate Commercial General Liability (“CGL
Policy”) to cover liability for bodily injury and medical expenses, property damage, and
“personal and advertising injury.”
C. Procedural History
Genesee County claimed coverage from Safety for Fox’s and Puchlak’s lawsuits, which
Safety denied. Safety then filed a declaratory-judgment action in federal court against Genesee
County, Fox, and Puchlak, seeking a ruling that, under its insurance policies, it owes no duty to
defend Genesee County from the lawsuits or to indemnify it from any subsequent damages.
Genesee County and Cherry counterclaimed, seeking both a declaration that they are covered
under the policies and damages for a breach of contract based on Safety’s refusal to defend them.
The parties filed cross-motions for summary judgment, with Fox and Puchlak arguing separately
that Safety lacked standing to sue them.
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 4
Genesee Cnty. Bd. of Comm’rs, et al.
The district court granted two motions for summary judgment: Fox and Puchlak’s motion
against Safety, and Safety’s motion against Genesee County. The court found no Article III case
or controversy between Safety and Fox and Puchlak. The court acknowledged that much of the
relevant caselaw suggests that, in coverage disputes, “the insurer typically has standing to pursue
a declaration against the injured party.” However, the court distinguished this case on the
ground that, here, “the alleged wrongdoers are not the [County] Defendants but two nonparties—
Gratiot County and St. Clair County.” Fox and Puchlak had joined Genesee County in their
lawsuits only for class-representation purposes. Noting the uncertainty of 1) whether Fox and
Puchlak would prevail in their lawsuits and 2) what damages, if any, they could recover from
Genesee County, the court found that no “substantial controversy” of “sufficient immediacy and
reality” exists between Safety and Fox and Puchlak. Safety timely appealed.
The court also held that Safety owes Genesee County no duty to defend under either
insurance policy. The court held that the CGL Policy does not cover the Fox and Puchlak
lawsuits. The court also assumed that the PO&EPL Policy arguably covers the lawsuits and their
indemnification but held that two of the policy’s exclusions applied: one for claims arising out of
tax collection, another for claims arising out of condemnation, inverse condemnation, or taking.
Genesee County timely appealed.
II. ANALYSIS
This court reviews de novo a district court’s grant of summary judgment. Bondex Int’l,
Inc. v. Hartford Accident & Indem. Co., 667 F.3d 669, 676 (6th Cir. 2011). Summary judgment
is proper “if the movant shows 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). A genuine dispute of
material fact exists if “the evidence is such that a reasonable jury could return a verdict for the
nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The court does
not weigh evidence but rather “view[s] [the evidence] in the light most favorable to the party
opposing the motion.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574,
587 (1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam)). This
standard does not change when the parties present cross-motions for summary judgment;
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 5
Genesee Cnty. Bd. of Comm’rs, et al.
we evaluate each motion on its own merits. Westfield Ins. Co. v. Tech Dry, Inc., 336 F.3d 503,
506 (6th Cir. 2003).
Below, we address Fox and Puchlak’s summary-judgment motion against Safety, then
turn to Safety’s summary-judgment motion against Genesee County.
A. Article III Case or Controversy
1. Legal Framework
The U.S. Constitution limits the jurisdiction of federal courts to “Cases” and
“Controversies.” U.S. Const. art. III, § 2. Federal courts cannot issue advisory opinions. Arnett
v. Myers, 281 F.3d 552, 562 (6th Cir. 2002). Article III’s case-or-controversy requirement
allows federal courts to resolve concrete disputes, but prohibits them from passing “judgments
on theoretical disputes that may or may not materialize.” Saginaw County v. STAT Emergency
Med. Servs. Inc., 946 F.3d 951, 954 (6th Cir. 2020) (citing Steel Co. v. Citizens for a Better
Env’t, 523 U.S. 83, 101–03 (1998)).
The Supreme Court has delineated these limits with a number of justiciability doctrines,
including standing and ripeness. See Nat’l Rifle Ass’n of Am. v. Magaw, 132 F.3d 272, 279–80
(6th Cir. 1997). To have standing, plaintiffs “must allege (1) an injury in fact (2) that’s traceable
to the defendant’s conduct and (3) that the courts can redress.” Gerber v. Herskovitz, 14 F.4th
500, 505 (6th Cir. 2021) (citing Lujan v. Defs. of Wildlife, 504 U.S. 555, 559–61 (1992)).
Plaintiffs “must show an imminent or actual injury before [entering] the federal courts.” STAT
Emergency, 946 F.3d at 954. They “cannot sue simply to avoid a ‘possible future injury.’” Id. at
954–55 (quoting Clapper v. Amnesty Int’l USA, 568 U.S. 398, 409 (2013)). Suits based solely on
the “mere risk of future harm” cannot establish an injury sufficient for standing. See TransUnion
LLC v. Ramirez, 141 S. Ct. 2190, 2211 (2021). Moreover, a claim is not ripe if it turns on
“contingent future events that may not occur as anticipated, or indeed may not occur at all.”
Trump v. New York, 141 S. Ct. 530, 535 (2020) (quoting Texas v. United States, 523 U.S. 296,
300 (1998)); see Bigelow v. Mich. Dep’t of Nat. Res., 970 F.2d 154, 157 (6th Cir. 1992).
“Ripeness separates those matters that are premature because the injury is speculative and may
never occur from those that are appropriate for the court’s review.” Magaw, 132 F.3d at 280.
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 6
Genesee Cnty. Bd. of Comm’rs, et al.
The Declaratory Judgment Act “does not alter these rules or otherwise enable federal
courts to deliver ‘an expression of opinion’ about the validity of laws.” STAT Emergency,
946 F.3d at 954 (quoting Muskrat v. United States, 219 U.S. 346, 362 (1911)). The Act offers
only an “alternative remedy—a declaratory judgment—for existing cases or controversies.” Ibid.
When a party sues for declaratory relief, “he must satisfy the prerequisites of the Declaratory
Judgment Act and Article III’s standing baseline.” Ibid. In particular, he must show
“a substantial controversy, between parties having adverse legal interests, of sufficient
immediacy and reality to warrant the issuance of a declaratory judgment.” Ibid. (quoting
MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007)); see Friends of Tims Ford v.
Tenn. Valley Auth., 585 F.3d 955, 971 (6th Cir. 2009) (explaining that a declaratory judgment
must “affect[] the behavior of the defendant towards the plaintiff” (quoting Hewitt v. Helms,
482 U.S. 755, 761 (1987))). The difference between an abstract question and a controversy
suitable for judgment is largely a one of degree. Maryland Cas. Co. v. Pac. Coal & Oil Co.,
312 U.S. 270, 273 (1941).
2. Analysis
In pursuing its declaratory judgment, Safety seeks to redress possible injuries that could
stem from an improper invocation of two of its duties as an insurer: the duty to defend and the
duty to indemnify. See Farmers & Merchants Mut. Fire Ins. Co. v. LeMire, 434 N.W.2d 253,
255 (Mich. Ct. App. 1988). The former requires insurers to pay for the insured’s legal counsel
and litigation costs when the policy arguably covers the alleged liability; the latter requires them
to pay the injured party any damages awarded against the insured for the covered loss. Ibid.
With respect to Fox and Puchlak, each claim fails to satisfy the requirements of Article III and
the Declaratory Judgment Act. The duty to defend is ripe for adjudication between Safety and
Genesee County, but has little to do with Fox or Puchlak. The duty to indemnify, to the extent
that it reflects a controversy between Safety and Fox and Puchlak, is not immediate enough to
warrant declaratory judgment.
Duty to Defend. Safety cannot litigate its duty to defend against Fox and Puchlak
because this duty does not involve them. The duty to defend is a “right affecting only the
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 7
Genesee Cnty. Bd. of Comm’rs, et al.
obligations of the insurer vis-a-vis the insured.” Allstate Ins. Co. v. Wayne County, 760 F.2d
689, 695 (6th Cir. 1985). Fox and Puchlak have not asked Safety to “prosecute or defend” them
in any lawsuit. Safety can properly sue Genesee County over this duty, and did, but Fox and
Puchlak have no stake in who wins that fight. To the extent that they have any interest in
Safety’s duty to defend Genesee County, it would seem to align with Safety’s. Fox and Puchlak
argue that they would “strategically prefer that there be no duty to defend” so that Genesee
County would stop the “current foot-dragging in the [underlying] litigation.” From its duty to
defend Genesee County, then, Safety cannot allege an “injury in fact . . . traceable” to Fox and
Puchlak’s conduct. Gerber, 14 F.4th at 505 (citing Lujan, 504 U.S. at 559–61).
Safety rejects the district court’s characterization of Fox and Puchlak as “complete
strangers” to the coverage dispute between Safety and Genesee County. It asserts that, for
Article III purposes, Fox and Puchlak are injured parties. We disagree. As discussed above, Fox
and Puchlak are not signatories to the insurance contracts between Safety and Genesee County.
Were we to declare a duty to defend Genesee County, that judgment would not affect the
behavior of Fox and Puchlak towards Safety. Friends of Tims Ford, 585 F.3d at 971. While a
dispute exists between Safety and Genesee County over Safety’s duty to defend, it has no
connection to Fox and Puchlak.
Safety argues that it included Fox and Puchlak in its lawsuit to avoid relitigating its
coverage obligations. Michigan law, notes Safety, requires it to include all “interested parties” in
a declaratory-judgment action. See Cincinnati Ins. Co. v. Vill. Plaza Holdings, LLC, 2020 WL
4200978, at *4 (E.D. Mich. July 22, 2020). Failing to add Fox and Puchlak means that any no-
coverage judgment would lack preclusive effect against the other members of their putative
classes. See Allstate Ins. Co. v. Hayes, 499 N.W.2d 743, 748 n.12 (Mich. 1993).
We share the district court’s conclusion that Fox and Puchlak are not “interested parties”
to whom Michigan law applies in this context. Even if Fox and Puchlak were interested parties,
Safety’s reliance on Michigan caselaw is misplaced. Those decisions concern the preclusive
effect of a declaratory-judgment action; they do not speak to federal courts’ jurisdiction over the
parties in these actions. While Hayes may explain Safety’s interest in joining Fox and Puchlak
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 8
Genesee Cnty. Bd. of Comm’rs, et al.
as parties to its lawsuit, it does not grant this court the jurisdiction to hear the dispute between
them. No doubt Safety has strong reasons for seeking finality from a binding judgment against
Fox, Puchlak, and their respective classes. But the “practical value” of its action “cannot
overcome” Article III’s requirements. Trustgard Ins. Co. v. Collins, 942 F.3d 195, 201 (4th Cir.
2019).
Duty to Indemnify. Even if Safety could seek declaratory relief against Fox and Puchlak
over its duty to indemnify, ripeness would keep us from adjudicating this dispute. Fox’s and
Puchlak’s lawsuits are both pending. For Safety to indemnify Fox and Puchlak, several events
must occur. First, Fox and Puchlak must secure judgments against Genesee County. Second,
Fox and Puchlak must establish damages against Genesee County; merely winning their claim or
establishing damages against other counties is not enough. Even then, Genesee County must
refuse, or declare itself unable, to satisfy any judgment before Fox and Puchlak could ask Safety
to pay them for their injuries. Although our recent decision in Hall v. Meisner, 51 F.4th 185 (6th
Cir. 2022), may signal merit to Fox’s and Puchlak’s lawsuits, the strength of their underlying
claims is but one link in a chain of “contingent future events” that illustrates how resolving
Safety’s duty to pay them damages would prove a costly and time-consuming hypothetical.
Trump, 141 S. Ct. at 535.
Safety argues that the Supreme Court’s decision in Maryland Casualty demands a
contrary holding. There, an insurer sued an insured and the injured party for a declaratory
judgment that it had no duty to defend or indemnify the insured for the injured party’s pending
lawsuit in state court. Maryland Cas., 312 U.S. at 271–72. The Court held that a “substantial
controversy” of “sufficient immediacy and reality” existed under the Declaratory Judgment Act.
Id. at 273.
On its face, Maryland Casualty would seem to govern this case. The Maryland Casualty
Court rested its holding on three factors: Ohio law allowed the injured party to proceed against
the insurer to satisfy any final judgment unpaid by the insured party after thirty days; the injured
party could prevent the policy from lapsing by performing its notice conditions; and different
courts could reach conflicting interpretations of the policy. Id. at 273–74. Here, Michigan law
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 9
Genesee Cnty. Bd. of Comm’rs, et al.
would allow Fox and Puchlak to proceed against Safety to satisfy an unpaid judgment against
Genesee County. Mich. Comp. L. § 500.3006. The PO&EPL Policy suggests that Fox and
Puchlak do not need to prevent its lapse before collecting on a judgment. And Puchlak’s lawsuit
awaits resolution in a state court, which could eventually reach an opposite interpretation of
Genesee County’s PO&EPL Policy.
However, unlike the insured party in Maryland Casualty, Genesee County is not the
“alleged tortfeasor” that supposedly injured Fox and Puchlak. That distinction belongs to two
nonparties, Gratiot County and St. Clair County, where Fox and Puchlak live. Even though the
Sixth Circuit has previously allowed an insurer to bring a declaratory-judgment action against
both the insured and injured parties, it has recognized that often the “real dispute is between the
injured third party and the insurance company, not between the injured and an often-times
impecunious insured.” Allstate Ins. Co. v. Green, 825 F.2d 1061, 1064 (6th Cir. 1987) (citing 6A
Moore’s Federal Practice ¶ 57.19 (2d ed. 1983)); see ibid. (citing Maryland Cas., 312 U.S. at
274). Here, no real dispute exists—at least, for now—between Safety and Fox and Puchlak. The
possibility that Fox and Puchlak might look to Safety for indemnification is more attenuated than
it was for the parties in Maryland Casualty. Fox and Puchlak have not asked Safety to pay them
for their injuries. As the district court noted, “[b]y all appearances, [Fox and Puchlak] joined
[Genesee County] in the underlying lawsuits for class-representation purposes only.” Safety
cannot derive from this arrangement a dispute with Fox and Puchlak, who, as the purportedly
injured parties, are adverse to Genesee County “only insofar as they have different stakes in the
outcome of the underlying lawsuits.” Even if Fox and Puchlak prevail in their lawsuits, Genesee
County might not be held liable for damages. While ripeness is largely a question of degree,
Maryland Cas., 312 U.S. at 273, we require more certainty of the necessity of indemnification
before allowing Safety to hale Fox and Puchlak into federal court.
Safety also contends that this case is ripe under Sixth Circuit precedent. The Sixth
Circuit considers several factors when deciding whether the issues presented are ripe for review.
United Steelworkers of America, Local 2116 v. Cyclops Corp., 860 F.2d 189, 194 (6th Cir.
1988). First is the hardship that “refusing to consider [Safety’s] prospective claims would
impose upon the parties.” Id. at 195. Second is the likelihood that the harm alleged by Safety
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 10
Genesee Cnty. Bd. of Comm’rs, et al.
“will ever come to pass.” Id. at 194. Third is whether the factual record is developed enough for
a fair adjudication on the merits of the parties’ claims. Id. at 195. Safety argues that each of
these factors tilts towards ripeness.
We disagree. On the first factor, Safety argues that “insulat[ing] Fox and Puchlak (and
the class members they represent)” from a coverage determination would leave Safety vulnerable
to “multiple declaratory judgment actions” from Fox’s and Puchlak’s class members and expose
it to the risk of “inconsistent coverage rulings.” Had Safety sought its judgment in state court, it
may have been able to join Fox and Puchlak as parties and secure a binding judgment without
running into the limits of Article III. On the second factor, Safety notes that Fox and Puchlak
have filed class-action lawsuits, for which Genesee County claims coverage and seeks an
immediate defense from Safety. As discussed above, to the extent that the duty to defend reflects
immediate harm, it does not involve Fox and Puchlak. Meanwhile, harm from Safety’s duty to
indemnify is less likely to occur. Fox and Puchlak must prevail in their lawsuits against Genesee
County; Genesee County must be held liable to them for damages; and Genesee County must
prove unwilling or unable to satisfy any judgment before Fox and Puchlak can ask Safety to
indemnify them. On the third factor, Safety argues that the factual record is sufficiently
developed and that Fox and Puchlak had an opportunity to weigh in. We agree with Safety on
this point. On balance, however, Safety’s duty to indemnify is not ripe for adjudication between
Safety and Fox and Puchlak.
Because Safety lacks standing to sue Fox and Puchlak over its duty to defend and its
claim for the duty to indemnify lacks ripeness, we affirm the district court’s holding that no
substantial controversy of sufficient immediacy and reality exists between Safety and Fox and
Puchlak.
B. The PO&EPL Policy Exclusions
1. Interpretation of Insurance Contracts Under Michigan Law
We focus here on the insurer’s duty to defend, which is broader under Michigan law than
its duty to indemnify. Am. Bumper & Mfg. Co. v. Hartford Fire Ins. Co., 550 N.W.2d 475, 481
(Mich. 1996). If the allegations of a third party against an insured party “even arguably come
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Genesee Cnty. Bd. of Comm’rs, et al.
within the policy coverage, the insurer must provide a defense . . . even where the claim may be
groundless or frivolous.” Ibid. Even if a policy excludes some claims, the duty to defend applies
“if there are any theories of recovery that fall within the policy.” Protective Nat’l Ins. Co. v. City
of Woodhaven, 476 N.W.2d 374, 376 (Mich. 1991) (quoting Detroit Edison Co. v. Mich. Mut.
Ins. Co., 301 N.W.2d 832, 835 (Mich. Ct. App. 1981)). But “the duty to defend is not an
unlimited one,” and insurers are not required to defend “against claims for damage expressly
excluded from policy coverage.” Meridian Mut. Ins. Co. v. Hunt, 425 N.W.2d 111, 114 (Mich.
Ct. App. 1988).
In Michigan, the interpretation of an insurance policy is a question of law that a court can
resolve at summary judgment. See Henderson v. State Farm Fire & Cas. Co., 596 N.W.2d 190,
193 (Mich. 1999); see also B.F. Goodrich Co. v. U.S. Filter Corp., 245 F.3d 587, 595 (6th Cir.
2001). The court interprets insurance contracts in two steps: it first determines coverage under
the general insurance agreement, then it decides whether an exclusion applies to negate
coverage. Auto-Owners Ins. Co. v. Harrington, 565 N.W.2d 839, 841 (Mich. 1997).
While the burden of proving coverage rests on the insured party, the insurer bears the
burden of proving that an exclusion precludes coverage. See Pioneer State Mut. Ins. Co. v.
Dells, 836 N.W.2d 257, 263 (Mich. Ct. App. 2013); Am. Tooling Ctr., Inc. v. Travelers Cas. &
Sur. Co. of Am., 895 F.3d 455, 459 (6th Cir. 2018) (applying Michigan law). Under Michigan
law, we read an exclusion independently of other exclusions. Farm Bureau Mut. Ins. Co. v.
Blood, 583 N.W.2d 476, 478 (Mich. Ct. App. 1998). Although exclusions are “strictly construed
in favor of the insured . . . [c]lear and specific exclusions must be given effect.” Auto-Owners
Ins. Co. v. Churchman, 489 N.W.2d 431, 434 (Mich. 1992). Courts must give policy provisions
their “plain and ordinary meaning” to avoid “technical and strained constructions.” Ann Arbor
Pub. Schs. v. Diamond State Ins. Co., 236 F. App’x 163, 166 (6th Cir. 2007) (quoting Century
Sur. Co. v. Charron, 583 N.W.2d 486, 488 (Mich. Ct. App. 1998)).
2. Analysis
Assuming, as the district court did, that the PO&EPL Policy would otherwise cover the
Fox and Puchlak lawsuits, we hold that at least one exclusion negates coverage. The PO&EPL
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 12
Genesee Cnty. Bd. of Comm’rs, et al.
Policy contains thirty-one exclusions, and Safety relies on six. Of those, the district court
addressed the two “most fitting” exclusions—Exclusions 9B and 12—holding that either was
sufficient to deny coverage. While Exclusion 12 may present a close case, Exclusion 9B does
not; it excludes coverage of the Fox and Puchlak lawsuits.
Exclusion 9B excludes claims “[a]rising out of . . . [t]ax collection, or the improper
administration of taxes or loss that reflects any tax obligation.” The first issue is the meaning of
the phrase “arising out of.” In the insurance-contract context, the Michigan Supreme Court has
held that the phrase “requires a ‘causal connection’ that is ‘more than incidental.’” People v.
Johnson, 712 N.W.2d 703, 706 (Mich. 2006) (quoting Pac. Emps. Ins. Co. v. Mich. Mut. Ins.
Co., 549 N.W.2d 872, 875 (Mich. 1996)). Applying Michigan law, we understand “arising out
of” to mean something that “springs from or results from something else, has a connective
relationship, a cause and effect relationship, of more than an incidental sort with the [underlying]
event.” Ibid. The language demands more than a “but-for causal connection, but does not
require direct or proximate causation.” Great Am. Fid. Ins. Co. v. Stout Risius Ross, Inc.,
438 F. Supp. 3d 779, 785 (E.D. Mich. 2020) (quoting Scott v. State Farm Mut. Auto. Ins. Co.,
751 N.W.2d 51, 56 (Mich. Ct. App. 2008)).
The claims in the Fox and Puchlak lawsuits are excluded from coverage because they
arise out of tax collection. The Michigan Supreme Court’s recent case in Rafaeli, LLC v.
Oakland County, 952 N.W.2d 434 (Mich. 2020), illustrates the cause-and-effect relationship
between tax collection and the alleged withholding of surplus proceeds at issue in the Fox and
Puchlak lawsuits. The court summarized the practice by which counties, under Michigan’s
General Property Tax Act (“GPTA”), Mich. Comp. Laws § 211.1 et seq., retained surplus
proceeds from the tax-foreclosure sales of private property. Rafaeli, 952 N.W.2d at 443–46.
Real-property taxes are first assessed and collected by the municipality where the property is
located. Id. at 443. When property taxes become delinquent, “collection is turned over to the
foreclosing governmental unit,” usually the county, whose treasurer attempts to collect the
delinquent taxes by seeking to foreclose on the associated property and then sell it at a public
auction. Id. at 443–44. Upon sale, the county treasurer deposits the proceeds into an account
containing the proceeds from all of the county’s delinquent-tax property sales for that year. Id. at
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 13
Genesee Cnty. Bd. of Comm’rs, et al.
445. Where the proceeds from individual sales exceed the tax delinquency, the surplus is first
used to offset the costs of the county’s foreclosure proceedings and sales. Id. at 446. Any
leftover money may then be transferred to the county’s general fund. Ibid. The Michigan
Supreme Court stressed that “the GPTA does not provide for any disbursement of the surplus
proceeds to the former property owner” but rather “requires the foreclosing governmental unit to
disperse the surplus proceeds to someone other than the former owner.” Ibid. (citing Jenna
Christine Foos, Comment, State Theft In Real Property Tax Foreclosure Procedures, 54 Real
Prop. Tr. & Est. L.J. 93, 101–02 & n.56 (2019)).
The overview in Rafaeli confirms that the process of tax collection is what causes Fox’s
and Puchlak’s claims—the retention of their surplus tax-auction proceeds—to occur. Great Am.
Fid. Ins. Co., 438 F. Supp. 3d at 785. The underlying conduct at issue in the Fox and Puchlak
lawsuits—that the defendant counties retained too much money from the sale of property at tax-
delinquency auctions—“springs from” tax collection, if it is not substantively an act of tax
collection itself. Johnson, 712 N.W.2d at 706. In other words, a “cause and effect relationship”
exists between the counties’ method of property-tax collection and the injury for which Fox and
Puchlak seek to recover. Ibid. Therefore, Exclusion 9B precludes coverage for these claims.
Genesee County argues for a narrow construction of “tax collection” that renders the
exclusion inapplicable. Genesee County contends that the “process of ‘collection’ could
reasonably be understood as not including the post-foreclosure decision to retain funds
previously collected.” They characterize this case as involving “what happens after the taxation
process is completed.” We disagree. The post-foreclosure retention of funds previously
collected cannot reasonably be understood as a separate decision that counties or their treasurers
make. As the Michigan Supreme Court describes, the GPTA contains an “exhaustive”
reimbursement scheme that dictates where delinquent-tax property-sale proceeds must go.
Rafaeli, 952 N.W.2d at 446. The retention of surplus proceeds is part of the multi-step process
that is “tax collection,” as established by the GPTA, rather than a separate and independent
decision.
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 14
Genesee Cnty. Bd. of Comm’rs, et al.
Even if we accepted Genesee County’s point that the allegedly withheld surplus proceeds
are not tax revenues, claims based on the failure to return those sums would still fall under the
exclusion. Construing “tax collection” narrowly to refer only to the gathering of taxes owed
does not affect the exclusion’s “arising out of” language, which sweeps in the complained-of
activity. Whether or not surplus proceeds amount to tax revenue, their retention directly resulted
from—and was part of—the tax-collection process outlined by the GPTA.
Genesee County also argues that, even if Exclusion 9B precludes claims arising out of tax
collection, it does not apply to other damages claims asserted in the underlying lawsuits. See
City of Woodhaven, 476 N.W.2d at 376 (noting that an insurer must defend against a lawsuit “if
there are any theories of recovery that fall within the policy” (quoting Detroit Edison, 301
N.W.2d at 835)). Genesee County asserts that Fox and Puchlak “allegedly ‘suffered two kinds
of’ damages: those arising from the retention of the excess funds and those arising from the
claimed due process violations.” To support the premise that the latter claims are not claims
arising out of tax collection to which the exclusion would apply, Genesee County relies on
Assurance Co. of America v. J.P. Structures, Inc., 1997 WL 764498 (6th Cir. Dec. 3, 1997).
There, the court held that an insurance-coverage exclusion for claims arising out of a breach of
contract did not preclude coverage for a trademark-infringement claim. See id. at *5. As
Genesee County sees it, the J.P. Structures court reached its holding because the underlying
claimant’s trademark-infringement claim was “of a different character” than its breach-of-
contract claim. Because claims arising from the retention of excess funds are of a different
character than claims for violations of due process and claims for excessive fines, Genesee
County would have us similarly recognize, and require the defense of, those other claims that do
not implicate a given exclusion.
We read J.P. Structures differently. The court’s decision focused on the lack of a causal
relationship between the two claims, not on whether the claims were different. It noted that the
insured party’s “breach of the contract caused its termination” while its “intentional unauthorized
use of the mark caused the trademark infringement.” Ibid. The only connection between the
contract breach and the trademark infringement was that the post-breach termination of the
contract “withdrew the authorization to use” the trademark, a connection that the court found
Nos. 22-1189/1196 Safety Specialty Ins. Co. v. Page 15
Genesee Cnty. Bd. of Comm’rs, et al.
“too remote.” Ibid. In our case, however, the causal link between the excluded conduct—tax
collection—and the subsequent claims is more direct. As the district court put it, “all 11 counts
across both complaints rely on the same allegation: that county governments seized tax-
delinquent property, sold it at auction, and kept the surplus proceeds.” We agree with Genesee
County that an insurer must prove more than but-for causation when construing “arising out of”
language in an exclusion. Stout Risius Ross, Inc., 438 F. Supp. 3d at 785. But that higher
standard is met here, where the alleged tax-collection process directly caused the injuries
underlying each of Fox’s and Puchlak’s claims.
Because one exclusion—Exclusion 9B—is enough to deny coverage, we affirm.
III. CONCLUSION
For the reasons above, we affirm the district court’s grant of summary judgment to Fox
and Puchlak against Safety, and its grant of summary judgment to Safety against Genesee
County. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488349/ | 2022 IL App (2d) 210698-U
No. 2-21-0698
Order filed November 21, 2022
NOTICE: This order was filed under Supreme Court Rule 23(b) and is not precedent
except in the limited circumstances allowed under Rule 23(e)(1).
______________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
SECOND DISTRICT
______________________________________________________________________________
THE PEOPLE OF THE STATE ) Appeal from the Circuit Court
OF ILLINOIS, ) of Winnebago County.
)
Plaintiff-Appellee, )
)
v. ) No. 18-CF-2108
)
TROY ROSSATO, ) Honorable
) Debra D. Schafer,
Defendant-Appellant. ) Judge, Presiding.
______________________________________________________________________________
JUSTICE HUDSON delivered the judgment of the court.
Presiding Justice Brennan and Justice Schostok concurred in the judgment.
ORDER
¶1 Held: The State proved beyond a reasonable doubt that (1) the victim lacked the ability
to knowingly consent to sexual acts and (2) defendant was aware of her inability to
give knowing consent. Although defendant testified that his sex with the victim
was consensual, the trial court appropriately credited the testimony of other
witnesses, who described the victim as severely intoxicated and barely conscious.
¶2 Defendant, Troy Rossato, appeals from the judgment of the circuit court of Winnebago
County finding him guilty of two counts of criminal sexual assault (720 ILCS 5/11-1.20(a)(2)
(West 2018)). He contends that the State failed to prove beyond a reasonable doubt that (1) the
2022 IL App (2d) 210698-U
victim, L.R., was unable to give consent and (2) he knew that L.R. was unable to give consent.
Because the evidence established both elements beyond a reasonable doubt, we affirm.
¶3 I. BACKGROUND
¶4 The State indicted defendant on one count of criminal sexual assault based on his having
inserted his finger in L.R.’s vagina while knowing that she was unable to give knowing consent
(720 ILCS 5/11-1.20(a)(2) (West 2018)) and one count of criminal sexual assault based on his
having inserted his penis into L.R.’s vagina while knowing that she was unable to give knowing
consent (720 ILCS 5/11-1.20(a)(2) (West 2018)).
¶5 At defendant’s bench trial, L.R. testified that, on July 13, 2018, she worked at a restaurant
in Rockford. After her shift, she and a coworker, Hannah Timmer, decided to go out drinking.
Timmer drove, and L.R. left her vehicle at the restaurant.
¶6 The pair went to a bar, stayed a short while, and then drove to a second bar. Defendant
and a friend, Dylan Badker, were at the second bar. L.R. knew Badker, as he dated another of her
coworkers. However, L.R. had never met defendant. At the bar, L.R. had a “couple of drinks”
while she and Timmer waited for Timmer’s friends to arrive.
¶7 After Timmer’s friends arrived, Timmer invited them to her house to swim and drink. L.R.
and Timmer left first and drove to Timmer’s house. Badker texted and called Timmer several
times seeking an invitation to her house.
¶8 Shortly after they arrived at the house, Timmer’s friends began arriving. Badker and
defendant also arrived. The house had an indoor pool and a bathroom in the same area. Upstairs
from the pool area was a loft with Timmer’s bedroom and another bathroom. L.R. borrowed a
swimsuit from Timmer. While she swam and played games, L.R. was “still drinking.” At one
point, L.R. was definitely “feeling real drunk.”
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2022 IL App (2d) 210698-U
¶9 As L.R. played a game called “Jenga,” defendant commented that she would not be able to
make a successful move. L.R. replied, “ ‘Watch me.’ ” According to L.R., that was her only
interaction with defendant.
¶ 10 The next thing L.R. remembered was being in the downstairs bathroom and vomiting into
the toilet. She described herself as “extremely intoxicated.” She then recalled Timmer and one of
Timmer’s friends helping her up the stairs. They sat her on Timmer’s bed. She was slumped over
and “couldn’t really move.” She remembered Timmer helping her undress and putting a robe on
her. She had no clothes on under the robe. L.R. fell asleep in bed.
¶ 11 L.R. awoke to someone trying to penetrate her vagina with his fingers. At first, she could
not see who it was. Then, she remembered “him” kissing her neck and asking her if it felt good.
Although she felt a beard, she could not see the person’s face. She tried to keep her legs closed
because she could not speak. The fingers penetrated her vagina. She then passed out. According
to L.R., she was in and out of consciousness several times.
¶ 12 When she awoke, “it was happening again.” She tried to say no but could not speak. She
tried to roll away but passed out again. At one point, she awoke and felt someone on top of her.
She could now see that it was defendant, penetrating her vagina with his penis. He also put his
fingers in her vagina. According to L.R., she tried to scream, but nothing came out. When she
tried to hit him, her arm went limp. She heard defendant say, “It feels good. I know it does.” L.R.
then passed out again.
¶ 13 She remembered defendant waking up next to her and “fingering [her].” L.R. was able to
roll away and pull herself against the wall. She was crying and saw defendant walk away. That
was the last time she saw defendant. She then passed out again.
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2022 IL App (2d) 210698-U
¶ 14 The next morning, Timmer woke L.R. up and took her to her car. She drove herself home.
When her roommate talked to her, L.R. could not hear her. L.R. went upstairs to bed. She slept
until around 2 or 3 p.m.
¶ 15 After waking, L.R. began recalling things from the night before. She texted Timmer and
asked if anyone had been in the bedroom. After speaking with Timmer, L.R. called her father and
asked him to accompany her to the hospital. She met with a doctor and nurse and completed a
sexual assault examination. L.R. denied ever telling defendant that she wanted to have sex with
him.
¶ 16 On cross-examination, L.R. testified that she had one drink at the first bar and stayed at the
second bar for about an hour to an hour and a half. When she and Timmer left the bar, Timmer
said goodbye to Badker. After that, he called her multiple times. According to L.R., Badker
invited himself and defendant to Timmer’s house.
¶ 17 After putting on a swimsuit, L.R. went downstairs and made herself and Timmer a drink.
L.R. did not recall there being a hot tub.
¶ 18 There were several people, including defendant, around a table, taking turns playing Jenga.
She thought she played Jenga twice with defendant. The next thing L.R. remembered was
vomiting inside the downstairs bathroom. Timmer was there with one of her male friends. L.R.
could hear Badker. The next thing she recalled was someone helping her up the stairs. She did
not know when she fell asleep, but it was “pretty late.” She recalled hearing people and music
downstairs.
¶ 19 After waking L.R. the next morning, Timmer dropped her off at her car at around 9 a.m.
L.R. drove 30 to 35 minutes to get home. She was “very out of it” and did not know how she made
it home.
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2022 IL App (2d) 210698-U
¶ 20 Timmer testified that she worked with L.R. on July 13, 2018. After work, Timmer drove
them to her house so they could change clothes and go out. According to Timmer, Badker and
defendant were at the first bar. She knew Badker but had never met defendant before. At some
point, some of Timmer’s friends joined them. All of them were drinking at both bars.
¶ 21 At some point, Timmer and L.R. left the second bar and went to Timmer’s house. Timmer
had invited several of her friends to swim and hang out. Several of Timmer’s friends showed up.
Badker and defendant arrived later. The group was drinking and swimming. Timmer described
L.R. as a “little social butterfly.” At one point, Timmer saw one of the guests, Blair Beeman,
helping L.R. up the stairs. Timmer joined in assisting L.R. up the stairs and into Timmer’s bed.
According to Timmer, L.R. was “[t]otally out of it. Throwing up. Just, like, very lethargic and
heavy.” L.R. could barely speak.
¶ 22 After getting L.R. to the bedroom, Timmer helped undress her and put her in a robe.
Timmer testified that both Badker and defendant were in the room, and Badker helped put L.R. in
bed. Badker also helped position L.R. on her side so she would not vomit and aspirate. They did
so because L.R. was so drunk. After putting L.R. in bed, they put a garbage can on the floor next
to the bed and tucked her in. When Timmer left the room, L.R. was asleep, and no one else
remained.
¶ 23 After going downstairs, Timmer went outside with Badker and picked up cigarette butts.
Defendant remained inside. After about 15 minutes, Timmer went back inside. When she did, she
saw defendant coming down the stairs from her bedroom. Timmer “freaked out” because she
wanted to know why defendant was in the bedroom when L.R. was “like, black-out drunk.” By
“black-out drunk,” she meant that L.R. was “[e]ssentially[ ] unconscious” and “[n]ot able to make
a decision for herself.” When Timmer asked defendant why he was upstairs, he said, “ ‘I didn’t
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2022 IL App (2d) 210698-U
do anything she didn’t want.’ ” Timmer then said they should go upstairs and ask L.R., because
Timmer knew that L.R. would be unable to respond.
¶ 24 When Timmer went upstairs, she saw L.R. lying against the wall in bed. She was not
“awake and talking.” Rather, she was moaning and saying no. When Timmer tried to wake L.R.,
she did not open her eyes but continued to moan. She could not form a sentence. Timmer then
went downstairs and told Badker and defendant to leave, or she would call the police. They left.
¶ 25 On cross-examination, Timmer testified that a hot tub was in the pool area and that some
guests used it. She saw L.R. get sick in the upstairs bathroom. After Beeman left the bedroom,
Badker helped L.R. get in Timmer’s bed. According to Timmer, defendant just stood there and
watched them put L.R. in bed. Timmer, Badker, and defendant went downstairs at the same time.
¶ 26 Beeman testified that she was at Timmer’s
- house on July 13 to July 14, 2018. She had not
met Timmer or L.R. before that night. She and several other people, including L.R., swam in the
pool. After swimming, Beeman saw L.R. in the downstairs bathroom, vomiting in the toilet.
Although Beeman was “pretty drunk” herself, she and Timmer helped L.R. up the stairs. They
then helped her out of her swimsuit. The last time Beeman saw L.R., she was asleep in bed. There
were other people upstairs in the bedroom, but she could not recall who.
¶ 27 On cross-examination, Beeman admitted to having two drinks at a bar before arriving at
the house. She continued drinking after arriving at the house. She admitted to blacking out after
putting L.R. to bed.
¶ 28 On July 14, 2018, Emily Bunton worked as an emergency room nurse at a hospital in
Rockford. L.R. came in for a sexual assault examination. According to Bunton, she did not
observe any external injuries on L.R.’s vagina or anus but added that she does not always see such
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2022 IL App (2d) 210698-U
injuries in sexual assault cases. No urine sample was taken from L.R., but Bunton could not recall
why.
¶ 29 Following the close of the State’s case, defendant moved for a directed finding. He argued,
among other things, that the State had failed to show that he knew that L.R. was unable to give
knowing consent. In doing so, he cited People v. Fisher, 281 Ill. App. 3d 395 (1996). The trial
court denied the motion.
¶ 30 Defendant testified that, on July 13, 2018, his fiancée dropped him off at a bar in Rockford.
After a while, he called Badker to join him. According to defendant, he and Badker met L.R. and
Timmer in the parking lot while defendant was having a cigarette. L.R. and Timmer said that they
had just come from another bar. They all went into the bar, and defendant went back to playing
slots. At some point, L.R. and Timmer left. Badker and defendant left around an hour later.
¶ 31 Because they had been invited to Timmer’s house, they stopped and bought a 12-pack of
beer. They also brought a Jenga game. They arrived around 11:45 p.m., and Timmer greeted them
outside.
¶ 32 Defendant went into the pool area and sat at a table, playing cards and Jenga. According
to defendant, while playing cards, he and L.R. had small talk and flirted with each other. After
cards, he played Jenga. L.R. also played Jenga. Defendant made one comment to L.R. about how
she was playing the game, but otherwise, it was a “flirtatious back and forth.”
¶ 33 According to defendant, after the Jenga game, L.R. got in the hot tub. At one point, she
looked over at defendant and made a gesture indicating oral sex. Defendant had no further
interaction with L.R. at that point.
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2022 IL App (2d) 210698-U
¶ 34 Defendant testified that he was outside smoking when L.R. went upstairs. When he came
inside, she was no longer downstairs. He was downstairs for about 15 minutes and then asked to
use the bathroom. Timmer told him to use the upstairs bathroom.
¶ 35 According to defendant, L.R. was awake when he passed through the room to use the
bathroom. He had no interaction with her before he used the bathroom. After exiting the
bathroom, he asked, “ ‘You good over there?’ ” According to defendant, L.R. said, “ ‘Yeah. Come
here.’ ” L.R. was in the middle of the bed. Defendant went over to her. They chatted “and one
thing led to the next.” They kissed and then had sex. According to defendant, while they were
having sex, L.R. said, “ ‘Yes, daddy. More, daddy.’ ” They had sex in several positions. After
defendant ejaculated, L.R. gave him oral sex until he was erect. Then, she got on top of him, and
they had sex again.
¶ 36 Defendant denied that L.R. ever passed out or fell asleep. After they had sex, L.R. asked
him if he had a girlfriend. When he told her that he did, she said that she felt dirty. Defendant
testified that he then laid there for about 15 to 20 minutes before they both fell asleep. Defendant
awoke around 6:30 a.m., left the bedroom, and went downstairs to the pool area. Timmer and
Badker were there. Timmer said that she was going upstairs to talk with L.R. Defendant started
cleaning up beer cans and cigarette butts. When Timmer came downstairs, he thanked her for
having them over and left with Badker. Defendant again denied that he penetrated L.R.’s vagina
with either his fingers or his penis while she was passed out.
¶ 37 On cross-examination, defendant acknowledged that L.R. was drinking and having fun at
Timmer’s. Defendant denied seeing L.R. vomit. According to defendant, L.R. was wearing a one-
piece satin lingerie in bed. He asked her if she wanted to have sex and she answered yes.
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2022 IL App (2d) 210698-U
¶ 38 In ruling, the trial court noted that the question was not whether defendant and L.R. had
sex but whether the sex was consensual. The court observed that there was little evidence of who
was drinking what and how much. However, the court noted that L.R., Timmer, and Beeman all
testified that L.R. was drunk. The court pointed to Timmer’s testimony that L.R. “was totally out
of it. She was very lethargic, throwing up and barely speaking.” The court noted that defendant
denied seeing L.R. vomit or any other evidence that she was drunk. In the court’s view, the
conflicting accounts of L.R.’s condition raised a credibility question. The court resolved the
conflict by finding L.R., Timmer, and Beeman more credible than defendant. The court concluded
that L.R. was unable to give knowing consent to sex with defendant. Thus, the court found
defendant guilty of both counts.
¶ 39 In his motion for a new trial, defendant argued, among other things, that the trial court did
not adequately consider whether the State proved beyond a reasonable doubt that defendant was
aware that L.R. was unable to give knowing consent. Defendant noted that “[t]he crime of criminal
sexual assault is committed by the wrongful act of the accused, not the disability of the victim.”
Fisher, 281 Ill. App. 3d at 402 (citing People v. Whitten, 269 Ill. App. 3d 1037, 1042 (1995)).
¶ 40 At the hearing on the motion, the court addressed defendant’s argument by pointing to the
evidence that L.R. “was incoherent at the time that she was being sexually assaulted and unable to
give knowing consent based on the description that was provided by other witnesses as to her
condition.” The court concluded: “I don’t know how any person in that room couldn’t have known
she was unable to give knowing consent.” Accordingly, the court denied defendant’s motion.
¶ 41 II. ANALYSIS
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¶ 42 On appeal, defendant contends that the State did not prove beyond a reasonable that
(1) L.R. was so intoxicated that she was unable to knowingly consent to sex and (2) defendant
knew that L.R. was unable to knowingly consent.
¶ 43 When presented with a challenge to the sufficiency of the evidence, our function is not to
retry the defendant. People v. Ressa, 2019 IL App (2d) 170439, ¶ 42. Rather, the relevant question
is whether, after viewing the evidence in the light most favorable to the prosecution, any rational
trier of fact could have found the essential elements of the crime beyond a reasonable doubt. Ressa,
2019 IL App (2d) 170439, ¶ 42. The trier of fact is responsible for assessing the credibility of the
witnesses, weighing their testimony, resolving inconsistencies and conflicts in the evidence, and
drawing reasonable inferences. Ressa, 2019 IL App (2d) 170439, ¶ 42. We will not substitute our
judgment for that of the trier of fact on witness credibility or the weight of the evidence. Ressa,
2019 IL App (2d) 170439, ¶ 42. We will not reverse a guilty finding unless the evidence, viewed
in the light most favorable to the prosecution, was so palpably contrary to the guilty finding, or so
unreasonable, improbable, or unsatisfactory as to create a reasonable doubt of the defendant’s
guilt. Ressa, 2019 IL App (2d) 170439, ¶ 42.
¶ 44 A person commits criminal sexual assault if he (1) commits an act of sexual penetration
and (2) knows that the victim is unable to understand the nature of the act or is unable to give
knowing consent. 720 ILCS 5/11-1.20(a)(2) (West 2018). The sexual assault statute prohibits a
person from taking advantage of another when the other is unable to knowingly consent to the
sexual act. Fisher, 281 Ill App. 3d at 402. Accordingly, if the perpetrator knows that the other
person may be unable, for any reason, to consent to the sexual act, the perpetrator must refrain
from taking advantage of the situation. Fisher, 281 Ill. App. 3d at 402. As noted, “[t]he crime of
criminal sexual assault is committed by the wrongful act of the accused, not the disability of the
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2022 IL App (2d) 210698-U
victim.” Fisher, 281 Ill. App. 3d at 402 (citing Whitten, 269 Ill. App. 3d at 1042). Put another
way, the State must prove beyond a reasonable doubt that the defendant knew the victim was
unable to give knowing consent because of her intoxication. People v. Lloyd, 2013 IL 113510,
¶ 42; see also Whitten, 269 Ill. App. 3d at 1042.
¶ 45 Consent requires a freely given agreement to the sexual conduct at issue. People v. Beasley,
314 Ill. App. 3d 840, 845 (2000). Knowledge of a material fact includes awareness of the
substantial probability that the fact exists. 720 ILCS 5/4-5(a) (West 2018). Whether a person
acted with knowledge may be inferred from circumstantial evidence. People v. Hall, 273 Ill. App.
3d 838, 842 (1995). Inferences regarding a defendant’s mental state are particularly a matter
within the province of the trier of fact. People v. DiVincenzo, 183 Ill. 2d 239, 253 (1998). The
sole limitation of using circumstantial evidence is that the inferences drawn must be reasonable.
People v. Grathler, 368 Ill. App. 3d 802, 808 (2006).
¶ 46 We begin by deciding whether there was sufficient evidence of L.R.’s inability to give
knowing consent. There was.
¶ 47 There was ample evidence that L.R. had been drinking to the point that she was extremely
intoxicated. L.R. and Timmer testified that L.R. began drinking earlier at a bar (Timmer said they
drank at two bars) and continued to drink at Timmer’s house. Even defendant admitted that L.R.
was drinking at the house. L.R. described herself as “real drunk” and “extremely intoxicated.”
Timmer described L.R. as being “totally out of it.” L.R. was so drunk that she vomited in the
downstairs bathroom and had to be helped upstairs, undressed, clothed in a robe, and put into bed.
¶ 48 Once in bed, L.R. immediately fell asleep. During the sexual encounter, she was in and
out of consciousness and unable to speak or physically resist. Finally, after defendant left the
room, L.R. again passed out. When viewed in the light most favorable to the prosecution, the
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evidence clearly established that L.R. was so intoxicated that she was unable to knowingly consent
to sex with defendant.
¶ 49 Although defendant points to the fact that L.R. was able to drive home the next morning,
L.R. testified that she was “very out of it” while driving and did not know how she made it home.
That shows that L.R. had not yet completely recovered from her intoxicated state.
¶ 50 We next address whether the State proved that defendant knew that L.R. was unable to give
knowing consent. We begin by noting that, in a bench trial, the trial judge is presumed to know
and follow the law, and that presumption is rebutted only when the record affirmatively shows
otherwise. Ressa, 2019 IL App (2d) 170439, ¶ 31.
¶ 51 Timmer testified that she, L.R., and the others, including defendant, drank at two bars
before going to Timmer’s house. At the house, the group (which included defendant) swam and
played games. L.R. testified that she was “still drinking” at Timmer’s house. Defendant admitted
that L.R. was drinking at the house. According to defendant, he played Jenga with L.R. and flirted
with her several times. From their interactions, defendant would have been keenly aware of L.R.’s
intoxicated condition.
¶ 52 Further, because she was so “out of it,” L.R. was helped up the stairs. Those stairs were in
the same room as the pool and the table where defendant had been playing games. It is difficult
to imagine that anyone in the pool area was unaware of L.R.’s condition in seeing her being helped
up the stairs. Critically, Timmer testified that defendant was in her upstairs bedroom when she
and others, including defendant’s friend Badker, helped L.R. get into the robe and go to bed.
Defendant’s watching L.R. being put to bed in her intoxicated condition would certainly have
shown him that she was unable to knowingly consent to sex. Indeed, as the trial court noted at the
hearing on the motion for a new trial, it “[didn’t] know how any person in that room couldn’t have
- 12 -
2022 IL App (2d) 210698-U
known [that] she was unable to give knowing consent.” When viewed in the light most favorable
to prosecution, the evidence was clearly sufficient to prove beyond a reasonable doubt that
defendant knew that L.R. was unable to knowingly consent to sex.
¶ 53 Although defendant points to his own testimony that L.R. was not so drunk that she could
not consent and that she did, in fact, engage in sex voluntarily, the trial court chose to believe the
State’s witnesses in that regard. As discussed, that was within the unique province of the trial
court. Defendant asserts that the trial court never found him incredible. However, it did so
implicitly when it expressly found Timmer, L.R., and Beeman credible.
¶ 54 Lastly, defendant contends that the trial court did not follow the law because it never
reached the issue of whether defendant knew that L.R. was unable to knowingly consent. As
discussed, we presume that the court knew and followed the law and made all findings necessary
to support a guilty finding. As pertinent here, we presume that the trial court was aware that it
could not adjudge defendant guilty without finding beyond a reasonable doubt that defendant knew
of L.R.’s inability to knowingly consent. That finding, while not expressed when the court
adjudged defendant guilty, was implied given the evidence of defendant’s knowledge and the
court’s presumed awareness of the rule in Fisher and Whitten. Moreover, at the hearing on the
motion for a new trial, the court referenced Fisher and Whitten, expressly finding that anyone in
the bedroom would have known that L.R. was incapable of knowingly consenting to sex. Of
course, the evidence established that defendant was in the bedroom when L.R. was put to bed and
thus would have known of her intoxicated condition. Public policy encourages a trial court to
clarify its prior rulings and findings at a posttrial proceeding. See People v. Marker, 233 Ill. 2d
158, 169-70 (2009). Based on its knowledge of the law and the evidence, and its clarification at
- 13 -
2022 IL App (2d) 210698-U
the hearing on the motion for a new trial, the court clearly found that defendant knew that L.R.
was unable to knowingly consent to sex.
¶ 55 III. CONCLUSION
¶ 56 For the reasons stated, we affirm the judgment of the circuit court of Winnebago County.
¶ 57 Affirmed.
- 14 - | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488338/ | Filed 11/21/22 P. v. Chance CA3
NOT TO BE PUBLISHED
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
THIRD APPELLATE DISTRICT
(Shasta)
----
THE PEOPLE, C095645
Plaintiff and Respondent, (Super. Ct. Nos. 17F5886,
19F1132, & 19F5154)
v.
ALLEN GEORGE CHANCE,
Defendant and Appellant.
Defendant Allen George Chance pleaded no contest to multiple felonies and
misdemeanors in four unrelated cases. Defendant pleaded no contest in the first case and
received probation. After defendant failed to comply with the terms of the plea jointly
resolving the three remaining cases, the trial court sentenced him to the eight-year four-
1
month maximum term, including the four-year upper term for inflicting corporal injury.
(Pen. Code, § 273.5, subd. (a).)1
On appeal, defendant contends the trial court could not impose the upper term for
inflicting corporal injury given the sentencing requirements within Senate Bill No. 567
(2021-2022 Reg. Sess.) (Senate Bill 567). We vacate defendant’s sentence and remand
for resentencing.
BACKGROUND 2
Over the course of several years, defendant abused, threatened, and harassed his
ex-wife.
In case No. 886, defendant pleaded no contest to assault with force likely to cause
great bodily injury (§ 245, subd. (a)(4)), and in 2018 he received three years’ probation.
While defendant was on probation, the probation department filed three revocation of
probation petitions which were based on defendant’s failure to participate in
rehabilitative programming and his commission of additional offenses. One of the
offenses cited in the revocation petition, plus two additional offenses defendant
committed while on probation, resulted in felony and misdemeanor charges in case
Nos. 132, 154, and 20M2497 (497).
Two years later, defendant appeared for a violation of probation hearing.
Defendant pleaded no contest to the felonies and misdemeanors in case Nos. 132, 154,
and 497. Pursuant to his plea jointly resolving case Nos. 132, 154, and 497, defendant
1 Undesignated statutory references are to the Penal Code.
2 The parties stipulated that the preliminary hearing in case No. 17F5886 (886) and the
police reports for case Nos. 19F1132 (132) and 19F5154 (154) provided the factual bases
for defendant’s pleas. As the substantive facts for each case are not relevant to our
disposition, they are not recounted here in any detail.
2
entered a Cruz/Vargas3 waiver and received probation. The court ordered defendant to
return for sentencing on September 3, 2020. If defendant appeared as ordered, the court
would impose a prison sentence with suspended execution while defendant remained on
probation. If defendant did not appear, then the court could impose a prison sentence up
to the maximum. Defendant also admitted a probation violation in case No. 886 when he
committed the three offenses in case Nos. 132, 154, and 497.
Prior to defendant’s September 3, 2020, sentencing, the probation department
signed a fourth petition for revocation of probation following defendant’s failure to attend
orientation, failure to report weekly, and failures to enroll or provide proof of enrollment
in rehabilitative programming.
Defendant did not appear for his September 3, 2020, sentencing. In October 2021,
the trial court revoked probation in case No. 886. In November 2021, defendant
appeared at a hearing, admitted he did not appear as ordered on September 3, 2020, and
admitted he violated the Cruz/Vargas waiver.
At sentencing, the trial court found six applicable aggravating factors: (1) the
crime involved great violence because the victim had been hurt tremendously;
(2) defendant engaged and continues to engage in violent conduct; (3) defendant’s adult
convictions were numerous; (4) defendant served a prior prison term; (5) defendant was
on probation when he entered his change of plea; and (6) defendant’s performance on
probation had been completely unsatisfactory. With respect to defendant’s violence, the
court noted defendant “scored an 8 on the ODARA,” which meant defendant was likely
to commit future violence. The trial court found no factors in mitigation.
In reaching the eight-year four-month maximum term, the trial court imposed the
following sentence: In case No. 154, the court imposed a four-year upper term sentence
3 People v. Cruz (1988) 44 Cal.3d 1247; People v. Vargas (1990) 223 Cal.App.3d 1107.
3
for inflicting corporal injury, an eight-month consecutive term for making criminal
threats, and a one-year consecutive term for assault with force likely to cause great bodily
injury. In case No. 132, the court imposed a one-year consecutive term for domestic
violence, an eight-month consecutive term for second degree burglary, and six months in
jail concurrent for misdemeanor violating a court order. In case No. 497, the court
imposed a six-month concurrent term for misdemeanor violating a court order. Finally,
in case No. 886, the court imposed a one-year consecutive term for assault with force
likely to cause great bodily injury.
DISCUSSION
Defendant contends the trial court could not impose the upper term on his
conviction for inflicting corporal injury given the sentencing requirements imposed by
Senate Bill 567. The People claim the trial court relied on four properly found
aggravating circumstances and thus the court’s consideration of additional aggravating
circumstances was harmless. We conclude remand is necessary.
At the time of sentencing, former section 1170 authorized a sentencing triad,
leaving the selection of the appropriate term to “the sound discretion of the court.”
(Former § 1170, subd. (b); Stats. 2020, ch. 29, § 14.) As relevant here, Senate Bill 567
amended sections 1170 and 1170.1 to limit the trial court’s discretion to impose a
sentence greater than the midterm. (§ 1170, subd. (b)(1), (2), as amended by Stats. 2021,
ch. 731, § 1.3.) To impose a sentence beyond the midterm, the aggravating factors must
justify doing so, and the facts underlying the circumstances must have been stipulated to
by defendant or found true beyond a reasonable doubt, except that the trial court may rely
on certified records of conviction to find a prior conviction proven. (§ 1170, subd. (b)(1)-
(3), as amended by Stats. 2021, ch. 731, § 1.3.) The amended section 1170, effective
January 1, 2022, applies retroactively as an ameliorative change in the law applicable to
all nonfinal convictions. (People v. Zabelle (2022) 80 Cal.App.5th 1098, 1109
(Zabelle).)
4
The trial court relied on six aggravating circumstances to impose the upper term.
But defendant’s aggravated sentence based on all six factors did not comply with
amended section 1170. To comply with amended section 1170, the facts supporting these
aggravating factors had to have been found true beyond a reasonable doubt, stipulated to
by defendant, or proven by certified record. (§ 1170, subd. (b)(2), (3).) The trial court
properly relied on the following three aggravating factors because defendant stipulated to
the facts supporting them: (1) defendant’s violation of probation; (2) poor performance
on probation; and (3) numerous prior convictions. The trial court therefore “could have
imposed the upper term sentence” (Zabelle, supra, 80 Cal.App.5th at p. 1112) consistent
with the Sixth Amendment’s jury-trial guarantee under the standard set forth in People v.
Sandoval (2007) 41 Cal.4th 825. Having satisfied the Sixth Amendment concerns, we
turn to the second step under Zabelle.
The second step under Zabelle requires us to assess whether the court “would have
imposed the upper term sentence even absent the error” (Zabelle, supra, 80 Cal.App.5th
at p. 1112) under the state law standard set forth in People v. Watson (1956) 46 Cal.2d
818. First, we ask whether the facts underlying the aggravating circumstances would
have been established in a statutorily permissible manner. (§ 1170, subd. (b)(2), (3); see
Watson, at p. 836.) Then, excluding any factors that we conclude would not have been
found true in a permissible manner, “we must consider whether it is reasonably probable
that the trial court would have chosen a lesser sentence in the absence of the error.”
(Zabelle, at p. 1112; People v. Price (1991) 1 Cal.4th 324, 492.) “ ‘A “reasonable
probability” “does not mean more likely than not, but merely a reasonable chance, more
than an abstract possibility.” ’ ” (People v. Soto (2022) 79 Cal.App.5th 602, 610.)
We conclude two aggravating factors considered by the trial court were not found
in a statutorily permissible manner: (1) the crime involved great violence; and
5
(2) defendant engaged and continues to engage in violent conduct.4 That leaves a final
aggravating factor: defendant’s prior prison term. Defendant’s prior prison term was not
established by certified records and he did not admit to serving a prior prison term.
Although there may be records available to support findings regarding defendant’s prior
incarceration, “we will not presume the existence of extrarecord materials.” (Zabelle,
supra, 80 Cal.App.5th at p. 1115, fn. 6.) Therefore, on this record, we cannot conclude
there is a reasonable probability the jury would have found defendant’s prior prison term
true beyond a reasonable doubt.
We turn to the second question. In selecting the upper term, the trial court relied
on three factors in aggravation that were found in a statutorily permissible manner:
defendant’s violation of probation, defendant’s poor performance on probation, and
defendant’s numerous prior convictions. But we cannot conclude the trial court would
have imposed the upper term based solely on these three permissible factors. The trial
court did not give any emphasis to defendant’s violation of probation, poor performance
on probation, or prior convictions. Instead, the trial court gave particular weight to
defendant’s violence. Despite finding no factors in mitigation, we cannot conclude the
trial court would have imposed the upper term had it known it could not rely on three of
the six aggravating factors it applied. In this instance, the proper remedy is to remand for
resentencing. (People v. Avalos (1984) 37 Cal.3d 216, 233.)
4 We note the People did not rely on these two aggravating factors in its brief, possibly
because the factors did not comply with amended section 1170.
6
DISPOSITION
Defendant’s sentence is vacated, and the matter is remanded for a full
resentencing. (People v. Buycks (2018) 5 Cal.5th 857, 893.) In all other respects, the
judgment is affirmed.
/s/
HOCH, J.
We concur:
/s/
ROBIE, Acting P. J.
/s/
EARL, J.
7 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488347/ | Filed 11/21/22 Farzam v. Anthony Mason Associates CA2/2
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 TWO
SIROOS FARZAM et al., B311890
Plaintiffs and Appellants, (Los Angeles County
Super. Ct. No.
v. 20STCV16404)
ANTHONY MASON
ASSOCIATES, INC.,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of
Los Angeles County, Rupert A. Byrdsong, Judge. Affirmed.
Andrade Gonzalez, Sean A. Andrade, Henry H. Gonzalez
and Stephen V. Masterson for Plaintiffs and Appellants.
Akerman, Brenda K. Radmacher and Christine B. Gardner
for Defendant and Respondent.
______________________________________
A luxury hotel was built in Santa Monica, without approval
by the California Coastal Commission (CCC). In 2019, the CCC
imposed monetary sanctions and room-rate restrictions, as a
condition of issuing an after-the-fact permit for the hotel. Two
lenders who funded construction of the hotel sued a construction
manager, claiming the manager is responsible for impairing the
value of their security, caused by the room-rate restrictions. The
trial court sustained demurrers, without leave to amend.
On de novo review, we conclude that the lenders,
appellants Siroos and Gina Farzam, cannot state a claim. In
2009, appellants’ son—on behalf of the property owner—applied
for, and the CCC authorized, construction of a “low to moderate
priced Travelodge.” Appellants had no reasonable expectation
their loan would be secured by a “boutique luxury hotel.” The
construction manager is not responsible for the hotel owner’s
excessive room rates. We affirm the judgment.
FACTS AND PROCEDURAL HISTORY 1
In 2011, appellants loaned $58 million (Loan) to their own
entity, Sunshine Enterprises, L.P. (Sunshine), to finance
construction of the Shore Hotel (Hotel) on Ocean Avenue in Santa
Monica. The trial court took judicial notice of Sunshine’s
Certificate of Limited Partnership, which was signed by Siroos
Farzam and filed with the California Secretary of State. The
Loan is secured by a first deed of trust on Hotel. Sunshine built
and operates Hotel.
Respondent Anthony Mason Associates, Inc. (AMA) is a
manager hired to oversee construction of Hotel. AMA allegedly
represented that it has extensive experience navigating the
1 The facts are from the first amended complaint (FAC).
2
approval process and would oversee and coordinate planning
approvals, building permits, and similar jurisdictional agency
requirements. AMA promised to “ ‘continually oversee[] the
quality of work generated by the entire team throughout the
duration of the project.’ ”2
Relying on these assurances, Sunshine constructed Hotel
“under the mistaken belief that Defendants had secured all
appropriate permits, approvals, and authorizations” from the
City of Santa Monica and the CCC. Contrary to Sunshine’s
belief, the permits were never issued.
The FAC states, “On January 15, 2014, the California
Coastal Commission issued a Notice of Violation [NOV] of the
California Coastal Act stating that . . . no coastal permits had
been issued for the demolition of two previous motels or for the
construction of the Shore Hotel, and that, rather than the
moderately priced Travel Lodge that had been conditionally
permitted, the Shore Hotel was an unauthorized luxury boutique
hotel that did not serve the Coastal Act’s goal of assuring
affordable overnight accommodations along the coast.” The NOV
“threatened a cease and desist order and penalties of up to
$15,000 per day of violation.” The CCC “encouraged Sunshine to
negotiate a resolution including payment of an appropriate
penalty and conditions on future operation of the Shore Hotel
designed to foster public access to the coast.”
The CCC and Sunshine negotiated a resolution of their
dispute. In May 2019, the CCC set the monetary penalty at
$15,581,000, which Sunshine paid in August 2019. The CCC
2 At the trial court hearing, the parties said they have no
copy of a written contract between AMA and Sunshine.
3
issued an after-the-fact permit allowing Hotel to operate, subject
to conditions that run with the land and are binding on future
owners. One condition is that Sunshine is limited to charging
$150 per night for 72 of Hotel’s 164 rooms. Appellants allege,
“These perpetual Conditions—caused by Defendants’ negligent
failures to timely obtain all required government agency permits
and approvals—impaired the Farzams’ security by significantly
reducing the market value” of Hotel.
Sunshine and appellants filed suit in April 2020 against
AMA, the contractor that built Hotel, and the architect who
designed it. Appellants’ sole claim against AMA is for negligent
impairment of security.
AMA demurred. As to the impairment of security claim,
AMA asserted that appellants failed to show the elements of
actionable negligence because there is no duty of care, breach of a
duty, causation, or injury. AMA asked the court to take judicial
notice of the NOV as “official government acts and records.” The
court granted the request for judicial notice.
At the hearing on the demurrer, counsel agreed that in
2009 the CCC conditionally authorized a coastal development
permit (CDP), which limited room rates, before appellants made
the Loan. In 2014, the CCC learned that Sunshine was charging
excessive room rates. The court observed that there is no
contract between appellants and AMA, and no facts “were alleged
or could be alleged that would be beyond speculation that
somehow the Loan has suffered some detriment.” Appellants
argued that loss in value of a security is a question of fact. The
court noted that the room rate restrictions dated to 2009, so “this
was always established, always going to be the deal,” regardless
of what the defendants did.
4
The court sustained a demurrer to appellants’ impairment
of security claim, without leave to amend. It found appellants did
not show they are damaged by the CCC’s restrictions. They did
not assert facts showing how the restriction impaired their first
trust deed: There is no allegation that Sunshine is in default or
unable to make payments on the Loan. The court noted “a
potential statute of limitations issue” because the NOV issued in
2014, six years before appellants filed suit.
On January 12, 2021, the court entered judgment in favor
of AMA. The Farzams appeal the judgment of dismissal.3
DISCUSSION
1. Appeal and Review
Appeal lies from a judgment of dismissal after demurrers
are sustained without leave to amend. (Code Civ. Proc., §§ 581d,
904.1, subd. (a)(1); Serra Canyon Co. v. California Coastal Com.
(2004) 120 Cal.App.4th 663, 667.) “For purposes of reviewing a
demurrer, we accept the truth of material facts properly pleaded
in the operative complaint, but not contentions, deductions, or
conclusions of fact or law. We may also consider matters subject
to judicial notice.” (Yvanova v. New Century Mortgage Corp.
(2016) 62 Cal.4th 919, 924 (Yvanova).)
2. We May Consider the Contents of the NOV
The NOV is alleged in paragraphs 36 to 38 of the FAC.
Appellants do not discuss it in their opening brief, except with
respect to the statute of limitations. Not until their reply brief do
appellants assert that this court cannot consider the contents of
3 Sunshine was listed on the notice of appeal but did not
file a brief. On November 9, 2021, this court dismissed the
appeal with respect to codefendants Benchmark Contractors,
Inc., and M. Arthur Gensler Jr. & Associates, Inc.
5
the NOV. We disagree with their belated claim that only the
existence of the NOV can be considered.
Courts may “consider material documents referred to in the
allegations of the complaint.” (City of Port Hueneme v. Oxnard
Harbor Dist. (2007) 146 Cal.App.4th 511, 514.) On demurrer,
when the superior court grants a request for judicial notice of
official documents, we “take notice of their existence and
contents, though not of disputed or disputable facts stated
therein.” (Yvanova, supra, 62 Cal.4th at p. 924, fn. 1 [court
considered the existence and contents of a recorded deed of trust,
assignment, substitution of trustee, notices of default and sale,
and trustee’s deed upon sale].) Appellants do not dispute the
veracity of the NOV, which falls within an exception to the
hearsay rule. (Evid. Code, § 1280.)
The FAC alleges more than the bare existence of the NOV;
it describes portions of the NOV for the truth of its statements.
The NOV led to Sunshine’s settlement with the CCC and
appellants’ alleged injury. As alleged in the FAC, the NOV states
that “no coastal permits had been issued for the demolition of the
two previous motels or for the construction of the Shore Hotel,
and that, rather than the moderately priced Travel Lodge that
had been conditionally permitted, the Shore Hotel was an
unauthorized luxury boutique hotel.”
Evidence Code section 356 “prevent[s] the use of selected
aspects of a conversation, act, declaration, or writing, so as to
create a misleading impression on the subjects addressed.”
(People v. Arias (1996) 13 Cal.4th 92, 156.) When applying this
rule of completeness, “ ‘the courts do not draw narrow lines
around the exact subject of inquiry’ ” and the entirety is placed in
evidence if it has “ ‘ “some bearing upon, or connection with” ’ ”
6
the part the proponent cites. (People v. Zapien (1993) 4 Cal.4th
929, 959, italics omitted.) Appellants described part of the NOV
in their pleading, opening the door to an examination of the
entirety of this public record.
3. The FAC Does Not State An Impairment Claim
“Real property, as security, affords a mortgagee his
primary, and in many cases his sole, means of repayment of a
debt should the mortgagor default. Generally speaking,
impairment of security is that circumstance where the mortgaged
property’s value no longer assures satisfaction of the debt.”
(Brown v. Critchfield (1980) 100 Cal.App.3d 858, 869; Pacific
Inland Bank v. Ainsworth (1995) 41 Cal.App.4th 277, 281.)
Trust deed beneficiaries may sue a third party tortfeasor
for negligent impairment of their security. (U. S. Financial v.
Sullivan (1974) 37 Cal.App.3d 5, 13–14.) A claim requires “acts
of negligence where it is reasonably foreseeable that such
negligence would result in the impairment of the security
interest.” (Baldwin v. Marina City Properties, Inc. (1978) 79
Cal.App.3d 393, 403 (Baldwin).)
The FAC alleges that AMA owed a duty to Sunshine to
secure and maintain compliance with all necessary permits while
assisting in the development of the Hotel. AMA’s duty “extended
to the Farzams as beneficiaries of a deed of trust securing their
loan to Sunshine.” AMA’s breach of its duty resulted in an
unpermitted development; appellants were harmed because the
value of their security was impaired by the CCC’s imposition of
conditions and restrictions limiting room rates to no more than
$150 per night, with no resort fees and reduced parking rates.
7
a. No Showing of a Duty
Appellants’ claim requires “acts of negligence.” (Baldwin,
supra, 79 Cal.App.3d at p. 403.) “[A] duty to the plaintiff is an
essential element” of negligence, and “[t]hat duty may be imposed
by law, be assumed by the defendant, or exist by virtue of a
special relationship.” (Potter v. Firestone Tire & Rubber Co.
(1993) 6 Cal.4th 965, 984, 985.) Appellants’ opening brief states,
“AMA was negligent in its duty to timely obtain all required
government agency permits and approvals for the Shore Hotel.”
The quoted sentence is the entire discussion of “duty.”
Appellants admitted in the trial court and to this court that
there is no written contract between Sunshine and AMA. Absent
a contract, appellants’ claim about AMA’s duty to obtain a permit
modification from the CCC is pure speculation. Sunshine applied
for a permit in 2009, not AMA. The CCC required “the property
owners to obtain an amendment to the CDP for any deviation
from the project description.” (Italics added.) Sunshine (i.e., the
Farzams) had to be involved in the amendment process.
Appellants have failed to show a basis for imposing a duty on
AMA that is “imposed by law, . . . assumed by the defendant, or
exist[s] by virtue of a special relationship.” (Potter v. Firestone
Tire & Rubber Co., supra, 6 Cal.4th at p. 985.)
b. No Impairment of Value Occurred
Plaintiffs suing third party wrongdoers for impairment of a
security interest must plead facts showing impairment of the
value of the security. Without this showing, there is no damage.
(Baldwin, supra, 79 Cal.App.3d at p. 404.) Appellants cannot
allege that the value of their security was impaired by CCC’s
imposition of restricted room rates: Low to moderate room rates
were a feature of Sunshine’s application to build Hotel and were
8
central to the CCC’s authorization of a CDP in 2009, two years
before appellants made the Loan.
The NOV shows that Michael Farzam signed an application
in 2009, proposing to replace two small motels with “a single
limited-amenity moderate priced Travelodge Hotel [that will]
increase the number of affordable moderate-priced guestrooms
from 87 to 164.” (Italics omitted.) His letter to the CCC states,
“[T]he Farzams, consistent with City and State policies for the
Coastal Zone, elected to pursue a replacement moderately-priced
Travelodge rather than yet another new luxury hotel in the
Coastal Zone. The Farzams made this decision even though . . . a
luxury hotel would be more profitable than a moderately priced
Travelodge.” (Italics omitted.)
On June 11, 2009, the CCC approved a CDP conditionally
authorizing “demolition of two existing motels and construction of
a low to moderately priced hotel.” Michael Farzam agreed to the
terms. The NOV states, “[R]ather than the affordable,
moderately-priced Travelodge proposed in [the] CDP application
and considered by the Commission, a ‘luxury boutique’ hotel was
constructed on the properties.” (Fn. omitted.) The CCC wrote,
“The fact that the applicant proposed an affordable, moderately
priced hotel was central to the Commission’s review of the
project.” Amendment was not in the cards. (Cal. Code Regs.,
tit. 14, § 13166, subd. (a) [director of the CCC “shall reject an
application for an amendment to an approved permit if he or she
determines that the proposed amendment would lessen or avoid
the intended effect of an approved or conditionally approved
permit”].)
The NOV dooms the Farzams’ claim. They funded
construction of a hotel permitted to have 164 “low to moderately
9
priced” rooms. Michael Farzam “impaired” the value of the
property in 2009 when he applied for a CDP on behalf of
Sunshine. The CDP application had to contain “proof that all
holders or owners of any interests of record in the affected
property have been notified in writing of the permit application
and each invited to join as a co-applicant.” (Cal. Code Regs.,
tit. 14, § 13053.5, subd. (b).) Before loaning $58 million,
appellants had constructive knowledge of the limitations imposed
by the publicly available CDP. The pleading does not show AMA
had anything to do with the CDP.
Sunshine violated the CDP, created a luxury hotel, and
charged high rates. The CCC discovered the bait-and-switch and
held Sunshine to the terms of its agreement. This is not an
unforeseeable impairment of appellants’ security. If anything,
they came out ahead: They funded construction of a hotel with
few amenities and 164 moderately priced rooms. Under the
negotiated settlement with the CCC, the Hotel has amenities and
the low-to-moderate rate applies to 72 rooms, not 164 rooms. If
appellants believe Sunshine misled them about the type of hotel
the CCC authorized, their remedy is to sue Sunshine for
fraudulently inducing them to make the Loan.4 But, such a suit
is improbable as Sunshine is their own entity.
4. Leave to Amend
Appellants argue that the court abused its discretion by
denying leave to amend. (Code Civ. Proc., § 472c, subd. (a);
Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 971.)
Appellants have the burden of showing a reasonable possibility
4 In light of our conclusion that the FAC does not state a
claim for negligent impairment of security, we need not decide
whether the claim is barred by the statute of limitations.
10
that the complaint’s defects can be cured by amendment. (King v.
CompPartners, Inc. (2018) 5 Cal.5th 1039, 1050; T.H. v. Novartis
Pharmaceuticals Corp. (2017) 4 Cal.5th 145, 162.)
Appellants propose to amend their pleading to “allege much
more detail to demonstrate that the value of their security—the
Shore Hotel—has been severely impaired by the severe [CCC]
permanent restrictions imposed.” They cite loss of income in
2020 and diminution of the Hotel’s market value.
The proposed amendment does not, and cannot, reach the
heart of the problem. The problem is that Michael Farzam
obtained a CDP by telling the CCC that his family “elected” to
build a “moderately-priced Travelodge rather than yet another
new luxury hotel in the Coastal Zone . . . even though . . . a
luxury hotel would be more profitable than a moderately priced
Travelodge.” Affordability was the key factor in the CCC’s
approval. Appellants cannot complain about lost profits or lower
value; a moderately priced Travelodge is what they funded.
There is no indication that Michael Farzam’s 2009
application for a CDP was the fault of AMA, and there is no
contract showing AMA had a duty to obtain CCC approval of a
different or amended CDP. As appellants’ reply states, the CCC
told Sunshine that “should the project ‘change from the project
description’ of a moderately priced hotel, Sunshine could obtain a
new or amended CDP permit.” The record shows that Sunshine
agreed to build an affordable hotel, then charged excessive rates
once the Hotel was in operation, without CCC approval.
11
DISPOSITION
The judgment is affirmed. Anthony Mason Associates, Inc.,
is entitled to its costs on appeal.
NOT TO BE PUBLISHED.
LUI, P. J.
We concur:
CHAVEZ, J.
HOFFSTADT, J.
12 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488356/ | [Cite as State v. Dixon, 2022-Ohio-4158.]
IN THE COURT OF APPEALS OF OHIO
ELEVENTH APPELLATE DISTRICT
PORTAGE COUNTY
STATE OF OHIO, CASE NO. 2021-P-0114
Plaintiff-Appellee,
Criminal Appeal from the
-v- Court of Common Pleas
DANTE D. DIXON,
a.k.a. DEANTE D. DIXON, Trial Court No. 2021 CR 00040
Defendant-Appellant.
OPINION
Decided: November 21, 2022
Judgment: Affirmed and remanded
Victor V. Vigluicci, Portage County Prosecutor, and Theresa M. Scahill, Assistant
Prosecutor, 241 South Chestnut Street, Ravenna, OH 44266 (For Plaintiff-Appellee).
Joseph C. Patituce and Madison E. Karn, Patituce & Associates, LLC, 16855 Foltz
Industrial Parkway, Strongsville, OH 44149 (For Defendant-Appellant).
JOHN J. EKLUND, J.
{¶1} Appellant, Dante Dixon, appeals his sentence from the Portage County
Court of Common Pleas. Appellant raises three assignments of error, arguing that the
trial court erred in sentencing him to 38 to 42 years imprisonment, that the trial court erred
in imposing consecutive sentences, and that trial counsel was ineffective by failing to
object to the constitutionality of his indefinite sentence.
{¶2} After review of the record and the applicable caselaw, we find appellant’s
assignments of error to be without merit. Appellant cannot affirmatively demonstrate that
the trial court did not comply with the seriousness and recidivism factors in R.C. 2929.12;
the trial court properly imposed consecutive sentences on appellant; and, because we
have previously held that the Reagan Tokes Law is constitutional in State v. Reffitt, 11th
Dist. Lake Case No. 2021-L-129, 2022-Ohio-3371, and State v. Joyce, 11th Dist. Lake
Case No. 2021-L-006, 2022-Ohio-3370, appellant was not prejudiced when trial counsel
failed to object to the imposition of an indefinite sentence.
{¶3} Although not raised by appellant, the trial court’s sentencing entry contains
a clerical error, which states that appellant pled guilty to one count of “‘Carrying a
Concealed Weapon’ a felony of the third degree, in violation of R.C. 2923.13.” At the plea
hearing, appellant entered a plea of guilty to having weapons while under disability. R.C.
2923.13 is the code section for having weapons while under disability. Therefore, the
sentencing entry incorrectly identifies Count Four as “Carrying a Concealed Weapon.”
{¶4} Thus, we affirm the judgment of the Portage County Court of Common pleas
and remand for the trial court to issue a nunc pro tunc entry.
Substantive and Procedural History
{¶5} In January 2021, Kent police officers responded to a residential address in
reference to a burglary in progress. A 14-year-old female called 911 stating that she was
babysitting a two-year-old in the residence when a man forced entry into the home. The
young woman hid herself and the two-year-old in a bathroom while the intruder forced
entry. When officers arrived, Officers Kyle Auckland and Nicole Watkins approached the
front door while Officer Leonard Kunka approached the back door. Officers observed
signs of forced entry to both the front and back doors. Kunka entered the home and saw
appellant in the residence. He identified himself and appellant tried to flee.
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Case No. 2021-P-0114
{¶6} When Kunka gave chase, appellant drew a handgun and fired three times.
One bullet struck Kunka in the left thumb and another struck Auckland in his ballistic vest.
The officers struggled with appellant, subdued him, and placed him under arrest without
firing their weapons. Appellant was injured by his own gun fire and was struck in the
abdomen.
{¶7} Kunka’s injuries required surgery, the placement of pins in his hand, and
extensive physical therapy and rehabilitation. Auckland was treated for chest injuries,
fortunately, his ballistic vest minimized his injuries. The children were rescued uninjured.
{¶8} The Portage County Grand Jury indicted appellant on two counts of
felonious assault, first-degree felonies in violation of R.C. 2903.11. Each count contained
a three-year firearm specification in violation of R.C. 2941.145, a seven-year firearm
specification in violation of R.C. 2941.1412, and a repeat violent offender specification in
violation of R.C. 2941.149. Appellant was also indicted on one count of aggravated
burglary, a first-degree felony in violation of R.C. 2911.01 with a three-year firearm
specification and a repeat violent offender specification. Finally, appellant was indicted
on two counts of having weapons wile under disability, third-degree felonies in violation
of R.C. 2923.13.
{¶9} Ultimately, appellant entered a plea of guilty to two counts of felonious
assault, each with a seven-year firearm specification and a repeat violent offender
specification; one count of aggravated burglary with a three-year firearm specification and
a repeat violent offender specification, and one count of having weapons while under
disability. The trial court accepted appellant’s change of plea and immediately proceeded
to sentencing. At the sentencing hearing, the trial court reviewed a presentence
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Case No. 2021-P-0114
investigation report and heard statements from Kunka, Auckland, the Kent Police Chief,
appellant’s father, and appellant.
{¶10} During sentencing, the court stated that it had read the victim impact
statements, the sentencing briefs of both parties, and the pre-sentencing memorandum.
The court heard arguments from defense counsel who argued that the events happened
quickly, and that appellant did not intend the harm that he caused. Counsel expressed
that appellant was remorseful for his actions and grateful that his actions did not cause
greater harm. Counsel indicated that appellant has a history of mental health issues and
that his formal education ended in the eighth grade, although he did later obtain his GED.
Counsel requested that the sentences run concurrently and for the court to impose the
minimum sentence allowed by law.
{¶11} Kunka related the events of appellant’s arrest and explained that the
physical and emotional toll they had on him and his family. He said his injuries caused
him to miss three months of work and that his thumb now has arthritic pain that will
become progressively worse. After his return to work, his wife and family have become
more fearful. He requested that the court impose the maximum sentence.
{¶12} Auckland similarly requested the maximum sentence and said that the
emotional toll on him and his family has been heavy. The Kent Police Chief also
addressed the court and spoke to the emotional toll that appellant’s actions had on the
entire police department and their families.
{¶13} The prosecutor told the court that the minor victims had chosen not to
appear for the sentencing, but he said that the children had exhibited post-traumatic
behaviors such as immense fear, extreme vigilance, as well as dread and nightmares. He
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Case No. 2021-P-0114
said that the residents of the home had been evicted as a direct result of the burglary and
were homeless for several months. The prosecutor also highlighted the emotional and
psychological impact that appellant’s actions had on the families and co-workers of the
victims.
{¶14} Appellant addressed the trial court, apologized for his conduct, and said that
he wished the day had never occurred for the sake of the victims. He said that at the time
of the offense he was under the influence of drugs and regretted his actions.
{¶15} The court said “I don’t know what can – what can society – what can I do to
change your direction in life except place you in prison for a long, long, long time? I give
you some credit for taking responsibility finally after – I think it’s 200 and some days in
jail, manning up and taking responsibility, not putting that child through this jury trial, not
putting these officers and their family through the jury trial. So I’ll give you some credit
there.”
{¶16} The court imposed mandatory consecutive seven-year terms for the two
firearm specifications; eight years for each of the felonious assault counts to run
consecutive with a four-year indefinite sentence on count one pursuant to the Reagan
Tokes Law; eight years for the aggravated burglary count to run consecutive; and 30
months for the weapons under disability count to run concurrent with counts one, two,
and three. In total, the court sentenced appellant to 38 to 42 years imprisonment with 287
days credit for time served. In imposing sentence, the court recited the R.C. 2929.11
sentencing factors. However, the court did not expressly recite the seriousness and
recidivism factors in R.C. 2929.12. The court did state that it was giving appellant
“consideration because you spared that child from coming in and testifying.”
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Case No. 2021-P-0114
{¶17} The court next said that consecutive sentences were necessary in this case
because appellant satisfied the R.C. 2929.14(C)(4) factors. The court found that appellant
committed the offense while under community control sanctions, that at least two or more
of the offenses were committed as part of one or more courses of conduct, the harm
caused was so great or unusual that no single prison term adequately reflected the
seriousness of the conduct, and that appellant’s “enormous” criminal history
demonstrated that consecutive sentences were necessary to protect the public from
future crimes.
{¶18} The court’s sentencing entry recited the R.C. 2929.11 purposes of felony
sentencing and R.C. 2929.14 consecutive sentencing findings. However, the entry does
not explicitly address the seriousness and recidivism factors contained in R.C. 2929.12.
{¶19} In addition, the sentencing entry contains a clerical error, which states that
appellant pled guilty to one count of “‘Carrying a Concealed Weapon’ a felony of the third
degree, in violation of R.C. 2923.13.” At the plea hearing, appellant entered a plea of
guilty to having weapons while under disability. Further, R.C. 2923.13 is the code section
for having weapons while under disability. Therefore, the sentencing entry incorrectly
identifies Count Four as “Carrying a Concealed Weapon.”
{¶20} Appellant timely appealed asserting three assignments of error.
Assignments of Error and Analysis
R.C. 2929.12 Challenge:
{¶21} Appellant’s first assignment of error states:
{¶22} “[1.] The trial court erred in sentencing Mr. Dixon to an aggregate term of
thirty-eight (38) to forty-two (42) years imprisonment.”
6
Case No. 2021-P-0114
{¶23} Appellant argues that his sentence of 38 to 42 years is inconsistent with the
purposes of felony sentencing set forth in R.C. 2929.11 and the sentencing factors in R.C.
2929.12. Appellant cites R.C. 2953.08(G) as our standard of review for felony sentencing
matters.
{¶24} However, that statute only applies to challenges to sentences issued under
R.C. 2929.13(B) or (D), R.C. 2929.14(B)(2)(e) or (C)(4), and R.C. 2929.20(I). In this
assignment, appellant does not challenge his sentence in reference to any of these
statutes. See State v. Shannon, 11th Dist. Trumbull No. 2020-T-0020, 2021-Ohio-789, ¶
7. Therefore, R.C. 2953.08(G) is unavailing to appellant’s first assignment of error.
{¶25} This conclusion is consistent with the conclusions of the Ohio Supreme
Court. In reviewing sentencing challenges relating to R.C. 2929.11 and R.C. 2929.12, this
court previously followed the Supreme Court of Ohio’s language in State v. Marcum, 146
Ohio St.3d 516, 2016-Ohio-1002 which stated:
[I]t is fully consistent for appellate courts to review those
sentences that are imposed solely after consideration of the
factors in R.C. 2929.11 and 2929.12 under a standard that is
equally deferential to the sentencing court. That is, an
appellate court may vacate or modify any sentence that is not
clearly and convincingly contrary to law only if the appellate
court finds by clear and convincing evidence that the record
does not support the sentence.
Marcum, at ¶ 23.
{¶26} However, the Ohio Supreme Court concluded that the above language was
dicta. State v. Jones, 163 Ohio St.3d 242, 2020-Ohio-6729, 169 N.E.2d 649, ¶ 27. In
Jones, the court held that R.C. 2953.08(G)(2)(b) “does not provide a basis for an appellate
court to modify or vacate a sentence based on its view that the sentence is not supported
7
Case No. 2021-P-0114
by the record under R.C. 2929.11 and 2929.12.” Id. at ¶ 39. “[A]n appellate court’s
determination that the record does not support a sentence does not equate to a
determination that the sentence is ‘otherwise contrary to law’ as that term is used in R.C.
2953.08(G)(2)(b).” Id. at ¶ 32. “Therefore, under Jones, an appellate court errs if it relies
on the dicta in Marcum and modifies or vacates a sentence ‘based on the lack of support
in the record for the trial court's findings under R.C. 2929.11 and R.C. 2929.12.’”
Shannon, supra, at ¶ 10, quoting Jones at ¶ 29.
{¶27} Thus, under Jones, an appellate court reviewing alleged error under R.C.
2929.11 and R.C. 2929.12 no longer evaluates whether those sentences are unsupported
by the record. Instead, the court “must simply analyze whether those sentences are
contrary to law.” Id. at ¶ 11. Jones offered that “legal dictionaries define ‘contrary to law’
as ‘in violation of statute or legal regulations at a given time,’ e.g., Black’s Law Dictionary
328 (6th Ed. 1990).” Id. at ¶ 34. However, Jones held that the phrase “contrary to law” is
not “equivalent” to an “appellate court’s conclusions that the record does not support a
sentence under R.C. 2929.11 or 2929.12.” Id.
{¶28} Although R.C. 2953.08(G) does not avail appellant, R.C. 2929.12 requires
the trial court to consider the seriousness and recidivism factors set forth in that statute.
Appellant argues that the trial court failed to consider these factors. R.C. 2929.12(A)
grants the sentencing judge discretion “‘to determine the most effective way to comply
with the purposes and principles of sentencing.’” State v. Foster, 109 Ohio St.3d 1, 2006-
Ohio-856, 845 N.E.2d 470, ¶ 37, quoting R.C. 2929.12(A). “‘In exercising that discretion,
the court shall consider’, along with any other ‘relevant’ factors, the seriousness factors
set forth in divisions (B) and (C) and the recidivism factors in divisions (D) and (E) of R.C.
8
Case No. 2021-P-0114
2929.12.” Id., quoting R.C. 2929.12(A). “These statutory sections provide a nonexclusive
list for the court to consider.” State v. Houk, 11th Dist. Lake No. 2021-L-077, 2021-Ohio-
4618, ¶ 28, citing Foster at ¶ 37.
{¶29} “The trial court possesses broad discretion to determine the most effective
way to comply with the purposes and principles of sentencing within the statutory
guidelines.” Id. at ¶ 29, citing State v. Phifer, 11th Dist. Trumbull No. 2020-T-0010, 2020-
Ohio-4694, ¶ 52; R.C. 2929.12(A). “The statutes do not mandate judicial fact-finding, and
when a sentencing court states that it has considered these factors, it fulfills its duty.” Id.,
citing State v. DeLuca, 11th Dist. Lake No. 2020-L-089, 2021-Ohio-1007, ¶ 18.
{¶30} Appellant rightly argues that the trial court did not mention R.C. 2929.12 or
the seriousness and recidivism factors at the sentencing hearing or in its judgment entry.
He therefore believes that this omission signifies that the trial court did not consider the
factors as required by statute. However, “[e]ven a ‘silent record raises the presumption’
that the sentencing court considered all relevant factors.” Id. quoting State v. Adams, 37
Ohio St.3d 295, 525 N.E.2d 1361 (1988), paragraph three of the syllabus. This court has
held “that even though a trial court is required to consider the R.C. 2929.11 and R.C.
2929.12 factors, it is not required to make specific findings on the record to comport with
its statutory obligations.” State v. Shannon, 11th Dist. Trumbull No. 2020-T-0020, 2021-
Ohio-789, at ¶ 17, citing State v. Parke, 11th Dist. Ashtabula No. 2011-A-0062, 2012-
Ohio-2003, ¶ 24. Consideration of the factors “can be presumed unless the defendant
affirmatively shows to the contrary.” Foster, supra, at ¶ 8. “A trial court’s silence regarding
the purposes of felony sentencing and/or the seriousness and recidivism factors is not
9
Case No. 2021-P-0114
sufficient to affirmatively demonstrate that the court did not comply with the statutes.”
State v. Claar, 11th Dist. Portage No. 2020-P-0058, 2021-Ohio-2180, ¶ 11.
{¶31} Although the trial court did not expressly address the seriousness and
recidivism factors set forth in R.C. 2929.12, appellant has not affirmatively demonstrated
that the trial court failed to comply with that statute. Appellant argues that “a majority of
the R.C. 2929.12(B) factors indicate that his conduct was not more serious than conduct
normally constituting the offense.” However, the factors listed in R.C. 2929.12 are
nonexclusive and are not intended to suggest that a crime will only be “more serious”
when a majority of the factors are present. Nor does it suggest a crime is not “more
serious” when any one or all factors are present. The statute requires the court to consider
the applicable factors based on the facts of the case before it.
{¶32} Appellant also argues that the trial court only considered his taking
responsibility for his actions while not considering other mitigating factors such as his
remorse, suffering from mental health issues, a difficult childhood, substance abuse
history, and lack of formal education.
{¶33} Here, appellant has not affirmatively shown that the trial court sentenced
him without due consideration of the R.C. 2929.12 factors. Appellant pled guilty to
aggravated burglary involving two minor children and pled guilty to two counts of felonious
assault where appellant shot and injured two police officers. The victim statements spoke
to both the physical and mental injury each of the victims suffered and continue to suffer.
See R.C. 2929.12(B)(1) and (2). R.C. 2929.12(B)(1) also considers whether the minor
victims’ mental suffering “was exacerbated because of the physical or mental condition
or age of the victim[s].” R.C. 2929.12(B)(1). The court said to appellant: “Do you know
10
Case No. 2021-P-0114
that they are going to have to live with that incident the rest of their lives? These officers
are trained to risk their lives. Unfortunately, that child was not trained to risk her life and
you put her in that position.” The court also said that “you might’ve murdered one of these
officers.” The court specifically addressed that the burglary resulted in the eviction of the
occupants, which caused them to become homeless for a period of time, thus causing
“serious * * * economic harm as a result of the offense.” R.C. 2929.12(B)(2).
{¶34} In the absence of an affirmative showing to the contrary, we find no error in
the court’s sentence as it relates to the consideration of these factors.
{¶35} Accordingly, appellant’s first assignment of error is without merit.
Consecutive Sentences:
{¶36} Appellant’s second assignment of error states:
{¶37} “[2.] The trial court erred in sentencing Mr. Dixon to serve consecutive
sentences.”
{¶38} Appellant next challenges the trial court’s imposition of consecutive
sentences. There are two ways an appellant can challenge consecutive sentences on
appeal. State v. Lewis, 11th Dist. Lake No. 2001-L-060, 2002-Ohio-3373, ¶ 6. First, the
appellant may argue that the sentencing court failed to state the findings for consecutive
sentences R.C. 2929.14(C)(4) requires. State v. Torres, 11th Dist. Lake No. 201-L-122,
2003-Ohio-1878, ¶18; R.C. 2953.08(G)(1). Second, an appellant may argue that the
record clearly and convincingly does not support the findings the sentencing court made
to justify consecutive sentences. State v. Lewis, at ¶ 7; R.C. 2953.08(G)(2)(a).
{¶39} When ordering consecutive sentences for multiple offenses, R.C.
2929.14(C)(4) requires a sentencing court to make three statutory findings:
11
Case No. 2021-P-0114
If multiple prison terms are imposed on an offender for
convictions of multiple offenses, the court may require the
offender to serve the prison terms consecutively if the court
finds that the consecutive service is necessary to protect the
public from future crime or to punish the offender and that
consecutive sentences are not disproportionate to the
seriousness of the offender's conduct and to the danger the
offender poses to the public, and if the court also finds any of
the following
(a) The offender committed one or more of the multiple
offenses while the offender was awaiting trial or
sentencing, was under a sanction imposed pursuant
to section 2929.16, 2929.17, or 2929.18 of the
Revised Code, or was under post-release control for a
prior offense.
(b) At least two of the multiple offenses were committed
as part of one or more courses of conduct, and the
harm caused by two or more of the multiple offenses
so committed was so great or unusual that no single
prison term for any of the offenses committed as part
of any of the courses of conduct adequately reflects the
seriousness of the offender's conduct.
(c) The offender's history of criminal conduct
demonstrates that consecutive sentences are
necessary to protect the public from future crime by the
offender.
R.C. 2929.14(C)(4)(a-c).
{¶40} The sentencing court is required to make the required statutory findings
“both at the sentencing hearing and in the sentencing entry.” State v. Beasley, 153 Ohio
St. 3d 497, 2018-Ohio-493, 108 N.E.3d 1028, at ¶ 253. When there is a discrepancy
between the sentencing hearing and the sentencing entry, a nunc pro tunc order may be
necessary to reflect what the sentencing court actually decided. Id. at ¶ 255, ¶ 261, citing
State ex rel. Fogle v. Steiner, 74 Ohio St. 3d 158, 164, 656 N.E. 2d 1288 (1995); State v.
Bonnell, 140 Ohio St. 3d 209, 2014-Ohio-3177, 16 N.E.3d 659, at ¶ 30. But a nunc pro
12
Case No. 2021-P-0114
tunc order is only necessary when the sentencing entry omits a required finding that was
made at the sentencing hearing. Beasley, at ¶ 256.
{¶41} “In order to impose consecutive terms of imprisonment, a trial court is
required to make the findings mandated by R.C. 2929.14(C)(4) at the sentencing hearing
and incorporate its findings into its sentencing entry, but it has no obligation to state
reasons to support its findings.” Bonnell at ¶ 37.
{¶42} “The appellate court may increase, reduce, or otherwise modify a sentence
that is appealed under this section or may vacate the sentence and remand the matter to
the sentencing court for resentencing * * * if it clearly and convincingly finds * * * that the
sentence is otherwise contrary to law.” R.C. 2953.08(G)(2)(b). A sentence is contrary to
law when the court fails to make the required findings for consecutive sentences. State
v. Barajas-Anguiano, No. 2017-G-0112 11th Dist. Geauga 2018-Ohio-3440, ¶ 19.
{¶43} Here, appellant concedes that the trial court recited the statutory language
of R.C. 2929.14(C)(4) at his sentencing hearing and in the sentencing entry, but he argues
that the record does not clearly and convincingly support the finding of consecutive terms
of imprisonment. We disagree. The record reflects that consecutive sentences were
necessary to protect the public from future crimes and to punish the defendant.
{¶44} At the sentencing hearing and in the court’s sentencing entry, the court
made a finding that the “consecutive sentence was necessary to protect the public from
future crime or to punish the defendant; that consecutive sentences are not
disproportionate to the seriousness of the defendant’s conduct and the danger the
defendant poses to the public.” The court also found that appellant was under community
control sanctions at the time of the offense. This plainly satisfied R.C. 2929.14(C)(4)(a).
13
Case No. 2021-P-0114
The court made additional findings as to section R.C. 2929.14(C)(4)(b) and (c). While the
court did not state the reasons for supporting these findings. The court “has no obligation
to state reasons to support its findings.” Bonnell at ¶ 37.
{¶45} Appellant seeks to compel the trial court to do something not required by
law when he states that consecutive sentences were improper because of the trial court
“failing to incorporate the evidence to support the court’s findings * * *.” This reverses the
standard of review and would require the record to clearly and convincingly support the
imposition of consecutive sentences.
{¶46} It is appellant who must clearly and convincingly demonstrate that the
record does not support consecutive sentences. However, appellant’s arguments against
the imposition of consecutive sentences are conclusory and do not offer or point to
evidence in the record to show that the court was wrong to impose consecutive
sentences. Therefore, appellant has failed to clearly and convincingly demonstrate that
the record does not support imposing consecutive sentences.
{¶47} Accordingly, appellant’ second assignment of error is without merit.
The Reagan Tokes Law and Ineffective Assistance of Counsel:
{¶48} Appellant’s third assignment of error states:
{¶49} “[3.] Trial counsel was ineffective for failing to preserve the issue of
unconstitutional sentencing under the Regan Tokes Law precluding Mr. Dixon from
raising the issue on appeal.”
{¶50} Appellant’s third assignment of error asserts that his trial counsel rendered
ineffective assistance of counsel by failing to object to the constitutionality of R.C.
2967.271, the Reagan Tokes Law. Appellant believes he suffered prejudice by this failure
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Case No. 2021-P-0114
because he argues that the Reagan Tokes Law is ripe for review and is unconstitutional.
He asserts that the law violates the separation of powers and his due process rights.
{¶51} In reviewing an ineffective assistance of counsel claim, the standard we
apply is “‘whether counsel's conduct so undermined the proper functioning of the
adversarial process that the trial cannot be relied on as having produced a just result.’”
State v. Story, 11th Dist. Ashtabula No. 2006-A-0085, 2007-Ohio-4959, ¶ 49, quoting
Strickland v. Washington, 466 U.S. 668, 686, 104 S.Ct. 2052, 80 L.Ed.2d 674 (1984). An
appellant must demonstrate (1) his counsel was deficient in some aspect of his
representation, and (2) there is a reasonable probability, were it not for counsel's errors,
the result of the proceedings would have been different. Strickland, at 669. “A reasonable
probability is a probability sufficient to undermine confidence in the outcome.” Id. A failure
to “satisfy one prong of the Strickland test negates a court’s need to consider the other.”
State v. Madrigal, 87 Ohio St.3d 378, 389, 2000-Ohio-448, 721 N.E.2d 52, citing
Strickland, at 697.
{¶52} An appellant “must be able to demonstrate that the attorney made errors so
serious that he or she was not functioning as ‘counsel’ as guaranteed by the Sixth
Amendment, and that he was prejudiced by the deficient performance.” Story, at ¶ 49,
quoting State v. Batich, 11th Dist. Ashtabula No. 2006-A-0031, 2007-Ohio-2305, ¶ 42.
Ohio courts presume that every properly licensed attorney is competent, and therefore a
defendant bears the burden of proof. State v. Smith, 17 Ohio St.3d 98, 100, 477 N.E.2d
1128 (1985). “Counsel’s performance will not be deemed ineffective unless and until
counsel’s performance is proved to have fallen below an objective standard of reasonable
representation and, in addition, prejudice arises from counsel’s performance.” State v.
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Case No. 2021-P-0114
Bradley, 42 Ohio St.3d 136, 142, 538 N.E.2d 373 (1989). “Debatable trial tactics generally
do not constitute a deprivation of effective counsel.” State v. Phillips, 74 Ohio St.3d 72,
85, 656 N.E.2d 643 (1995). “Failure to do a futile act cannot be the basis for claims of
ineffective assistance of counsel, nor could such a failure be prejudicial.” State v.
Henderson, 8th Dist. Cuyahoga No. 88185, 2007–Ohio–2372, at ¶ 42.
{¶53} This Court has recently held that the Reagan Tokes Law is constitutional.
See State v. Reffitt, 11th Dist. Lake Case No. 2021-L-129, 2022-Ohio-3371, and State v.
Joyce, 11th Dist. Lake Case No. 2021-L-006, 2022-Ohio-3370. “Because we have found
R.C. 2967.271 to be constitutional, Appellant has not demonstrated prejudice from
counsel's failure to raise the claim in the trial court.” State v. Maddox, 6th Dist. Lucas, No.
L-19-1253, 2022-Ohio-1350 at ¶ 11; accord State v. Williams, 5th Dist. Coshocton No.
2021CA0003, 2022-Ohio-2002, ¶ 15; State v. Leamman, 2nd Dist. Champaign No. 2021-
CA-30, 2022-Ohio-2057, ¶ 14; State v. Philpot, 8th Dist. Cuyahoga No. 110828, 2022-
Ohio-1499, ¶ 33; (all holding R.C. 2967.271 constitutional and therefore finding no
demonstration of prejudice).
{¶54} We find that appellant has not presented a meritorious ineffective
assistance of counsel claim.
{¶55} Accordingly, appellant’s third assignment of error is without merit.
Nunc Pro Tunc Sentencing Entry:
{¶56} Finally, although not raised by appellant, the trial court’s sentencing entry
contains a clerical error, which states that appellant pled guilty to one count of “‘Carrying
a Concealed Weapon’ a felony of the third degree, in violation of R.C. 2923.13.” At the
plea hearing, appellant entered a plea of guilty to having weapons while under disability.
16
Case No. 2021-P-0114
R.C. 2923.13 is the code section for having weapons while under disability. Therefore,
the sentencing entry incorrectly identifies Count Four as “Carrying a Concealed Weapon.”
{¶57} Crim.R. 36 authorizes the trial court to correct “[c]lerical mistakes in
judgments, orders, or other parts of the record, and errors in the record arising from
oversight or omission * * * at any time.” Courts have held that a nunc pro nunc entry may
be used to correct a sentencing entry to reflect the sentence the trial court imposed at the
sentencing hearing. See, e.g., State v. Vaughn, 8th Dist. Cuyahoga No. 103330, 2016-
Ohio-3320, ¶ 21; State v. Fugate, 12th Dist. Butler No. CA2000-02-031, 2000 WL
1708508, *2 (Nov. 13, 2000).
{¶58} Accordingly, the trial court is ordered to issue a nunc pro tunc entry to
correctly identify that appellant pled guilty to one count of having weapons while under
disability, a third-degree felony in violation of R.C. 2923.13.
{¶59} For the foregoing reasons, the judgment of the Portage County Court of
Common Pleas is affirmed, and this matter is remanded for the issuance of a nunc pro
tunc entry.
THOMAS R. WRIGHT, P.J.,
MARY JANE TRAPP, J.,
concur.
17
Case No. 2021-P-0114 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488335/ | Filed 11/21/22 P. v. Ramos CA4/1
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.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
THE PEOPLE, D079800
Plaintiff and Respondent,
v. (Super. Ct. No. SCN371166)
JOEY MARTIN RAMOS,
Defendant and Appellant.
APPEAL from a judgment of the Superior Court of San Diego County,
Sim Von Kalinowski, Judge. Affirmed.
Alex Coolman, under appointment by the Court of Appeal, for
Defendant and Appellant.
Rob Bonta, Attorney General, Lance E. Winters, Chief Assistant
Attorney General, Charles C. Ragland, Assistant Attorney General, Melissa
Mandel and A. Natasha Cortina, Deputy Attorneys General, for Plaintiff and
Respondent.
In a prior appeal, we mostly affirmed a judgment against Joey Martin
Ramos after he was convicted of 34 criminal offenses with strike priors and
sentenced to a prison term of 500 years to life plus 146 years. (People v.
Ramos (June 24, 2021, D075889) [nonpub. opn.].) We rejected Ramos’s
sufficiency of evidence claims and found that his sentence did not constitute
cruel and unusual punishment. However, we remanded the matter to the
trial court to: (1) strike a one-year prison prior; (2) strike a misdemeanor
conviction for which Ramos had received a concurrent sentence; and (3) hold
a hearing on Ramos’s ability to pay the fees and restitution fine.
On remand, after several continuances to allow defense counsel to
communicate with Ramos and arrange for his presence by video, the court
held a hearing at which Ramos appeared remotely by video from prison. His
defense attorney objected and argued that Ramos had a right to be physically
present for the resentencing. The court overruled the objection and struck
the one-year prison prior and the misdemeanor conviction. Rather than hold
a hearing on Ramos’s ability to pay the fees and restitution fine, the court
struck them as well. Ramos now appeals from the resentencing order,
arguing that he was denied his rights to consult with his appointed counsel
and to be present at a critical stage of the proceedings.
We conclude that the trial court committed error by compelling Ramos
to appear remotely at the resentencing without his consent, but we find the
error to be harmless under any standard of prejudice. We also conclude that
Ramos has failed to establish a violation of his Sixth Amendment right to
counsel. Accordingly, we affirm the trial court’s judgment on resentencing.
FACTUAL AND PROCEDURAL BACKGROUND
In a jury trial, Joey Martin Ramos was convicted of 34 criminal offenses
committed in a crime spree that occurred over the course of five months
between May and October 2016. Many of the charges arose from a series of
burglaries, petty thefts, and an attempted burglary. Ramos then committed
additional crimes as he attempted to flee from law enforcement, including
2
kidnapping a man and young child at gunpoint in a carjacking. Ramos also
committed several crimes related to his unlawful possession of firearms and
ammunition.
The trial court found that Ramos had incurred four prior strikes (Pen.
Code, §§ 667, subds. (b)-(i), 668, 1170.12),1 one prior serious felony (§§ 667,
subd. (a)(1), 668, 1192.7, subd. (c)), and one prior prison term (former § 667.5,
subd. (b)). The court sentenced him to an indeterminate sentence of 500
years to life, and a consecutive determinate sentence of 146 years. It also
imposed fees and a restitution fine.
In a prior appeal, we affirmed the judgment, except that we remanded
the matter to the trial court for three purposes: (1) to strike the one-year
prison prior; (2) to strike Ramos’s misdemeanor conviction in count 27 for
having a concealed firearm on his person in violation of section 25400,
subdivision (a)(2); and (3) to hold a hearing to consider his ability to pay the
fees and restitution fine. We also directed the trial court to resentence
Ramos and issue an amended abstract of judgment. We found that the trial
court had properly denied Ramos’s motion to strike some or all of his prior
strikes and his prior serious felony, and we concluded that the resulting
sentence did not constitute cruel and unusual punishment. (People v. Ramos
(June 24, 2021, D075889) [nonpub. opn.].) After the Supreme Court denied
review, the remittitur issued on September 3, 2021.
On October 18, 2021, the trial court held a hearing for the
resentencing. Defense counsel Herb Weston appeared at the hearing
remotely. He explained: “My client is not present at this time for this
particular hearing” and “I haven’t been able to contact my client since he’s
1 All further statutory references are to the Penal Code unless otherwise
noted.
3
been in the appellate process.” Mr. Weston asked the court to “continue the
matter so that I may at least try to contact my client at the prison system.”
The trial court agreed to continue the hearing until November 8, 2021. The
court stated: “Mr. Weston, you indicated that you would make attempts to
contact Mr. Ramos by phone and/or video at the prison prior to that, and then
we’ll go ahead and proceed at that time . . . .”
On November 8, 2021, the court held the continued hearing. Ramos
was present for the hearing via Zoom, and attorney Tanya Weston made a
special appearance for Ramos because Mr. Weston was ill and unable to
attend even by video. The court inquired whether Mr. Weston had been able
to talk to Ramos. Ms. Weston responded: “We have not, your Honor. We’ve
tried to talk to him, and we have not been able to contact him.” Ramos
confirmed that he had not been able to talk to his attorney. The court then
proposed to “put this out another month to see if we can have Mr. Weston be
able to get in contact with Mr. Ramos.” Ms. Weston agreed and said to
Ramos: “Mr. Ramos, can you please give us a collect call so we can talk to
you about what is going to happen in a month from court[?]” Ramos
responded: “Yeah. I don’t know -- yeah -- I will.” The court continued the
hearing again until December 13, 2021.
On December 13, 2021, the court convened again for the continued
hearing. Mr. Weston appeared in person to represent Ramos, who was
present by video from Calipatria State Prison. Ramos confirmed that he
could hear the court proceedings, and the court was able to hear him.
However, Mr. Weston objected to the proceeding as follows: “I’m objecting to
the Court proceeding without my client being personally present in the
courtroom. I have had no contact with my client except just briefly on an un-
confidential phone. . . . My belief, he has a Constitutional right to be present
4
at what, basically, is a resentencing. . . . He has a right to have a competent
attorney, which means going over what his rights are, which I have not been
able to do and won’t be able to do unless he’s brought here and can be present
so I can communicate with him.” Mr. Weston stated, “we’re objecting on all
federal and state constitutional grounds because, number one, he’s being
deprived of his right to have a competent counsel; number two, that he -- my
belief is even in this COVID time, he has a right to be present at a
sentencing.”
The trial court observed that “this is at least our third attempt at
having this hearing and [we] have been unable to do so.” The court also
noted “that the Emergency Rules of Court 3 and 5 are still in place” and
“there continues to be COVID in our institutions . . . .”2 The court stated that
“in essence, as far as the resentencing portion, I see that as an administerial
function.” The court explained that “but for the appellate court’s direction to
have a hearing on the fines and fees, I could have done that by minute order
because I’m simply following what the appellate court has told me to do,” i.e.,
strike the one-year prison prior and the conviction in count 27. The court
stated: “The appellate court affirmed all the other sentencing decisions that
were made. I’m not touching any of those.” Accordingly, the court decided to
proceed with the resentencing over defense counsel’s objection.
The trial court struck the one-year prison prior and the concealed
firearm conviction in count 27. As a result, the court reduced the
determinate portion of Ramos’s sentence from 146 years to 145 years. Rather
2 Emergency Rules 3 and 5 are part of the Emergency Rules Related to
COVID-19 adopted by the Judicial Council and contained in Appendix I of the
California Rules of Court. Emergency rules 3 and 5 (effective until June 30,
2022) authorized remote criminal proceedings, but only with the consent of
the defendant. (Cal. Rules of Court, Appen. I, rules 3, 5.)
5
than hold a hearing on Ramos’s ability to pay the fees and restitution fine,
the court simply decided to strike them. By doing so, the court explained that
it was “giv[ing] [Ramos] the entire relief that he would be entitled to if he was
to dispute this in any way . . . .”
Ramos now appeals from the resentencing order.
DISCUSSION
I
Ramos first argues that the trial court denied him his right to be
present for the resentencing by compelling him to appear remotely without
his consent. We agree with the parties that a criminal defendant has a
constitutional and statutory right to be present at critical stages of the
proceedings, including sentencing and resentencing. (People v. Simms (2018)
23 Cal.App.5th 987, 996.) We also agree that the trial court committed error
by compelling Ramos to participate in the resentencing hearing remotely
without his consent. However, we find the error to be harmless under either
the Watson or Chapman standard of prejudice. (People v. Watson (1956) 46
Cal.2d 818, 836–837 (Watson); Chapman v. California (1967) 386 U.S. 18, 24
(Chapman).)
In People v. Whitmore (2022) 80 Cal.App.5th 116 (Whitmore), the trial
court forced a criminal defendant to appear remotely from jail without his
consent for post-trial hearings on a Marsden motion (People v. Marsden
(1970) 2 Cal.3d 118), a motion for new trial, and sentencing. These
proceedings took place during a jail lockdown caused by a spike in COVID-19
cases. (Whitmore, at pp. 123–124.) Our colleagues in Division Three
concluded that the trial court had committed state-law error by forcing the
defendant to appear remotely without his consent, but not state or federal
constitutional error. (Id. at pp. 125–127.)
6
On the state-law question, the Whitmore court noted that sections 977,
subdivision (b)(1) and 1193 both guarantee the defendant a right to be
“personally present” at sentencing and “California courts have interpreted
similar statutes as requiring a physical presence in the courtroom.”
(Whitmore, supra, 80 Cal.App.5th at p. 126 [citing cases].) Moreover,
emergency rules 3 and 5 clearly require the defendant’s consent to appear
remotely, rather than in person. (Cal. Rules of Court, Appen. I, rules 3, 5.)
Thus, the court concluded that the trial court had violated state law by
compelling the defendant to participate in the hearings remotely without his
consent.
The People concede that the trial court committed state-law error
under Whitmore, and we accept the concession. However, we need not
determine whether the error was also of constitutional dimension because we
find that it would be harmless under either the Watson standard for state-
law error or the Chapman standard for federal constitutional error. (Watson,
supra, 46 Cal.2d at pp. 836–837 [defendant must demonstrate reasonable
probability of a more favorable result for state-law errors]; Chapman, supra,
386 U.S. at p. 24 [prosecution bears burden of showing that federal
constitutional error was harmless beyond a reasonable doubt].)
On remand, the trial court merely followed our directions by striking
the prison prior and the misdemeanor conviction in count 27. As for the fees
and fine, the trial court granted Ramos the maximum relief he could have
achieved by striking them in their entirety. Moreover, there is no reasonable
probability that the trial court would have chosen to revisit any of its other
sentencing decisions if he had appeared in person for the resentencing, rather
than remotely. “There is no indication in this record that [Ramos]’s physical
presence in the courtroom would have benefited his case in any way or
7
otherwise altered the outcome . . . .” (Whitmore, supra, 80 Cal.App.5th at
pp. 127–128.) Specifically, there is no reason to believe that Ramos’s physical
presence in the courtroom at resentencing would have caused the trial court
to make discretionary sentencing decisions different from those it had
already made when Ramos was physically present at the original sentencing.
In these circumstances, the trial court’s error would be harmless under either
the Watson standard or the Chapman standard.
II
Next, Ramos argues that per se reversal is required because he was
denied his Sixth Amendment right to consult confidentially with his counsel
for the resentencing. He relies on Geders v. United States (1976) 425 U.S. 80
and other cases in which courts have found a Sixth Amendment violation
without any showing of prejudice when counsel was prohibited or prevented
from assisting the accused during a critical stage of the proceeding.
We reject this claim. In the first place, Ramos has failed to establish
any interference with his right to consult confidentially with his attorney
before the resentencing. At the request of the defense, the trial court twice
continued the resentencing hearing for this very purpose. Although Ramos’s
counsel stated at the final hearing that he had only had brief contact with
Ramos on a non-confidential phone call, nothing in the record suggests that
he was prevented from setting up a confidential attorney-client phone call
with Ramos or visiting him in prison. As Ramos appears to recognize in his
reply brief, an attorney may request a confidential telephone call with a
client who is a prison inmate. (Cal. Code Regs., tit. 15, § 3282, subds. (a)(2),
(g).) Absent any explanation why defense counsel was unable to consult
confidentially with Ramos during the three months before the final
resentencing hearing, we cannot find any Sixth Amendment violation.
8
Second, the record also does not establish why Ramos could not consult
confidentially with his attorney at or during a break in the resentencing
hearing. The trial court expressly noted that COVID emergency rules 3 and
5 were still in effect. Emergency rule 5(e)(2) provided: “Where a defendant
appears remotely, counsel may not be required to be personally present with
the defendant for any portion of the criminal proceeding provided that the
audio and/or video conferencing system or other technology allows for private
communication between the defendant and his or her counsel. Any private
communication is confidential and privileged under Evidence Code section
952.” (Cal. Rules of Court, Appen. I, rule 5(e)(2), italics added.) Based on the
presumption that official duties have been regularly performed (Evid. Code,
§ 664), and in the absence of any evidence to the contrary, we must presume
that the video system used by the court did allow for private, confidential
communication between Ramos and his counsel. On this record, therefore,
we presume that defense counsel could have requested a recess to consult
with Ramos confidentially before proceeding with the resentencing.
Finally, we note that the California Supreme Court has narrowly
construed the Geders line of cases in which a Sixth Amendment violation may
be established without any showing of prejudice. (People v. Hernandez (2012)
53 Cal.4th 1095, 1102–1105 (Hernandez).) As the court explained, “not all
unwarranted interference with a client’s ability to consult with counsel
justifies a presumption of prejudice, requiring per se reversal.” (Id. at
p. 1111.) The court construed Geders as holding that the Sixth Amendment
is violated without a showing of prejudice only “when the restriction on access
to counsel was so profound as to create an inference that the defendant’s
attorney was unable to perform the essential functions of trial counsel.”
(Id. at p. 1109.) Otherwise, the defendant can establish a Sixth Amendment
9
violation “only by showing, in accordance with the standard stated in
Strickland [v. Washington (1984) 466 U.S. 668, 686–687], that the trial
court’s order deprived him of effective assistance of counsel and there is a
reasonable probability that, but for the error, the result . . . would have been
different.” (Id. at p. 1111.)
Other than the fact that Ramos was incarcerated in prison and special
arrangements had to be made for a confidential attorney-client phone call, he
has not demonstrated that there was any restriction on his access to counsel
before the resentencing hearing, and on this record, the only proven
restriction on his access to counsel during the hearing was that it was only
available by video, rather than in person. Ramos’s appointed defense counsel
was present at the resentencing hearing; he was the same attorney who
represented Ramos at the original trial and sentencing when Ramos was
personally present; Ramos was present by video at the resentencing and
presumptively available for consultation under emergency rule 5; and
nothing prevented defense counsel from making whatever arguments may
have been available to Ramos on resentencing. As a practical matter, the
court and the parties seem to have recognized that the court would not be
altering any of its original sentencing decisions other than those we required
it to act on. We therefore conclude that “the circumstances present here do
not render it so likely [Ramos] was deprived of the effective assistance of
counsel as to entitle him to a presumption of prejudice . . . .” (Hernandez,
supra, 53 Cal.4th at p. 1107.)
Ramos does not contend that he can establish a Sixth Amendment
violation without the Geders presumption of prejudice. For the reasons we
have discussed in connection with his physical presence claim, there is no
reasonable probability that the result of the resentencing would have been
10
more favorable to Ramos if he could have had additional consultation with
his appointed defense counsel in person or otherwise. As with the physical
presence claim, there is no reason to believe that additional attorney-client
consultation would have caused the trial court to make discretionary
sentencing decisions different from those it had already made when Ramos
was physically present and able to consult with his attorney in person at the
original sentencing.
DISPOSITION
The judgment on resentencing is affirmed.
BUCHANAN, J.
WE CONCUR:
McCONNELL, P. J.
DO, J.
11 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488348/ | Filed 11/21/22 Alpinieri v. Alpinieri CA4/1
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.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
STEVEN ALPINIERI, D079217
Plaintiff and Respondent,
v. (Super. Ct. No.
37-2017-00012192-PR-TR-CTL)
LOUIS J. ALPINIERI,
Defendant and Appellant.
APPEAL from an order of the Superior Court of San Diego County,
Julia Craig Kelety, Judge. Affirmed.
Cunneen Booth, Dawn Hall Cunneen and Jess Raymond Booth for
Defendant and Appellant.
Hughes & Pizzuto, Shannon Noelle Montisano and Anne Marie
Rudolph for Plaintiff and Respondent.
Louis J. Alpinieri appeals a probate court order in favor of his son,
respondent Steven Alpinieri.1 The order requires Louis to comply with the
1 To avoid confusion, we refer to the parties by their first names, and
intend no disrespect.
parties’ settlement agreement by executing a waiver of his right to his
confidential medical information under the Health Insurance Portability and
Accountability Act (HIPAA), as well as permitting Steven visitation rights
when Louis is in a health care facility.
Louis contends the probate court erred by ruling he could not include in
the HIPAA waiver additional information regarding his concerns about
Steven accessing his medical information. Louis also argues that if we
reverse the order, Steven would not be the prevailing party and therefore this
court should reverse the probate court’s separate order awarding Steven
attorney fees and costs. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
The Parties’ Agreement
To resolve their probate-related disputes, the parties dismissed their
probate court claims against each other and entered into an “agreement of
settlement and mutual general release” (capitalization omitted, hereafter the
settlement agreement), which the probate court approved. The settlement
agreement’s section 3.16 states: “Louis agrees to execute a HIPAA waiver as
to Louis’ confidential medical information and to include Steven’s right to
visitation with Louis in a health care facility.” The agreement provides that
the San Diego Superior Court “shall retain jurisdiction to enforce this
agreement,” which is enforceable under Code of Civil Procedure2 section
664.6, subdivision (a).
Steven’s First Motion to Enforce the Settlement Agreement
After Louis failed to execute a HIPAA waiver, Steven brought a motion
to enforce the settlement agreement, which the probate court granted,
ordering Louis to “execute a HIPAA waiver in favor of Steven that includes a
2 Undesignated statutory references are to the Code of Civil Procedure.
2
provision allowing some measure of reasonable visitation by [Steven] if and
when [Louis] resides in a health care facility.” The court stated at the
hearing: “The settlement agreement doesn’t bar [Louis] . . . from telling his
doctors whatever he wants to tell his doctors. He just needs to sign the
HIPAA release, that’s all. I have no idea—I thought this was a very strange
provision and I had no idea. But he bargained for it . . . .” The court added:
“So on the visitation side [Louis] has recourse there as long as he’s not in a
nursing facility. . . . [H]e can get a restraining order, call the cops, whatever,
to keep Steven away, because Steven has no rights to visitation under this
agreement now while [Louis is] not in a facility. . . . And as to the HIPAA
waiver, [Louis] signed the waiver as to confidential information, so Steven
can be kept apprised of his father’s medical condition. But if it becomes
abusive, then there are remedies there as well . . . .”
Louis did not appeal from that order. Instead, he provided a two-page
“authorization for release of protected health information,” (capitalization
omitted) authorizing his health care providers to release to Steven “[a]ll
health information pertaining to my medical history, mental or physical
condition, and treatment received.” However, the waiver goes on to state: “I
have been estranged from my son, Steven, for many years due to litigation
between us that arose as a result of him stealing from me. Steven and I
settled the litigation between us in 2017. As part of that settlement, I agreed
to provide a HIPAA waiver in favor of Steven. I believed that I could revoke
the HIPAA waiver, if I felt it necessary for my safety. The court, however,
disagreed and recently ordered me to comply with the terms of the settlement
agreement. [(]See the March 10, 2021 minute order of the San Diego
Superior Court, Probate Division, which is attached hereto as Exhibit 1 and
incorporated herein by this reference.[)] [¶] I do not feel comfortable with
3
Steven having access to my protected health information. After the
settlement agreement was reached, Steven continued to harass me when I
did not want to rekindle our relationship. The police have been contacted on
multiple occasions when Steven has caused disturbances at my home. While
I do not wish to provide my protected health information to Steven, the court
is ordering me to provide this authorization. [¶] Nevertheless, I ask that any
health care provider presented with this authorization by Steven consider
whether to exercise its/her/his powers under HIPAA not to release my
protected health information.” (Some capitalization and italics omitted.)
Louis adds in the waiver: “The authority given to Steven herein shall
NOT supersede any prior instrument or agreement that I may have provided
to and/or made with any health care provider to restrict access to, or the
disclosure of, my health and medical information. Rather, the authority
given to Steven herein shall only supplement and be considered in
conjunction with any prior instrument or agreement that I may have
provided to and/or made with any health care provider to restrict access to, or
the disclosure of, my health and medical information. [¶] Although
information disclosed by a health care provider according to this
authorization is subject to re-disclosure and may no longer be protected by
the privacy rules of HIPAA (45 [C.F.R.] § 164 [(2013)]), California law
prohibits the further disclosure of this information without a ‘new
authorization.’ It is my intention that this authorization form NOT be
construed to be a ‘new authorization’ that meets the requirements of . . . Civil
Code [section] 56.11 for purposes of . . . Civil Code [section] 56.13.”
Louis executed a separate visitation authorization, which repeats
verbatim some of his concerns about Steven.
4
Steven’s Second Motion to Enforce the Court’s Order
Steven filed a second motion to enforce the settlement agreement,
contending Louis’s HIPAA waiver failed to comply with the court’s order: “By
including unverified allegations of harassment and essentially directing
health care providers to not disclose any information to Steven, the HIPAA
waiver provides Steven with no realistic ability to obtain Louis’ medical
information, as no reasonable health care provider would disclose any
information in light of the directions and allegations made by Louis in the
document. The HIPAA waiver completely deprives Steven of the benefit of a
material term of the settlement agreement for which he bargained.” (Some
capitalization omitted.)
Louis argued in opposition: “Steven failed to negotiate the form of the
HIPAA waiver as part of the settlement agreement and now must live with
the result, namely, that there is no agreement as to the form. So long as the
instrument contains a HIPAA waiver, which the instrument executed by
[Louis] does, it is sufficient for purposes of the settlement agreement. . . .
As the court recognized . . . [Louis] is free to tell his doctors whatever he
wants. . . . This makes sense given the court’s observation that despite
requiring [Louis] to provide a HIPAA waiver and visitation authorization,
[Louis] is free to protect himself against the abusive and threatening
behavior exhibited by Steven after the settlement agreement was entered.
[Louis] does not know and cannot foresee all of the health care providers that
Steven may seek to contact, or facilities at which he may seek to visit [Louis].
Rather than [Louis] guessing or having to contact each of his health care
providers (to the extent [Louis] knows who they are in advance), [Louis] set
forth his concerns in the HIPAA waiver and visitation authorization so that
5
when Steven presents either instrument, [Louis] can be assured that the
provider is made aware of [Louis’s] concerns.” (Some capitalization omitted.)
The court granted Steven’s motion: “The information included in
[Louis’s] waiver makes the waiver ineffective because it contradicts [Louis’s]
authorization for release of his medical information. Although the court’s
order and the settlement agreement did not specify the exact language to be
used, the inclusion of information that contradicts the [waiver] clearly does
not comply with the order and the settlement agreement. As Steven
acknowledges, the order and the settlement agreement do not bar [Louis]
from communicating any information to health care professionals but
including that information within the waiver would be inconsistent with the
settlement agreement. [¶] [Louis’s] concern that he cannot foresee all of the
health care providers that Steven may seek to contact is minimal because
[Louis] should be aware of most, if not all, health care providers that he has
seen or will see. This concern does not warrant the execution of a waiver that
would be inconsistent with the settlement agreement. Also, [Louis’s]
argument that Steven cannot challenge the waiver because he did not
challenge the visitation authorization lacks merit. That is not an adequate
basis for estoppel, and the court’s order required the visitation authorization
to be included . . . in the waiver, which [Louis] failed to do.” (Some
capitalization omitted.)
The court ordered Louis to execute a waiver that states verbatim: “I,
Louis J. Alpinieri hereby authorize my health care providers to release the
following information to my son, Steven L. Alpinieri (‘Steven’): [¶] All health
information pertaining to my medical history, mental or physical condition,
and treatment received. [¶] This authorization shall apply to any health
care providers, including physicians, nurses, and all other persons, who may
6
have provided, or are providing at the time such health or medical
information is sought by Steven, any type of health or medical care to me. If
I reside in a health care facility, Steven shall have the right to visit me in
that health care facility, subject to any rules or procedures of the health care
facility. [¶] This authorization may only be revoked by (1) a written
agreement signed by Steven and me; or (2) a court order. [¶] Any person or
entity may rely upon a photocopy, facsimile, or electronic version of this
signed document.”
Louis appeals from this probate court order.
DISCUSSION
Louis contends: “Despite the lack of any specificity regarding the form
of the HIPAA waiver in the settlement agreement, the probate court
erroneously read into the settlement agreement a prohibition against Louis
informing his health care providers in writing about his concerns with Steven
having his protected health information, while simultaneously asserting that
Louis was free to tell ‘his doctors whatever he wants.’ . . . The settlement
agreement (and HIPAA) do not preclude Louis from engaging in written
communications with his own health care providers. In a similar manner,
the settlement agreement does not limit Louis to orally ‘telling’ his wishes to
his health care providers. Therefore, the court erred when it so limited Louis’
ability to communicate with his own health care providers.” (Some
capitalization omitted.)
On a motion to enforce a settlement under section 664.6, the trial
court’s legal conclusions are not entitled to deference and will be subject to
independent review. (Critzer v. Enos (2010) 187 Cal.App.4th 1242, 1253.)
We also apply a de novo review because we are reviewing a written
instrument about which there is no conflicting extrinsic evidence. (Parsons v.
7
Bristol Development Co. (1965) 62 Cal.2d 861, 865-866.) We review the
court’s ruling, not its reasoning. (AMN Healthcare, Inc. v. Aya Healthcare
Services, Inc. (2018) 28 Cal.App.5th 923, 934.)
“ ‘The purpose of the law of contracts is to protect the reasonable
expectations of the parties.’ [Citation.] ‘A contract must be so interpreted as
to give effect to the mutual intention of the parties as it existed at the time of
contracting, so far as the same is ascertainable and lawful.’ [Citation.] ‘The
interpretation must be fair and reasonable, not leading to absurd conclusions.
[Citation.]’ [Citation.] ‘The court must avoid an interpretation which will
make a contract extraordinary, harsh, unjust, or inequitable.’ ” (Citizens for
Goleta Valley v. HT Santa Barbara (2004) 117 Cal.App.4th 1073, 1076–1077.)
Louis’s proposed HIPAA waiver was not effective. Although Louis’s
waiver states the medical providers are authorized to share Louis’s medical
information with Steven, it also includes information undermining that grant
of authorization. It states Louis does not wish to provide the health care
information to Steven, and it references their estrangement and their many
years of litigation. Louis’s waiver includes unnecessary information about
his previous belief he could revoke the HIPAA waiver for his safety, and the
fact the probate court rejected that notion. This waiver also states Louis does
not “feel comfortable with Steven having access to [Louis’s] protected health
information.” Moreover, Louis’s waiver includes a reference to the federal
regulations implementing the HIPAA, setting forth circumstances in which a
medical provider may elect not to release medical information to a designee.
Additionally, Louis’s waiver states that it does not supersede any previous
authority he might have given to a health care provider to restrict access to
or disclosure of, his health and medical information.
8
Louis’s proposed waiver contained extraneous material that
undermined the parties’ settlement agreement requiring him to provide a
HIPAA waiver, which the parties intended to be effective. Louis
acknowledges case law stating that “courts assume that each party to a
contract is alert to, and able to protect, his or her own best interests.
[Citations.] Therefore, courts will not rewrite contracts to relieve parties
from bad deals nor make better deals for parties than they negotiated for
themselves.” (Series AGI West Linn of Appian Group Investors DE, LLC v.
Eves (2013) 217 Cal.App.4th 156, 164.) As Louis agreed to provide an
unconditional HIPPA waiver, the probate court could not rewrite their
settlement agreement to include Louis’s proposed conditions. “ ‘Section 664.6
was enacted to provide a summary procedure for specifically enforcing a
settlement contract without the need for a new lawsuit. [Citations.] . . .
Although a judge hearing a section 664.6 motion may receive evidence,
determine disputed facts, and enter the terms of a settlement agreement as a
judgment [citations], nothing in section 664.6 authorizes a judge to create the
material terms of a settlement, as opposed to deciding what terms the parties
themselves have previously agreed upon.’ ” (Critzer v. Enos, supra, 187
Cal.App.4th at p. 1252.)
Louis argues “the fundamental issue in this appeal” is whether the
settlement agreement prohibits him from sharing his concerns about Steven
accessing his protected medical information in the HIPAA waiver. Louis
relies on the court’s comments that he is free to separately communicate his
reservations about the HIPAA waiver to his health care providers. But as
stated, under our standard of review, we are not bound by the probate court’s
reasoning. We review its ruling. Nothing in the plain text of the settlement
9
agreement contemplates Louis elaborating on his concerns about Steven in
the HIPAA waiver.
Louis does not argue with citation to the record or case law that the
probate court’s HIPAA waiver, with its specific language that more closely
aligns with the parties’ intent as set forth in their agreement, is inadequate
or improper. Accordingly, he provides no reasoned basis to overturn the
probate court’s ruling. “In order to demonstrate error, an appellant must
supply the reviewing court with some cogent argument supported by legal
analysis and citation to the record.” (City of Santa Maria v. Adam (2012) 211
Cal.App.4th 266, 286-287.)
In light of our disposition of this case, we do not disturb the probate
court’s order regarding attorney fees and costs.
DISPOSITION
The order is affirmed.
O’ROURKE, J.
WE CONCUR:
HUFFMAN, Acting P. J.
AARON, J.
10 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488354/ | [Cite as State v. Victor, 2022-Ohio-4159.]
IN THE COURT OF APPEALS OF OHIO
ELEVENTH APPELLATE DISTRICT
ASHTABULA COUNTY
STATE OF OHIO, CASE NO. 2021-A-0046
Plaintiff-Appellee,
Criminal Appeal from the
- vs - Court of Common Pleas
PHILLIP JAMES VICTOR,
Trial Court No. 2020 CR 00648
Defendant-Appellant.
OPINION
Decided: November 21, 2022
Judgment: Affirmed
Colleen M. O’Toole, Ashtabula County Prosecutor, and Jessica Fross, Assistant
Prosecutor, 25 West Jefferson Street, Jefferson, OH 44047 (For Plaintiff-Appellee).
Edward M. Heindel, 2200 Terminal Tower, 50 Public Square, Cleveland, OH 44113 (For
Defendant-Appellant).
MATT LYNCH, J.
{¶1} Defendant-appellant, Phillip James Victor, appeals from his convictions and
sentence for Rape and Gross Sexual Imposition in the Ashtabula County Court of
Common Pleas. For the following reasons, we affirm the judgment of the lower court.
{¶2} On December 28, 2020, the Ashtabula County Grand Jury issued an
Indictment, charging Victor with one count of Rape, a felony of the first degree, in violation
of R.C. 2907.02(A)(1)(b); and three counts of Gross Sexual Imposition, felonies of the
third degree, in violation of R.C. 2907.05(A)(4).
{¶3} A jury trial was held on November 2 and 3, 2021. The following pertinent
testimony was presented:
{¶4} H.K., who was 17 at the time of her testimony and born in April 2004,
testified that Victor had been her mother’s boyfriend and watched H.K. at his residence
while her mother was at work in 2012 to 2013. At that time, when she was around the
ages of eight and nine, she alleged that Victor sexually abused her. While the two were
laying on Victor’s bed and watching movies, he would pull down her pants and lick her
vaginal area. Victor used both his tongue and fingers to touch that area. During this time,
he did not touch himself or remove his clothes. H.K. testified that this happened “quite
often” and “probably right around” ten times while she was eight to nine years old. She
described it as occurring in the evening before her mother would come to pick her up and
that these incidents took place around October 2012.
{¶5} H.K. testified as to one instance, “probably in 2013” where “it was like what
usually happens” but he then pulled down his pants and had intercourse with her. She
believed it happened sometime a little bit after her ninth birthday. After this occurred, they
did not talk and were silent while watching a movie.
{¶6} After the instances of sexual abuse, H.K. no longer wanted to spend time
with Victor. Her mother and Victor later broke up. H.K. began to experience anxiety and
nightmares as well as difficulty sleeping. She was scared to tell anyone what had
occurred because she did not know what would happen and was afraid she would get in
trouble. Several years later, in the summer of 2020, while with her mother and a friend,
her mother inquired whether she was a virgin. H.K. stated no, and told her mother what
happened with Victor. She then told her dad and the police.
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{¶7} Heather Stearns, H.K.’s mother, testified that she began dating Victor in
2011 and they were in a relationship for about two years. H.K. would stay with Victor on
days when Stearns was working. They ended their relationship in 2013 because they
fought too much. Stearns testified that, around that period of time, H.K. was experiencing
physical health problems that were attributed to anxiety and was placed in counseling.
Stearns provided testimony similar to H.K.’s regarding the circumstances under which the
abuse was disclosed, wherein they were discussing virginity and H.K. stated “your ex took
that from me.” H.K. disclosed the incident to police about a week and a half later when
an officer H.K. was comfortable with was available. Stearns testified that while she was
dating Victor, H.K. was always excited to see him and liked spending time with him.
{¶8} Michelle Flick, a coordinator and forensic interviewer for the Ashtabula Area
Child Advocacy Center, interviewed H.K. in September 2020, during which time H.K.
disclosed sexual abuse by Victor. Flick testified that it was not unusual for children to
disclose abuse several years after the fact.
{¶9} The jury found Victor guilty of one count of Rape and three counts of Gross
Sexual Imposition as charged in the indictment. A sentencing hearing was held on
December 13, 2021. The parties stipulated that one count of Gross Sexual Imposition
merged into the Rape count. The court sentenced Victor to serve 15 years to life for the
Rape conviction and five years for each count of Gross Sexual Imposition, all to be served
consecutively for a total term of 25 years to life in prison.
{¶10} Victor timely appeals and raises the following assignments of error:
{¶11} “[1.] The convictions were not supported by sufficient evidence.
{¶12} “[2.] The convictions for rape and gross sexual imposition were against the
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manifest weight of the evidence.
{¶13} “[3.] The trial court erred when it did not find that the rape and gross sexual
imposition charges are all allied offenses; or that the two gross sexual imposition charges
are allied offenses.
{¶14} “[4.] The findings that were made to impose consecutive sentences were
not supported in the record.”
{¶15} We will address Victor’s first two assignments of error jointly, as they relate
to the weight and sufficiency of the evidence.
{¶16} “‘[S]ufficiency’ is a term of art meaning that legal standard which is applied
to determine whether the case may go to the jury or whether the evidence is legally
sufficient to support the jury verdict as a matter of law.” State v. Thompkins, 78 Ohio St.
3d 380, 386, 678 N.E.2d 541 (1997), quoting Black’s Law Dictionary (6 Ed.1990), 1433.
In reviewing the sufficiency of the evidence, “[t]he relevant inquiry is whether, after
viewing the evidence in a light most favorable to the prosecution, any rational trier of fact
could have found the essential elements of the crime proven beyond a reasonable
doubt.” State v. Jenks, 61 Ohio St.3d 259, 574 N.E.2d 492 (1991), paragraph two of the
syllabus.
{¶17} Whereas “sufficiency of the evidence is a test of adequacy as to whether
the evidence is legally sufficient to support a verdict as a matter of law, * * * weight of the
evidence addresses the evidence’s effect of inducing belief.” State v. Wilson, 113 Ohio
St.3d 382, 2007-Ohio-2202, 865 N.E.2d 1264, ¶ 25, citing Thompkins at 386-387. “[A]
reviewing court asks whose evidence is more persuasive—the state’s or the
defendant’s?” Id. An appellate court must consider all the evidence in the record, the
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Case No. 2021-A-0046
reasonable inferences, the credibility of the witnesses, and whether, “in resolving conflicts
in the evidence, the jury clearly lost its way and created such a manifest miscarriage of
justice that the conviction must be reversed and a new trial ordered.” (Citation
omitted.) Thompkins at 387. “Since there must be sufficient evidence to take a case to
the jury, it follows that ‘a finding that a conviction is supported by the weight of the
evidence necessarily must include a finding of sufficiency.’” (Citation omitted.) State v.
Arcaro, 11th Dist. Ashtabula No. 2012-A-0028, 2013-Ohio-1842, ¶ 32.
{¶18} To convict Victor of Rape, the State was required to prove, beyond a
reasonable doubt, that he did “engage in sexual conduct with another who is not the
spouse of the offender * * *, when * * * [t]he other person is less than thirteen years of
age * * *.” R.C. 2907.02(A)(1)(b). To convict him of Gross Sexual Imposition, the State
was required to prove he had “sexual contact with another, * * * when * * * [t]he other
person * * * is less than thirteen years of age * * *.” R.C. 2907.05(A)(4).
{¶19} In his first assignment of error, Victor raises various arguments supporting
his contention that the elements of the charges for which he was convicted were not
proven beyond a reasonable doubt. First, he argues that the separate convictions for
Gross Sexual Imposition were improper because the victim did not testify as to multiple
distinct instances of sexual contact or identify the dates on which the contact occurred.
{¶20} While H.K. did testify as to the Gross Sexual Imposition in a blanket manner
by giving general testimony about the Victor’s conduct and stating that it occurred on
several occasions, her testimony was clear that this conduct did occur more than once.
Her testimony regarding his actions demonstrated that Victor had sexual contact with her
on multiple occasions, up to ten times, when she was less than thirteen years old.
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Case No. 2021-A-0046
Whether the level of detail provided by her testimony satisfied the trier of fact as to the
credibility of her allegations is not an issue of sufficiency. State v. Yarbrough, 95 Ohio
St.3d 227, 2002-Ohio-2126, 767 N.E.2d 216, ¶ 79 (an evaluation of a witness’ credibility,
“is not proper on review for evidentiary sufficiency”).
{¶21} Further, the lack of specificity as to the dates on which this conduct occurred
does not warrant a finding of insufficiency. This court has repeatedly observed, in the
context of motions to dismiss an indictment, that the “precise date and time of an alleged
offense in an indictment are immaterial to the essential elements of an offense; therefore,
the failure to provide an exact date and time will not by itself warrant dismissal of a
charge.” (Citation omitted.) In re N.Z., 11th Dist. Lake Nos. 2010-L-023, et al., 2011-
Ohio-6845, ¶ 53 (“the specific date of sexual conduct is not an element of rape”); Matter
of J.D., 11th Dist. Lake No. 2021-L-126, 2022-Ohio-2334, ¶ 25 (“[o]rdinarily, precise times
and dates are not essential elements of offenses”) (citation omitted). “[I]n cases involving
alleged sexual misconduct with young children, this court and other courts have held that
it is not mandatory for the state to provide precise dates and times because young
children are usually unable to remember such specific information and such incidents
usually take place over an extended span of time.” State v. LaTorres, 11th Dist. Ashtabula
Nos. 2000-A-0060 and 2000-A-0062, 2001 WL 901045, *4 (Aug. 10, 2001). “[I]f the
evidence supports a finding that the defendant was alone with the victim during the
relevant time frame and the defense is that the sexual abuse never occurred,” rather than
an alibi defense, “the inability to identify a specific date does not require reversal of a
conviction.” Id.
{¶22} Challenges to the sufficiency of the evidence have been rejected in similar
6
Case No. 2021-A-0046
circumstances to those present here. In State v. Miller, 5th Dist. Licking No.
2006CA00030, 2006-Ohio-6236, ¶ 23, the court rejected a challenge to the sufficiency of
the evidence for a Rape charge; since time was not an essential element, “it was sufficient
for the State to prove the offense occurred on a date reasonably near the date claimed.”
Also State v. Scott, 2020-Ohio-3230, 155 N.E.3d 56, ¶ 40-46 (12th Dist.) (rejecting the
defendant’s sufficiency challenge since the precise date the Gross Sexual Imposition
occurred was not necessary to prove the elements of the offense nor was his defense
prejudiced by uncertainty on the date it occurred).
{¶23} Here, the indictment set forth a timeframe for each offense, throughout 2012
to 2013. H.K. was consistently alone with Victor on various dates during those
timeframes. While she did not recall the exact dates, her testimony demonstrated the
age she was during the offenses, which is a key issue in this type of case, and the exact
dates were not necessary since Victor did not attempt to mount an alibi defense. LaTorres
at *4.
{¶24} Victor also argues that no testimony was presented regarding arousal or
gratification and no evidence that he reacted in a manner consistent with arousal.
{¶25} To prove the sexual conduct element of Gross Sexual Imposition, it is
necessary to demonstrate that the touching of the victim occurred “for the purpose of
sexually arousing or gratifying either person.” R.C. 2907.01(B).
{¶26} “A sexual purpose can be inferred from the nature of the act itself if a
reasonable person would find that act sexually stimulating to either the offender or the
victim.” (Citation omitted.) State v. Bussle, 11th Dist. Portage No. 2016-P-0026, 2017-
Ohio-4045, ¶ 36. “The relevant inquiry is would an ordinary prudent person or a
7
Case No. 2021-A-0046
reasonable person sitting as a juror perceive from the defendant’s actions, and all of the
surrounding facts and circumstances, that the defendant’s purpose or specific intention
was arousal or gratification of sexual desire?” (Citation omitted.) (Emphasis sic.) Id.
{¶27} Regardless of whether Victor showed outward signs of being sexually
aroused, a reasonable person would conclude that his purpose or intent was arousal or
sexual gratification, either for himself or the victim. He touched the victim, a young child,
who was alone with him while lying in bed, on several occasions, subsequently
culminating this pattern of sexual abuse by committing an act of sexual intercourse with
her. A finding that sexual gratification occurred is not supported by insufficient evidence
in these circumstances. See State v. Breland, 11th Dist. Ashtabula No. 2003-A-0066,
2004-Ohio-7238, ¶ 26 (“reasonable jurors could infer that appellant’s placing of his hand
underneath the victim’s underwear and inside her, as well as feeling her private area, was
sexually stimulating”).
{¶28} As to the Rape, Victor argues that there were no corroborating witnesses,
medical records or evidence other than H.K.’s testimony, observing that the allegations
were made nine years after the incidents and her statements could have been the result
of pressure from loved ones and interview techniques.
{¶29} This court has explained that physical and medical evidence are not
necessary to support a guilty verdict for Rape or Gross Sexual Imposition and that the
“sole testimony of the victim can support a conviction.” State v. Waskelis, 11th Dist.
Portage No. 2011-P-0035, 2012-Ohio-3030, ¶ 46; N.Z., 2011-Ohio-6845, at ¶ 81-85.
H.K.’s testimony established the elements necessary to support the convictions beyond
a reasonable doubt. Issues relating to the credibility of her testimony were for the jury to
8
Case No. 2021-A-0046
determine. Waskelis at ¶ 44.
{¶30} While Victor argues that there were reasons H.K. may have lied, such as
pressure or use of certain interview techniques, there is nothing in the record to support
a conclusion that she was improperly pressured or coerced to make statements that were
untruthful. Further, while he emphasizes that the disclosure occurred nine years after the
sexual assault, “[d]elayed disclosure of the incidents does not equate to insufficient
evidence as to that charge but rather goes to the credibility of the witnesses and the
manifest weight of the evidence.” State v. Mugrage, 11th Dist. Portage No. 2020-P-0066,
2021-Ohio-4136, ¶ 6.
{¶31} In his second assignment of error, Victor similarly argues the convictions
are against the weight of the evidence due to concerns with H.K.’s testimony, alleging
that they were “fabricated somehow in her mind.” He contends that the allegations are
“suspect” in that they were made only after her mother’s relationship with Victor ended
and were disclosed by “blurting [them] out in front of others.”
{¶32} The issues raised here primarily relate to the credibility of H.K., an issue for
the trier of fact as discussed above. Her testimony was consistent with the disclosures
she made regarding the abuse. The testimony was consistent with the time and
circumstances under which Victor had watched her while her mother was working.
Nothing specific in the record shows her testimony was “fabricated.” Further, as to the
delayed disclosure, which H.K. described arose due to her fear of what might occur if she
disclosed, “it is within the province of the jury to parse out the credible portions of [the
victim’s] testimony, principally as it pertained to her ability to recall certain events and her
delayed disclosure from what is not credible.” State v. Chute, 3d Dist. Union No. 14-22-
9
Case No. 2021-A-0046
02, 2022-Ohio-2722, ¶ 32.
{¶33} Victor observes that H.K. only disclosed the abuse after her mother’s
relationship with him ended and “clearly, there was animosity there.” However, the abuse
was disclosed several years after the breakup and it is unclear what “animosity” is
referenced. The relationship ended, according to H.K.’s mother, because the two were
fighting a lot but she did not indicate that it ended in a manner that would cause animosity,
particularly on H.K.’s behalf. It is unclear why a relationship ending in 2013 would lead
H.K. to falsely disclose abuse in 2020. The only “animosity” present in the record,
according to H.K.’s testimony, arose due to Victor’s abuse of her, not a breakup that
occurred seven years prior.
{¶34} The first and second assignments of error are without merit.
{¶35} In his third assignment of error, Victor argues that the charges for Rape and
Gross Sexual Imposition should have merged and, alternatively, the Gross Sexual
Imposition charges should have merged with each other. He argues that the Rape and
Gross Sexual Imposition were “simultaneous acts” as H.K. made one specific allegation
about Rape and “some very vague allegations about gross sexual imposition.” He argues
that the Gross Sexual Imposition charges cannot be separated into distinct acts because
each incident described by H.K. “is not particularly detailed” and the dates and
circumstances were vague.
{¶36} R.C. 2941.25 governs the imposition of punishment for multiple offenses:
(A) Where the same conduct by defendant can be construed to
constitute two or more allied offenses of similar import, the indictment or
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Case No. 2021-A-0046
information may contain counts for all such offenses, but the defendant may
be convicted of only one.
(B) Where the defendant’s conduct constitutes two or more offenses
of dissimilar import, or where his conduct results in two or more offenses of
the same or similar kind committed separately or with a separate animus as
to each, the indictment or information may contain counts for all such
offenses, and the defendant may be convicted of all of them.
{¶37} “Under R.C. 2941.25(B), a defendant whose conduct supports multiple
offenses may be convicted of all the offenses if any of the following is true: (1) the conduct
constitutes offenses of dissimilar import, (2) the conduct shows that the offenses were
committed separately, or (3) the conduct shows that the offenses were committed with
separate animus.” State v. Ruff, 143 Ohio St.3d 114, 2015-Ohio-995, 34 N.E.3d 892,
paragraph three of the syllabus.
{¶38} “[G]ross sexual imposition and rape may, depending on the circumstances,
be allied offenses of similar import. For instance, it is well-established that gross sexual
imposition is a lesser included offense of rape. * * * Accordingly, under R.C. 2941.25, a
defendant may generally not be convicted of and sentenced for both gross sexual
imposition and rape when they arise out of the same conduct.” State v. St. John, 11th
Dist. Lake No. 2015-L-133, 2017-Ohio-4043, ¶ 18, citing State v. Hay, 3d Dist. Union No.
14-2000-24, 2000 WL 1852725, *3 (Dec. 19, 2000).
{¶39} As an initial matter, even to the extent that it could be argued that the Rape
offense occurred during an act of Gross Sexual Imposition on a single day (H.K. indicated
that the rape occurred after the acts he “usually” performed) and it may be unclear to what
11
Case No. 2021-A-0046
extent they included separate acts, the court merged the Rape conviction with one count
of Gross Sexual Imposition, removing such concern.
{¶40} As to the remaining counts of Gross Sexual Imposition, they resulted from
multiple incidents/acts of touching the victim and occurred on separate days, a fact
demonstrated by the separate time periods in the indictment and the corresponding
testimony regarding the Gross Sexual Imposition occurring multiple times. As such, they
would not merge with each other or with the Rape conviction since they were committed
separately. See J.D., 2022-Ohio-2334, at ¶ 49 (where the victim’s testimony indicated
that the defendant conducted sexual acts “every night,” supporting separate instances of
Rape and Gross Sexual Imposition, the offenses did not merge). The fact that the
testimony was not “particularly detailed” does not mean the offenses should merge where
it was demonstrated there were separate occurrences.
{¶41} The third assignment of error is without merit.
{¶42} In his fourth assignment of error, Victor argues that the consecutive
sentencing findings were not supported by the record given his lack of a sexual abuse
related criminal history or statements by the victim indicating she suffered great harm.
{¶43} “The court hearing an appeal [of a felony sentence] shall review the record,
including the findings underlying the sentence or modification given by the sentencing
court.” R.C. 2953.08(G)(2). With respect to consecutive sentences, a reviewing court
may vacate the sentence and remand for resentencing “if it clearly and convincingly finds
* * * [t]hat the record does not support the sentencing court’s findings under division * * *
(C)(4) of section 2929.14.” Id. Under R.C. 2929.14(C)(4), a sentencing court is required
to find that consecutive sentences are “necessary to protect the public from future crime
12
Case No. 2021-A-0046
or to punish the offender”; “not disproportionate to the seriousness of the offender’s
conduct and to the danger the offender poses to the public”; and that one of the
circumstances described in subdivision (a) to (c) is present. Relevant to the present
matter, subdivisions (b) and (c) require findings that “[a]t least two of the multiple offenses
were committed as part of one or more courses of conduct” which caused harm so great
a single prison term would not reflect the seriousness of the conduct; and “[t]he offender’s
history of criminal conduct demonstrates that consecutive sentences are necessary to
protect the public from future crime by the offender.” To impose consecutive terms, the
court “is required to make the findings mandated by R.C. 2929.14(C)(4) at the sentencing
hearing and incorporate its findings into its sentencing entry, but it has no obligation to
state reasons to support its findings.” State v. Bonnell, 140 Ohio St.3d 209, 2014-Ohio-
3177, 16 N.E.3d 659, ¶ 37.
{¶44} Here, the court made each of the required findings for ordering consecutive
sentences enumerated above, including findings under both subdivisions (b) and (c).
Victor does not dispute that the court made the required findings but argues that they are
not supported by the record. See Id. at ¶ 29 (“as long as the reviewing court can * * *
determine that the record contains evidence to support the findings, consecutive
sentences should be upheld”).
{¶45} Victor argues that the finding regarding “great or unusual” harm is
unsupported because “H.K. did not testify about any long-term effects of Victor’s actions,”
was not physically injured, has not been “so emotionally harmed that she just can’t
continue with life,” and the record did not demonstrate “nightmares, an inability to sleep
or work, or engage in any normal trusting relationships.”
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Case No. 2021-A-0046
{¶46} Contrary to Victor’s argument, H.K. specifically testified that she had
difficulty sleeping and nightmares after the time period when the abuse occurred. She
testified regarding anxiety and her mother corroborated that she had physical health
problems attributed to anxiety and sought counseling and medication. The fact that H.K.
is able to “continue with life” does not negate any suffering she experienced. From these
facts, the court could determine that the abuse had a significant impact on her life and did
not err in making this consecutive sentencing finding. This finding alone is sufficient to
support the consecutive sentence, since “the plain language of the statute requires that
only one of these three elements [R.C. 2929.14(C)(4)(a) through (c)] need be found,
which is evident from the statute’s use of the word ‘any.’” State v. Wauer, 11th Dist.
Trumbull No. 2016-T-0043, 2017-Ohio-1337, ¶ 27.
{¶47} Nonetheless, the lower court also made the finding that Victor’s history of
criminal offenses warrants consecutive sentences to protect the public. Victor argues that
his prior offenses were not sex crimes but it is not required that all offenses be of the
same character to find a danger to the public. His multiple felony offenses, including the
present sexual assault of a child over an extended period of time, supported the trial
court’s finding. We also find his argument that the consecutive sentences were an
“overreaction,” supported by his observation that the rape was not “forceful,” to be
unconvincing. Victor was convicted of committing the Rape and Gross Sexual Imposition
of an eight- and nine-year-old victim, resulting in what she described as psychological
harm.
{¶48} The fourth assignment of error is without merit.
{¶49} For the foregoing reasons, Victor’s convictions and sentence for Rape and
14
Case No. 2021-A-0046
Gross Sexual Imposition in the Ashtabula County Court of Common Pleas are affirmed.
Costs to be taxed against appellant.
MARY JANE TRAPP, J.,
JOHN J. EKLUND, J.,
concur.
15
Case No. 2021-A-0046 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488351/ | 2022 IL App (1st) 210415-U
No. 1-21-0415
FIRST DIVISION
November 21, 2022
NOTICE: This order was filed under Supreme Court Rule 23 and may not be cited as precedent
by any party except in the limited circumstances allowed under Rule 23(e)(1).
____________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
FIRST JUDICIAL DISTRICT
____________________________________________________________________________
PNC BANK, N.A., ) Appeal from the Circuit Court of
) Cook County
Plaintiff-Appellee, )
) No. 2019 CH 7510
v. )
) The Honorable
DONGXI JIN, GEA WHA KIM, et al., ) Edward J. King,
) Judge Presiding.
Defendant-Appellant. )
JUSTICE PUCINSKI delivered the judgment of the court.
Justices Lavin and Hyman concur in the judgment.
ORDER
¶1 Held: We affirm the circuit court’s orders denying Defendant-Appellant’s motion to
quash service of process and approving the sale of the foreclosed-upon property. We find
the circuit court did not err in allowing Plaintiff-Appellee to serve Defendant-Appellant by
publication following several unsuccessful attempts to serve him personally at both of the
current residential addresses found through due and diligent inquiry.
¶2 Defendant-Appellant Dongxi Jin (“Jin”) appeals from the circuit court’s order denying his
motion to quash service of process (“Motion to Quash”) that he filed in a foreclosure action that
concluded with the court approving the judicial sale of the property. He also seeks to have the
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order approving the sale vacated, based on his argument that Plaintiff-Appellee PNC Bank, N.A.’s
(“PNC”) service of process by publication was invalid.
¶3 Following the circuit court’s entry of an order of default and foreclosure judgment against
Jin, Jin filed a Motion to Quash, arguing that PNC should have attempted to serve him at his
claimed place of employment after unsuccessfully attempting to serve him at his residence, rather
than proceeding to service by publication. Jin now appeals from the November 5, 2020 order
denying his Motion to Quash, as well as the March 15, 2021 order approving the judicial sale.
¶4 BACKGROUND
¶5 The underlying matter arises from a residential mortgage foreclosure suit filed by PNC
against Jin, his then-wife Gea Wha Kim, and their homeowners’ association on June 21, 2019. 1
Jin signed a promissory note and mortgage that was assigned to PNC; pursuant to the terms of the
note, any notice that must be given to Jin would be mailed or delivered to the property address
listed on the note, or to another address provided to the note holder. The address listed on the note,
and the foreclosed-upon property at issue, was 4314 Exeter Lane, in Northbrook, Illinois (the
“Exeter Property.”) To serve the defendants, PNC used the process server that the trial court had
previously appointed as the standing special process server for all cases filed by PNC’s counsel.
The defendant homeowners’ association was successfully served on June 27, 2019. Summons were
also issued to Jin and Kim, each listing the Exeter Property and an alternative address for each
defendant. The summons to Jin listed as an alternative his last known address, an apartment unit
on 1103 South Hunt Club Drive in Mount Pleasant, Illinois (the “Hunt Property.”)
¶6 Neither Jin nor Kim was personally served. The special process server tasked with serving
Jin made five attempts to locate him between June 27, 2019 and July 11, 2019, once at the Exeter
1
Jin is the only defendant appealing from the trial court’s decision.
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property and four times at the Hunt property. In his affidavit regarding attempted service at the
Exeter property, special process server Paul Winston of ATG LegalServe, Inc. stated that the house
appeared vacant, with garbage on the floor and no visible furniture. There was a sticker on the
front door indicating that the property was managed by safeguard property. In Winston’s affidavit
regarding the Hunt property, he stated that he made four separate visits on various days of the
week and times of day, that the property was a multi-unit building, that Jin’s name did not appear
on the lobby directory and the buzzers and unit numbers were only listed in code, and that he
received no response after attempting to ring a few different buzzers and could not get past the
locked lobby doors. Winston further stated that the entrance to the back of the building was not
accessible. On one occasion, Winston was able to access the building and locate Jin’s supposed
unit, but received no response after knocking on the door. Winston did not state that service by
mail had been attempted at either known address.
¶7 PNC filed an Affidavit for Service by Publication on July 29, 2019, attaching a Due
Diligent Inquiry Affidavit signed by John Kienzle of ATG LegalServe, Inc. that listed seven search
engines and databases the process servers used in attempting to locate Jin: (1) a search of recent
addresses; (2) a motor vehicle search; (3) a forwarding address inquiry with the United States
Postal Service; (4) the AT&T 411 Directory Assistance; (5) an Illinois Department of Financial
and Professional Regulation license search; (6) county, state, and federal inmate searches; and (6)
a National Provider Identifier number search on hipaaspace.com. According to the affidavit, the
searches revealed that Jin’s last-known address was the Hunt Property, and prior to that, the Exeter
Property. The searches located one additional address, an apartment on Milwaukee Avenue in
Glenview, Illinois (“Milwaukee Property”), where Jin allegedly resided until 2017. The process
server also found an acupuncturist license healthcare provider number for Jin, the latter of which
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was connected to the Milwaukee Property address. The Clerk of the Court issued a Notice by
Publication to Jin and Kim on July 29, 2019. The notice was mailed to Jin and Kim at both the
Exeter and Hunt Properties. The notice of the foreclosure case was also published in the Chicago
Daily Law Bulletin on August 2, 9, and 16, 2019.
¶8 Neither Jin nor Kim nor the defendant homeowners’ association ever filed an appearance
in the foreclosure case, and PNC filed a Motion for Default Order against all three defendants on
October 8, 2019. The circuit court entered a Judgment of Foreclosure and Sale (“Foreclosure
Judgment”) on November 12, 2019, which states that Jin and Kim were served by publication
beginning on August 2, 2019 and never filed an answer, and the homeowners’ association was
served on June 27, 2019 and never filed an answer. The court also entered an Order of Default
against all three defendants on that date. A Notice of Entry of Default and Judgment of Foreclosure
was filed on November 14, 2019 and sent to each defendant to their most recent known addresses;
for Jin, these were the Exeter and Hunt Properties. The notice was also published in the Chicago
Daily Law Bulletin on January 21, January 28, and February 4, 2020. On February 7, 2020, PNC
filed a Notice of Sale, stating that a foreclosure sale of the Exeter Property would take place on
March 3, 2020. This notice was also mailed to Jin at the Exeter and Hunt Properties. The sale date
was continued several times, and each new Notice of Sale was mailed to Jin at the same two
addresses and published in the Chicago Daily Law Bulletin.
¶9 On August 10, 2020, Jin filed a Motion to Quash Service of Process pursuant to 735 ILSC
5/2-301. Jin argued that the process server’s single attempt to serve him with a summons and
complaint at the Exeter Property and four attempts to serve him at the Hunt Property, as well as
the service by publication, were insufficient to grant the circuit court with jurisdiction over him,
and that PNC failed to exercise the statutorily required due inquiry into his whereabouts and
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diligent inquiry into his place of residence required for service by publication pursuant to 735
ILCS 5/2-206(a). In his Motion to Quash, Jin took issue with the process server’s failure to attempt
service at the third address found in the process server’s search, as identified in the Due Diligent
Inquiry Affidavit. Jin claimed that the Milwaukee Property was his business address, and that the
process server should have attempted to visit that address and call the phone number associated
with Jin’s business. In an affidavit attached to the Motion to Quash, Jin stated that he was never
served with a summons and complaint in the foreclosure case, that he was a licensed acupuncturist
practicing at Beijing Acupuncture Pain & Rehab, Inc., located at the Milwaukee Property address,
from February 2010 to July 30, 2019, and that he could have been found at that address in June
and July of 2019 during the work hours provided, both in person and at the business’s phone
number.
¶ 10 PNC responded that special process server Winston listed in his affidavit the signs he
observed indicating that no one was living at the Exeter Property, and stated that he was not able
to locate Jin at the Hunt Property after four separate attempts to do so. In support of its argument
that the special process server made a diligent and due inquiry into Jin’s whereabouts prior to PNC
moving for service by publication, despite Jin’s claim that he could have been found at his business
address at the Milwaukee Property, PNC stated that Jin failed in his motion and affidavit to provide
any evidence of where he resided during the time that the special process server was attempting
personal service. PNC further stated that there was no authority for Jin’s position that the process
server was required to attempt service on an individual defendant at his business address, and that
while the process server’s search did identify the acupuncturist license, as well as a phone number
and the Milwaukee Property address in connection to Jin’s occupation, the years during which he
appeared to be associated with the address and phone number were from 2011 to 2017, not 2019.
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The search also did not turn up the name of Jin’s workplace, and a search for Beijing Acupuncture
Pain & Rehab, Inc. on the Illinois Secretary of State Corporation Search showed that the
corporation was dissolved on October 7, 2018 and the address listed for Jin as president was the
Exeter Property, with no mention of the Milwaukee Property.
¶ 11 The circuit court dismissed the Motion to Quash on November 5, 2020, without providing
its reasoning. Jin filed a motion to clarify and certify that order as final and appealable. A few days
later, Jin’s counsel filed a motion to withdraw, and stated in that motion that Jin’s last known
address was in East Lansing, Michigan. The circuit court granted the motion to withdraw as
counsel and entered an order withdrawing Jin’s motion to certify the November 5, 2020 dismissal
of the Motion to Quash as final and appealable. The court also granted PNC’s motion to proceed
with the foreclosure sale. A public notice of sale of the Exeter Property was issued on January 22,
2021, for a sale scheduled to take place on February 23, 2021. On that date, the property was sold
to a third-party buyer. On March 15, 2021, the circuit court held a hearing for confirmation of the
sale and entered an order approving the sale. The order permitted the buyer to take possession of
the property on April 14, 2021. On April 14, Jin filed a notice of appeal from the order dismissing
his Motion to Quash and the order approving the judicial sale.
¶ 12 On appeal, Jin argues that his procedural due process rights were violated by PNC’s service
by publication when it was aware of his business address and did not attempt service there. He
relies on the affidavit filed with his Motion to Quash, where he stated that he owned and operated
an acupuncture business at an address that PNC’s process server uncovered in its search of Jin,
and Jin could have been served there during his work hours or by phone. PNC responds detailing
the database searches and service attempts made by its process servers and documented in the
affidavits of Wilson and Kienzle, and counters that these efforts were sufficient to warrant service
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by publication and did not violate Jin’s due process rights, particularly since Jin himself has not
provided his address of residence during late June and early July 2019. It notes that the relevant
statutory requirements for service of process on an individual speak to service at the individual’s
usual place of abode, without mention of his place of employment. PNC further argues that the
issue on appeal is moot, because the Exeter Property was purchased by and conveyed to a third-
party buyer, and there was no longer an actual controversy at issue since a successful appeal would
not undo the foreclosure sale.
¶ 13 ANALYSIS
¶ 14 Issues on Appeal
¶ 15 As an initial matter, we note that Jin’s Notice of Appeal, which was filed on April 14, 2021,
seeks appeal of both the November 5, 2020 order denying his Motion to Quash and the March 15,
2021 order approving the sale of the foreclosed property. He timely appeals the latter order;
however, we may review the order denying the Motion to Quash as well. See Korogluyan v.
Chicago Title & Trust Co., 213 Ill.App.3d 622, 627 (1st Dist. 1991) (The Appellate Court may
properly review an underlying order where the appellant appeals from a motion to reconsider that
order and the appellee has adequate notice of the implied request for appellate review of that
underlying order); see also JPMorgan Chase Bank, N.A. v. Ivanov¸ 2014 IL App (1st) 133553, ¶¶
39-40 (A notice of appeal is to be construed liberally, and the reviewing court has jurisdiction to
review rulings that were necessary steps to the judgment named in the notice of appeal.) As Jin’s
argument for why the sale should not have been approved is based on the alleged improper service
of process, we have jurisdiction to review the order denying his Motion to Quash as well. See
Ivanov, 2014 IL App 1st at ¶ 41 (Where appellant did not include the order denying his motion to
quash service of process in his notice of appeal, the court nevertheless had jurisdiction to review
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the order, as its denial was a necessary step for the trial court's judgment approving the sale of his
property.)
¶ 16 We also reject PNC’s argument that Jin does not challenge the foreclosure or sale of the
property, but only the denial of his Motion to Quash. The Notice of Appeal clearly indicates that
he appeals from both of the abovementioned orders, and he sufficiently makes clear in his appellant
brief that he challenges the foreclosure judgment. Furthermore, the foreclosure judgment is
necessarily implicated in his argument that he lacked proper notice of the foreclosure action against
him due to the alleged invalid service of process.
¶ 17 Standard of Review
¶ 18 When reviewing a decision on a motion to quash service of process, we must determine
whether the trial court's findings of fact are against the manifest weight of the evidence. Deutsche
Bank National Trust Co. v. Brewer, 2012 IL App (1st) 111213, ¶ 17; Household Finance Corp. III
v. Volpert, 227 Ill.App.3d 453, 455–56 (1st Dist. 1992). If proper service was not achieved and the
defendant did not voluntarily submit to the court’s jurisdiction, the court lacked personal
jurisdiction over the defendant and any judgment entered over that party is void. BankUnited v.
Velcich¸ 2015 IL App (1st) 132070, ¶ 27. We review whether the trial court obtained personal
jurisdiction over Jin de novo. Id. at ¶ 26 (citing BAC Home Loans Servicing, LP v. Mitchell, 2014
IL 116311, ¶ 17). Where the trial court’s denial of a motion to quash service of process is based
solely on documentary evidence and we review the judgment de novo, we need not rely on the
court's reasoning and may affirm the denial on any basis that appears on the record. TFC National
Bank v. Richards, 2016 IL App (1st) 152083, ¶ 25.
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¶ 19 Whether Service by Publication Was Sufficient Notice
¶ 20 Service of summons on an individual must be made “by leaving a copy of the summons
with the defendant personally,” or “by leaving a copy at the defendant's usual place of abode, with
some person of the family or a person residing there, of the age of 13 years or upwards, and
informing that person of the contents of the summons, provided the officer or other person making
service shall also send a copy of the summons in a sealed envelope with postage fully prepaid,
addressed to the defendant at his or her usual place of abode.” 735 ILCS 5/2-203(a). If service
cannot be accomplished in either of those manners, the plaintiff must file “an affidavit showing
that the defendant resides or has gone out of this State, or on due inquiry cannot be found, or is
concealed within this State, so that process cannot be served upon him or her, and stating the place
of residence of the defendant, if known, or that upon diligent inquiry his or her place of residence
cannot be ascertained, the clerk shall cause publication to be made ***.” 735 ILCS 5/2-206(a).
Section 2–206(a) allows a plaintiff to serve process on a defendant by publication “in limited
cases where the plaintiff has strictly complied with the requirements for such service.” TFC
National Bank, 2016 IL App (1st) 152083 at ¶ 28. Because service by publication has a more
limited effectiveness in reaching the intended recipient of the notice, “a party defending notice
by publication must demonstrate strict compliance with every requirement of the statute,
including due diligence and due inquiry.” Id. at ¶ 30.
¶ 21 The Circuit Court of Cook County also has a local rule emphasizing the requirements for
an affidavit supporting notice by publication in mortgage foreclosure suits:
Pursuant to 735 ILCS 5/2-206 (a), due inquiry shall be made to find the defendant(s)
prior to service of summons by publication. In mortgage foreclosure cases, all affidavits
for service of summons by publication must be accompanied by a sworn affidavit by the
individual(s) making such "due inquiry" setting forth with particularity the action taken to
demonstrate an honest and well directed effort to ascertain the whereabouts of the
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defendant(s) by inquiry as full as circumstances permit prior to placing any service of
summons by publication. Cook Co. Cir. Ct. R. 7.3 (Oct. 1, 1996).
Therefore, we must review whether PNC’s affidavit sets forth with sufficient particularity the
steps the process server took in attempting to find and serve Jin, and whether PNC complied with
the requirements of due diligence and due inquiry into ascertaining his whereabouts. TFC
National Bank, 2016 IL App (1st) 152083 at ¶ 30; Deutsche Bank, 2012 IL App (1st) 111213 at ¶
20. Additionally, Jin may challenge the affidavit with his own affidavit setting forth that upon
due inquiry, he could have been found; PNC may challenge this “either by successfully
questioning the conclusory nature of the defendant's challenge or by producing evidence
demonstrating in fact that the plaintiff made due inquiry to locate the defendant so that process
could be served upon him.” TFC National Bank, 2016 IL App (1st) 152083 at ¶ 31.
¶ 22 The requisites of due process are satisfied “if the manner of effecting service of summons
gives reasonable assurance that notice will actually be given and the person against whom the
action is brought is given time to appear and defend on the merits.” Dobrowolski v. LaPorte, 38
Ill.App.3d 492, 494 (1st Dist. 1976). Examples where our courts found that the attempted service
did not satisfy the requirements of due and diligent inquiry and due process considerations include:
failure to physically visit potential addresses found via computer search and failure to follow up
on information that the intended individual was receiving Social Security benefits at some location
(see In re Dar. C., 2011 IL 111083, ¶¶ 70-72); failure to conduct a basic search into an individual’s
business address after multiple failed attempts to serve him at home (see Sutton v. Ekong, 2013 IL
App (1st) 121975, ¶¶ 21-23); and service by publication on a property owner who had been
adjudicated disabled, had been living as homeless for years, and for whom no evidence existed to
suggest that he was living in the area of publication or that he would have understood the meaning
of the published notice (see O’Halloran v. Luce, 2013 IL App (1st) 113735, ¶ 36).
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¶ 23 In the Sutton case, where the court determined that the plaintiff should have located and
attempted service on the defendant’s workplace address, there were facts in the record that the
plaintiff could have easily discovered this information prior to requesting service by special order
of the court, but did not make what the court deemed a “basic search” in the phonebook that would
have revealed said address. 2013 IL App (1st) 121975 at ¶ 22. The present matter is
distinguishable, as PNC did make efforts to find Jin through his profession, including making a
request to AT&T 411 Directory Assistance, searching for a professional license registered with
the Illinois Department of Financial and Professional Regulation, and a search on hipaaspace.com.
The search revealed that Jin held an Illinois acupuncturist license with no associated address, and
that he had possibly worked at the Milwaukee Property until 2017, two years prior to the attempted
service. Furthermore, the acupuncture business that Jin stated he owned and operated from that
address was dissolved in 2018, according to the Illinois Secretary of State Corporation Search
website. PNC certainly conducted at least a basic search into Jin’s work address, and did not find
any information suggesting that in June and July of 2019, he could have been found at the
Milwaukee Property. The statutory prerequisites for service “require an honest and well-directed
effort to ascertain the whereabouts of a defendant by inquiry as full as circumstances permit.” Bank
of New York v. Unknown Heirs and Legatees, 369 Ill.App.3d 472, 476 (1st Dist. 2006). Section 2-
203(a) speaks of service at the defendant’s usual place of abode, which is precisely where PNC
sought to serve him. Under the circumstances present here, PNC was not required to attempt
service at the Milwaukee Property given the information it was able to find on Jin’s last-known
addresses.
¶ 24 Jin argues that the basis for reversing the circuit court’s approval of the judicial sale is that
the circuit court violated his Fourteenth Amendment constitutional procedural due process rights
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by denying his Motion to Quash, and he subsequently lacked proper notice of the foreclosure case
against him. He contends that PNC failed to conduct a due and diligent inquiry into his
whereabouts before seeking service by publication because it failed to attempt service at Jin’s
alleged place of business despite having found the address through the process server’s search; he
claims that during June and July of 2019, he owned and worked at an acupuncture business at the
Milwaukee Property address. PNC responds that its process server conducted a thorough search
and found no additional residential or business addresses for Jin that were current to 2019, and it
attempted service at both residential locations it discovered, including multiple attempts at the
address that appeared to still be occupied. It submits the affidavits of process servers Kienzle and
Wilson to detail the searches and service attempts made, and provide particular details of the due
and diligent inquiry and well directed effort made into locating and serving Jin.
¶ 25 We agree with PNC that failure to attempt service at Jin’s place of business did not render
the service by publication void. See Volpert, 227 Ill.App.3d at 456 (finding no authority for
defendant’s argument that failure to ascertain and attempt service at his workplace rendered service
by publication void.) In Volpert, the court also noted that the record did not indicate whether or
where the defendant was working at the time of service by publication. Id. That is also the case
here, where the special process server’s affidavit does identify an acupuncturist license for Jin, but
the search did not reveal a work address or whether any such address was current at the time of
attempted service. The statutory requirements of 735 ILCS 5/2-203(a) do not state that PNC was
obligated to locate and send a process server to Jin’s place of business. Furthermore, Jin does not
deny in his motion or affidavit that he was residing at and/or could have been found at either the
Exeter and Hunt Property addresses in June and July 2019. Neither does Jin provide any other
residential address where he could have been served at that time. Jin relies solely on the fact that
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he allegedly had a work address at the time of attempted service, and, without providing any legal
support for this contention, argues that PNC was required to attempt service at that address in order
to satisfy the strict statutory requirements of due and diligent inquiry before moving for service by
publication. PNC attempted service at Jin’s last-known residential address, the Hunt Property, on
various days and times, including outside of the time that Jin claimed to be at work. Jin does not
explain why he was unable to be served at his alleged home at those times. He also does not address
how he was working in Glenview, Illinois (the Milwaukee Property) Mondays through Saturdays
while—according to his former counsel—allegedly living in East Lansing, Michigan. Without any
evidence to support his claim that PNC failed to serve him at an address where he could have been
found at the time—including, apparently, at the Milwaukee Property—he fails to show that the
court improperly permitted service by publication or dismissed his Motion to Quash.
¶ 26 Jin argues that Volpert did not establish a blanket rule that attempting personal service at
an individual defendant’s place of employment was never necessary before resorting to service by
publication. He distinguishes the present matter from the facts in Volpert on three points: (1) the
record in Volpert did not indicate whether or where the defendant was working, while Jin filed an
affidavit stating that he was working at the Milwaukee Property at the time of service by
publication; (2) the plaintiff in Volpert attempted service at a location that was possible business
address for the defendant, while PNC did not attempt service at the Milwaukee Property; and (3)
in Volpert, the defendant’s affidavit did not state that the plaintiff could have located him at his
place of employment, while Jin’s did. In further support of his position, Jin cites to three other
cases which he claims are in accord with his position that service by publication is meant to be
used as a last resort, and is disfavored over in-person service or service by mail.
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¶ 27 In Passalino v. City of Zion, our supreme court found that notice by publication was
insufficient to inform the individual plaintiffs of a meeting to address a proposed zoning
amendment. 237 Ill. 2d 118, 127 (2005). The court noted that the Supreme Court had held that
notice by publication was inadequate “only where ‘it is not reasonably possible or practicable to
give more adequate warning.’” Id. (quoting Jones v. Flowers, 547 U.S. 220, 237 (2006)); see also
Wells v. Village of Libertyville, 153 Ill.App.3d 361, 367 (2d Dist. 1987) (“[N]otice by publication
is not enough in cases where a person's legally protected interests are directly affected by the legal
proceedings and the person's name and address are known or easily discerned.”) It further found
that the defendant City easily could have located the address of the land trustee by checking tax
assessment records, and the trustee could have informed the plaintiff property owners. Id. at 128.
The court therefore held that the City’s failure to make an inquiry into the locations of the
individual plaintiffs, and its publishing of the meeting information in two local newspapers,
violated the procedural due process rights of the property owners who would be affected by the
proposed zoning change. Id. at 130.
¶ 28 Jin does not provide any argument for why the present matter is factually similar to
Passalino; indeed, it is not. PNC did locate two addresses at which Jin appeared to reside in 2019;
the process server investigated the Exeter Property and found evidence that it was uninhabited,
and then made four efforts to locate Jin at the Hunt Property. According to Jin’s own prior counsel,
Jin resided in Michigan at least soon after, if not during, the period of attempted service. No such
address turned up in the process server’s seven different approaches in researching Jin’s location.
The aforementioned search did not turn up a work address that appeared to be current to June and
July of 2019. In this case, the process server clearly made multiple attempts to serve Jin personally
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before PNC moved for leave to serve him by publication, as opposed to the Passalino defendant’s
failure to conduct a simple search of records which were accessible to it.
¶ 29 The next case Jin relies on is In re Application of County Collector, in which the plaintiff
public guardian argued that a tax purchaser failed to comply with the “take notice” requirement of
the Property Tax Code in acquiring a tax deed for a property owned by a mentally incapacitated
individual who was hospitalized for schizophrenia. 217 Ill.2d 1, 3-5 (2005), cert. granted, Estate
of Lowe ex rel. Harris v. Apex Tax Investments, Inc., 547 U.S. 1145 (2006), aff’d In re Application
of the County Collector, 225 Ill.2d 208, 212 (2007). Our supreme court held that the tax purchaser
made the requisite reasonably diligent efforts in locating the owner despite failing to learn that she
was hospitalized at the time, due to her mental illness. Id. at 37-39. The court noted that the
Property Tax Code did not include specific provisions for adequate notice to hospitalized
individuals, and it was beyond the court’s authority to require hospitals to disclose patient
information to purchasers in such situations, in violation of Illinois medical privacy laws. Id. at
40-41. While the present matter involves neither the notice requirements of the Property Tax Code
nor the property owner’s medical privacy rights, it also does not support the argument that PNC
was required to attempt service at Jin’s place of employment.
¶ 30 In Rodriguez v. Brady, a plaintiff arrestee challenged an order granting the defendant
county State’s Attorney’s motion to dismiss his suit seeking the return of money that was seized
through civil forfeiture. 2017 IL App (3d) 160439, ¶ 1. The State’s Attorney’s office had mailed
the declaration of forfeiture to the plaintiff’s home address, and the plaintiff argued that this notice
was insufficient, where the office knew or should have known that plaintiff was incarcerated at the
time, and no attempt was made to serve him in jail. Id. at ¶¶ 4-6. On appeal, the court agreed,
holding that the plaintiff had sufficiently pled that the defendant violated his due process rights
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where the defendant knew the plaintiff had been arrested, was unlikely to have been released by
the time of the attempted notice, and could have easily been located by calling the jail to confirm.
Id. at ¶¶ 29-30. The court considered whether, despite the defendant’s compliance with the minimal
requirements of the Drug Asset Forfeiture Procedure Act’s notice provisions by mailing notice to
his last given address, the notice satisfied constitutional due process requirements of being
“reasonably calculated, under all the circumstances, to apprise interested parties” of the pending
forfeiture. Id. at ¶ 25 (quoting Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314).
In the present matter, as discussed above, PNC’s process server made a thorough search of Jin’s
last-known addresses, and attempted to serve the ones that appeared to be current at the time of
the suit, which were the Exeter and Hunt Properties. Unlike the State’s Attorney in Rodriguez,
PNC was not attempting to serve Jin at an address it knew he was not residing in at the time, and
it had no reason to believe he was located anywhere else. Even though the process server did find
some information suggesting Jin had an active acupuncturist license in Illinois at the time, his time
spent at work and out of the house certainly would not have prevented him from ever being served
at home, in the way that incarceration would. If Rodriguez provides an example of attempted
service that fails to protect the intended recipient’s due process rights, the facts here do not suggest
that any similar violation occurred.
¶ 31 As a final comment, we note that it appears from the record that the process server never
attempted service by mail before PNC sought service by publication. While we find that the
process server made a due and diligent inquiry into Jin’s last known addresses, as well as a diligent
effort to effectuate service in person at those addresses, we do not know why the circuit court did
not address PNC’s apparent failure to attempt service by mail. See 735 ILCS 5/2-203(a) (Service
of summons on an individual must be made “by leaving a copy of the summons with the defendant
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personally,” or “by leaving a copy at the defendant's usual place of abode, with some person of the
family or a person residing there, of the age of 13 years or upwards, and informing that person of
the contents of the summons, provided the officer or other person making service shall also send
a copy of the summons in a sealed envelope with postage fully prepaid, addressed to the defendant
at his or her usual place of abode.”) (emphasis added.) We acknowledge that the process server’s
description of his attempts to locate Jin at either known address, as well as additional arguments
by PNC, suggest that service by mail would not have been effective. Nevertheless, PNC had an
absolute duty to follow the proper procedure for service prior to seeking service by publication—
including mailing copies of the service to Jin’s usual residence. However, Jin does not raise this
argument on appeal, limiting his criticisms of PNC’s efforts to serve him to only the failure to
attempt to locate him at his place of business. As such, we deem any argument regarding failure
to attempt service by mail to be waived. See Mabry v. Boler, 2012 IL App (1st) 111464, ¶ 15
(“Generally, arguments not raised before the circuit court are forfeited and cannot be raised for the
first time on appeal.”)
¶ 32 Jin does not provide any authority for his position that PNC was required to attempt service
at his business address. His affidavit in support of his Motion to Quash does not include any
evidence that the acupuncture business he claimed to work at in June and July 2019 was in
operation despite the Illinois Secretary of State’s records indicating that it had been dissolved
almost a year prior. His affidavit also does not include the residential address he could have been
served at in June or July 2019. If Jin seeks to successfully challenge PNC’s representation of his
last-known addresses in order to show that service by publication was improper, he must provide
competent evidence suggesting PNC was in error. See Bank of New York Mellon v. Karbowski,
2014 IL App (1st) 130112, ¶ 16. We find that PNC made a due and diligent inquiry into Jin’s last-
- 17 -
1-21-0425
known location and sufficiently attempted service at those locations prior to moving for service by
publication. The service by publication did not violate Jin’s due process rights and properly gave
the circuit court personal jurisdiction over Jin. Having found that service by publication was
proper, we need not address PNC’s alternative argument regarding actual controversy.
¶ 33 CONCLUSION
¶ 34 For the foregoing reasons, the judgment of the Circuit Court of Cook County is affirmed.
¶ 35 Affirmed.
- 18 - | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488355/ | [Cite as State v. Shannon, 2022-Ohio-4160.]
IN THE COURT OF APPEALS OF OHIO
ELEVENTH APPELLATE DISTRICT
TRUMBULL COUNTY
STATE OF OHIO, CASE NO. 2021-T-0049
Plaintiff-Appellee,
Criminal Appeal from the
-v- Court of Common Pleas
MARQUES L. SHANNON,
Trial Court No. 2021 CR 00581
Defendant-Appellant.
OPINION
Decided: November 21, 2022
Judgment: Affirmed
Dennis Watkins, Trumbull County Prosecutor, and Ryan J. Sanders, Assistant
Prosecutor, Administration Building, Fourth Floor, 160 High Street, N.W., Warren, OH
44481 (For Plaintiff-Appellee).
Joseph F. Salzgeber, P.O. Box 799, Brunswick, OH 44212 (For Defendant-Appellant).
MATT LYNCH, J.
{¶1} Defendant-appellant, Marques L. Shannon, appeals his convictions and
sentence for Domestic Violence, Felonious Assault, and Intimidation of a Witness in the
Trumbull County Court of Common Pleas. For the following reasons, we affirm the
decision of the lower court.
{¶2} On August 5, 2021, Shannon was indicted by the Trumbull County Grand
Jury for Domestic Violence, a felony of the third degree, in violation of R.C. 2919.25(A);
Felonious Assault, a felony of the second degree, in violation of R.C. 2903.11(A)(1); and
Intimidation of a Witness in a Criminal Case, a felony of the third degree, in violation of
R.C. 2921.04(B)(1).
{¶3} A jury trial was held on October 12-14, 2021. The following pertinent
testimony and evidence were presented:
{¶4} Laken Cortese had a romantic and sexual relationship with Shannon from
November 2020 until June 2021. Shannon would sometimes spend the night at her home
and had been living with her since March 7, 2021. On March 22, 2021, at around 7 p.m.,
the two got in an argument. Shannon began using expletives and Cortese called him a
“bi**h.” Shannon hit her multiple times on the face and head and dumped salad dressing
on her. He said, “that’s what [Cortese] got for calling him a bi**h.” She could not
remember what happened afterward until she was inside her residence in the shower.
Shannon was present with her in the bathroom. She took pictures of her injuries, sent
them to friends, and “told them if they didn’t hear from me the next day to send help.”
When a friend called her, Shannon took the phone away from Cortese.
{¶5} The next day, Cortese went with Shannon to his mother’s house. She
subsequently visited a friend and later received a call from her mother that her child was
in the emergency room, which call was made in an attempt to get Cortese to seek
treatment. Cortese received treatment at the hospital and had suffered bruising to her
face, jaw pain, and a “minor brain bleed.”
{¶6} Cortese testified that Shannon threatened her and her children and stated
that if she thought about pressing charges, she would not make it to the preliminary
hearing. Cortese received calls in the days before trial asking if she was going to court
and a text message telling her not to testify.
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Case No. 2021-T-0049
{¶7} The State introduced screenshots of posts on Shannon’s Facebook
account. One post made after the incident stated: “Ladies if you have the nerve to call a
man a bi**h, don’t act all scared and s**t when you get bi**hed. Watch your mouth.”
Another post stated: “Women better act like women or they’re getting clapped like men.”
In messages between Shannon and Cortese, Shannon asked what he did, Cortese
described her injuries, and he responded “I’m sorry. I’m very strong. I don’t kno[w] my
strength. I’ll NEVER touch you aggressively again.”
{¶8} Kourtney Willrich, Cortese’s friend, described that, on March 22, she
received a call from Cortese who was crying, but the phone disconnected. She also
received pictures through Snapchat which showed Cortese was crying and had a swollen
face. She attempted to contact Cortese via Facetime and Shannon stated, “If your friend
would have never called me a bi**h, * * * this would have never ended like this” and hung
up. Shaunci Osborne called Cortese via Facetime around 8 p.m. on March 22 and
Shannon answered. He said “this is what happens to your friend when she wants to call
me a bi**h.” He then showed Cortese in the shower with a bloody face, crying.
{¶9} Ashley Beach, another friend, testified that Cortese sent her a message
around 9 p.m. on March 22 “and said that they had gotten into a fight and that she was
scared. She was hurt. She didn't know what to do. * * * And then she had Snapchatted
me and was asking me if I don't hear from her to please make sure that she’s okay in the
morning.” On March 23, Beach cleaned out Cortese’s car, which was covered in Italian
dressing and had blood smeared on the roof. On that date, Beach observed that Shannon
repeatedly sent messages to Cortese, who she described as acting frantic and shaky.
{¶10} Patrolman Bryce Lapierre of the Girard Police Department was dispatched
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Case No. 2021-T-0049
to the hospital on March 24 and encountered Cortese who was crying and scared. A
video of his interview with Cortese was played, in which she described Shannon
assaulting her.
{¶11} Elizabeth Sheets, a friend of Shannon, testified for the defense. She
testified that she was with Shannon on March 22 from around 5 p.m. to 11 p.m. when she
dropped him off at another friend’s home. He did not leave the residence during the time
she was with him. The prosecutor inquired about whether she had committed sexual acts
with Shannon and the nature of their relationship. She maintained that they were friends.
Sheets admitted to posting Facebook comments online at his request, including a
comment about “running to the cops.”
{¶12} The jury found Shannon guilty of the offenses as charged in the indictment.
The court held a sentencing hearing on November 2, 2021. Domestic Violence and
Felonious Assault were merged for sentencing. The court noted Shannon’s felony record,
including prior domestic violence convictions, and imposed a sentence of 8 to 12 years
for Felonious Assault and one year for Intimidation of a Witness, to be run consecutively.
The sentence was memorialized in a November 9, 2021 Judgment Entry.
{¶13} On appeal, Shannon raises the following assignments of error:
{¶14} “[1.] The evidence was insufficient to support the jury’s verdicts of ‘guilty’
with respect to the charged offenses of felonious assault, domestic violence and
intimidation against defendant-appellant.
{¶15} “[2.] Defendant-appellant’s convictions of the charged offenses of felonious
assault, domestic violence and intimidation were against the manifest weight of the
evidence.
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Case No. 2021-T-0049
{¶16} “[3.] The state of Ohio committed prosecutorial misconduct in the cross-
examination of the defense alibi witness, which constituted plain error and prejudicially
affected the defendant-appellant’s substantive rights.
{¶17} “[4.] The Reagan Tokes sentencing law is unconstitutional as applied in the
instant case where the trial court imposed an indefinite prison term on defendant-
appellant of a minimum of 8 years up to a maximum of 12 years, with respect to
defendant-appellant’s felonious assault conviction as to count two, a felony of the second
degree.”
{¶18} We will consider Shannon’s first and second assignments of error jointly.
Shannon argues that the convictions were unsupported by sufficient evidence and were
against the weight of the evidence.
{¶19} Sufficiency is a test of the adequacy of the evidence to determine “whether
the evidence is legally sufficient to support the * * * verdict as a matter of law.” (Citation
omitted.) State v. Thompkins, 78 Ohio St.3d 380, 386, 678 N.E.2d 541 (1997). “An
appellate court’s function when reviewing the sufficiency of the evidence to support a
criminal conviction is to examine the evidence admitted at trial to determine whether such
evidence, if believed, would convince the average mind of the defendant’s guilt beyond a
reasonable doubt,” i.e., “whether, after viewing the evidence in a light most favorable to
the prosecution, any rational trier of fact could have found the essential elements of the
crime proven beyond a reasonable doubt.” State v. Jenks, 61 Ohio St.3d 259, 574 N.E.2d
492 (1991), paragraph two of the syllabus.
{¶20} Whereas “sufficiency of the evidence is a test of adequacy as to whether
the evidence is legally sufficient to support a verdict as a matter of law, * * * weight of the
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Case No. 2021-T-0049
evidence addresses the evidence’s effect of inducing belief.” State v. Wilson, 113 Ohio
St.3d 382, 2007-Ohio-2202, 865 N.E.2d 1264, ¶ 25, citing Thompkins at 386-387. “[A]
reviewing court asks whose evidence is more persuasive—the state’s or the
defendant’s?” Id. An appellate court must consider all the evidence in the record, the
reasonable inferences, the credibility of the witnesses, and whether, “in resolving conflicts
in the evidence, the jury clearly lost its way and created such a manifest miscarriage of
justice that the conviction must be reversed and a new trial ordered.” (Citation
omitted.) Thompkins at 387. “Since there must be sufficient evidence to take a case to
the jury, it follows that ‘a finding that a conviction is supported by the weight of the
evidence necessarily must include a finding of sufficiency.’” (Citation omitted.) State v.
Arcaro, 11th Dist. Ashtabula No. 2012-A-0028, 2013-Ohio-1842, ¶ 32.
{¶21} Shannon raises several arguments relating to the weight and sufficiency of
the evidence. First, he contends that the State failed to establish all of the elements of
Felonious Assault and Domestic Violence, specifically whether he was present during the
alleged time of the commission of the acts, citing to the testimony of his alibi witness.
{¶22} To convict Shannon of Domestic Violence, the State was required to prove
that he did “knowingly cause or attempt to cause physical harm to a family or household
member.” R.C. 2919.25(A). To convict him of Felonious Assault, it was required to prove
that he did “knowingly * * * [c]ause serious physical harm to another.” R.C. 2903.11(A)(1).
{¶23} As an initial matter, this court has held that, “where allied offenses are
merged and there is sufficient evidence on the offense for which the defendant is
sentenced, errors relating to sufficiency and weight of the evidence on the count that is
merged are harmless and need not be considered.” State v. McCleery, 11th Dist.
6
Case No. 2021-T-0049
Trumbull No. 2021-T-0024, 2022-Ohio-263, ¶ 21, citing State v. Mugrage, 11th Dist.
Portage No. 2020-P-0066, 2021-Ohio-4136, ¶ 133. See also State v. Johnson, 1st Dist.
Hamilton Nos. C-190658 and C-190659, 2021-Ohio-1321, ¶ 12 (declining to address
arguments relating to the finding of guilt on a Domestic Violence charge where it merged
into Assault conviction at sentencing). Thus, we will address the issues raised by
Shannon in relation to Felonious Assault but not Domestic Violence.
{¶24} We do not find that the verdict was against the weight of the evidence or
supported by insufficient evidence due to the testimony of the alibi witness. Sheets
testified that Shannon was with her at the time of the alleged assault. However, Cortese
testified that during that same time, she was with Shannon and he assaulted her.
Cortese’s version of events was corroborated by the testimony of multiple friends who
received calls or messages documenting Cortese’s injuries and who spoke to Shannon
on Facetime, demonstrating he was present with Cortese at that time. It is evident the
jurors found Sheets’ testimony lacking in credibility when compared to the other
witnesses. “The choice between credible witnesses and their conflicting testimony rests
solely with the finder of fact and an appellate court may not substitute its own judgment
for that of the finder of fact.” State v. Awan, 22 Ohio St.3d 120, 123, 489 N.E.2d 277
(1986). “Since the jury is in the best position to assess credibility, we generally decline
to second guess its credibility determinations.” State v. Tiggett, 11th Dist. Trumbull No.
2018-T-0036, 2019-Ohio-1715, ¶ 34.
{¶25} Shannon also argues that Cortese’s acts were not consistent with a victim
of assault, emphasizing that she did not call the police or ask her friends to do so and she
continued to date Shannon and have a sexual relationship with him after the incident.
7
Case No. 2021-T-0049
These arguments also relate to Cortese’s credibility and are best left for the jurors to
decide. Her actions after the assault and decision to stay with Shannon do not negate
the testimony from several witnesses about the injuries she suffered and there was
extensive testimony and evidence that Shannon made statements on social media and
to Cortese’s friends that implied or admitted the assault.
{¶26} Shannon contends that Cortese’s injuries could have been caused by her
falling in the shower. Again, however, there was extensive testimony supporting the fact
that he was the cause of her injuries. Further, Patrolman Lapierre of the Girard Police
Department testified that in his opinion and experience with assaults and domestic
violence, the injuries were not caused by passing out or falling. There is also no question
Cortese suffered serious physical harm, given her testimony, the photographs of her
injuries, and medical records showing injuries to her head. See State v. Bowden, 11th
Dist. Ashtabula No. 2013-A-0040, 2014-Ohio-158, ¶ 33 (“it is well-established that this
element may be reasonably inferred ‘[w]here injuries to the victim are serious enough to
cause him or her to seek medical treatment’”) (citation omitted.)
{¶27} Shannon next argues that the State failed to prove that the victim was a
“family or household member” as is necessary for Domestic Violence. As stated above,
however, since the offense of Domestic Violence merged into Felonious Assault, it is not
necessary to address the sufficiency or weight of the evidence as to this charge.
{¶28} Finally, Shannon asserts that the conviction for Intimidation of a Witness
was against the weight and sufficiency of the evidence because Cortese provided
testimony that she was not threatened by or afraid of him and had maintained their
relationship after the alleged assault occurred.
8
Case No. 2021-T-0049
{¶29} To convict Shannon of Intimidation of a Witness, the State was required to
prove that he “knowingly and by force or by unlawful threat of harm to any person or
property or by unlawful threat to commit any offense or calumny against any person, * * *
attempt[ed] to influence, intimidate, or hinder * * * [t]he victim of a crime or delinquent act
in the filing or prosecution of criminal charges.” R.C. 2921.04(B)(1).
{¶30} Here, Cortese testified that Shannon threatened her and stated that she
would not make it to the preliminary hearing if she reported the assault. This testimony
meets the requirements of using a threat to attempt to influence, intimidate or hinder the
victim from prosecuting charges. Regardless of whether Cortese was in fear from these
threats and continued to remain in contact with Shannon, the elements of this offense do
not require that the State prove that the victim was in fear. As has been observed, under
R.C. 2921.04(B), “[t]he defendant need only try to create fear about or try to influence or
hinder the filing or prosecution of criminal charges” and “[t]here is no requirement that the
victim actually feel intimidated.” (Citation omitted.) State v. Serrano, 69 N.E.3d 87, 2016-
Ohio-4691, ¶ 44 (8th Dist.).
{¶31} At the preliminary hearing, Cortese testified that she was not threatened
by Shannon and was not concerned for her safety, before subsequently proceeding to
identify Shannon as assaulting her. While Cortese may have been inconsistent in her
testimony regarding the threats, this again is an issue of credibility for the jury to
determine. It was within their province to decide whether Cortese was telling the truth at
trial and may have had reasons, including the threats, to give inconsistent testimony at
the preliminary hearing. As Cortese testified at trial, her conduct relating to Shannon after
the assault and decision to stay with him arose in part due to the threat he made and her
9
Case No. 2021-T-0049
fear that he may harm her family.
{¶32} The first and second assignments of error are without merit.
{¶33} In his third assignment of error, Shannon argues that prosecutorial
misconduct was committed during the State’s cross-examination of Sheets “by repeatedly
and falsely claiming to have recorded telephone conversations” between Shannon and
Sheets in which she allegedly talked about committing certain sexual acts with him.
{¶34} To address allegations of prosecutorial misconduct, we “must determine (1)
whether the prosecutor’s conduct was improper and (2) if so, whether it prejudicially
affected [the defendant’s] substantial rights.” State v. LaMar, 95 Ohio St.3d 181, 2002-
Ohio-2128, 767 N.E.2d 166, ¶ 121. “[P]rosecutorial misconduct alone does not require a
new trial.” State v. Hamad, 11th Dist. Trumbull No. 2017-T-0108, 2019-Ohio-2664, ¶ 123.
“The conduct of a prosecuting attorney during trial cannot be made a ground of error
unless the conduct deprives defendant of a fair trial.” State v. Apanovitch, 33 Ohio St.3d
19, 24, 514 N.E.2d 394 (1987), citing State v. Maurer, 15 Ohio St.3d 239, 266, 473 N.E.2d
768 (1984). “[I]t must be clear beyond a reasonable doubt that, absent the prosecutor’s
comments, the jury would have found defendant guilty.” Maurer at 267.
{¶35} Here, Shannon did not object to the statements in question and thus has
“forfeited all argument relative to these statements except that of plain error.” State v.
Furmage, 11th Dist. Ashtabula No. 2020-A-0057, 2022-Ohio-1465, ¶ 80. “Plain error
exists when it can be said that but for the error, the outcome of the trial would clearly have
been otherwise.” State v. Issa, 93 Ohio St.3d 49, 56, 752 N.E.2d 904 (2001). Notice of
plain error “is to be taken with the utmost caution, under exceptional circumstances and
10
Case No. 2021-T-0049
only to prevent a manifest miscarriage of justice.” State v. Long, 53 Ohio St.2d 91, 372
N.E.2d 804 (1978), paragraph three of the syllabus.
{¶36} During Sheets’ cross-examination, the prosecutor asked whether she
planned on “being with” Shannon once he is released from jail, to which she responded
negatively. The prosecutor stated: “I can show you the messages where you talk about
[performing sexual acts involving Shannon] and those types of things, if you want.”
Sheets responded that she did not send that type of message. The prosecutor asked:
“You agree that there are messages between you and him talking sexually, though;
correct?” including from the jail, to which Sheets responded “Yeah.” No records of phone
calls or text messages referenced were introduced.
{¶37} Here, it is not clear if the prosecution was in possession of text messages
or phone calls of the alleged interactions between Sheets and Shannon. However, there
is nothing in the record to indicate that the questions were asked to convey false
information or mislead the jury. “The prosecution * * * must avoid insinuations and
assertions which are calculated to mislead the jury.” State v. Grable, 11th Dist. Ashtabula
No. 2019-A-0042, 2019-Ohio-4516, ¶ 16. In fact, Sheets ultimately admitted that she did
engage in sexual text messages with Shannon, although the content of such messages
is unknown.
{¶38} Nonetheless, even presuming the prosecutor’s comments were improper,
they had no prejudicial impact on Shannon’s rights or the outcome of the trial. As outlined
above, there was overwhelming evidence supporting Shannon’s convictions, including
the testimony of the victim and multiple witnesses regarding the events that occurred that
11
Case No. 2021-T-0049
night, which directly contradicted Sheets’ alibi testimony, and Shannon’s own Facebook
comments.
{¶39} The third assignment of error is without merit.
{¶40} In his fourth assignment of error, Shannon argues that “the Reagan Tokes
Law, as applied to the sentence in Mr. Shannon’s case, violates [his] Sixth Amendment
right to trial by jury, the doctrine of separation of powers, and Fourteenth Amendment due
process based on (1) lack of notice due to vagueness, (2) inadequate parameters on
executive branch discretion, and (3) inadequate guarantees for a fair hearing.”
{¶41} In support of the contention that sentences under Reagan Tokes are invalid,
Shannon cites extensively to State v. Delvallie, 2021-Ohio-1809, 173 N.E.3d 544 (8th
Dist.). We emphasize that this opinion was vacated by the Eighth District sitting en banc
and the court upheld the constitutionality of the law in State v. Delvallie, 2022-Ohio-470,
185 N.E.3d 536 (8th Dist.).
{¶42} We reject Shannon’s arguments that the Reagan Tokes Law is
unconstitutional. Initially, “we are to presume that [a] state statute is constitutional, and
the burden is on the person challenging the statute to prove otherwise beyond a
reasonable doubt.” State v. Lowe, 112 Ohio St.3d 507, 2007-Ohio-606, 861 N.E.2d 512,
¶ 17. Further, no objection was raised to the sentence in the lower court. “[A]n appellate
court will not consider any error which counsel for a party complaining of the trial court’s
judgment could have called but did not call to the trial court's attention at a time when
such error could have been avoided or corrected by the trial court.” (Citation omitted.)
Awan, 22 Ohio St.3d at 122, 489 N.E.2d 277. While an appellate court may hear a
constitutional challenge that has not been raised below, such an issue is evaluated only
12
Case No. 2021-T-0049
for plain error. State v. Freetage, 11th Dist. Portage No. 2020-P-0083, 2021-Ohio-4050,
¶ 34. “When the court hears an appeal for plain error, it must presume the constitutionality
of the statute at issue and will not invalidate it unless the challenger establishes that it is
unconstitutional beyond a reasonable doubt.” Id.
{¶43} Shannon argues that Reagan Tokes violates the right to a trial by jury,
noting that Delvallie found that it improperly removed the fact-finding duty from the jury
and put it in the hands of the ODRC.
{¶44} In the en banc Delvallie opinion, 2022-Ohio-470, the Eighth District found
that R.C. 2967.271(C) and (D) do not violate the right to a jury trial. It rejected its prior
determination and found that, while Apprendi v. New Jersey, 530 U.S. 466, 120 S.Ct.
2348, 147 L.Ed.2d 435 (2000), prevents the trial court from imposing a sentence in excess
of the statutory maximum without the factual circumstances justifying the enhanced
sentence first being found by a jury beyond a reasonable doubt, R.C. 2967.271 statutorily
requires a court “to impose the minimum and maximum terms upon the offender being
found guilty of the qualifying felony offense – similar to an offender being sentenced to
life with the possibility of parole under the indefinite life sentencing structure.” Id. at ¶ 40.
Reagan Tokes does not authorize “a sentencing court, or the ODRC for that matter, to
impose a sentence beyond the maximum set forth in the sentencing statutes or to elevate
the minimum term beyond the ranges set forth in R.C. 2929.14(A)(1)(a) and (A)(2)(a).”
Id. at ¶ 41. Further, it emphasized that under Oregon v. Ice, 555 U.S. 160, 129 S.Ct. 711,
172 L.Ed.2d 517 (2009), a state court’s imposition of consecutive sentences did not
violate the right to a jury trial because juries historically “played no role in” the decision to
impose consecutive or concurrent sentences and that “specification of the regime for
13
Case No. 2021-T-0049
administering multiple sentences has long been considered the prerogative of state
legislatures.” Delvallie at ¶ 42, citing Ice at 168. Under Reagan Tokes, the court cannot
impose a term greater than the maximum as prohibited under Apprendi nor does it impose
a sentence longer than the minimum term prescribed by statute based on findings of facts
in addition to those considered by the jury.
{¶45} Next, Shannon argues that Reagan Tokes violates the separation of
powers. This argument has been consistently rejected by courts throughout this state.
State v. Barnes, 2d Dist. Montgomery No. 28613, 2020-Ohio-4150, ¶ 36; State v. Hacker,
2020-Ohio-5048, 161 N.E.3d 112, ¶ 22 (3d Dist.); State v. Bontrager, 2022-Ohio-1367,
188 N.E.3d 607, ¶ 44 (4th Dist.); State v. Ratliff, 2022-Ohio-1372, 190 N.E.3d 684, ¶ 56
(5th Dist.); State v. Maddox, 2022-Ohio-1350, 188 N.E.3d 682, ¶ 7 (6th Dist.); Delvallie,
2022-Ohio-470, at ¶ 38.
{¶46} Shannon cites the application of State ex rel. Bray v. Russell, 89 Ohio St.3d
132, 729 N.E.2d 359 (2000), in support of the argument that the Reagan Tokes Law
violates the separation of powers because it vests judicial power in the executive branch.
Bray addressed the constitutionality of R.C. 2967.11, which allowed the parole board to
punish a rule violation committed by the prisoner by extending the stated prison term. In
Bray, the Ohio Supreme Court held that R.C. 2967.11 was unconstitutional because the
parole board “act[ed] as judge, prosecutor, and jury” and its enactment intruded “well
beyond the defined role of the executive branch as set forth in our Constitution.” Id. at
135.
{¶47} Bray is inapplicable to the Reagan Tokes Act. R.C. 2967.11 authorized the
parole board to impose an additional prison term beyond the one the trial court imposed.
14
Case No. 2021-T-0049
Under Reagan Tokes, the executive branch cannot impose additional time beyond the
maximum sentence imposed by the trial court at the time of sentencing. This situation is
more similar to that in Woods v. Telb, 89 Ohio St.3d 504, 733 N.E.2d 1103 (2000), where
the court found Ohio’s postrelease control statute, R.C. 2967.27, to be constitutional since
the postrelease control terms are made part of the sentence imposed by the court and
the parole board’s discretionary power to impose postrelease control sanctions did not
impinge on the judiciary’s mandate to impose sentence. Id. at 512. In Reagan Tokes
sentences, the court imposes both presumptive minimum and possible maximum prison
terms in its sentence. Thereafter, the ODRC determines whether the offender’s conduct
warrants more than the minimum imposed but cannot exceed the judiciary’s maximum
imposed sentence. This procedure has been characterized as “not meaningfully distinct
from Ohio’s current parole system, in which offenders may be kept in prison following
service of the minimum term for parole eligibility” and as “similar, if not identical, to the
executive branch’s authority to release offenders from sentences under Ohio’s parole
system for indefinite life sentences.” Delvallie, 2022-Ohio-470, at ¶ 24-25. Therefore,
Bray does “not compel the conclusion that the Reagan Tokes Law violates the separation
of powers doctrine.” Barnes at ¶ 36.
{¶48} Shannon also argues that Reagan Tokes violates his due process rights,
contending that it is void for vagueness because factors other than those stated in the
statute can be considered to extend his sentence. Again, he cites to the vacated opinion
in Delvallie, in which the appellant argued that the requirements for a rule violation in
prison were too vague to allow for extending the minimum sentence. We observe that
although Shannon states in his brief that the Reagan Tokes Law “as applied to the
15
Case No. 2021-T-0049
sentence in Mr. Shannon’s case, violates * * * due process,” the substantive arguments
raised relate to the validity of the statute as a whole rather than in relation to his particular
conduct. See Kruppa v. Warren, 11th Dist. Trumbull No. 2009-T-0017, 2009-Ohio-4927,
¶ 12 (“[a]n as applied challenge asserts that a statute is unconstitutional as applied to the
challenger’s particular conduct,” while a facial challenge asserts the statute is
unconstitutional in “all of its applications”). We thus address his arguments as a facial
challenge to the law.
{¶49} “‘[A] law will survive a void-for-vagueness challenge if it is written so that a
person of common intelligence is able to ascertain what conduct is prohibited, and if the
law provides sufficient standards to prevent arbitrary and discriminatory enforcement.’”
(Citations omitted.) Klein v. Leis, 99 Ohio St.3d 537, 2003-Ohio-4779, 795 N.E.2d 633,
¶ 16. A tripartite analysis must be conducted to address a void for vagueness challenge:
the statute must provide “adequate notice and fair warning to persons of ordinary
intelligence so that they can conform their conduct to the dictates of the statute”; it cannot
permit arbitrary and discriminatory enforcement; and it cannot unreasonably hinder
fundamental constitutional freedoms. State v. Collier, 62 Ohio St.3d 267, 270, 581 N.E.2d
552 (1991). See also Perez v. Cleveland, 78 Ohio St.3d 376, 378, 678 N.E.2d 537 (1997)
(“when a statute is challenged under the due process doctrine of vagueness, a court must
determine whether the enactment (1) provides sufficient notice of its proscriptions and (2)
contains reasonably clear guidelines to prevent official arbitrariness or discrimination in
its enforcement”).
{¶50} In State v. Williams, 88 Ohio St.3d 513, 728 N.E.2d 342 (2000), the Ohio
Supreme Court found a sex offender classification statute was not vague where it did not
16
Case No. 2021-T-0049
prohibit specific conduct but established remedial registration and notification, since such
remedial measures “require less specificity to satisfy a void-for-vagueness challenge than
do criminal statutes.” Id. at 533. Applying this analysis, the Fifth District found that
postrelease control enactments were also not unconstitutionally vague, emphasizing that
they did not prohibit specific conduct. State v. Hopkins, 5th Dist. Stark Nos.
2000CA00053 and 2000CA000054, 2000 WL 1751286, *4 (Nov. 27, 2000).
{¶51} The foregoing is applicable to the Reagan Tokes Law. R.C. 2967.271(B)
establishes a rebuttable presumption that the offender shall be released upon the
expiration of the minimum prison term or early release date, whichever is earlier. Division
(C) provides a detailed description of means by which that presumption may be
overcome, including commission of institutional rule infractions, the offender’s security
level classification, and when the behavior while incarcerated demonstrates a continued
threat to society. As in Williams, R.C. 2967.271 does not prohibit any specific conduct.
Therefore, the statute requires less specificity than a typical criminal enactment.
{¶52} As the en banc panel in Delvallie explained, the Reagan Tokes Law does
not create a new prison rule infraction system; Ohio Adm.Code 5120-9-08 sets forth “an
inmate’s rights and the procedures the Rules Infraction Board are to follow in imposing
any and all institutional infractions upon the inmates. See, e.g., Oko v. Lake Erie Corr.
Inst., 11th Dist. Ashtabula No. 2010-A-0002, 2010-Ohio-2821, 2010 WL 2499702, ¶ 3
(overruling a constitutional challenge to the decision by the Rules Infraction Board).”
Delvallie, 2022-Ohio-470, at ¶ 86. An as applied challenge of an infraction received under
that Board would have to be raised through a separate writ upon imposition of the
infraction. Therefore, any challenges to the vagueness of the enforcement of the Rules
17
Case No. 2021-T-0049
Infraction Board must be pursued through a writ of mandamus. Id. at ¶ 87. Based on the
foregoing, we conclude that the provisions in R.C. 2967.271 are not vague.
{¶53} Finally, we address the proposition that due process is violated due to a
lack of procedural safeguards in relation to rebuttal of the presumption of release. As
noted above, the rights in the present matter have been compared to those involving
parole. The Ohio Supreme Court has held that a right to parole consideration does not
create a “liberty interest sufficient to establish a right to procedural due process.” State
ex rel. Blake v. Shoemaker, 4 Ohio St.3d 42, 446 N.E.2d 169 (1983). “However, if state
law entitles an inmate to release on parole, that entitlement is a liberty interest that is not
to be taken away without due process.” Ratliff, 2022-Ohio-1372, at ¶ 20.
{¶54} While no Ohio appellate district has held that R.C. 2967.271(C) violates due
process, some districts have reached different conclusions regarding whether requiring a
prisoner to remain in prison beyond the rebuttable presumption of release is analogous
to parole eligibility or parole revocation proceedings involving a termination of liberty
which would require an “informal hearing” to verify facts supporting revocation. Morrissey
v. Brewer, 408 U.S. 471, 484, 92 S.Ct. 2593, 33 L.Ed.2d 484 (1972).
{¶55} The Twelfth and Sixth Districts have concluded that hearings conducted
under the Reagan Tokes Law are analogous to parole revocation proceedings. In State
v. Stenson, 190 N.E.3d 1240, 2022-Ohio-2072 (6th Dist.), the court found that “the
Reagan Tokes Law creates a liberty interest more akin to probation revocation decisions,”
emphasizing that a parole release/eligibility is more discretionary and subjective than
parole revocation. Id. at ¶ 31. See also State v. Guyton, 12th Dist. Butler No. CA2019-
12-203, 2020-Ohio-3837, ¶ 17 (“[t]he hearings conducted by the ODRC under R.C.
18
Case No. 2021-T-0049
2967.271(C) are analogous to parole revocation proceedings, probation revocation
proceedings, and postrelease control violation hearings”).
{¶56} In contrast, the Second District has concluded that “requiring a defendant
to remain in prison beyond the presumptive minimum term is akin to the decision to grant
or deny parole” since “if [the offender] commits rule infractions or crimes while in prison,
he may be required to serve the entire sentence already imposed by the trial court.” State
v. Leet, 2d Dist. Montgomery No. 28670, 2020-Ohio-4592, ¶ 17.
{¶57} We find it premature to reach a conclusion as to whether parole revocation
or parole eligibility procedures most closely resemble the present matter. Shannon does
not raise a challenge to the statute as applied; since he has not yet been subject to a
sentence beyond the minimum term, his challenge necessarily is facial in nature. See
Stenson at ¶ 31 (the “ODRC has not sought to extend [appellant’s] term beyond the
presumptive minimum sentence * * * [and his] challenge to the Reagan Tokes Law is
necessarily a facial challenge”). “A facial challenge to a statute is the most difficult to
bring successfully because the challenger must establish that there exists no set of
circumstances under which the statute would be valid.” Harrold v. Collier, 107 Ohio St.3d
44, 2005-Ohio-5334, 836 N.E.2d 1165, ¶ 37. “The fact that a statute might operate
unconstitutionally under some plausible set of circumstances is insufficient to render it
wholly invalid.” Id. “If a statute is unconstitutional on its face, the statute may not be
enforced under any circumstances.” Wymslo v. Bartec, Inc., 132 Ohio St.3d 167, 2012-
Ohio-2187, 970 N.E.2d 898, ¶ 21.
{¶58} It has been held that “the Reagan Tokes Law may not be found to be
unconstitutional, on its face, as violating due process merely because the specific
19
Case No. 2021-T-0049
procedures for invoking an additional period of incarceration are not set forth in the Law
itself.” State v. Williams, 6th Dist. Lucas No. L-21-1152, 2022-Ohio-2812, ¶ 22. “[T]he
legislature is not required to codify all rules and procedures under the statutory provision
but instead can defer to the executive agency’s establishment of its own rules or
procedures to safeguard constitutional concerns, which must be challenged through the
appropriate mechanisms.” Delvallie, 2022-Ohio-470, at ¶ 59. We do not find that, as a
facial challenge, there are no circumstances under which the statute can be enforced.
Stenson at ¶ 33 (“given that this is a facial challenge to the Law, it cannot be said at this
juncture that the Law ‘cannot be applied constitutionally in any circumstances’”).
{¶59} We find that Shannon’s arguments relating to R.C. 2967.271(C) and the
procedural safeguards of the hearing to rebut his presumptive release constitute an as
applied challenge which is not yet ripe for review, because those aspects of the statute
have not been applied to him.
{¶60} The fourth assignment of error is without merit.
{¶61} For the foregoing reasons, Shannon’s convictions and sentence in the
Trumbull County Court of Common Pleas are affirmed. Costs to be taxed against
appellant.
THOMAS R. WRIGHT, P.J.,
MARY JANE TRAPP, J.,
concur.
20
Case No. 2021-T-0049 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488346/ | Filed 11/21/22 Hollander v. Tennenbaum Capital Partners CA2/1
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 ONE
DAVID HOLLANDER, B314018
Plaintiff, Cross-defendant and (Los Angeles County
Appellant, Super. Ct. No. 20STCP02406)
v.
TENNENBAUM CAPITAL
PARTNERS, LLC et al.,
Defendants, Cross-complainants
and Respondents.
APPEAL from an order of the Superior Court of Los
Angeles County, Laura A. Seigle, Judge. Affirmed.
Hill, Farrer & Burrill and Michael K. Collins for Plaintiff,
Cross-defendant and Appellant.
Quinn Emanuel Urquhart & Sullivan, Harry A. Olivar, Jr.
and Thomas Parker for Defendants, Cross-complainants and
Respondents.
_________________________
INTRODUCTION
David Hollander appeals the superior court’s ruling
denying his petition to correct and affirm as corrected the award
in an arbitration between Hollander, Tennenbaum Capital
Partners, LLC (TCP), and Tennenbaum Special Situations MM,
IX LLC, Tennenbaum IX-C SLP, LLC, Tennenbaum IX-O SLP,
LLC, and Tennenbaum Special Situations IX-S GP, LLC
(collectively the CIV entities).1 Hollander prevailed on certain of
his claims in the arbitration, but not others including his request
for attorney’s fees.
When Hollander presented his request for attorney’s fees to
the arbitrator, he did not include any claim or argument that he
was entitled to attorney’s fees under Labor Code section 218.5
(section 218.5). That section provides that in any action for
nonpayment of wages, “the court shall award reasonable
attorney’s fees and costs to the prevailing party if any party to
the action requests attorney’s fees and costs upon the initiation of
the action.” (§ 218.5, subd. (a).) In his petition to the superior
court, Hollander sought an order adding attorney’s fees to the
arbitration award, contending section 218.5 entitled him to such
fees. The superior court denied Hollander’s request to correct
and affirmed the arbitration award as is without any award of
attorney’s fees.
On appeal, Hollander asserts he has an “unwaivable right”
to attorney’s fees under section 218.5 such that he can argue for
1 Consistent with the parties’ briefs, we refer to the funds
as the CIV entities, reflecting that those entities are “carried
interest vehicles.” TCP and the CIV entities are collectively
referred to as respondents.
2
such fees for the first time in a petition to correct the arbitration
award. We disagree, and conclude Hollander’s failure to make
such a claim in the arbitration proceeding precludes Hollander
from seeking such attorney’s fees through a petition to correct the
award. An arbitration award may be corrected when an
arbitrator exceeds her powers, but the arbitrator here did not
exceed her powers by failing to rule on a claim for relief that was
never presented to her in the first place. Hollander does not
advance any other ground in this appeal for correcting the
arbitration award, and we therefore affirm.
FACTUAL AND PROCEDURAL BACKGROUND
A. Hollander’s Employment and the Parties’ Dispute
The pertinent facts set forth in the arbitrator’s final award
are as follows. Hollander was employed by TCP starting in 2002,
first as a director, then as general counsel. In 2011, he became a
managing partner of TCP. In April 2016, he withdrew from TCP
as a partner and became an employee of TCP. The terms of his
employment were set forth in a transition agreement with TCP.
He remained at TCP as an employee until he voluntarily
separated on January 15, 2017.
TCP is an investment manager that, among other things,
manages pooled investment funds including the CIV entities.
The CIV entities are limited liability companies directly managed
by TCP and governed by operating agreements referred to
collectively as the “CIV Agreements.” Each of the CIV entities
manages its own investment fund from which the CIV entity
receives a performance fee if the fund generates profits at or
above a specific rate. The performance fee paid to a CIV entity is
distributed to its equity investors based on their percentage
interest, as defined in each of the CIV Agreements; the investors
3
are defined as either “Senior Members” or “Employee Members.”
Hollander was a Senior Member and officer of each of the CIV
entities at the relevant times.
After Hollander separated from TCP in 2017, a dispute
arose over whether Hollander was entitled to equity interests in
the CIV entities that were forfeited by four former TCP
employees. The forfeited equity interests were conveyed to TCP,
and Hollander did not receive any share of them.
B. Arbitration Proceeding
On March 27, 2018, Hollander filed an arbitration demand
with JAMS naming TCP as the sole respondent.2 Hollander
asserted claims for breach of contract and breach of fiduciary
duty and sought compensatory damages, specific performance,
2 The CIV Agreements included the following arbitration
provision:
“The parties hereto agree that in the event of any dispute,
controversy or claim arising out of or relating to this Agreement,
whether based on contract, tort, statue [sic] or other legal or
equitable theory (including without limitation, any claim of
fraud, misrepresentation or fraudulent inducement or any
question of validity or effect of this Agreement including this
clause) or the breach or termination hereof (the ‘Dispute’), the
parties shall negotiate in good faith to resolve such Dispute for a
period of no less than thirty (30) days following the notification of
one party to the other(s) that a Dispute exists. If the parties are
unable to resolve a Dispute through such good-faith negotiations,
then such Dispute shall be resolved in binding arbitration in
accordance with the following provisions: [¶] (a) Such dispute
shall be resolved by binding arbitration to be conducted before
JAMS in accordance with the provisions of JAMS’ Comprehensive
Arbitration Rules and Procedures as in effect at the time of the
arbitration. . . . .”
4
and punitive damages. About a year later, Hollander amended
his arbitration demand to add the CIV entities as additional
respondents in the claim for breach of contract and to include as
to all respondents a claim for conversion and a specific prayer for
attorneys’ fees and costs. The prayer for attorney’s fees and costs
was based on indemnification clauses in the operative
agreements governing the investment vehicles.
The arbitration hearing was held on December 3, 2019, and
the matter was submitted for a final decision after the parties
simultaneously submitted post-hearing briefing on February 3,
2020.
In her first interim award, issued on March 6, 2020, the
arbitrator decided that Hollander was entitled to recover
$742,170 on his breach of contract claims. The arbitrator found
the CIV entities were required to allocate forfeited equity to
Senior Members, including Hollander, under section 3.10 of the
CIV Agreements. The arbitrator rejected respondents’ argument
that there was a mutual mistake in the drafting of the
agreements. The arbitrator thus concluded that the CIV entities
breached the CIV Agreements; the arbitrator, however, stated
she was not “mak[ing] a determination on the conversion or
breach of fiduciary duty claims, as they are superfluous in
conjunction with Hollander’s breach of contract claim.” The
$742,170 award to Hollander included $622,856 in monetary
damages and $119,314 in prejudgment interest. The arbitrator
denied Hollander’s request for punitive damages.
Hollander subsequently submitted a request for attorney’s
fees and costs to the arbitrator. Hollander’s request for
attorney’s fees was based on indemnification provisions in the
5
CIV Agreements and the TCP “Operating Agreement.”3
Hollander sought $330,511.70 in attorneys’ fees and expenses
plus another $305,658.57 in indemnification for tax liability
Hollander claimed he would incur as a result of any fee award.
On April 14, 2020, the arbitrator issued her interim award
No. 2 in which she denied Hollander’s request for attorney’s fees,
concluding the indemnification provisions applied only to third
party claims against the indemnitees, and not to first party
claims such as Hollander’s claims against the CIV entities and
TCP. The arbitrator also stated that “[f]rom an equitable
standpoint, it would be unjust to require [r]espondents to cover
[Hollander’s] costs here,” because Hollander “created a significant
amount of expenses as a result of his quest for indemnification of
tax liabilities, as well as punitive damages” and the positions he
took in support of those claims were “untenable.”
On May 5, 2020, the arbitrator issued her final award to
Hollander in the amount of $742,170. The final award
incorporated interim award No. 2 by reference and confirmed
that Hollander’s application for attorney’s fees and costs was
denied.
Respondents paid the award on May 19, 2020.
C. Superior Court Proceedings
On July 29, 2020, Hollander filed a petition under Code of
Civil Procedure section 1286.6, subdivision (b) to correct the
arbitration award and confirm it as so corrected. Hollander
sought to correct the arbitration award to include an award of
3 The full title of this agreement is the “Sixth Amended and
Restated Limited Liability Company Agreement of Tennenbaum
Capital Partners LLC.”
6
attorney’s fees and costs in the amount of $330,510 pursuant to
section 218.5 as well as the indemnification provisions in the CIV
Agreements and the TCP Operating Agreement.
On August 27, 2020, respondents filed a response to the
petition as well as a contingent cross-petition to vacate the
arbitration award. On September 3, 2020, Hollander filed his
response to respondents’ contingent cross-petition.
On February 24, 2021, after the matter was fully briefed,
the superior court held a hearing on Hollander’s petition. Prior
to the hearing, the court posted a tentative ruling denying the
petition to correct the arbitration award. On the court’s motion,
the matter was continued to March 30, 2021. The parties
subsequently supplemented the record.
At the second hearing, held on March 30, 2021, the court
heard oral argument and then took the matter under submission.
The court later issued a written decision denying the petition to
correct the arbitration award and granting the petition to confirm
the award. The court assumed, without deciding, that Hollander
was not precluded from pursuing a claim for attorney’s fees under
section 218.5 in a petition to correct the award even though he
had not presented such a claim to the arbitrator. The court
reasoned that Hollander was not a prevailing party against TCP
because the arbitration award for breach of contract damages
was against the CIV entities only. While Hollander was a
prevailing party against the CIV entities, those entities were not
Hollander’s employer, which the court found to be a prerequisite
to a recovery under section 218.5. In addition, Hollander’s claim
against the CIV entities was premised on the CIV Agreements,
which were not employment contracts.
7
The court also ruled that Hollander could not challenge the
arbitrator’s finding that he was not entitled to attorney’s fees
under the indemnification provisions in the CIV Agreements and
TCP Operating Agreement, because the arbitrator’s finding on
that issue could not be reviewed for errors of fact or law.
On May 13, 2021, the court entered a judgment denying the
petition to correct the arbitration award and confirming the final
arbitration award issued on May 5, 2020.
On July 2, 2021, Hollander filed a timely notice of appeal.
DISCUSSION
A. Legal Principles and Standard of Review
“California law favors alternative dispute resolution as a
viable means of resolving legal conflicts.” (Richey v. AutoNation,
Inc. (2015) 60 Cal.4th 909, 916.) “[I]t is the general rule that
parties to a private arbitration impliedly agree that the
arbitrator’s decision will be both binding and final.” (Moncharsh
v. Heily & Blase (1992) 3 Cal.4th 1, 9, fn. omitted (Moncharsh).)
“Because the decision to arbitrate grievances evinces the parties’
intent to bypass the judicial system and thus avoid potential
delays at the trial and appellate levels, arbitral finality is a core
component of the parties’ agreement to submit to arbitration.”
(Id. at p. 10.)
“[J]udicial review of private, binding arbitration awards is
generally limited to the statutory grounds for vacating ([Code
Civ. Proc.,] § 1286.2) or correcting ([Code Civ. Proc.,] § 1286.6) an
award.” (Moshonov v. Walsh (2000) 22 Cal.4th 771, 775, citing
Moncharsh, supra, 3 Cal.4th at pp. 8-28.) Hollander does not
seek to vacate the arbitration award, but instead to correct it
under Code of Civil Procedure section 1286.6. This section sets
forth three grounds for correcting an arbitration award:
8
“(a) There was an evident miscalculation of figures or an
evident mistake in the description of any person, thing or
property referred to in the award;
“(b) The arbitrators exceeded their powers but the award
may be corrected without affecting the merits of the decision
upon the controversy submitted; or
“(c) The award is imperfect in a matter of form, not
affecting the merits of the controversy.” (Code Civ. Proc.,
§ 1286.6.)
Hollander relies on the second ground, arguing that the
arbitrator in this case exceeded her powers. “[A]rbitrators do not
‘exceed[ ] their powers’ within the meaning of . . . [Code of Civil
Procedure] section 1286.6, subdivision (b) merely by rendering an
erroneous decision on a legal or factual issue, so long as the issue
was within the scope of the controversy submitted to the
arbitrators.” (Moshonov v. Walsh, supra, 22 Cal.4th at p. 775,
citing Moncharsh, supra, 3 Cal.4th at p. 28.)
We review a trial court’s ruling on whether an arbitrator
“exceeded her powers” de novo. (Lonky v. Patel (2020) 51
Cal.App.5th 831, 841-842; see Richey v. AutoNation, Inc., supra,
60 Cal.4th at p. 918, fn. 1 [court reviews de novo “the question
whether the arbitrator exceeded his powers and thus whether we
should vacate his award on that basis”].)
The principles of waiver and forfeiture apply in the
arbitration context and serve to ensure the finality of arbitration
awards. “ ‘ “[W]aiver” means the intentional relinquishment or
abandonment of a known right.’ [Citations.] . . . [¶] . . . [Waiver]
differs from the related concept of forfeiture, which results when
a party fails to preserve a claim by raising a timely objection.”
(Lynch v. California Coastal Com. (2017) 3 Cal.5th 470, 475-476.)
9
Where a party fails to present a claim to an arbitrator relating to
an issue within the scope of the arbitration, the party is generally
precluded from pursuing that claim in a subsequent court
proceeding challenging the arbitrator’s award. (Moncharsh,
supra, 3 Cal.4th at p. 31; Maaso v. Signer (2012) 203 Cal.App.4th
362, 377-378 (Maaso); Corona v. Amherst Partners (2003) 107
Cal.App.4th 701, 706 (Corona).)
B. Hollander is Precluded from Pursuing His Claim for
Attorney’s Fees Under Section 218.5 Because He Did
Not Present this Claim to the Arbitrator
Hollander contends the arbitrator exceeded her powers by
not awarding him attorney’s fees under section 218.5.4 TCP and
the CIV entities point out, and Hollander concedes, that he never
presented the arbitrator with a claim for attorney’s fees under
section 218.5. Because the issue of attorney’s fees was submitted
to the arbitrator for decision, Hollander is precluded from raising
a new ground for an attorney’s fees award (here, under § 218.5)
in a court challenge to the arbitration award. (Moncharsh, supra,
3 Cal.4th at p. 31 [“[f]ailure to raise the claim before the
arbitrator . . . waives the claim for any future judicial review”].)
Hollander contends that Moncharsh “holds only that
arguments about the legality of the arbitration agreement itself
must be raised before the arbitrator to be preserved for future
review.” We do not agree. In Moncharsh, the Supreme Court
addressed whether a party waives certain claims by participating
4 On appeal, Hollander has abandoned the contention that
the arbitrator exceeded her powers by not awarding him
attorney’s fees under the CIV Agreements and the TCP
Operating Agreement.
10
in the arbitration itself. The court held “that unless a party is
claiming (i) the entire contract is illegal, or (ii) the arbitration
agreement itself is illegal, he or she need not raise the illegality
question prior to participating in the arbitration process, so long
as the issue is raised before the arbitrator.” (Ibid.) The court
then noted that “[f]ailure to raise the claim before the arbitrator,
however, waives the claim for any future judicial review.” (Ibid.)
Nothing suggests that the court’s statement that failure to
raise a claim before the arbitrator precludes “future judicial
review” was limited solely to claims about the legality of an
arbitration agreement. In fact, the claim at issue in Moncharsh
related to the legality of the fee-splitting provision that was at
the heart of the parties’ dispute, and not to the legality of the
arbitration agreement. (See Moncharsh, supra, 3 Cal.4th at p. 30
[“when—as here—the alleged illegality goes to only a portion of
the contract (that does not include the arbitration agreement),
the entire controversy, including the issue of illegality, remains
arbitrable”].) As a result, the court held, the issue was to be
decided by the arbitrator and the plaintiff was not required to
raise it in court prior to the arbitration “in order to preserve the
issue for later judicial review.” (Ibid.) The court then made clear
that “[t]he issue would have been waived, however, had [the
plaintiff] failed to raise it before the arbitrator.” (Ibid.)
That is the situation here. Hollander is claiming the
arbitrator’s award was in excess of her powers and illegal because
it did not award him fees under section 218.5. His failure to
request such fees from the arbitrator in the first place waived
that claim because, as Moncharsh states, “[a]ny other conclusion
is inconsistent with the basic purpose of private arbitration,
11
which is to finally decide a dispute between the parties.”
(Moncharsh, supra, 3 Cal.4th at p. 30.)
Nor does Hollander’s cramped reading of Moncharsh
square with other cases holding that, where a party fails to
present a claim in an arbitration and the claim falls within the
scope of the arbitration, the party is precluded from pursuing the
claim in a court action challenging the arbitration award.
(Maaso, supra, 203 Cal.App.4th at pp. 377-378; Corona, supra,
107 Cal.App.4th at p. 706; see Heimlich v. Shivji (2019) 7 Cal.5th
350, 358 [noting that the plaintiff “was required to request costs
from the arbitrator in the first instance” and that “[f]ailure to do
so would have precluded relief” in court, citing Maaso and
Corona]; see also Paramount Unified School Dist. v. Teachers
Assn. of Paramount (1994) 26 Cal.App.4th 1371, 1385-1386
[holding school district waived its arguments that a monetary
damage award against it was precluded on various grounds by
failing to raise the arguments before the arbitrator].)
Maaso is instructive. In that case, the plaintiff filed a
petition to confirm an arbitration award in his favor and also
sought to recover, under Code of Civil Procedure section 998 and
Civil Code section 3291, expert costs incurred in the arbitration
and pre-judgment interest.5 (Maaso, supra, 203 Cal.App.4th at
p. 369.) The plaintiff had made an offer of judgment under Code
of Civil Procedure section 998 prior to the arbitration, the
defendant did not accept the offer, and the arbitration award
5 The court noted that “[a]lthough [the plaintiff] styled his
petition as one to ‘confirm’ the award, he essentially sought
‘correction’ of the award by asking the court to add costs and
interest not awarded by the panel.” (Maaso, supra, 203
Cal.App.4th at p. 378.)
12
exceeded the offer.6 (Maaso, supra, at pp. 367, 369.) The
plaintiff “did not request that the arbitrators rule on the issue of
[Code of Civil Procedure] section 998 costs or seek to present
evidence on the issue” during the arbitration, although his
counsel did “advise[ ] the panel that [the plaintiff] had previously
made a [Code of Civil Procedure] section 998 offer that was
rejected by [the defendant], without stating the amount of the
offer.” (Id. at pp. 368-369.) The trial court granted the petition to
confirm the arbitration award but denied the plaintiff’s claim for
expert costs and prejudgment interest. (Id. at p. 369.) The Court
of Appeal affirmed, concluding “that [the plaintiff] was not
entitled to these costs and interest because he never requested
these enhancements from the arbitrators.” (Id. at p. 377.)
Similarly, in Corona, the plaintiff prevailed in an
arbitration and in his petition to confirm the award sought
attorney’s fees and costs incurred in both the arbitration and the
judicial proceedings. (Corona, supra, 107 Cal.Appp.4th at p. 704.)
On appeal from the trial court’s ruling denying the application for
attorney’s fees and costs, the Court of Appeal concluded that the
plaintiff could not pursue his claim for attorney’s fees and costs
6 Under Code of Civil Procedure section 998, subdivision (d)
if a defendant does not accept an offer of judgment within the
time allowed by the section, and thereafter “fails to obtain a more
favorable judgment or award,” the court or arbitrator has
discretion to require the defendant to pay the plaintiff’s post-offer
expert costs. Civil Code section 3291 provides that, in personal
injury cases, where a plaintiff makes an offer of judgment under
Code of Civil Procedure section 998, which is not accepted, and
the plaintiff then obtains a more favorable judgment, the plaintiff
is entitled to interest at a rate of 10 percent from the date of the
offer.
13
incurred in the arbitration because he had not presented this
claim to the arbitrator. (Id. at p. 706.) The court held that
“[u]nder [Code of Civil Procedure sections 1286.2 and 1286.6], a
party’s failure to request the arbitrator to determine a particular
issue within the scope of the arbitration is not a basis for
vacating or correcting an award.” (Ibid.) As the court explained,
“As a general rule, parties to a private arbitration impliedly, if
not expressly, agree that the arbitrator’s decision will be both
binding and final and thus the arbitrator’s decision ‘should be the
end, not the beginning, of the dispute.’ (Moncharsh, supra, 3
Cal.4th at pp. 9-10.) Allowing a party to request that the trial
court make an award that was within the scope of the arbitration
but not pursued in that forum is inconsistent with the policies
underlying the statutory private arbitration scheme.” (Corona,
supra, 107 Cal.App.4th at p. 706.)
In this case, Hollander does not contend that the arbitrator
was unable to decide a claim for attorney’s fees under section
218.5, or that Hollander was in any way precluded or hampered
in presenting such a claim to the arbitrator. Indeed, Hollander
presented the arbitrator with a request for attorney’s fees on
other grounds. An arbitrator’s decision on a request for
attorney’s fees cannot be challenged in a petition to correct the
award, as long as the issue was within the scope of the
arbitration. (Moshonov v. Walsh, supra, 22 Cal.4th at pp. 776-
779; see Moore v. First Bank of San Luis Obispo (2000) 22 Cal.4th
782, 787; Maaso, supra, 203 Cal.App.4th at p. 378.) As our
Supreme Court held in Moore, “[h]aving submitted the fees issue
to arbitration, plaintiffs cannot maintain the arbitrators exceeded
their powers, within the meaning of [Code of Civil Procedure]
section 1286.6, subdivision (b), by deciding it, even if they decided
14
it incorrectly.” (Moore, supra, at p. 787.) Thus, Hollander was
required to present his claim under section 218.5 to the arbitrator
if that was a basis on which he was seeking fees. Allowing
Hollander to raise this claim for the first time in court, after the
conclusion of the arbitration, would undermine the strong policy
favoring finality of arbitration awards. (Moncharsh, supra, 3
Cal.4th at p. 30.)
C. The Cases Hollander Relies Upon Do Not Compel a
Different Result
Hollander argues that, because the nature of his attorney’s
fees claim is “unwaivable,” he is excused from the above line of
case law and entitled to have a court consider his section 218.5
claim even though he did not present it to the arbitrator. He first
contends courts have described section 218.5 as an unwaivable
right. (E.g., Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th
227, 250; Jones v. Humanscale Corp. (2005) 130 Cal.App.4th 401,
412 [“Because the arbitration dealt with [the] plaintiff’s wage
claim, it covered an unwaivable statutory issue affecting public
policy”].) Hollander asserts the arbitrator exceeded her powers
by issuing an award that did not include fees under section 218.5,
because the award essentially waived his unwaivable statutory
right to such fees. (E.g., Richey v. AutoNation, Inc., supra, 60
Cal.4th at p. 916 [“Arbitrators may exceed their powers by
issuing an award that violates a party’s unwaivable statutory
rights or that contravenes an explicit legislative expression of
public policy”].)
This argument confuses the minimum requirements
necessary when unwaivable statutory rights are subject to
arbitration instead of litigation in court (minimum requirements
a plaintiff cannot be compelled to waive as part of an agreement
15
to arbitrate) with a party’s own failure to make a claim in
arbitration for a specific monetary recovery (which can lead to a
waiver or forfeiture of such a claim for relief).7
In Armendariz v. Foundation Health Psychcare Services,
Inc. (2000) 24 Cal.4th 83, our Supreme Court considered the
minimum requirements necessary to permit arbitration of
unwaivable statutory rights. (Id. at pp. 90-91.) The court found
parties could agree to arbitrate these matters in the employment
context if “the arbitration . . . meet[s] certain minimum
requirements” deemed essential for the “employee to vindicate
his or her statutory rights.” (Id. at pp. 90, 91.) As relevant here,
“the arbitration agreement or arbitration process cannot
generally require the employee to bear any type of expense that
the employee would not be required to bear if he or she were free
to bring the action in court.” (Id. at pp. 110-111, italics omitted.)
Applying the teaching of Armendariz demonstrates the
inapplicability of the cases on which Hollander relies to assert he
did not forfeit his section 218.5 claim. Hollander does not
challenge any provisions in the arbitration agreement, nor does
he contend that he was required to pay any attorney’s fees or
inappropriate arbitral expense that he would not have had to pay
had he litigated his claims in court. Nothing in the arbitration
agreement here prevented the arbitrator from awarding attorney
fees under section 218.5 if they were warranted under the
7 Even assuming section 218.5 sets forth an unwaivable
right, by its terms the section does not allow for the recovery of
fees unless a “party to the action requests attorney’s fees and
costs upon the initiation of the action.” (§ 218.5, subd. (a).) This
demonstrates that the right to seek fees under this section can be
lost if not asserted.
16
statute. (Compare Carbajal v. CWPSC, Inc., supra, 245
Cal.App.4th at p. 250 [striking arbitration clause provision that
each party was to bear their own attorney’s fees because it
conflicted with right of recovery in § 218.5].) Hollander does not
contend the arbitrator exceeded her authority in addressing what
he now characterizes as a wage claim—indeed, he argues that
portion of the award should be confirmed. He does not contend
the arbitration agreement was unconscionable. Hollander does
not assert he was improperly required to pay any arbitration
related costs (compare Jones v. Humanscale Corp., supra, 130
Cal.App.4th at pp. 415-416 [correcting arbitration award to make
the defendant pay all costs and fees for the arbitrator but
otherwise affirming award]), and the award did not require
Hollander to pay any attorney fees of the respondents (compare
D.C. v. Harvard-Westlake School (2009) 176 Cal.App.4th 836,
864-868 [attorney’s fee award to the defendant under prevailing
party provision of arbitration agreement was invalid because
hate crime statute at issue provided for fee award only to a
prevailing plaintiff]). Hollander was ordered to bear his own
attorney fees by the arbitrator, but that result would not have
been any different if Hollander failed to make a claim for section
218.5 fees in court like he failed to do in the arbitration.8
8 Hollander also relies on DiMarco v. Chaney (1995) 31
Cal.App.4th 1809, where the Court of Appeal held the trial court
properly corrected an arbitration award to grant the defendant
attorney’s fees as the prevailing party in the arbitration but erred
in determining the amount of attorney’s fees itself instead of
remanding the issue to the arbitrator. (Id. at p. 1811.) That case
is inapposite because the defendant presented their claim for
prevailing party attorney’s fees to the arbitrator in the initial
17
Hollander relies on one additional case—Jordan v.
Department of Motor Vehicles (2002) 100 Cal.App.4th 431
(Jordan)—to argue that Moncharsh’s waiver rule does not apply
to his “unwaivable right” to fees under section 218.5. Jordan
arose from a related case which held a smog impact fee imposed
by the state was unconstitutional. The trial court found the case
had resulted in a “common fund” of more than $363 million and
awarded the plaintiffs’ counsel (Attorneys) 5 percent of this fund,
approximately $18 million, in fees and expenses. (Jordan, supra,
100 Cal.App.4th at p. 439.) The state appealed the fee award, but
before the appeal was decided the Attorneys and the state
entered into an agreement to arbitrate the amount of attorney’s
fees; in addition, the Legislature enacted a statute that created a
refund account to be used to reimburse people who had paid the
smog impact fee and also provided the attorney’s fees dispute in
Jordan would be resolved through binding arbitration, with the
fees award being paid from the refund account. That statute was
codified at Revenue and Taxation Code section 6909. (Jordan,
supra, at p. 440.)
The arbitrators subsequently rendered an award of more
than $88 million in attorney’s fees based on the common fund
doctrine. (Jordan, supra, 100 Cal.App.4th at p. 441.) The state
sought reconsideration of the award before the arbitrators,
contending for the first time that Revenue and Taxation Code
section 6909, subdivision (b) limited the award to $18 million
because otherwise the statute would be an unconstitutional gift
arbitration. (Id. at p. 1812.) Thus, the defendant did not waive
their claim for attorney’s fees by failing to present it to the
arbitrator.
18
of public funds. The arbitration panel denied the motion for
reconsideration, with one member dissenting and indicating his
tentative view that the award did violate Revenue and Taxation
Code section 6909, subdivision (b) and was an unconstitutional
gift of public funds. (Jordan, supra, at pp. 441-442.)
Attorneys then petitioned to confirm the arbitration award;
the state for its part petitioned for a writ of mandate to vacate
the award as being in excess of the arbitrators’ powers and in
violation of public policy. The trial court vacated the arbitration
award and the Court of Appeal affirmed, concluding that both the
statute which authorized the arbitration (Rev. & Tax. Code,
§ 6909, subd. (b)) and public policy limited the award to $18
million. (Jordan, supra, 100 Cal.App.4th at p. 445.) In so ruling,
the court rejected the Attorneys’ argument that they had created
a common fund in the form of the refund account, concluding that
“a cap of $18 million must be read into [Revenue and Taxation
Code] section 6909[, subdivision] (b) because otherwise the
statute authorizes an arbitration award that is an
unconstitutional gift of public funds.” (Id. at p. 450.)
Attorneys argued the state waived this argument by failing
to make it to the arbitrators prior to the motion for
reconsideration. (Jordan, supra, 100 Cal.App.4th at p 452.)
Jordan found the Moncharsh rule of waiver did not apply to the
facts before it, because the state was acting to protect the public
fisc, and “ ‘ “neither the doctrine of estoppel nor any other
equitable principle may be invoked against a governmental body
where it would operate to defeat the effective operation of a policy
adopted to protect the public.” [Citation.]’ [Citations.]” (Jordan,
supra, at p. 453.) Jordan does not aid Hollander, because none of
19
the parties to the arbitration was a governmental body acting to
protect the public, and that fact was instrumental to its holding.
D. Hollander’s Claim under Section 218.5 Does Not
Involve Pure Questions of Law
Hollander asserts that our opinion in D.C. v. Harvard-
Westlake School, supra, 176 Cal.App.4th 836, “rejected the
argument that a claim based on a nonwaivable right was
forfeited if not raised in the arbitration.” That misreads the
opinion, in which a divided panel permitted the plaintiff-
appellant to argue a theory not raised before the arbitrator
because it involved a question of law based on undisputed facts.
(Id. at p. 868, and cases/treatise cited therein.)9 In any event,
Hollander elsewhere argues that we should invoke this exception
that a pure question of law may be raised for the first time on
appeal. (E.g., Waller v. Truck Ins. Exchange, Inc. (1995) 11
Cal.4th 1, 24 [appellate courts have discretion to address
question of law based on undisputed facts even though issue was
not raised in the trial court].)
The issue upon which Hollander seeks review—a claim for
attorney’s fees under section 218.5—is not a pure question of law.
Section 218.5, subdivision (a) provides, in relevant part, “In any
action brought for the nonpayment of wages, fringe benefits, or
9 The majority declined to address whether a waiver
occurred because it lacked the entire record of the arbitration
proceedings. (D.C. v. Harvard-Westlake School, supra, 176
Cal.App.4th at p. 867.) In dissent, now Presiding Justice Frances
Rothschild was of the view that because nothing in the record
showed the appellant properly preserved the issue by raising it
before the arbitrator, the issue was waived. (Id. at p. 869 (dis.
opn. of Rothschild, J.).)
20
health and welfare or pension fund contributions, the court shall
award reasonable attorney’s fees and costs to the prevailing party
if any party to the action requests attorney’s fees and costs upon
the initiation of the action.” Resolution of this claim requires the
determination of many factual issues or mixed issues of fact and
law, including whether the forfeited equity interests in the CIV
entities were “wages” within the meaning of section 200,
subdivision (a). There are also disputed factual issues regarding
the reasonableness of the fees claimed, and whether some of the
fees sought do not relate to what Hollander now characterizes as
his wage claim and instead to claims the arbitrator found
untenable.
In any event, the exception Hollander asks us to invoke is
discretionary. (E.g., Greenwich S.F., LLC v. Wong (2010) 190
Cal.App.4th 739, 767.) We decline to consider Hollander’s new
claim under these circumstances. Hollander could have
presented his claim under section 218.5 to the arbitrator, but he
chose to pursue attorney fees on other grounds (presumably
recognizing that a significant portion of his fees was, as the
arbitrator found, related to punitive damage and indemnification
issues that indisputably were not wages). He invited the very
error of which he now complains by not seeking fees under
section 218.5 before the arbitrator. As explained above, his claim
presents messy questions of fact. It would require review of the
grounds for the arbitrator’s ruling that Hollander caused
unnecessary attorney’s fees to be incurred pursuing untenable
claims, which is not a proper basis on which to seek correction of
an arbitration award. Finally, allowing Hollander to raise a
section 218.5 claim now, in the context of a petition to correct the
arbitration award, would frustrate finality of the award, which
21
“is a core component of the parties’ agreement to submit to
arbitration.” (Moncharsh, supra, 3 Cal.4th at p. 10.)
DISPOSITION
We affirm the trial court’s order. Respondents are awarded
their costs on appeal.
NOT TO BE PUBLISHED
WEINGART, J.*
We concur:
CHANEY, J.
BENDIX, Acting P. J.
* Judge of the Los Angeles County Superior Court, assigned
by the Chief Justice pursuant to article VI, section 6 of the
California Constitution.
22 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488352/ | 2022 IL App (1st) 210942-U
FIRST DISTRICT,
FIRST DIVISION
November 21, 2022
No. 1-21-0942
NOTICE: This order was filed under Supreme Court Rule 23 and is not precedent except in
limited circumstances allowed under Rule 23(e)(1).
_____________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
FIRST JUDICIAL DISTRICT
_____________________________________________________________________________
)
ADRIANA MAZUTIS, )
Appeal from the
)
Circuit Court of
Plaintiff-Appellant, )
Cook County, Illinois.
v. )
)
No. 2020 L 2307
LAWRENCE KARLIN, WARREN LUPEL, and )
LUPEL WEININGER, LLP, )
Honorable
)
Daniel Kubasiak,
Defendants-Appellees. )
Judge Presiding.
)
_____________________________________________________________________________
JUSTICE COGHLAN delivered the judgment of the court.
Justices Pucinski and Hyman concurred in the judgment.
ORDER
¶1 Held: Dismissal of plaintiff’s “First Amended Complaint at Law” affirmed where it fails
to state a claim upon which relief can be granted pursuant to section 2-615 of the
Code of Civil Procedure (735 ILCS 5/2-615).
¶2 Plaintiff Adriana Mazutis filed an action against defendants Lawrence Karlin, Warren
Lupel, and Lupel Weininger, LLP (Lupel Weininger) (collectively referred to as defendants),
alleging a number of claims related to their representation of plaintiff in the underlying litigation,
Adriana Mazutis v. Polekatz Gentleman’s Club, Inc., et al., Case No. 2007-CH-18984. After
No. 1-21-0942
filing three amended complaints, plaintiff voluntarily dismissed her action. The action was later
re-filed. Summary judgment was ultimately granted in favor of defendants and the action was
dismissed again, with prejudice.
¶3 On appeal, this court reversed and remanded, directing the trial court to allow plaintiff to
file an amended complaint “with the admonition that the complaint must comply with section 2-
603 of the Code” of Civil Procedure (Code) (735 ILCS 5/2-603 (West 2018)). Mazutis v. Lupel,
2019 IL App (1st) 173048-U, ¶ 13. The “First Amended Complaint at Law” 1 plaintiff filed on
remand was dismissed by the trial court pursuant to sections 2-603 and 2-615 (735 ILCS 5/2-615
(West 2018)) of the Code. Plaintiff now appeals that dismissal. For the reasons stated herein, we
affirm the trial court’s dismissal of plaintiff’s “First Amended Complaint at Law.”
¶4 BACKGROUND
¶5 While plaintiff was married to Steven Reynolds, they acquired an equitable ownership
interest in Polekatz Gentleman’s Club (“the Club”). Plaintiff operated the Club and received a
monthly salary and a share of the net profits generated from the Club. After her husband’s death
in March 2007, plaintiff was “locked out of the business” and denied her salary and the “value of
her ownership interest” by other investors.
¶6 On July 18, 2007, the RockFusco law firm filed an action on plaintiff’s behalf against the
Club and its investors “to restore her position.” In July or August 2007, plaintiff was introduced
to defendants by George Michael, a mutual acquaintance and client of defendants, for the
“purpose of hiring the Defendants to prosecute claims *** against Polekatz *** and Vonch,
1
Although plaintiff titled her complaint “First Amended Complaint at Law,” this is technically
her second amended complaint in the re-filed action. For the purposes of this appeal, we refer to it as the
“First Amended Complaint at Law.”
-2-
No. 1-21-0942
LLC.” 2 Plaintiff advised defendants that she intended “to take back the Club and *** operate the
Club as she had prior to her husband’s death.” In August 2007, defendants filed an appearance
on plaintiff’s behalf in the Polekatz litigation. On February 1, 2011, plaintiff “fired” defendants
after “discover[ing] that the Defendants [sic] advice was for the purpose of preserving a claim on
her rights to the business for the benefit of George Michael.” The Polekatz litigation eventually
settled. 3
¶7 Original Action
¶8 On September 13, 2012, plaintiff filed a complaint against defendants, asserting claims of
legal malpractice, “conflicts of interest,” fraud, breach of fiduciary duty, and negligent
supervision and hiring. Plaintiff generally alleged that defendants “committed legal malpractice
when [they] engaged in conflicts of interest [and] ceded control of the Litigation” to both George
and his brother Robert Michael.4 Plaintiff’s original complaint also alleged that defendants were
negligent in their representation of her in a probate matter relating to her husband’s will.
¶9 On July 19, 2013, the trial court “grant[ed] the [defendants’ section 2-619] motion to
dismiss regarding the estate of Steven Reynolds,” finding that this claim was barred by the
statute of limitations. Because “there [were] a lot of other allegations in the complaint *** [that]
weren’t even addressed in [defendants’] motion” that the trial court wanted “laid out better,” the
court struck the complaint in its entirety and granted plaintiff leave to file an amended complaint.
2
Plaintiff’s “Fist Amended Complaint at Law” does not explain what “Vonch, LLC” is, but our
review of the record reveals that it is the “holding company” for Polekatz.
3
Plaintiff’s “First Amended Complaint at Law” does not allege when the litigation settled. Our
review of the record shows that the parties entered into a confidential settlement agreement, but the record
does not contain the date of the settlement.
4
Some allegations refer to both George and his brother Robert Michael, so we refer to them by
their first names, or collectively as the “Michael brothers.”
-3-
No. 1-21-0942
¶ 10 Plaintiff’s first amended complaint was filed on August 23, 2013. Defendants moved to
dismiss pursuant to sections 2-615 and 2-619 (735 ILCS 5/2-619) of the Code. On November 26,
2013, the court dismissed counts II (“Conflicts of Interest and Breach of Duty of Loyalty”) and
IV (“Breach of Fiduciary Duty”) of the amended complaint with prejudice, and all other counts
without prejudice.
¶ 11 On January 6, 2014, plaintiff filed a second amended complaint, adding a claim for
breach of contract. Defendants again moved to dismiss the complaint.5 At a March 21, 2014,
status hearing, the trial court gave plaintiff leave to file a third amended complaint over
defendants’ objection, but indicated that no further amendments would be allowed. On March
28, 2014, plaintiff filed a third amended complaint. On August 27, 2014, the trial court denied
defendants’ motion to dismiss counts I, III, V, and VI of the third amended complaint.6 On
October 25, 2016, the court granted plaintiff’s Motion for Voluntary Dismissal pursuant to 735
ILCS 5/2-1009 without prejudice.
¶ 12 Re-Filed Action
¶ 13 On January 3, 2017, plaintiff re-filed her action against defendants. (Case No. 2017 L
00008). On April 10, 2017, defendants filed an answer and affirmative defenses, and the parties
proceeded with expert discovery. During the four years prior to the action being voluntarily
dismissed, the parties completed extensive written and oral discovery.
¶ 14 On September 7, 2017, pursuant to defendants’ motion for summary judgment, the trial
court entered judgment in favor of defendants and against plaintiff, “disposing of the case in its
5
Defendants’ motion to dismiss is not contained in the record on appeal, so we do not know on
what grounds defendants moved to dismiss plaintiff’s second amended complaint.
6
The motion was filed under sections 2-615 and 2-619 of the Code.
-4-
No. 1-21-0942
entirety.” The court found that plaintiff “presented no evidence that Defendants proximately
caused her damages” and that her cause of action was barred by the statute of limitations.
¶ 15 Plaintiff appealed the dismissal of counts I, III, V, and VI, but did not appeal the
dismissal of counts II and IV (which were also dismissed with prejudice). On February 15, 2019,
this court reversed, finding that “[t]he deficiencies in the plaintiff’s complaint and the circuit
court’s failure to address all of the claims asserted therein, prevent us from reaching the
substantive issues” raised on appeal. Mazutis, 2019 IL App (1st) 173048-U, ¶ 8. We held that
plaintiff’s complaint failed to comply with section 2-603(b) of the Code by including multiple
causes of actions in each count. Id. ¶¶ 9, 13. Exercising our power under Illinois Supreme Court
Rule 366(a)(5) (eff. Feb. 1, 1994), we struck plaintiff’s complaint and remanded for the filing of
an amended complaint. Id. ¶ 13. In doing so, we expressly admonished “that the complaint must
comply with section 2-603 of the Code, requiring a ‘plain and concise statement’ of the
plaintiff’s cause of action with each cause of action stated in a separate count that is separately
pled, numbered, and divided into consecutively numbered paragraphs with each paragraph
containing a separate allegation.” (Emphasis added in original.) Id. (quoting 735 ILCS 5/2-603).
¶ 16 On remand, plaintiff filed a “Complaint at Law,” 7 which defendants moved to dismiss
pursuant to sections 2-603, 2-615, and 2-619 of the Code. The trial court found that “[plaintiff]
has failed to comply with 735 ILCS 5/2-603 when pleading counts I through VI, and the
complaint is drafted in such a manner as to render any attempt by Defendants to answer futile.”
Plaintiff was granted leave “to replead counts I, III, V, and VI.” As to counts II and IV, the trial
court incorrectly indicated that those counts “were previously dismissed by the Appellate Court
7
While plaintiff titled this “Complaint at Law,” it is her first amended complaint in the re-filed
action.
-5-
No. 1-21-0942
on November 26, 2013.” Although those counts were dismissed by the circuit court on
November 26, 2013, plaintiff did not appeal the dismissal of counts II and IV. 8
¶ 17 On February 24, 2021, plaintiff filed her “First Amended Complaint at Law.” The six-
count complaint alleged: “Legal Malpractice Regarding the Polekatz Litigation” (count I),
“Legal Malpractice regarding Breach of Fiduciary Duties for conflicts of interest” (count II),
“Legal Malpractice regarding Fiduciary duties for unauthorized disclosures” (count III), fraud
(count IV), negligent supervision and hiring (count V) (against Lupel and Lupel & Lupel
Weininger only), and breach of contract (count VI).
¶ 18 On March 26, 2021, defendants filed two motions to dismiss the “First Amended
Complaint at Law.” In the first, defendants argued that counts I, II, III, and VI violated section 2-
603 of the Code by commingling multiple causes of actions. In the second, defendants argued
that counts II and IV had been previously dismissed with prejudice; plaintiff “was not given
leave to replead these counts”; all counts failed to state a claim under section 2-615 of the Code;
and that certain allegations in count I were precluded by the viability doctrine and should be
dismissed pursuant to section 2-619 of the Code.
¶ 19 On July 16, 2021, the trial court entered two separate dismissal orders. In the first order,
the court found that counts I, II, III and VI “fail[ed] to comply with the requirements of section
2-603 as they “remain ‘virtually impossible’ to decipher.” Specifically, the trial court found that
count I alleged “multiple causes of actions *** including facts that appear to support a cause of
action for breach of fiduciary duty, and fraud,” count II alleged “multiple causes of action,”
count III “commingle[d] two causes of action into one,” and count VI contained “causes of
8
The Appellate Court’s decision is dated February 15, 2019. The circuit court dismissed counts II
and IV of plaintiff’s first amended complaint in the original action with prejudice on November 26, 2013.
-6-
No. 1-21-0942
action for breach of contract, breach of fiduciary duty, and fraud and conspiracy.” Counts I, II,
III, and VI were dismissed with prejudice.
¶ 20 In the second order, the trial court found that counts II and IV “had previously been
dismissed and the court did not grant Plaintiff leave to refile these counts.” The court dismissed
count V pursuant to section 2-615, because plaintiff “failed to sufficiently allege facts, rather
than conclusions” and failed to “identif[y] a ‘particular unfitness’ by Karlin to perform his job as
an attorney, let alone that Lupel and/or Lupel Weininger knew about any such ‘unfitness’ or that
any such ‘unfitness proximately caused an injury to [p]laintiff.”
¶ 21 ANALYSIS
¶ 22 Initially, defendants assert that we should strike the “first two pages” of plaintiff’s
statement of facts because it is “wholly argumentative and devoid of a single citation to the
record.” Illinois Supreme Court Rule 341(h)(6) (eff. Oct. 1, 2020) requires that the statement of
facts shall be “stated accurately and without argument or comment, and with appropriate
reference to the pages of the record on appeal ***.” We agree that this portion of plaintiff’s
statement of facts is argumentative and fails to cite to the record, but decline to strike the brief.
We will disregard the noncompliant portions of plaintiff’s statement of facts in our review and
admonish counsel to carefully follow supreme court rules in future submissions. See Hubert v.
Consolidated Medical Laboratories, 306 Ill. App. 3d 1118, 1120 (1999).
¶ 23 Plaintiff argues that the trial court erred in finding that counts II and IV of the complaint
were previously dismissed with prejudice. Defendants respond that the dismissal of counts II and
III was proper pursuant to the law of the case doctrine or, alternatively, res judicata, because
these counts were dismissed with prejudice in the original action.
-7-
No. 1-21-0942
¶ 24 Plaintiff re-numbered and re-labeled the counts in the “First Amended Complaint at
Law,” which understandably caused some confusion in the trial court. In the first amended
complaint filed in the original action, count II (alleging “Conflicts of Interest and Breach of Duty
of Loyalty”) and count IV (alleging “Breach of Fiduciary Duty”) were dismissed with prejudice.
The trial court found that count II was improperly based on “purported violations of the Illinois
Rules of Professional Conduct” and count IV was duplicative of count I. In the current “First
Amended Complaint at Law,” count II alleges “Legal Malpractice regarding Breach of Fiduciary
Duties for conflicts of interest,” count III alleges “Legal Malpractice regarding Fiduciary duties
for unauthorized disclosures,” and count IV alleges fraud.
¶ 25 The law of the case doctrine provides that “where an issue has been litigated and decided,
a court’s unreserved decision on that question of law or fact settles that question for all
subsequent stages of the suit.” Alwin v. Village of Wheeling, 371 Ill. App. 3d 898, 911 (2007).
Res judicata bars a “subsequent action” if it involves the “same claim, demand, or cause of
action” as a previous action involving the same parties that was decided on the merits. Pepper
Construction Co. v. Palmolive Tower Condominiums, LLC, 2016 IL App (1st) 142754, ¶ 73.
Because the allegations contained in counts II and III of the current complaint are different from
the allegations previously dismissed with prejudice, counts II and III of the current complaint are
not barred by the law of the case doctrine or res judicata. Count IV, which now alleges fraud,
also contains different allegations than those dismissed with prejudice in the original action. In
any event, for the following reasons, counts II, III, and IV of the “First Amended Complaint at
Law” were still properly dismissed.
-8-
No. 1-21-0942
¶ 26 Section 2-615
¶ 27 Defendants argue that plaintiff’s “First Amended Complaint at Law” should have been
dismissed in its entirety pursuant to section 2-615 because it fails to state a claim upon which
relief can be granted. The trial court dismissed count V pursuant to section 2-615 of the Code
and counts I, II, III, IV, and VI pursuant to section 2-603 of the Code. However, “we may affirm
on any basis appearing in the record, whether or not the trial court relied on that basis and
whether or not the trial court’s reasoning was correct.” Khan v. Fur Animal Rescue, Inc., 2021 IL
App (1st) 182694, ¶ 25.
¶ 28 A section 2-615 motion to dismiss attacks the legal sufficiency of a complaint based on
the face of the pleading. Marshall v. Burger King Corp., 222 Ill. 2d 422, 429 (2006). We accept
all well-pleaded facts as true and draw all reasonable inferences from those facts. Id. “The
essential question is whether the allegations of the complaint, when construed in the light most
favorable to the plaintiff, are sufficient to establish a cause of action upon which relief may be
granted.” Cochran v. Securitas Security Services USA, Inc., 2017 IL 121200, ¶ 11. A complaint
will not be dismissed unless no set of facts can be proved which will entitle the plaintiff to
recover. Vernon v. Schuster, 179 Ill. 2d 338, 344 (1997). “Mere conclusions of law or facts
unsupported by specific factual allegations in a complaint are insufficient to withstand a section
2-615 motion to dismiss.” Estate of Powell ex rel. Harris v. John C. Wunsch, P.C., 2013 IL App
(1st) 121854, ¶ 15. We review a section 2-615 dismissal de novo. Id.
¶ 29 Counts I-III: Legal Malpractice
¶ 30 To state a claim for legal malpractice, a plaintiff must plead “(1) the existence of an
attorney-client relationship that establishes a duty on the part of the attorney; (2) a negligent act
or omission constituting a breach of that duty; (3) proximate cause establishing that ‘but for’ the
-9-
No. 1-21-0942
attorney’s negligence, the plaintiff would have prevailed in the underlying action; and (4) actual
damages.” Lucey v. Law Officers of Pretzel & Stouffer, Chartered, 301 Ill. App. 3d 349, 353
(1998). “Even if negligence on the part of the attorney is established, no action will lie against
the attorney unless that negligence proximately caused damage to the client.” Tri-G, Inc. v.
Burke, Bosselman & Weaver, 222 Ill. 2d 218, 226 (2006). “The existence of actual damages is
therefore essential to a viable cause of action for legal malpractice.” Id.
¶ 31 The allegations set forth in count I for “Legal Malpractice Regarding the Polekatz
Litigation” are conclusory, not supported by specific facts, and not connected to any injury.
Plaintiff claims that defendants drafted a fraudulent purchase agreement between herself and
George, “transfer[ing] all or part of [her] business interest to George.” As a result, the Polekatz
defendants filed a motion for summary judgment, asserting that George, “not [plaintiff], was the
real party in interest in the litigation.” Defendant Karlin’s response, which included George’s
affidavit, “disclaim[ed] his interest in the Purchase Agreement.” Notably, the motion for
summary judgment was denied. Plaintiff also alleges that defendants “[n]egligently advised [her]
regarding the effect of the purported assignments of [her] interest in the Club to George
Michael” and “negligently presented inaccurate facts to the trial court relating to Michael’s
assertions of rights in the Litigation.” However, plaintiff fails to allege how she was injured by
these acts.
¶ 32 Although plaintiff claims that defendants’ conduct “led to litigation against her *** filed
by George Michael,” the nature of this “litigation” is not identified in count I. She also claims
that she was “required to expend in excess of $30,000.00 defending against [George] Michael’s
attempts to intervene as a party in the Polekatz litigation,” but fails to disclose how George
attempted to intervene or how these attempts are related to defendants’ conduct.
- 10 -
No. 1-21-0942
¶ 33 In alleging that defendants “took direction from the Michael Brothers,” plaintiff claims
that defendants “conferred with Michael [in December, 2010] to determine what discovery
requests would be issued.” No other facts are alleged describing how defendants took direction
from either George or Robert Michael. She also asserts that defendants protected the interests “of
others” and took payment “from others,” without identifying these “others,” what interests were
protected, or how she was injured as a result.
¶ 34 Plaintiff alleges that defendants failed to “make any attempt to settle the Litigation,”;
“advise or consult with [her] regarding any amendments to her complaint”; allege loss of
compensatory losses of salary or monetary interest in the Club; and conduct discovery related to
the value of Polekatz. She claims she was “forced to settle” for a “fraction of the damages
incurred by her,” but alleges no facts supporting these vague accusations. Conclusory allegations
that defendants were negligent are fatally insufficient in the absence of specific facts showing
that defendants’ conduct proximately caused “actual damages.” See Tri-G, Inc., 222 Ill. 2d at
226.
¶ 35 Finally, plaintiff alleges that defendants were negligent in failing “to bring suit against
Robert and George Michael for the theft and conversion of her assets.” Since she fails to disclose
what assets were stolen and converted, whether defendants were retained for this purpose, or
why they would have otherwise had a duty to sue the Michael brothers on her behalf, count I
fails to state a claim for legal malpractice. See, e.g., Purmal v. Robert N. Wadington and
Associates, 354 Ill. App. 3d 715, 721 (2004) (plaintiff failed to state a claim for legal malpractice
where she “never states with specificity how [defendant’s] failure to communicate or his breach
of the confidential settlement prevented her from collecting the settlement money”).
- 11 -
No. 1-21-0942
¶ 36 Counts II and III are similarly deficient. Count II alleges that defendants were negligent
in taking “strategic direction from George and Robert Michael.” Again, no specific factual
allegations support this claim or explain the manner in which the value of her settlement was
diminished. Plaintiff also alleges that after defendants were fired, they represented George in a
motion to intervene in the Polekatz litigation and represented George and Susan Tamuzian in
separate lawsuits against plaintiff, asserting their respective interests in Polekatz. Plaintiff claims
that the Tamuzian action “directly diminished the value of [her] ownership right by
$1,000,000.00,” but admits that the Tamuzian action was “voluntarily dismissed.” Conclusory
allegations that George’s lawsuit “had the effect of reducing, diminishing and destroying [her]
interest in the Litigation and the value of the Club,” are fatally insufficient.
¶ 37 In count III, plaintiff alleges that defendants disclosed confidential information to the
Michael brothers, including “tax returns, financial statements, [and] business papers regarding
the financial condition of other ventures.” No facts are alleged demonstrating how “[b]ut for
[d]efendants [sic] negligent disclosures of confidential information *** [she] was required to
settle the Litigation for a fraction of the damages incurred by her.” See, e.g., Purmal, 354 Ill.
App. 3d at 721 (plaintiff failed to state a claim for legal malpractice where she “never state[d]
with specificity how [the attorney’s] breach of the attorney-client privilege *** prevented her
from collecting the settlement money”).
¶ 38 Plaintiff further asserts that confidential documents were divulged to Patrick Splan
“while she was engaged in ongoing litigation” with him, without identifying the nature of the
litigation, the documents allegedly disclosed, or how Patrick Splan is related to this litigation.
We are similarly unable to decipher how Splan is connected to plaintiff being “removed from her
home, [and] los[ing] the value of her home and the value of her investment in the Willowbrook
- 12 -
No. 1-21-0942
residence in an amount exceeding $1,200,000.00.” These “conclusory allegations are insufficient
to state a cause of action for legal malpractice.” See id.
¶ 39 Count IV: Fraud
¶ 40 To state a claim for common law fraud, a plaintiff must plead “(1) a false statement of
material fact; (2) knowledge or belief by the defendant that the statement was false; (3) an
intention to induce the plaintiff to act; (4) reasonable reliance upon the truth of the statement by
the plaintiff; and (5) damage to the plaintiff resulting from this reliance.” Avon Hardware Co. v.
Ace Hardware Corp., 2013 IL App (1st) 130750, ¶ 15. A plaintiff must plead “with sufficient
particularity *** what misrepresentations were made, when they were made, who made the
misrepresentations, and to whom they were made.” Id.
¶ 41 Plaintiff alleges that defendants made “false statements” by sending bills for services to
the Michael brothers instead of her; taking money from her bank account “without her consent or
knowledge”; presenting her with an invoice in March 2011 seeking $80,000.00 in attorney fees
including charges for “work unrelated to the representation of her interests”; issuing an
attorney’s lien in February 2011; and “demand[ing] and attempt[ing] to extort payment of
approximately $85,000.00 to continue the representation” in November 2011 (even though
defendants were fired in February 2011).
¶ 42 Plaintiff claims she relied on these statements “in determining how she would act,” but
pleads no facts showing how she relied on the statements or how she subsequently “acted.” See,
e.g., Merrilees v. Merrilees, 2013 IL App (1st) 121897, ¶ 34 (plaintiff “fails to sufficiently allege
fraud because plaintiff’s conclusory allegations do not identify misstatements of material fact on
which she reasonably relied”). We question how these statements could have been made with the
- 13 -
No. 1-21-0942
“specific intent *** to induce [her] to continue on the course of the litigation with Polekatz,”
where the overbilling, attorney’s lien, and “extort[ion]” occurred after defendants had been fired.
¶ 43 Count V: Negligent Hiring and Supervision
¶ 44 A claim for negligent hiring requires “ ‘(1) that the employer knew or should have known
that the employee had a particular unfitness for the position so as to create a danger of harm to
third persons; (2) that such particular unfitness was known or should have been known at the
time of the employee’s hiring or retention; and (3) that this particular unfitness proximately
caused the plaintiff’s injury.’ ” Doe v. Coe, 2019 IL 123521, ¶ 66 (quoting Van Horne v. Muller,
185 Ill. 2d 299, 311 (1998)). To prove negligent supervision, a supervisor does not need to have
“prior notice of a particular unfitness.” Id. Rather, a plaintiff must show that the defendant had a
duty to supervise the harming party; the defendant negligently supervised that party; and the
defendant’s negligence proximately caused the plaintiff’s injuries. Id. ¶¶ 52, 61.
¶ 45 We agree with the trial court’s finding that plaintiff “failed to sufficiently allege facts,
rather than conclusions” relating to her negligent hiring and supervision claims. Plaintiff does not
allege facts showing how Lupel and Lupel Weininger knew or should have known about a
“particular unfitness” of Karlin. See Coe, 2019 IL 123521, ¶ 46 ( plaintiff pled specific facts
showing that a simple google search “would have put [defendants] on notice of Coe’s sexual
interest in children at or before his hire”). Plaintiff’s negligent supervision claim is likewise
conclusory and not supported by specific facts.
¶ 46 Count VI: Breach of Contract
¶ 47 Count VI alleges breach of contract “in the alternative to Count I.” To state a claim for
breach of contract, a plaintiff must allege: (1) the existence of a valid and enforceable contract,
(2) performance by plaintiff, (3) breach of the contract by defendant, and (4) resultant injury to
- 14 -
No. 1-21-0942
plaintiff. Gonzalzles v. American Express Credit Corp., 315 Ill. App. 3d 199, 206 (2000). A legal
malpractice claim “may be couched in either contract or tort [citation]; however, when grounded
in tort, the action arises out of either an express or implied contract for legal services [citation.].”
Majumdar v. Lurie, 274 Ill. App. 3d 267, 270 (1995). Claims for legal malpractice and breach of
contract can be pled in the alternative. Nettleton v. Stogsdill, 387 Ill. App. 3d 743, 761 (2008).
¶ 48 Plaintiff alleges that in July 2007, she “entered into a contracted [sic] with Defendants to
provide legal services ***.” She claims that defendants breached this “contract for services”
through the same breaches of duty alleged in counts I-III. Because we consider these allegations
insufficient to withstand dismissal under section 2-615, plaintiff’s breach of contract claim,
based on the same allegations, also fails. See Land v. Greenwood, 133 Ill. App. 3d 537, 541
(1985) (finding that plaintiff’s breach of contract claim was properly dismissed where it was
“simply a restatement of the negligence count”). Finally, plaintiff alleges that defendants
breached the contract for services by failing to advise her that defendants “accepted benefits,
including payment of funds and repair and construction of real property” from George, failing to
return her personal papers and documents, failing to disclose and charge a reasonable fee, and
failing to properly account for fees in the Polekatz litigation. These conclusory allegations are
not supported by specific facts or tied to any identified injury.
¶ 49 CONCLUSION
¶ 50 For all of the reasons set forth herein, we affirm the dismissal of plaintiff’s “First
Amended Complaint at Law” with prejudice.
¶ 51 Affirmed.
- 15 - | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488359/ | [Cite as McMullen v. Wyatt, 2022-Ohio-4162.]
IN THE COURT OF APPEALS OF OHIO
ELEVENTH APPELLATE DISTRICT
PORTAGE COUNTY
CHRISTINE MCMULLEN, CASE NO. 2022-P-0023
Plaintiff-Appellee,
Civil Appeal from the
- vs - Court of Common Pleas
JOHN A. WYATT,
Trial Court No. 2020 CV 00398
Defendant-Appellant.
OPINION
Decided: November 21, 2022
Judgment: Affirmed
Scott J. Flynn, Flynn Keith & Flynn, 214 South Water Street, P.O. Box 762, Kent, OH
44240 (For Plaintiff-Appellee).
Joel A. Holt, Ickes \ Holt, 4301 Darrow Road, Suite 1100, Stow, OH 44224 (For
Defendant-Appellant).
MATT LYNCH, J.
{¶1} Defendant-appellant, John A. Wyatt, appeals the judgment of the Portage
County Court of Common Pleas, finding in favor of plaintiff-appellee, Christine McMullen,
on her claim for adverse possession. For the following reasons, we affirm the decision of
the court below.
{¶2} On June 19, 2020, McMullen filed a Complaint against Wyatt for Adverse
Possession, Implied and Prescriptive Easements, and Private Nuisance.
{¶3} On August 7, 2020, Wyatt filed an Answer and Counterclaim for Trespass.
{¶4} On July 13, 2021, the matter was tried before a magistrate.
{¶5} On July 20, 2021, a Magistrate’s Decision was issued. The magistrate
made the following relevant findings of fact:
- Plaintiff Christine McMullen lives at 1804 Merrill Rd. Kent, OH with
her husband.
- Plaintiff purchased the property from her mother in 2015.
- Plaintiff has lived at the property since November 1998.
- Plaintiff’s residence includes an unattached garage.
- The garage is used daily as a separate living room for the McMullen
family. The room contains a TV, wood-burner, furniture, and other
accessories suitable for a recreation room/family room.
- The garage was built in 1901. Its location has never moved.
- Plaintiff has used the garage continuously for 21 years.
- Defendant has not used the garage or demanded access to the
garage.
- Defendant did not institute a legal claim against Plaintiff in the 21
years from the time the garage was being used and possessed by
the Plaintiff.
- The history of which parcel the garage resides on has a complicated
past.
- At times, the property the garage has been deeded on resided at
1804 Merrill Rd.
- At other times, and currently, the land the garage resides on has
been included in the legal description/deed of the neighboring
property owned by the Defendant.
- In 1993, the property owned by Linda Dixon (which included the
.102 acre parcel where the garage encroaches) was sold at sheriff’s
sale and deeded to the Wyatt family.
- The .102 acre parcel’s dimensions are roughly 17’x293.05’[.]
- The McMullen family used the .102 parcel for outbuildings, gardens,
and driveway access to the back of their property.
2
Case No. 2022-P-0023
- At some point, prior to the accumulation of 21 years, the Wyatt
family revoked permission for the McMullen family to use the parcel
as a driveway. They also demanded the outbuildings be removed.1
- The McMullen family ceased using the parcel as a driveway. They
also tore down/removed all of the outbuildings, except for the garage.
- The McMullen family stopped caring for the back part of the .102
parcel behind their home as well.
***
- Defendant has been the owner of his parcel since 2007.
- Defendant has had the property surveyed three times. Each survey
showed the garage encroachment on his property.
- Defendant’s counsel sent a letter in 2008 informing the McMullen
family about the encroachment.
- Plaintiff’s possession of the garage and garage curtilage has been
open, continuous, notorious, and exclusive for more than 21 years.
{¶6} The magistrate found “by clear and convincing evidence that the Plaintiff
has proved its adverse possession claim for the garage, but not the entire .102 acre strip
of land.” The plaintiff was awarded a 5’ strip of land from Merrill Road to and around the
part of the garage encroaching on Wyatt’s parcel. All other claims were denied. The trial
court adopted the Magistrate’s Decision without modification on the day it was issued.
{¶7} On July 28, 2021, Wyatt filed Objections to Magistrate’s Decision. Wyatt’s
stated objections were as follows: “Defendant hereby files his objections to the
Magistrate’s Decision filed herein on July 20, 2021, granting adverse possession to
plaintiff.”
1. According to Wyatt’s testimony, his mother revoked her permission for the McMullens to use the property
to access the rear of their property, i.e., as a driveway, in June of 2003. In a 2008 letter, referenced below,
Wyatt (through counsel) advised the McMullens “to have any building on his Brady Lake property removed.”
3
Case No. 2022-P-0023
{¶8} On August 24, 2021, the trial court issued an Order and Journal Entry,
advising Wyatt that, pursuant to Civil Rule 53(D)(3)(b)(ii), his “objection needs to be
specific and state with particularity all grounds for objections,” and that, pursuant to Civil
Rule 53(D)(3)(a)(iii), “any objection to a factual finding * * * shall be supported by a
transcript of all the evidence submitted to the magistrate.” Wyatt would have 45 days
from the date of the Order to file the transcript and could seek leave of court to supplement
his objections.
{¶9} On September 22, 2021, Wyatt filed Amended Objections to Magistrate’s
Decision. The Amended Objections stated: “Defendant hereby files his amended
objections to the Magistrate’s Decision filed herein on July 20, 2021, in the following
respect: The evidence failed to establish 21-years of open and notorious possession on
the part of the plaintiff, and that said possession was adverse to the defendant.”
{¶10} On October 8, 2021, the transcript of the hearing before the magistrate was
filed.
{¶11} On March 30, 2022, the trial court issued a Journal Entry overruling Wyatt’s
Objections.
{¶12} On April 29, 2022, Wyatt filed a Notice of Appeal. On appeal, he raises the
following assignment of error: “The final judgment is erroneous because it is against the
manifest weight of the evidence, incorrectly applied the law of adverse possession, and
failed to properly apply the clear and convincing evidence evidentiary standard.”
{¶13} The usual standard of review for a trial court’s adoption of a magistrate’s
decision is abuse of discretion. Allen v. Allen, 2022-Ohio-3198, __ N.E.3d __, ¶ 39 (11th
Dist.). Under this deferential standard of review, the trial court’s decision should be
4
Case No. 2022-P-0023
affirmed “if there is some competent, credible evidence to support [it],” and regardless of
whether “the reviewing court would have reached a different result.” Id. at ¶ 40.
{¶14} Preliminarily, McMullen argues that Wyatt failed to comply with the
requirement that “[a]n objection to a magistrate’s decision shall be specific and state with
particularity all grounds for objection.” Civ.R. 53(D)(3)(b)(ii). Therefore, the adoption of
the magistrate’s decision should be reviewed for plain error. Civ.R. 53(D)(3)(b)(iv)
(“[e]xcept for a claim of plain error, a party shall not assign as error on appeal the court’s
adoption of any factual finding or legal conclusion * * * unless the party has objected to
that finding or conclusion as required by Civ.R. 53(D)(3)(b)”). McMullen maintains that to
hold that Wyatt complied with the rule that objections should be specific and stated with
particularity by asserting that the “evidence failed to establish” the elements of an adverse
possession claim “would render Civ. R. 53(D) worthless.” Brief of Appellee at 8.
{¶15} There is no strong consensus regarding the degree of specificity or
particularity with which objections must be stated to satisfy Civil Rule 53(D)(3). The Staff
Notes to Rule 53 provide that the form of objections must “be specific; a general objection
is insufficient to preserve an issue for judicial consideration.” “In interpreting this provision
of Civ.R. 53, it has been held that a mere blanket objection to the magistrate’s decision
is insufficient to preserve an objection.” Lambert v. Lambert, 11th Dist. Portage No. 2004-
P-0057, 2005-Ohio-2259, ¶ 16. “When a party submits general objections that fail to
provide legal or factual support, ‘the trial court may affirm the magistrate’s decision
without considering the merits of the objection.’” (Citation omitted.) Id.; compare Gordon
v. Gordon, 98 Ohio St.3d 334, 2003-Ohio-1069, 784 N.E.2d 1175, ¶ 14 (“[a] party who
files premature objections runs the risk of not complying with this rule and of having the
5
Case No. 2022-P-0023
objections overruled because they are not responsive to the grounds ultimately relied on
by the magistrate”). See Lambert at ¶ 17 (“appellant filed general objections to the
magistrate’s decision and did not specifically raise the objection that the trial court [sic]
erred in determining his gross income,” and so “is precluded from raising [on appeal] any
claim not raised in his objections to the magistrate’s decision”); Bass-Fineberg Leasing,
Inc. v. Modern Auto Sales, Inc., 9th Dist. Medina No. 13CA0098-M, 2015-Ohio-46, ¶ 24
(“[w]here a party fails to raise an issue in its objections to a magistrate’s decision, that
issue is forfeited on appeal”); In re Ingles, 11th Dist. Trumbull No. 2003-T-0037, 2004-
Ohio-5462, ¶ 24 (“[a]lthough appellant set forth specific objections to the magistrate’s
decision, he failed to support such objections with any factual or legal grounds,” and so
“his objections fail to comply with Civ.R. 53([D])(3)(b)”); Wallace v. Willoughby, 3d Dist.
Shelby No. 17-10-15, 2011-Ohio-3008, ¶ 14 and 21 (objections stating “that the findings
of fact; conclusions of law; discussion; and decision regarding the allocation of the
residential parent of the Minor Children are not supported by the record of the case and
law” did “not meet the specificity requirement set forth in Civ.R. 53(D)(3)(b)(ii), as they
baldly assert an objection to the magistrate’s findings of fact and conclusions of law”).
Compare Smith v. Bank of Am., 7th Dist. Mahoning No. 11-MA-169, 2013-Ohio-4321, ¶
18 (“[e]ach of the five objections took issue with each of the five specific legal conclusions
reached by the magistrate” and, “[w]hile * * * brief and not supported with any further
argument or case law citations, they were nonetheless specific and stated with
particularity the grounds for objection”).
{¶16} Here, Wyatt’s Amended Objections stated that the “evidence failed to
establish 21-years of open and notorious possession on the part of the plaintiff, and that
6
Case No. 2022-P-0023
said possession was adverse to the defendant,” without any citation to the magistrate’s
factual findings, the record, or case law. This is essentially a general objection stating
the elements of an adverse possession claim. On appeal, however, Wyatt does raise
specific arguments: he claims that the use of the garage, like the driveway, the
outbuildings, and other uses of the disputed property, was permissive. Thus, McMullen’s
use of the garage was neither adverse nor continuous. Wyatt additionally argues that the
evidence supporting McMullen’s claim does not meet the clear and convincing evidence
standard but rather, at most, satisfies a preponderance of the evidence standard.
Although minimal, Wyatt’s objections were sufficient to preserve the arguments he raises
on appeal. Ramsey v. Pellicioni, 7th Dist. Mahoning Nos. 14 MA 134 and 14 MA 135,
2016-Ohio-558, ¶ 13 (“although objections may be brief and not supported with further
argument or case law citations, as long as they are specific and state the grounds for the
objections they are adequate to preserve the issue for appeal”).
{¶17} McMullen also argues that Wyatt’s objections were not properly supported
by a transcript of the hearing before the magistrate because “[t]he trial court, sua sponte,
filed the trial transcript 80 days after Wyatt filed his Objections, and 16 days after Wyatt
filed his “Amended Objections.” Brief of Appellee at 9-10. On October 8, 2021, the
hearing transcript was filed with the trial court although it is not evident, from the face of
the record, by whom it was filed. We find the issue immaterial. The transcript was timely
filed pursuant to the trial court’s August 24 Order, i.e., within 45 days of the Order, and
the court duly reviewed the transcript when ruling on the Amended Objections. We find
no issue with the filing of the transcript in support of the objections.
7
Case No. 2022-P-0023
{¶18} “It is well established in Ohio that to succeed in acquiring title by adverse
possession, the claimant must show exclusive possession that is open, notorious,
continuous, and adverse for 21 years.” Evanich v. Bridge, 119 Ohio St.3d 260, 2008-
Ohio-3820, 893 N.E.2d 481, ¶ 7. “[T]he legal requirement that possession be adverse is
satisfied by clear and convincing evidence that for 21 years the claimant possessed
property and treated it as the claimant’s own.” Id. at syllabus.
{¶19} “It is well established that a possession is not hostile or adverse if the entry
is by permission of the owner, or the possession is continued by agreement; such an
occupancy, consequently, confers no right.” (Citation omitted.) Golubski v. U.S. Plastic
Equip., L.L.C., 11th Dist. Portage No. 2015-P-0001, 2015-Ohio-4239, ¶ 18; Rodgers v.
Pahoundis, 178 Ohio App.3d 229, 2008-Ohio-4468, 897 N.E.2d 680, ¶ 41 (5th Dist.) (“[i]f
a claimant’s use of the disputed property is either by permission or accommodation for
the owner, then it is not ‘adverse,’ for purposes of establishing adverse possession”)
(citation omitted). Once the party claiming title by adverse possession establishes a
prima facie case of adverse use, the owner of the property in question has the burden of
proving that such use was permissive. Rodgers at ¶ 42; Andrews v. Passmore, 2015-
Ohio-2681, 38 N.E.3d 450, ¶ 12 (7th Dist.) (“[o]nce the occupier has set forth a prima
facie case that the use may be adverse, the landowner must then prove the use was
permissive by a preponderance of the evidence”).
{¶20} As noted above, Wyatt’s argument on appeal is that McMullen’s use of the
garage was permissive for at least part of the 21-year period in question, or, alternatively,
that the evidence for McMullen’s use being truly adverse does not meet the
preponderance of the evidence standard. We find neither argument convincing. On the
8
Case No. 2022-P-0023
contrary, the trial court’s judgment is readily supported by competent and credible
evidence.
{¶21} The encroachment of the garage onto Wyatt’s property predates both
Wyatt’s and McMullen’s ownership of their respective properties. McMullen has used the
garage as a recreation/living room since the time of her occupancy of the property in
1998. Wyatt was aware of the encroachment having had the property surveyed three
times since 2007. Thus, a prima facie case of adverse possession is established. The
evidence that the use was permissive is minimal. Wyatt did not testify that he, or his
mother who owned the property before him, ever gave their consent to the encroachment
of the garage onto their property. McMullen testified that she never received such consent
from the Wyatts. Any suggestion that Wyatt suffered the garage to encroach on his
property as a “neighborly accommodation” to McMullen cannot be seriously maintained
in light of the relationship between the parties.
{¶22} Wyatt bases the claim that the use of the garage was permissive on the
existence of evidence that other uses of his property by McMullen, such as for a driveway,
outbuildings, flowerbeds and birdhouses, may have been permissive. When Wyatt
objected to these uses McMullen discontinued them. The nature of the encroachment of
the garage onto his property, however, is not comparable to these other uses, which only
began after McMullen’s occupancy of her property. The garage’s existence predated
both parties’ occupancy of their properties and, in any event, its use by McMullen was
never discontinued. There is no error in the trial court’s award of title to the garage and
the five-foot strip around the property to McMullen.
9
Case No. 2022-P-0023
{¶23} Finally, Wyatt contends that the magistrate failed to apply the
preponderance of the evidence standard despite the profession that it found “by clear and
convincing evidence that the Plaintiff has proved its adverse possession claim for the
garage.” He “contends that equally credible contradictory testimony does not in and of
itself qualify as clear and convincing evidence.” Specifically, “Wyatt * * * produced
documentary evidence in the form of the August 2008 letter and the Auditor’s public
records to support his testimony that he revoked permission for all of the buildings on the
Disputed Property, including the garage, in 2006 and/or 2008. Wyatt’s evidence at trial
discredited and reduced the probative value of McMullen’s testimony to perhaps even
below the preponderance standard, to ‘a basis for only a choice among different
possibilities’ as to the adversity requirement of adverse possession.” Brief of Appellant
at 12, quoting Landon v. Lee Motors, Inc., 161 Ohio St. 82, 99, 118 N.E.2d 147 (1954).
{¶24} Wyatt’s argument fails to convince. It presumes that his evidence of
permissive use was equally credible, but the record does not support the presumption.
McMullen testified directly that she had never been given permission by either Wyatt or
his mother regarding the encroachment of the garage. Wyatt’s evidence merely shows
that it would be possible to infer, if the trier of fact were so inclined, that permission had
been given at some point. More fundamentally, “[w]eight is not a question of
mathematics, but depends on its effect in inducing belief.” (Citation omitted.) State v.
Thompkins, 78 Ohio St.3d 380, 387, 678 N.E.2d 541 (1997). It is not enough to say that
there is evidence to support either side of an issue. Even if Wyatt had presented direct
evidence of McMullen’s use being permissive, the magistrate could still have found the
10
Case No. 2022-P-0023
clear and convincing evidence standard satisfied if McMullen’s testimony were deemed
to be significantly more credible than Wyatt’s testimony.
{¶25} The sole assignment of error is without merit.
{¶26} For the foregoing reasons, the judgment of the Portage County Court of
Common Pleas is affirmed. Costs to be taxed against the appellant.
THOMAS R. WRIGHT, P.J.,
MARY JANE TRAPP, J.,
concur.
11
Case No. 2022-P-0023 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488357/ | [Cite as State ex rel. Mansfield v. Falkowski, 2022-Ohio-4163.]
IN THE COURT OF APPEALS OF OHIO
ELEVENTH APPELLATE DISTRICT
LAKE COUNTY
STATE OF OHIO ex rel. CASE NO. 2022-L-073
RICHARD H. MANSFIELD,
Relator, Original Action for Procedendo
- vs -
JUDGE COLLEEN A.
FALKOWSKI, et al.,
Respondents.
PER CURIAM
OPINION
Decided: November 21, 2022
Judgment: Dismissed
Oliver L. Herthneck, Perez & Morris, LLC, 1300 East 9th Street, Suite 1600, Cleveland,
OH 44144 (For Relator).
Charles E. Coulson, Lake County Prosecutor, Kelly A. Nichols and Michael L. DeLeone,
Lake County Administration Building, 105 Main Street, P.O. Box 490, Painesville, OH
44077 (For Respondents).
PER CURIAM.
{¶1} Respondents, Judge Colleen A. Falkowski and Magistrate Margaret
Campbell, move to dismiss the complaint for a writ of procedendo filed by relator, Richard
H. Mansfield. We dismiss.
{¶2} This original action stems from a divorce case pending in the Lake County
Common Pleas Court, Domestic Relations Division, known as Cheryll Mansfield v.
Richard H. Mansfield, Case No. 19DR000702, in which relator is the defendant. Judge
Falkowski presides over this case, and Magistrate Campbell heard the matter.
{¶3} Mansfield filed his petition for a writ of procedendo alleging that evidentiary
hearings were held in this matter on May 25, 2021, September 15, 2021, and December
6, 2021. As of August 8, 2022, when Mansfield filed his complaint for a writ of
procedendo, no decision had been issued. Mansfield seeks a writ requiring Magistrate
Campbell to expeditiously rule on his pending divorce matter.
{¶4} On September 12, 2022, respondents, with leave of this court, moved to
dismiss the petition, maintaining that the magistrate’s decision was filed on August 15,
2022. Mansfield has not responded in opposition to the motion.
“A writ of procedendo is an extraordinary remedy in the form
of an order from a higher tribunal directing a lower tribunal to
proceed to judgment.” State ex rel. Mignella v. Indus. Comm.,
156 Ohio St.3d 251, 2019-Ohio-463, 125 N.E.3d 844, ¶ 7. * *
* The writ does not instruct the lower court as to what the
judgment should be; rather, it merely instructs the lower court
to issue a judgment. State ex rel. Sherrills v. Cuyahoga Cty.
Court of Common Pleas, 72 Ohio St.3d 461, 462, 650 N.E.2d
899 (1995). “A writ of procedendo is appropriate upon a
showing of ‘a clear legal right to require the trial court to
proceed, a clear legal duty on the part of the trial court to
proceed, and the lack of an adequate remedy in the ordinary
course of the law.’” State ex rel. White v. Woods, 156 Ohio
St.3d 562, 2019-Ohio-1893, 130 N.E.3d 271, ¶ 7, quoting
State ex rel. Ward v. Reed, 141 Ohio St.3d 50, 2014-Ohio-
4512, 21 N.E.3d 303, ¶ 9.
State ex rel. Bechtel v. Cornachio, 164 Ohio St.3d 579, 2021-Ohio-1121, ¶ 7.
{¶5} However, “[p]rocedendo will not compel the performance of a duty that has
already been performed.” Bechtel at ¶ 9, citing State ex rel. Roberts v. Marsh, 159 Ohio
St.3d 457, 2020-Ohio-1540, 151 N.E.3d 625, ¶ 6. “When a relator seeks to compel the
issuance of a judgment entry through a writ of procedendo and the judge issues the entry,
2
Case No. 2022-L-073
the procedendo claim is moot.” Bechtel at ¶ 9, citing State ex rel. Hibbler v. O’Neill, 159
Ohio St.3d 566, 2020-Ohio-1070, 152 N.E.3d 265, ¶ 8.
{¶6} Irrespective of whether the respondents were legally required to issue a
decision, the magistrate has issued the decision rendering the complaint for procedendo
moot. Accordingly, Respondents’ motion to dismiss is granted.
THOMAS R. WRIGHT, P.J., MARY JANE TRAPP, J., MATT LYNCH, J., concur.
3
Case No. 2022-L-073 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488362/ | In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 21-3235
IRIS J. DURHAM,
Plaintiff-Appellant,
v.
KILOLO KIJAKAZI,
Acting Commissioner of Social Security,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Southern District of Illinois.
No. 3:20-cv-00623 — J. Phil Gilbert, Judge.
____________________
ARGUED SEPTEMBER 15, 2022 — DECIDED NOVEMBER 21, 2022
____________________
Before SYKES, Chief Judge, RIPPLE and KIRSCH, Circuit
Judges.
RIPPLE, Circuit Judge. Iris J. Durham filed for disability ben-
efits on September 12, 2017. An Administrative Law Judge
(“ALJ”) considered her claim and concluded that
Ms. Durham’s diabetes, hypertension, and tachycardia were
limiting, but not disabling, conditions. On review, the district
court concluded that substantial evidence supported the
ALJ’s determination.
2 No. 21-3235
Seeking further review in this court, Ms. Durham now
contends that the ALJ relied on outdated evidence and over-
stepped his authority by interpreting, without supporting
medical opinions, the results of medical tests. We cannot ac-
cept Ms. Durham’s submission. The record reveals that the
ALJ carefully considered Ms. Durham’s entire medical his-
tory and relied on the opinions of her treating physicians in
reaching his conclusions about her physical limitations. We
therefore affirm the judgment of the district court.
I.
BACKGROUND
A.
At the time Ms. Durham applied for benefits, she was
forty-six years old and had been diagnosed with diabetes and
hypertension. Her records reveal that she was seen by a phy-
sician’s assistant, Sherry Locey, in February 2016, June 2016,
and January 2017 for these conditions, as well as neck pain.
On March 3, 2017, Ms. Durham returned to Ms. Locey,
with a new complaint: heart palpitations. She had been expe-
riencing symptoms, which included shortness of breath and
lightheadedness, for about three weeks. Ms. Durham re-
ported that she had experienced these symptoms in the past
(about a year and a half before), but they seemed worse to her
this time. Ms. Locey ordered tests, including Holter monitor-
ing, and referred Ms. Durham to a cardiologist.
Later in March, Ms. Durham saw Dr. Mohamed Ibrahim
for follow-up on her heart palpitations. The Holter monitor-
ing ordered by Ms. Locey revealed premature ventricular
contractions and tachycardia for thirty percent of monitored
beats. Dr. Ibrahim ordered an electrocardiogram (“EKG”),
No. 21-3235 3
blood panel, and myocardial perfusion scan. He also coun-
seled her to reduce her caffeine intake (she reported drinking
five Mountain Dews per day) and, more generally, to adopt a
healthy lifestyle.
On April 20, 2017, Ms. Durham returned to Dr. Ibrahim to
review her test results. Her stress test with myocardial perfu-
sion study was normal. Ms. Durham had reduced her caffeine
intake significantly and was having only occasional palpita-
tions. Dr. Ibrahim adjusted one medication. He also noted
that her lipoprotein levels were not satisfactory and again en-
couraged her to work on a healthy lifestyle.
On September 21, 2017, Ms. Locey saw Ms. Durham for
both diabetes and heart palpitations. During that visit,
Ms. Durham complained of tingling in her feet. She also
stated that her heart palpitations had worsened; she ex-
plained that she had not been taking her prescribed medica-
tion because she had lost her medical card and could not af-
ford the prescription. Ms. Locey ordered bloodwork and sent
a note to Dr. Ibrahim concerning Ms. Durham’s inability to
afford her medication.
The following week, Ms. Durham went to Good Samaritan
Regional Health Center Emergency Room due to chest pain,
accompanied by lightheadedness and shortness of breath.
The chest pain was intermittent, correlated with walking, and
had begun three to five hours prior. The hospital treated her
with metoprolol, which eased her palpitations. She was dis-
charged the same day with a prescription for metoprolol.
On October 5, 2017, Ms. Durham had a follow-up appoint-
ment with Dr. Ibrahim. She reported that she was doing well
with the medication and had “[n]o recent palpitations, pre-
4 No. 21-3235
1
syncope or syncope.” The same day, Ms. Durham also saw
Ms. Locey for ongoing treatment for her diabetes. She re-
ported bilateral foot pain. She also stated that her palpitations
2
were “better, but not completely gone.”
Almost nine months later, on July 31, 2018, Ms. Durham
returned to Ms. Locey, complaining of an increase in head-
aches and some breakthrough tachycardia, especially when
she worked out in the heat. She saw Ms. Locey again on Au-
gust 29, 2018, and on February 12, 2019, for diabetes manage-
ment. Ms. Durham was counselled to increase physical activ-
ity and decrease calorie intake.
Ms. Durham returned to Ms. Locey on March 26, 2019, due
to shortness of breath, palpitations, and occasional faintness.
After examining Ms. Durham, Ms. Locey ordered a chest
x-ray, stress test, EKG, Holter monitoring, and blood work.
The following week, Ms. Durham was admitted to Good
Samaritan Hospital due to “exertional shortness of breath and
3
palpitations.” She was seen by interventional cardiologist,
Dr. Labroo, as well as electrophysiologist, Dr. Binh Nguyen.
An EKG and a stress test were performed. “Cardiology …
suggest[ed] [an] outpatient sleep study” and “recommended
medical management with continuation of her metoprolol
4
with extra PRN beta blocker for palpitations.” As
Ms. Durham’s palpitations had resolved, she “was
1 A.R. 288.
2 Id. at 390.
3 Id. at 579.
4 Id. at 580.
No. 21-3235 5
discharged in stable condition” the following day and re-
5
ferred to Dr. Nguyen for follow-up.
At her April 9, 2019 appointment, Dr. Nguyen discontin-
ued Ms. Durham’s beta blocker and prescribed Sotalol.
Dr. Nguyen discussed ordering a cardiac catheterization for
further evaluation of her symptoms. On April 22, 2019, a pre-
procedure examination revealed that Ms. Durham had no car-
diac instability, “no acute problems, [and] no functional limi-
6
tations.” Ms. Durham underwent a cardiac catheterization,
and the results were normal. Following the catheterization,
Dr. Nguyen reported the results to Ms. Locey. Regarding the
plan for Ms. Durham’s care, Dr. Nguyen listed:
1. Refill aldactone
2. Continue with current medications
7
3. Return in 3 months[.]
No further procedures were recommended, and no re-
strictions were placed on Ms. Durham.
B.
On September 12, 2017, Ms. Durham applied for disability
benefits alleging an onset date of March 1, 2016. On her appli-
cation for benefits, she listed the following conditions that
limited her ability to work:
1. Diabetes
5 Id.
6 Id. at 660 (capitalization removed).
7 Id. at 733.
6 No. 21-3235
2. Swollen feet and legs
3. High blood pressure
4. Pain in feet
8
5. High cholesterol[.]
An agency consulting physician noted Ms. Durham’s records
had been received from Ms. Locey and identified
Ms. Durham’s impairments as diabetes mellitus, essential hy-
pertension, and obesity. The consulting physician provided
the following explanation for the physical and postural limi-
tations noted in her report:
Clmt has dx in file of DM, HBP and obesity (BMI
42.2), Clmt had echo completed 4/17 showing
60% EF. Clmt has hx of tingling in her feet, re-
ports of not always being complaint [sic] with
medications. Most recent physical apt 10/17 re-
ports clmt ambulated normally, had full rom in
all joints/spine, no difficulties with any extrem-
ity, c/o joint pain and bilateral foot pain, diabetic
foot exam revealed normal inspection, motor
9
strength normal.
Ms. Durham’s claim was denied at the initial review level.
On reconsideration, a different agency consulting physi-
cian reviewed Ms. Durham’s records, which included Dr. Ib-
rahim’s treatment notes through June 2, 2018. Ms. Durham’s
8 Id. at 197.
9 Id. at 75.
No. 21-3235 7
claim again was denied, and her case was referred to an ALJ
for a hearing.
At the May 17, 2019 hearing, Ms. Durham testified that she
had last worked in 2017 as a personal assistant for a home
health care service. She testified that she could no longer do
10
that job because of her “neuropathy.” She also testified that
she was not pursuing other jobs because of her “spells,” com-
prised of dizziness, lightheadedness, and shortness of
11
breath. She explained that standing exacerbated the neurop-
athy pain, but she still experienced pain even when sitting
and lying down. She testified that she was relying more on
her son to take care of the grocery shopping. Although she
still fixed meals, she brought a chair into the kitchen so that
she could sit down if she got tired. She also was attending
fewer of her children’s sporting events because she could not
walk for any prolonged period.
In response to the ALJ’s question as to whether she could
perform sedentary work, she replied: “My thing with that is
per doctor’s orders, they told me to prop my feet up because
12
of the swelling and because of my heart condition.” When
the ALJ asked if that was documented, counsel for
Ms. Durham responded: “I did not see it in the records,
13
Judge.” According to Ms. Durham, these instructions were
given to her by Dr. Labroo while she was in the hospital.
10 Id. at 39.
11 Id. at 40.
12 Id. at 41.
13 Id.
8 No. 21-3235
A vocational expert also testified at the hearing. The ALJ
posed a hypothetical question to the expert regarding an in-
dividual who mirrored Ms. Durham in age, work history, and
education. In the hypothetical, the claimant could perform
only sedentary work, “[c]ould only occasionally climb ramps
and stairs; never ladders, ropes, and scaffolds. She c[ould] oc-
casionally stoop, kneel, crouch, and crawl. [She] must avoid
unprotected elevations[,] … being near dangerous moving
machinery[,] … [and] concentrated exposure to extreme heat
14
or humidity.” The vocational expert testified that such an in-
dividual could perform the jobs of document preparer, recep-
tionist/information clerk, telephone quotation clerk, and ad-
dresser.
On June 13, 2019, the ALJ issued an unfavorable decision,
concluding the Ms. Durham’s impairments permitted the per-
formance of other work. The ALJ found that Ms. Durham had
the following severe impairments: diabetes, hypertension, ep-
15
isodes of “nonsustained V-tach,” and obesity. The ALJ then
noted each of Ms. Durham’s encounters with her health care
providers regarding her diabetes and heart issues. He con-
cluded that, although Ms. Durham’s medical records were
consistent with her claims of pain, “when considered as a
whole, [they] were not supportive of the contention that the
existence of [her] impairment[s] would be preclusive of all
16
types of work.” The ALJ specifically noted that, although
Ms. Durham testified at the hearing that she needed to
14 Id. at 56–57.
15 Id. at 16.
16 Id. at 21.
No. 21-3235 9
“elevate her legs,” “[s]uch a limitation[] was not noted in her
function reports,” and “[t]here [wa]s no indication that any
provider ha[d] recommended the claimant elevate her legs. In
addition, her mild exam findings; her limited specialty
care/follow-up; and her improvement with medication d[id]
not support further limitations as those detailed in the highly
17
restrictive residual functioning capacity.”
The ALJ also referenced the opinions of the agency’s med-
ical consultants and found that “[t]heir opinions [we]re con-
sistent with the claimant’s … mild exam findings; her limited
specialty care/ follow-up; and her improvement with medica-
18
tions; and her activities of daily living.” Overall, the ALJ
19
found the opinions “somewhat persuasive.”
The ALJ then concluded that Ms. Durham’s statements re-
garding her “impairments and her resulting limitations
[we]re not entirely consistent with the objective medical evi-
20
dence.” “Taking into consideration the claimant’s subjective
complaints, as well as the objective medical evidence,” the
ALJ concluded that Ms. Durham was “capable of exertionally
21
sedentary work.” However, her “ability to perform exertion-
ally sedentary work [wa]s reduced somewhat by the addi-
tional limitations set forth in the residual functional
17 Id. at 22.
18 Id.
19 Id.
20 Id.
21 Id.
10 No. 21-3235
22
capacity.” Because the vocational expert had concluded that
there were jobs in the national economy that were both sed-
entary and could accommodate the other restrictions in the
hypothetical scenario, the ALJ concluded that Ms. Durham
was not disabled.
After the Appeals Council denied review, Ms. Durham
filed this action in district court on June 28, 2020, seeking ju-
dicial review of the Commissioner’s unfavorable decision.
On October 4, 2021, the district court entered a decision af-
firming the Commissioner’s final determination.
II.
We review de novo the district court’s judgment affirming
the Commissioner’s decision, but we apply the deferential
“substantial evidence” standard when reviewing the ALJ’s
decision. 42 U.S.C. § 405(g); see also, e.g., Skinner v. Astrue, 478
F.3d 836, 841 (7th Cir. 2007). Substantial evidence is “such rel-
evant evidence as a reasonable mind might accept as ade-
quate to support a conclusion.” Simila v. Astrue, 573 F.3d 503,
513 (7th Cir. 2009) (quoting Craft v. Astrue, 539 F.3d 668, 673
(7th Cir. 2008)). “[W]hatever the meaning of ‘substantial’ in
other contexts,” the Supreme Court has made clear that in the
disability context, “the threshold for such evidentiary suffi-
ciency is not high.” Biestek v. Berryhill, 139 S. Ct. 1148, 1154
(2019).
A.
Ms. Durham’s primary argument is that the ALJ relied on
stale opinions of medical experts in rendering his decision.
According to Ms. Durham, neither of the consulting agency
22 Id.
No. 21-3235 11
physicians considered her cardiac arrhythmia and related
symptoms. She also maintains that these experts’ opinions
cannot be relied upon given her hospitalization in April 2019
and the results of her follow-up tests. She asserts that the ALJ
“should have re-submitted [her] case to medical expert scru-
tiny in light of th[is] potentially determinative and highly
23
complex medical evidence.” Because no medical expert in-
terpreted this evidence, Ms. Durham submits, the ALJ imper-
missibly “played doctor” in concluding that this evidence did
not establish complete disability.
Had the ALJ, as Ms. Durham suggests, relied heavily on
the opinions of the consulting physicians who failed to recog-
nize Ms. Durham’s tachycardia, that would raise concern. The
ALJ, however, found the consulting physicians’ assessments
24
only “somewhat persuasive.” Instead, the ALJ primarily re-
lied on Ms. Durham’s treatment records. These records
served as the basis for his conclusion that Ms. Durham’s tach-
ycardia was a severe impairment and for the restrictions that
he incorporated into his hypothetical question to the voca-
tional expert. Additionally, although neither agency consult-
ing physician explicitly mentioned tachycardia, the last
agency consulting physician evaluated Ms. Durham’s records
as of June 5, 2018. The records included Ms. Durham’s treat-
ment by Dr. Ibrahim through June 2, 2018, which revealed
that Ms. Durham had been diagnosed with tachycardia in
March 2017 and that her condition was largely controlled
through medication.
23 Appellant’s Br. 12.
24 A.R. 22.
12 No. 21-3235
Moreover, had the ALJ interpreted results of “highly com-
plex” medical tests on his own, that would be problematic.
For instance, we repeatedly have criticized ALJs for interpret-
ing the results of an MRI and using that interpretation as a
basis for denying benefits. In one such case, McHenry v. Ber-
ryhill, 911 F.3d 866, 871 (7th Cir. 2018), an MRI revealed that
the claimant “had multiple impinged nerves in addition to
spinal cord compression.” However, without the input of a
medical expert, “the ALJ independently … compared the MRI
results with earlier medical records” to determine the exist-
ence and level of the claimant’s impairments. Id. We held that
the ALJ had overstepped his role, noting that we had stated
“that an ALJ may not ‘play[] doctor’ and interpret ‘new and
potentially decisive medical evidence’ without medical scru-
tiny.” Id. (quoting Goins v. Colvin, 764 F.3d 677, 680 (7th Cir.
2014)); see also Akin v. Berryhill, 887 F.3d 314, 317–18 (7th Cir.
2018) (stating that “without an expert opinion interpreting the
MRI results in the record, the ALJ was not qualified to con-
clude that the MRI results were ‘consistent’ with his assess-
ment”). We reiterated that “[a]n ALJ may not conclude, with-
out medical input, that a claimant’s most recent MRI results
are ‘consistent’ with the ALJ’s conclusions about her impair-
ments.” McHenry, 911 F.3d at 871 (quoting Akin, 887 F.3d at
317–18). Because in McHenry “the ALJ alone [had] compared
the test results with earlier treatment records” to determine
the severity of the impairment during the relevant time pe-
riod, we concluded that the ALJ’s decision was not supported
by substantial evidence. Id. at 871–72.
This line of cases, however, is not relevant to
Ms. Durham’s situation. Some of Ms. Durham’s tests certainly
were complex. But the ALJ did not attempt to interpret, on his
own, the significance of any of these medical tests or
No. 21-3235 13
procedures. Rather, he relied, as he should, on the conclusions
of her treating physicians. The most recent evaluation per-
formed by a cardiologist revealed that Ms. Durham had “mild
systemic disease, no acute problems, and no functional limi-
25
tations.” The same report indicated that she had no cardiac
instability. Thus, Ms. Durham’s treating cardiologist did all of
the interpretation of her exam and procedures; the ALJ simply
restated those findings.
Finally, nothing that occurred in April 2019 suggests a ma-
terial change in Ms. Durham’s situation that merited re-sub-
mission to a consulting physician. In April 2019, she went to
Good Samaritan Hospital due to “exertional shortness of
26
breath and palpitations.” Cardiology was consulted, and an
EKG and stress test were performed. Her symptoms were re-
solved with medication, and she was released the following
day. This 2019 hospital visit thus bears a significant resem-
blance to her emergency-room visit in September 2017. At that
time, Ms. Durham sought treatment at Good Samaritan Hos-
pital when she experienced shortness of breath and chest
pains. Her caregivers administered metoprolol and dis-
charged her with a prescription and instructions to follow up
with treating physicians. When she followed up with Ms. Lo-
cey and Dr. Ibrahim, she reported that her palpitations largely
were controlled, and that she had experienced no fainting,
chest pain, or breathing issues. Thus, in both 2017 and 2019,
Ms. Durham experienced some additional symptoms for a
short period of time, no new issues were discovered, and her
25 Id. at 21 (ALJ’s opinion); id. at 660 (report) (capitalization removed).
26 Id. at 579.
14 No. 21-3235
medications were adjusted. Her 2019 hospital visit cannot be
characterized as having presented “new” developments,
much less potentially dispositive ones, that require an addi-
tional opinion of a medical expert. See Pavlicek v. Saul, 994 F.3d
777, 783–84 (7th Cir. 2021) (evidence of bodily tremors that re-
sulted in emergency room visits did not require new medical
opinion because treatment notes regarding tremors were in
the record during agency physician’s review).
In sum, although Ms. Durham claims that the testing done
in April 2019 rendered the medical opinions stale, the results
of that testing—as interpreted by her physicians, not the
ALJ—do not reveal a worsening of her condition such that re-
submission to a medical expert was required.
B.
Ms. Durham also faults the ALJ for failing to include in his
hypothetical question “any … time off task to address
27
[Ms. Durham’s] ventricular tachycardia.” According to
Ms. Durham, the ALJ’s failure to include this limitation—or
any limitation addressing her “spells”—renders his conclu-
28
sion unsustainable.
An ALJ must include in his hypothetical question “all of a
claimant’s limitations supported by the medical record.” Deb-
orah M. v. Saul, 994 F.3d 785, 791 (7th Cir. 2021). Here, how-
ever, there is no evidence in the record to support a time-off-
task limitation. Ms. Durham testified that her spells happen
“frequently” and that she needs to “prop [her] feet up” when
27 Appellant’s Br. 19.
28 Id. at 22.
No. 21-3235 15
29
she feels dizziness coming on. However, the ALJ noted that
this aspect of Ms. Durham’s testimony was not supported by
any medical record, and Ms. Durham has not invited our at-
tention to any. Moreover, during the hearing, Ms. Durham’s
counsel did not elicit any further evidence about the “fre-
quency” of the spells or how long they last.
Furthermore, contrary to Ms. Durham’s assertion, the ALJ
did include limitations in his hypothetical question that ac-
counted for Ms. Durham’s tachycardic events. Ms. Durham
testified that she experiences “spells” upon exertion, espe-
cially in the heat. The ALJ therefore limited Ms. Durham to
sedentary work and further provided that she could not be
30
exposed “to extreme heat or humidity.” Additionally, the
ALJ limited Ms. Durham to jobs where, if she experienced a
“spell,” she would not pose a danger to herself or to others.
Specifically, the ALJ noted that she could never climb “lad-
ders, ropes, and scaffolds”; “must avoid unprotected eleva-
tions”; and could not be near “dangerous moving machin-
31
ery.” Indeed, these limitations went beyond those imposed
by any medical opinion.
The burden was on Ms. Durham to “prove she is disabled
by producing medical evidence.” Gedatus v. Saul, 994 F.3d 893,
905 (7th Cir. 2021). However, she has failed to come forward
with medical evidence to establish that her tachycardia would
impede her ability to do sedentary work or that it required
29 A.R. 40–42.
30 Id. at 57.
31 Id.
16 No. 21-3235
any limitations beyond those set forth by the ALJ in his hypo-
thetical question.
Conclusion
Here, the ALJ thoroughly reviewed Ms. Durham’s medi-
cal history. He did not ignore relevant evidence or fail to in-
clude necessary limitations in his hypothetical question to the
vocational expert. His decision was supported by substantial
evidence. We therefore affirm the judgment of the district
court denying benefits.
AFFIRMED | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488364/ | UNITED STATES COURT OF APPEALS
FOR THE ARMED FORCES
_______________
UNITED STATES
Appellee
v.
Chase M. THOMPSON, Airman First Class
United States Air Force, Appellant
No. 22-0098
Crim. App. No. 40019
Argued October 13, 2022—Decided November 21, 2022
Military Judge: Willie J. Babor
For Appellant: Captain Alexandra K. Fleszar (ar-
gued); Major Ryan S. Crnkovich (on brief); Mark C.
Bruegger, Esq.
For Appellee: Major Allison Gish (argued); Colonel
Naomi P. Dennis, Lieutenant Colonel Matthew J.
Neil, Major Allison R. Barbo, Major Cortland Bob-
czynski, and Mary Ellen Payne, Esq. (on brief).
Judge MAGGS delivered the opinion of the Court, in
which Chief Judge OHLSON, Judge SPARKS,
Judge HARDY, and Senior Judge ERDMANN
joined.
_______________
United States v. Thompson, No. 22-0098/AF
Opinion of the Court
Judge MAGGS delivered the opinion of the Court.1
Appellant argues that the United States Air Force
Court of Criminal Appeals (AFCCA) erred in affirming a
judgment that he sexually assaulted a fifteen-year-old girl
in violation of Article 120b(b), Uniform Code of Military
Justice (UCMJ), 10 U.S.C. § 920b(b) (2018). Appellant as-
serts the AFCCA erred in conducting its factual sufficiency
review under Article 66(d)(1), UCMJ, 10 U.S.C. § 866(d)(1)
(2018), by requiring him to prove his mistake of fact de-
fense with “direct evidence.” We agree that certain lan-
guage in the AFCCA’s opinion supports Appellant’s argu-
ment. We therefore set aside the AFCCA’s decision and
remand the case for a new factual sufficiency review.
I. Background
Appellant first made contact with VP through an online
dating service in March 2019. Her dating profile portrayed
her as a nineteen-year-old college student. In reality, VP
was a fifteen-year-old girl living with her mother and
stepfather on Aviano Air Base. Over the next month,
Appellant and VP exchanged hundreds of electronic
messages. In addition, Appellant and VP met in person and
engaged in sexual activity on four occasions. Later, when
Air Force investigators interviewed Appellant, he lied
about his actions.
A military judge sitting as a general court-martial
found Appellant guilty, contrary to his pleas, of one speci-
fication of making a false official statement, one specifica-
tion of sexual assault of a child who had attained the age
of twelve but who had not attained the age of sixteen years,
and one specification of producing child pornography, in vi-
olation of Articles 107(a), 120b(b), and 134, UCMJ, 10 U.S.C.
§§ 907(a), 920b(b), 934 (2018). The military judge sentenced
1 The Court heard oral argument in this case at the Univer-
sity of San Diego School of Law, San Diego, California, as part
of the Court’s “Project Outreach.” See United States v. Mahoney,
58 M.J. 346, 347 n.1 (C.A.A.F. 2003). Project Outreach is a public
awareness program demonstrating the operation of a federal
court of appeals and the military justice system.
2
United States v. Thompson, No. 22-0098/AF
Opinion of the Court
Appellant to a dishonorable discharge, confinement for
twelve months, and reduction to the grade of E-1. The con-
vening authority took no action on the findings and ap-
proved the sentence.
On appeal to the AFCCA, Appellant challenged the fac-
tual sufficiency of the evidence for finding that he is guilty
of sexually assaulting VP. United States v. Thompson, No.
ACM 40019, 2021 CCA LEXIS 641, at *2, 2021 WL
5570291, at *1 (A.F. Ct. Crim. App. Nov. 29, 2021) (un-
published). Appellant contended that he had proved by a
preponderance of the evidence that he had a good faith and
reasonable belief that VP had attained the age of sixteen.
See id. at *15, 2021 WL 5570291, at *6. He therefore as-
serted that he had a defense under Article 120b(d)(2),
UCMJ, and Rule for Courts-Martial (R.C.M.) 916(j)(2). See
Thompson, 2021 CCA LEXIS 641, at *14-16, 2021 WL
5570291, at *6.
In assessing this assignment of error, the AFCCA de-
scribed the applicable legal rules at some length. Id. at *14-
16, 2021 WL 5570291, at *6-7. The court quoted the test for
factual sufficiency announced in United States v. Turner,
25 M.J. 324, 325 (C.M.A. 1987); described the elements of
the offense of sexual assault of a child under Article
120b(b), UCMJ; quoted what Appellant had to show under
Article 120b(d)(2), UCMJ, to establish a mistake of fact de-
fense; and cited R.C.M. 916(j)(2) which addresses the mis-
take of fact defense in the context of child sexual offenses.
Thompson, 2021 CCA LEXIS 641, at *14-16, 2021 WL
5570291, at *6-7. The AFCCA also explained: “An accused
is not required to testify in order to establish a mistake of
fact defense. . . . The evidence to support a mistake of fact
instruction can come from evidence presented by the de-
fense, the prosecution, or the court-martial.” Id. at *16,
2021 WL 5570291, at *6 (citing United States v. Jones, 49
M.J. 85, 91 (C.A.A.F. 1998)).
The AFCCA then summarized the evidence that “Appel-
lant could have had a reasonable belief VP was at least 16”
as follows:
3
United States v. Thompson, No. 22-0098/AF
Opinion of the Court
The record shows that VP consistently held
herself out to be at least 16 years old to individu-
als she was meeting on various social media plat-
forms and cell phone dating applications. While
there is no discussion of VP’s actual age in the
[electronic] messages Appellant and VP ex-
changed between 28 March 2019 and 30 May
2019, there are numerous examples in the record
which would support the reasonableness of a be-
lief that VP was over the age of 16: the references
on VP’s Bumble account to being 18 years old and
being an “undergrad;” VP stating she was drink-
ing alcohol while messaging Appellant; VP talking
about relationships with other, older men; VP’s
mention of consuming “edibles” (presumably
drugs); VP purportedly taking a college class; and
VP leaving Italy to go to London and Germany for
weeks at a time when someone under 18 years old
would presumably have been in school.
Id. at *22-23, 2021 WL 5570291, at *8.
Despite this evidence, the AFCCA concluded that
Appellant had not proved his mistake of fact defense,
explaining:
Under all of the circumstances, although there
was plenty of evidence for one to conclude that Ap-
pellant could have had a reasonable belief VP was
at least 16, there was no direct evidence that this
belief existed in Appellant’s mind. Even Appellant
acknowledges this on appeal, noting that “there is
no direct evidence that shows [he] ever knew her
real age during the time period between 30 March
2019 and 30 May 2019. Rather, there is only evi-
dence about [his] conduct.” We agree with this as-
sessment, and as such, the Defense failed to meet
its burden to demonstrate by a preponderance of
the evidence that a mistake of fact actually ex-
isted in Appellant’s mind every time he had sex
with VP.
Id. at *23-24, 2021 WL 5570291, at *8 (alterations in
original).
The AFCCA concluded by affirming the finding that Ap-
pellant was guilty of the offense of sexually assaulting a
4
United States v. Thompson, No. 22-0098/AF
Opinion of the Court
child in violation of Article 120b(b), UCMJ. Id. at *24, 2021
WL 5570291, at *8. The AFCCA stated: “[I]n assessing fac-
tual sufficiency, after weighing all the evidence in the rec-
ord of trial and having made allowances for not having per-
sonally observed the witnesses, we are convinced of
Appellant’s guilt beyond a reasonable doubt.” Id., 2021 WL
5570291, at *8. In portions of the opinion not at issue here,
the AFCCA set aside the finding that Appellant was guilty
of producing child pornography and affirmed the finding
that he was guilty of making a false statement. Id. at *2 &
n.2, *27, 2021 WL 5570291, at *1 & n.2, *10. The AFCCA
reassessed the sentence and affirmed it as adjudged. Id. at
*27, 2021 WL 5570291, at *10.
We granted Appellant’s petition for review of the follow-
ing question: “Did the Court of Criminal Appeals err by re-
quiring that Appellant introduce direct evidence of his sub-
jective belief to meet his burden for a reasonable mistake
of fact defense?”
II. Standard of Review and Governing Law
Review of the factual sufficiency of the evidence is a spe-
cial power and duty that Article 66(d)(1), UCMJ, confers
only on the Courts of Criminal Appeals (CCA). United
States v. Nerad, 69 M.J. 138, 141 n.1 (C.A.A.F. 2010) (ex-
plaining that the CCA’s duty under Article 66, UCMJ, to
affirm only findings that are “ ‘correct in law and fact’ ” re-
quires review of both the legal and factual sufficiency of the
evidence). The test for factual sufficiency is “whether, after
weighing the evidence in the record of trial and making al-
lowances for not having personally observed the witnesses,
the members of the [CCA] are themselves convinced of the
accused’s guilt beyond a reasonable doubt.” Turner, 25 M.J.
at 325. Although this Court does not review evidence for
factual sufficiency, we “retain the authority to review fac-
tual sufficiency determinations of the CCAs for the appli-
cation of ‘correct legal principles,’ but only as to matters of
law.” United States v. Clark, 75 M.J. 298, 300 (C.A.A.F.
2016) (quoting United States v. Leak, 61 M.J. 234, 241
(C.A.A.F. 2005)).
5
United States v. Thompson, No. 22-0098/AF
Opinion of the Court
In determining whether a CCA has applied correct legal
principles, this Court starts with the rule that the “CCAs
are presumed to know the law and follow it.” United States
v. Chin, 75 M.J. 220, 223 (C.A.A.F. 2016). Accordingly, the
CCAs need not address each issue raised by an appellant
and are not required to state their reasoning for their deci-
sions. United States v. Reed, 54 M.J. 37, 42 (C.A.A.F. 2000).
But when the record reveals that a CCA misunderstood the
law, this Court remands for another factual sufficiency re-
view under correct legal principles. United States v.
Thompson, 2 C.M.A. 460, 464, 9 C.M.R. 90, 94 (1953). This
Court also has remanded when it is “an open question”
whether a CCA’s review under Article 66(d)(1), UCMJ, was
“consistent with a correct view of the law.” Nerad, 69 M.J.
at 147 (internal quotation marks omitted).
The version of Article 120b(b), UCMJ, applicable to this
case provides that “[a]ny person subject to this chapter who
commits a sexual act upon a child who has attained the age
of 12 years is guilty of sexual assault of a child and shall be
punished as a court-martial may direct.”2 Article
120b(h)(4), UCMJ, defines a “child” as a “person who has
not attained the age of 16 years.” Article 120b(d)(2), UCMJ,
provides:
In a prosecution under this section, it need not be
proven that the accused knew that the other per-
son engaging in the sexual act . . . had not at-
tained the age of 16 years, but it is a defense in a
prosecution under subsection (b) (sexual assault
of a child) . . . which the accused must prove by a
preponderance of the evidence, that the accused
2 The specification at issue alleged conduct occurring be-
tween March and May 2019. The version of Article 120b, UCMJ,
found in 10 U.S.C. § 920b (2018), applies to conduct occurring
after January 1, 2019. See National Defense Authorization Act
for Fiscal Year 2017, Pub. L. No. 114-328, § 5542(a), 130 Stat.
2000, 2967 (2016) (making the 2016 amendment effective on the
date designated by the President); 2018 Amendments to the
Manual for Courts-Martial, United States, Exec. Order No.
13,825, § 3, 83 Fed. Reg. 9889, 9889 (Mar. 1, 2018) (setting the
effective date as Jan. 1, 2019).
6
United States v. Thompson, No. 22-0098/AF
Opinion of the Court
reasonably believed that the child had attained
the age of 16 years, if the child had in fact attained
at least the age of 12 years.
Consistent with this statutory provision, the applicable
version of R.C.M. 916(j)(2) places the burden on the
accused to “prove this defense by a preponderance of the
evidence.”3
Neither Article 120b(d)(2), UCMJ, nor R.C.M. 916(j)(2)
place any limitations on the source or the kind of evidence
that may establish a mistake of fact defense. As the AFCCA
correctly observed, this Court held in Jones, 49 M.J. at 91,
that an accused need not testify to establish a mistake of
fact defense and the evidence supporting the defense can
come from evidence presented by the defense, the prosecu-
tion, or the court-martial. No precedent of this Court has
ever required proof by “direct” evidence nor restricted the
proof to “direct” evidence. Either such holding would con-
tradict R.C.M. 918(c), which provides that “[f]indings may
be based on direct or circumstantial evidence.”4
3 The version of R.C.M. 916 that appears in Manual for
Courts-Martial, United States (2019 ed.) reflects amendments
that were made on March 1, 2018, that became effective on
January 1, 2019. See Exec. Order No. 13,825, § 5, 83 Fed. Reg.
at 9890.
4 The Discussion to R.C.M. 918(c) explains:
“Direct evidence” is evidence which tends di-
rectly to prove or disprove a fact in issue (for ex-
ample, an element of the offenses charged). “Cir-
cumstantial evidence” is evidence which tends
directly to prove not a fact in issue but some other
fact or circumstance from which, either alone or
together with other facts or circumstances, one
may reasonably infer the existence or non-exist-
ence of a fact in issue.
7
United States v. Thompson, No. 22-0098/AF
Opinion of the Court
III. Discussion
Appellant contends that the AFCCA Court “erred by in-
sisting that if [he] wanted to defend against [the sexual as-
sault] charge, he needed to rely upon direct evidence to es-
tablish that in his own mind, he subjectively believed VP
was at least 16 years old.” In supporting this contention,
Appellant focuses on the AFCCA’s statements, quoted
above, that “ ‘there was no direct evidence’ ” that Appellant
believed in his mind that VP was sixteen.
We would not question the AFCCA’s understanding of
the applicable legal rules if the AFCCA had merely ex-
pressed an observation about whether the record contained
direct evidence to support Appellant’s mistake of fact de-
fense. The CCAs often summarize the content and nature
of relevant evidence when conducting a factual sufficiency
review. See, e.g., United States v. Mitchell, No. ARMY
9601800, 1998 CCA LEXIS 595, at *4-5, 1998 WL
35319989, at *2 (A. Ct. Crim. App. Dec. 28, 1998) (observ-
ing that there was “no direct evidence, and only speculative
circumstantial evidence” to support a finding of guilt). Such
summaries are helpful to anyone reading CCA opinions.
But in this case, the AFCCA appears to have gone beyond
merely noting a lack of direct evidence. Instead, the
AFCCA twice stated that there was no direct evidence to
support the mistake of fact defense and then said “and as
such, the Defense failed to meet its burden.” Thompson,
2021 CCA LEXIS 641, at *23-24, 2021 WL 5570291, at *8.
The AFCCA’s use of the phrase “and as such” leaves the
impression that the AFCCA rested its decision on an erro-
neous view that the mistake of fact defense required direct
evidence.
The Government acknowledges that the quoted state-
ments “incorrectly implied Appellant needed to prove his
state of mind as to VP’s age with ‘direct evidence.’ ” But the
Government nevertheless contends that “a contextual
reading of AFCCA’s opinion suggests that, despite its mis-
statement about direct evidence, [the] AFCCA understood
circumstantial evidence could be used to infer Appellant’s
state of mind as to VP’s age.” We agree with the general
8
United States v. Thompson, No. 22-0098/AF
Opinion of the Court
point that a reviewing court must read specific statements
in a judicial opinion in context to determine whether the
statements are correct. See, e.g., United States v. Antonelli,
35 M.J. 122, 128 (C.M.A. 1992) (determining that context
clarified an otherwise problematic statement in a judicial
opinion). We also agree that the AFCCA correctly stated
numerous applicable legal principles. But the Government
has not identified anything in the AFCCA’s opinion that
negates the impression left by the specific statements
about direct evidence quoted above.
The Government also contends that we do not need to
remand the case because no evidence presented at trial
shows that Appellant actually believed VP was at least six-
teen. Appellant disagrees, citing various text messages
that Appellant contends provide such evidence. In our
view, these competing arguments concern the persuasive-
ness of the evidence, which is not a matter for us to deter-
mine. Instead, the AFCCA should consider these conten-
tions when conducting a new factual sufficiency review
under Article 66(d)(1), UCMJ, consistent with this opinion.
See Clark, 75 M.J. at 300.
In sum, even though the CCAs are presumed to know
the law absent contrary indications, the AFCCA’s language
creates at least “an open question” about whether the court
applied the correct rule. Nerad, 69 M.J. at 147. Accord-
ingly, we set aside the AFCCA’s decision and remand for a
new Article 66(d)(1), UCMJ, review consistent with this
opinion. In so doing, we express no view on whether, when
reviewed under correct legal principles, the evidence is or
is not factually sufficient. That determination is solely for
the AFCCA to make.
IV. Conclusion
The decision of the United States Air Force Court of
Criminal Appeals is set aside. The record of trial is re-
turned to the Judge Advocate General of the Air Force for
remand to the United States Air Force Court of Criminal
Appeals for a new review under Article 66(d)(1), UCMJ, 10
U.S.C. § 866(d)(1) (2018).
9 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488363/ | USCA11 Case: 22-10297 Date Filed: 11/21/2022 Page: 1 of 3
[DO NOT PUBLISH]
In the
United States Court of Appeals
For the Eleventh Circuit
____________________
No. 22-10297
____________________
MOMS FOR LIBERTY - BREVARD COUNTY, FL,
AMY KNEESSY,
ASHLEY HALL,
KATIE DELANEY,
JOSEPH CHOLEWA,
Plaintiffs-Appellants,
versus
BREVARD PUBLIC SCHOOLS,
MISTY HAGGARD-BELFORD,
Chair, Brevard County School Board, in her official and
individual capacities,
MATT SUSIN,
Vice Chair, Brevard County School Board, in his official and
individual capacities,
USCA11 Case: 22-10297 Date Filed: 11/21/2022 Page: 2 of 3
2 Opinion of the Court 22-10297
CHERYL MCDOUGALL,
Member, Brevard County School Board, in her official and
individual capacities,
KATYE CAMPBELL,
Member, Brevard County School Board, in her official and
individual capacities, et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court
for the Middle District of Florida
D.C. Docket No. 6:21-cv-01849-RBD-GJK
____________________
Before WILSON, JILL PRYOR, Circuit Judges, and RUIZ, * District
Judge.
PER CURIAM:
Plaintiffs-Appellants Moms for Liberty–Brevard County, FL
and four of its members challenged as unconstitutional the Public
Participation Policy utilized by Defendants-Appellees Brevard Pub-
lic Schools and the individual members of its school board.
* Honorable Rodolfo A. Ruiz II, United States District Judge for the Southern
District of Florida, sitting by designation.
USCA11 Case: 22-10297 Date Filed: 11/21/2022 Page: 3 of 3
22-10297 Opinion of the Court 3
Appellants filed a Motion for Preliminary Injunction, which the dis-
trict court denied. See Moms for Liberty–Brevard Cnty., FL v. Bre-
vard Pub. Schs., 582 F. Supp. 3d 1214, 1217 (M.D. Fla. 2022). Ap-
pellants timely appealed.
After review of the parties’ briefs, and with the benefit of
oral argument, we find no abuse of discretion in the district court’s
thorough, well-reasoned order. See Schultz v. Alabama, 42 F.4th
1298, 1311 (11th Cir. 2022) (“We review a district court’s order
granting or denying a preliminary injunction for abuse of discre-
tion.”). We therefore affirm the district court’s order denying Ap-
pellants’ Motion for Preliminary Injunction.
AFFIRMED. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488361/ | 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 21, 2022
Before
DIANE P. WOOD, Circuit Judge
AMY J. ST. EVE, Circuit Judge
JOHN Z. LEE, Circuit Judge
No. 22-1443
MATTHEW RICHARD, Appeal from the United States District
Plaintiff-Appellant, Court for the Eastern District of
Wisconsin.
v.
No. 20-CV-876
WILLIAM SWIEKATOWSKI and
ANDREW WICKMAN, William E. Duffin,
Defendants-Appellees. Magistrate Judge.
ORDER
Matthew Richard, a Wisconsin prisoner, sued officials and correctional officers at
the Green Bay Correctional Institution, claiming that they violated his constitutional
rights by punishing him for writing letters. See 42 U.S.C. § 1983. After dismissing some
of his claims at the screening stage, see 28 U.S.C. § 1915A, the district court entered
* 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. 22-1443 Page 2
summary judgment for the defendants on the remaining claims. It concluded that
Richard lacked sufficient evidence that correctional officers acted with retaliatory
motives in violation of the First Amendment when imposing discipline for the two
letters or that Richard’s disciplinary hearing was procedurally unfair. We affirm.
We construe the undisputed facts in the light most favorable to the plaintiff and
draw all reasonable inferences in his favor. Douglas v. Reeves, 964 F.3d 643, 645 (7th Cir.
2020). At Waupun Correctional Institution, where he was housed before his transfer to
Green Bay in 2015, Richard was sanctioned for involvement with the Almighty Vice
Lord Nation, but he asserts that he left the gang in 2012. In the first letter at issue,
addressed to fellow Green Bay prisoner Frederick Jones in September 2018, Richard
congratulated Jones on his impending release and promised to connect Jones with
Kamallah Brelove, someone outside the prison. Richard then wrote to Brelove, his
friend. In this letter, Richard encouraged Brelove to contact Jones and requested
Brelove’s help contacting two other “brothers” about a “revenue stream” that he and
these men were “trying to tap into.” Richard signed both letters, “Mateen Wasi El-
Shabazz.”
Green Bay’s Security Threat Group Coordinator, William Swiekatowski,
reviewed the letters and issued a conduct report to Richard. Swiekatowski consulted
various sources, including a scholarly article, prison databases, and officials at Waupun.
He concluded that Richard, Brelove, Jones, and the two other men named in Richard’s
letters were members of the Vice Lords gang. Swiekatowski also considered an earlier
letter written by Michael Johnson, another Green Bay prisoner, that laid out plans to
start businesses to support the Vice Lords. Johnson had written about meeting with
Mateen Wasi-El Shabazz—Richard, Swiekatowski believed—and discussing business
plans and communications channels. Swiekatowski concluded that Richard’s letters
evinced his involvement in gang activity and in business, both of which violated prison
regulations. See WIS. ADMIN. CODE DOC §§ 303.24, 303.36 (2018).
Richard responded to the charges by denying any gang involvement and arguing
that he was merely communicating with old friends; he maintained that Swiekatowski
took his letters out of context. Richard was found guilty at his first disciplinary hearing,
but he successfully appealed because he had not been afforded sufficient opportunity to
present evidence. After a second hearing, Andrew Wickman, the hearing officer, found
Richard guilty of both charges, and the warden affirmed.
No. 22-1443 Page 3
Richard then sued Swiekatowski, Wickman, and four prison officials. The
magistrate judge, presiding with consent from all parties, 28 U.S.C. § 636(c), screened
the complaint and permitted Richard to proceed with a First Amendment retaliation
claim against Swiekatowski and a due-process claim against Wickman for denying him
access to evidence (a gang-member database) at the second hearing. The court
dismissed Richard’s claims against the remaining officials because he did not plausibly
allege their personal participation in the events or their involvement in a conspiracy
with the other defendants. Swiekatowski and Wickman later moved for summary
judgment. The district court granted the motion, concluding that Richard lacked
evidence that Swiekatowski issued the conduct report to retaliate against Richard or
that Wickman deprived him of due process. Richard appeals.
We review the decisions entering summary judgment and screening the
complaint de novo. Crouch v. Brown, 27 F.4th 1315, 1319 (7th Cir. 2022); Schillinger v.
Kiley, 954 F.3d 990, 994 (7th Cir. 2020).
In challenging the summary-judgment ruling, Richard first contends that
Swiekatowski violated his rights under the First Amendment by punishing him for
writing letters to friends. To bring his case to trial, Richard needed evidence that his
protected speech was a motivating factor in Swiekatowski’s decision to take a
retaliatory action against him. Douglas, 964 F.3d at 646. Assuming the letters were
protected speech, Richard has not mustered sufficient evidence of retaliatory motive to
raise a disputed question of fact. Swiekatowski submitted evidence that he would have
issued the conduct report irrespective of any protected speech. See Jones v. Van Lanen,
27 F.4th 1280, 1284 (7th Cir. 2022). He attested that he wrote up Richard because he
believed “the letters were communications to gang members plotting ways to raise
money and start businesses for the Vice Lords.” Richard suggests that the timing of the
conduct report—just days before Richard’s administrative segregation status was up for
a regularly scheduled review—is suspect. He infers that Swiekatowski’s true motive
was to keep him in segregation, and that Swiekatowski misinterpreted the letters as a
pretext. Swiekatowski maintains that he issued the conduct report to prevent gang
activity and ensure the safety of the prison.
This is a disagreement, but it is not a genuine dispute of material fact. Even if
Swiekatowski was wrong about what the letters meant, there is no evidence that he
issued the conduct report to punish Richard for communicating with his friends. The
timing of the conduct report relative to Richard’s regularly scheduled administrative
review is not relevant to the question of whether there is a causal connection between
No. 22-1443 Page 4
the report and the letters. See Holleman v. Zatecky, 951 F.3d 873, 879 (7th Cir. 2020)
(explaining that causation requires a showing that the fact of plaintiff’s protected
activity, not the substance, motivated the alleged adverse action). Thus, the First
Amendment claim fails because Richard has no evidence to dispute Swiekatowski’s
account of his non-retaliatory reason for issuing the conduct report.
Richard adds that having Johnson’s letter, which Richard did not author or
receive, used as evidence against him also infringed his free speech rights. Richard fails
to explain, however, how the introduction of Johnson’s letter as evidence at his hearing
curtailed his own First Amendment rights, much less how it trumps the prison officials’
legitimate penological interests in monitoring prisoners’ nonlegal mail to promote
safety. See Van den Bosch v. Raemisch, 658 F.3d 778, 791 (7th Cir. 2011). Neither Richard’s
constitutional rights nor prison regulations, see WIS. ADMIN. CODE DOC § 303.87(2),
prohibited the introduction of this relevant evidence at Richard’s disciplinary hearing.
The district court also properly entered summary judgment against Richard on
his procedural due-process claim. Richard asserts that Swiekatowski fabricated
information about the purported gang activity of Richard’s associates in the conduct
report, and Wickman knowingly used that information to find him guilty at the
disciplinary hearing. But Richard did not submit any evidence to back up his accusation
that anything in the report was untrue, let alone fabricated. Because Swiekatowski
submitted “some” evidence—Richard’s letters and corroborating evidence of gang
activity—to the hearing officer before discipline was imposed, Richard’s due-process
rights were protected. See Superintendent v. Hill, 472 U.S. 445, 447 (1985); McPherson v.
McBride, 188 F.3d 784, 787 (7th Cir. 1999).
Richard also appeals the decision to dismiss his civil conspiracy claim at
screening, repeating his allegations that various prison officials “turned a blind eye” to
Swiekatowski’s issuance of the conduct report. But Richard has not shown how these
officials—John Kind, William Pollard, Dylon Radtke, and Steven Schueler—were
personally involved. Some of these officials participated in various stages of the
disciplinary process after Swiekatowski issued the conduct report, but that would not
make them responsible (whether as supervisors or as administrative reviewers) for
misconduct, such as retaliation, by Swiekatowski. See Owens v. Evans, 878 F.3d 559, 563
(7th Cir. 2017); Sanville v. McCaughtry, 266 F.3d 724, 740 (7th Cir. 2001). And Richard did
not overcome this problem with his conclusory assertion of a conspiracy. To state such a
claim, he needed to allege facts plausibly suggesting an agreement among the
defendants to achieve a common purpose of violating his rights. See Redd v. Nolan,
No. 22-1443 Page 5
663 F.3d 287, 292 (7th Cir. 2011); N. Highland Inc. v. Jefferson Mach. & Tool Inc.,
898 N.W.2d 741, 747 (Wis. 2017). Nothing in the complaint makes such coordination
plausible; therefore, the magistrate judge properly dismissed the conspiracy claim.
We have considered Richard’s remaining arguments, and none has merit.
AFFIRMED | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488376/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0465
No. DA 22-0465
STATE OF MONTANA,
Plaintiff and Appellee,
v.
MICHAEL LEE MARFUTA, JR.,
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 28, 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 21 2022 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488374/ | FILED
Nov 21, 2022
01:40 PM(CT)
TENNESSEE COURT OF
WORKERS' COMPENSATION
CLAIMS
TENNESSEE BUREAU OF WORKERS’ COMPENSATION
IN THE COURT OF WORKERS’ COMPENSATION CLAIMS
AT MURFREESBORO
LISA COOK, ) Docket No. 2021-05-0644
Employee, )
v. )
)
NEWTON NISSAN OF GALLATIN/ ) State File No. 57259-2020
NEWTON FORD, LLC, )
Employer, )
)
And )
)
SECURITY NAT. INS. CO., ) Judge Dale Tipps
Carrier. )
EXPEDITED HEARING ORDER GRANTING BENEFITS
The Court held an Expedited Hearing on November 10, 2022, on whether Ms. Cook
is entitled to additional medical treatment, specifically treatment at the Vanderbilt Pain
Management Center, or a panel to replace the pain management panel already provided by
Newton. The Court finds that the panel was invalid and, therefore, she is likely to prevail
at a hearing on the merits that she is entitled to a new panel.
History of Claim
Ms. Cook, an automobile salesperson, was injured at work on August 4, 2020, when
the tailgate of a vehicle fell on her left wrist. Although she reported the injury to her
supervisors, they did not offer her any medical treatment. As a result, she went to the local
emergency room after she left work. The emergency room doctor recommended that Ms.
Cook follow up with an orthopedist, and she made an appointment with Brian Peterson
Orthopedics, where she saw a physician’s assistant several times.
On referral from Peterson Orthopedics, Ms. Cook began seeing Dr. Kyle Joyner,
who determined she was not a surgical candidate.1 However, he assessed causalgia and
referred her to Dr. Jeffrey Hazlewood, a physiatrist, “to determine if there may be a
component of CRPS2 or radial sensory neuropathy requiring further treatment.”
Dr. Hazlewood diagnosed deQuervain’s tenosynovitis and provided conservative
treatment for three visits. On June 7, he said he had no explanation for her ongoing pain
and wrote, “I have done everything I can do.” Dr. Hazlewood suggested that she contact
Dr. Joyner to see whether he would be willing to see her again and possibly operate on her
deQuervain’s condition. He added, “If Dr. Joyner tells her he will see her back, I will be
glad to refer her back to him as I have no further options of treatment.” He then said he
would see her in three months for follow-up.
Ms. Cook returned to Dr. Joyner, and he referred her to Dr. Michael Bowman for a
nerve block. On her first visit, Dr. Bowman concluded that she met the Budapest criteria
for CRPS. When the nerve block provided limited relief, he prescribed medication and
occupational therapy. The last time Dr. Bowman saw Ms. Cook, she reported no
improvement from her continuing left-wrist pain. He changed her prescription but felt that
she had exhausted conservative measures. He suggested that if she did not improve during
the eight weeks before her next appointment, he could either refer her to Vanderbilt or
order a functional capacity evaluation.
Ms. Cook called Dr. Bowman’s office shortly before her return visit and opted for
the referral. He referred her to “Vanderbilt Complex Regional Pain Syndrome Center” on
January 4, 2022, for “Pain Medicine. Evaluate and treat.” His clinical reasons for the
referral were, “Second Opinion. Complex Regional Pain.” Newton provided a panel of
pain-management physicians two days after the referral.
Drs. Bowman and Hazlewood both gave somewhat lengthy depositions in this case.3
Dr. Bowman disagreed with Dr. Hazlewood’s diagnosis of deQuervain’s tenosynovitis. He
also testified that, when he last saw Ms. Cook, her objective symptoms had improved to
the point that he was unsure whether she had CRPS.
Dr. Hazlewood admitted that he referred Ms. Cook back to Dr. Joyner, although he
said he would be willing to see her again. He repeated the tendonitis diagnosis and said
she did not have CRPS.
Ms. Cook testified during the hearing that she suffers significant pain in her left
1
Newton authorized Ms. Cook’s treatment with Dr. Joiner and, at some point, paid for her previous
unauthorized treatment.
2
Complex regional pain syndrome.
3
Most of the deposition testimony is irrelevant to the only issue before the court – whether Ms. Cook is
entitled to a direct referral or a new panel. Therefore, the Court will not summarize the depositions in detail
at this time.
wrist every day. This pain has been constant and unrelenting since the day of the accident,
and it interferes with her work and daily activities. Ms. Cook also confirmed that, except
for the pain-management panel, Newton never offered her a panel of physicians.
At the conclusion of the hearing, Ms. Cook requested treatment at the Vanderbilt
Pain Management Center. She objected to the panel from Newton because it included Dr.
Hazlewood, who had already referred her back to the orthopedists, and two doctors in the
Knoxville area, which is far from her home in Lascassas. She contended the panel is not
valid and, if the Court will not order treatment at Vanderbilt, she is entitled to a panel of
physicians that complies with the locality requirements of Tennessee Code Annotated
section 50-6-204(a)(3)(A)(i).
Newton argued that Ms. Cook must select from the existing panel. It contends Dr.
Bowman’s direct referral was invalid because he referred Ms. Cook to the Vanderbilt
Complex Regional Pain Syndrome Center, which is not the correct name of the clinic.
Newton also maintains that it provided the panel within two days of the referral and it meets
the statutory requirements for a pain-management panel.4
Findings of Fact and Conclusions of Law
For the Court to grant Ms. Cook’s request, she must prove she is likely to prevail at
a hearing on the merits. Tenn. Code Ann. § 50-6-239(d)(1) (2022); McCord v. Advantage
Human Resourcing, 2015 TN Wrk. Comp. App. Bd. LEXIS 6, at *7-8, 9 (Mar. 27, 2015).
Newton first argued that Dr. Bowman’s referral to Vanderbilt Complex Regional
Pain Syndrome Center was invalid because that is not the correct name of the practice.
This argument borders on the absurd, since the referral also included the address and
telephone number of the Vanderbilt Pain Management Center. It would have taken little
or no effort to either contact the clinic or Dr. Bowman for clarification.
Newton also contended that the entire referral was invalid because it was for a
second opinion, which is prohibited by Tennessee Code Annotated section 50-6-204(j)(3).
This argument is similarly unpersuasive, as the section in question clearly contemplates an
employee’s right to a second opinion related to their pain-management treatment, not their
referral by an authorized doctor to a pain-management provider.
Which brings the Court to the crux of this case – Newton’s contention that Ms. Cook
is entitled only to the existing pain management panel. Both parties briefed this issue as
one governed by Tennessee Code Annotated section 50-6-204(a)(3)(A)(ii). However,
4
Newton also asked the Court for a finding that Ms. Cook has reached maximum medical improvement
and contended that she does not have CRPS. Since this is not relevant to the issue of whether Ms. Cook is
entitled to treatment at Vanderbilt or to another panel, the Court will not address this request.
because the referring physician, Dr. Bowman, was not selected from a panel, this section
is inapplicable. Ducros v. Metro Roofing and Metal Supply Co., Inc., 2017 TN Wrk. Comp.
App. Bd. LEXIS 62, at *9 (Oct. 17, 2017). Thus, the specific question before the Court is:
what is the effect, if any, of a direct referral from a non-panel authorized physician?
The current statute gives no answer to this question, and the Court has identified no
explicit authority for ordering an employer to honor a direct referral to a specific provider
in this situation. Further, before section 50-6-204(a)(3)(A)(ii) was included in the 2013
reform legislation, the previous statute was silent regarding direct referrals to a specific
doctor or practice. Instead, the statute (and case law) merely focused on whether an
employer timely provided a panel when an authorized doctor made a referral to another
specialist. In this case, Newton offered a panel within two days of the referral. Under pre-
reform law, this would have been a sufficient response, and Ms. Cook would have been
obliged to select a physician from the panel.
The Court finds that this is the appropriate procedure for the current case. When no
specific statutory authority exists for a direct referral, the employer is only required to
provide a panel when the treating doctor refers an employee to a specialist.5 This is
consistent with Thompson v. Comcast Corp., 2018 TN Wrk. Comp. App. Bd. LEXIS 1, at
*20-22 (Jan. 30, 2018) (because an employee did not seek pain management on his own
when the employer failed to provide a panel, he was not allowed to select his own
specialist).
However, that does not end the analysis. Ms. Cook contended that the pain
management panel is invalid for two reasons. First, she objected to the fact that the other
two doctors on the panel are a great distance from her home. She acknowledged that
Tennessee Code Annotated section 50-6-204(j)(2)(A) allows pain-management panels to
include doctors up to 175 miles from an employee’s residence, but she argued that this was
not just a pain-management referral. Instead, Ms. Cook maintained that Dr. Bowman
referred her for evaluation and treatment.
This argument overlooks the fact that Dr. Bowman specifically referred Ms. Cook
to a pain-management clinic. Even though he testified that he wanted Vanderbilt to
evaluate her and possibly offer treatment that he could not, this is consistent with the
statutory description of pain management as “pharmacological, nonpharmalogical and
other approaches to manage chronic pain.” Tenn. Code Ann. § 50-6-204(j)(1). Further,
Ms. Cook admitted in her responses to requests for admissions that the referral was to a
pain-management specialty group.
5
The Court recognizes that this approach could potentially reward Newton for failing to give the initial
panels. However, even if that is the unintended effect of the statute, the Court is constrained by the language
used by the General Assembly.
Ms. Cook’s second argument is more persuasive. She contended that the panel was
invalid because it included Dr. Hazlewood, who had already treated her and said that he
had nothing further to offer. So, she maintained that Newton failed to offer a panel of three
physicians who were willing and able to treat her.
The Court agrees. Dr. Hazlewood made it very clear during Ms. Cook’s last visit
that he had no explanation for her ongoing pain, saying, “I have done everything I can do.”
He then told Ms. Cook that he would refer her back to Dr. Joyner if she wished to return to
him, and she chose to do just that.
Newton argued that Dr. Hazlewood testified in his deposition that he would be
willing to see Ms. Cook again to reevaluate her and “see if there are any other options.”
However, Dr. Hazlewood was deposed almost six months after Newton included him on
the panel, and no evidence suggests that it consulted with him before doing so. Thus, the
evidence shows that at the time Newton gave the panel, Dr. Hazlewood had released Ms.
Cook, did not know why she was hurting, and had no treatment to offer her. Under those
circumstances, his inclusion did not meet the requirement of providing a panel of three
physicians as described in Tennessee Code Annotated section 50-6-204(3)(a)(i).
Therefore, Newton must offer a new pain management panel to Ms. Cook that does
not include Dr. Hazlewood. Of course, Newton has a statutory right to include doctors as
far away as Knoxville, but it seems unlikely that no other qualified doctors are available in
the Nashville area. The Court is troubled by what appears to have been a cynical attempt
to limit Ms. Cook’s choices and force her back to the doctor who had already put her at
maximum medical improvement and assigned an impairment rating. Ms. Cook testified
that driving to Knoxville would be painful and the time off work would negatively affect
her income, as she works on commission. Hopefully, the next panel will be more
conducive to simply evaluating and treating her as recommended by Dr. Bowman.
Finally, as noted above, Newton repeatedly failed to meet its statutory duty to offer
panels of physicians, a practice that only ended when it provided a panel to prevent Ms.
Cook from going to the Vanderbilt Pain Center. Newton contended that this was not
required, since Ms. Cook sought emergency treatment. This argument overlooks the fact
that Ms. Cook went to the emergency room because Newton offered no medical care when
she reported the injury. Further, “[a]fter an injured employee’s medical condition has
stabilized, the employer shall follow the requirements of subsection (1) above, the same as
any alleged workplace injury not requiring emergency care.” Tenn. Comp. R. & Regs.
0800-02-01-.06(3). For this reason, the Court refers this case to the Compliance Program
for investigation and possible assessment of a civil penalty. See Tenn. Comp. R. & Regs.
0800-02-01-.06(2). Upon its issuance, a copy of this Order will be sent to the Compliance
Program. See Tenn. Comp. R. & Regs. 0800-02-24-.03.
IT IS, THEREFORE, ORDERED as follows:
1. Newton Nissan of Gallatin/Newton Ford, LLC shall continue to provide medical
benefits, including a pain-management panel to evaluate and treat Ms. Cook. The
panel shall not include Dr. Hazlewood.
2. This case is referred to the Compliance Program for consideration of the imposition
of a penalty regarding Newton’s repeated failure to provide panels of physicians.
3. A status hearing will take place on February 1, 2023, at 10:00 a.m. Central Time.
The parties must call 615-532-9552 or toll-free at 866-943-0025 to participate.
Failure to call might result in a determination of issues without your participation.
4. Unless an interlocutory appeal of the Expedited Hearing Order is filed, compliance
with this Order must occur no later than seven business days from the date of entry
of this Order as required by Tennessee Code Annotated section 50-6-239(d)(3). The
Employer must submit confirmation of compliance with this Order to the Bureau by
email to WCCompliance.Program@tn.gov no later than the seventh business day
after entry of this Order. Failure to submit confirmation within seven business days
may result in a penalty assessment for non-compliance. For questions regarding
compliance, contact the Workers’ Compensation Compliance Unit via email at
WCCompliance.Program@tn.gov.
ENTERED November 21, 2022.
_____________________________________
Judge Dale Tipps
Court of Workers’ Compensation Claims
APPENDIX
Exhibits:
1. Ms. Cook’s Rule 72 declaration
2. Indexed medical records
3. Transcript of Dr. Jeffrey Hazlewood’s deposition
4. Transcript of Dr. Michael Bowman’s deposition
5. Ms. Cook’s responses to Requests for Admissions (with exhibits)
Technical record:
1. Petition for Benefit Determination
2. Dispute Certification Notice
3. Request for Expedited Hearing
4. Employer’s Brief in Opposition to Employee’s Petition for Medical Benefit
5. Employer’s Witness and Exhibit List
6. Employee’s Pre-Expedited Hearing Statement and List of Witnesses and Exhibits
CERTIFICATE OF SERVICE
I certify that a copy of the Expedited Hearing Order was sent as indicated on
November 21, 2022.
Name Certified Via Service Sent To
Mail Email
Steven Waldron, X arlenesmith@wfptnlaw.com
Employee’s Attorney
Gregory Fuller and X cgrowe@mijs.com
Chris Rowe, ghfuller@mijs.com
Employer’s Attorneys
Compliance Program X WCCompliance.Program@tn.gov
______________________________________
PENNY SHRUM, COURT CLERK
wc.courtclerk@tn.gov
Expedited Hearing Order Right to Appeal:
If you disagree with this Expedited Hearing Order, you may appeal to the Workers’
Compensation Appeals Board. To appeal an expedited hearing order, you must:
1. Complete the enclosed form entitled: “Notice of Appeal,” and file the form with the
Clerk of the Court of Workers’ Compensation Claims within seven business days of the
date the expedited hearing order was filed. When filing the Notice of Appeal, you must
serve a copy upon all parties.
2. You must pay, via check, money order, or credit card, a $75.00 filing fee within ten
calendar days after filing of the Notice of Appeal. Payments can be made in-person at
any Bureau office or by U.S. mail, hand-delivery, or other delivery service. In the
alternative, you may file an Affidavit of Indigency (form available on the Bureau’s
website or any Bureau office) seeking a waiver of the fee. You must file the fully-
completed Affidavit of Indigency within ten calendar days of filing the Notice of
Appeal. Failure to timely pay the filing fee or file the Affidavit of Indigency will
result in dismissal of the appeal.
3. You bear the responsibility of ensuring a complete record on appeal. You may request
from the court clerk the audio recording of the hearing for a $25.00 fee. If a transcript of
the proceedings is to be filed, a licensed court reporter must prepare the transcript and file
it with the court clerk within ten business days of the filing the Notice of
Appeal. Alternatively, you may file a statement of the evidence prepared jointly by both
parties within ten business days of the filing of the Notice of Appeal. The statement of
the evidence must convey a complete and accurate account of the hearing. The Workers’
Compensation Judge must approve the statement before the record is submitted to the
Appeals Board. If the Appeals Board is called upon to review testimony or other proof
concerning factual matters, the absence of a transcript or statement of the evidence can be
a significant obstacle to meaningful appellate review.
4. If you wish to file a position statement, you must file it with the court clerk within ten
business days after the deadline to file a transcript or statement of the evidence. The
party opposing the appeal may file a response with the court clerk within ten business
days after you file your position statement. All position statements should include: (1) a
statement summarizing the facts of the case from the evidence admitted during the
expedited hearing; (2) a statement summarizing the disposition of the case as a result of
the expedited hearing; (3) a statement of the issue(s) presented for review; and (4) an
argument, citing appropriate statutes, case law, or other authority.
For self-represented litigants: Help from an Ombudsman is available at 800-332-2667.
NOTICE OF APPEAL
Tennessee Bureau of Workers’ Compensation
www.tn.gov/workforce/injuries-at-work/
wc.courtclerk@tn.gov | 1-800-332-2667
Docket No.: ________________________
State File No.: ______________________
Date of Injury: _____________________
___________________________________________________________________________
Employee
v.
___________________________________________________________________________
Employer
Notice is given that ____________________________________________________________________
[List name(s) of all appealing party(ies). Use separate sheet if necessary.]
appeals the following order(s) of the Tennessee Court of Workers’ Compensation Claims to the
Workers’ Compensation Appeals Board (check one or more applicable boxes and include the date file-
stamped on the first page of the order(s) being appealed):
□ Expedited Hearing Order filed on _______________ □ Motion Order filed on ___________________
□ Compensation Order filed on__________________ □ Other Order filed on_____________________
issued by Judge _________________________________________________________________________.
Statement of the Issues on Appeal
Provide a short and plain statement of the issues on appeal or basis for relief on appeal:
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
Parties
Appellant(s) (Requesting Party): _________________________________________ ☐Employer ☐Employee
Address: ________________________________________________________ Phone: ___________________
Email: __________________________________________________________
Attorney’s Name: ______________________________________________ BPR#: _______________________
Attorney’s Email: ______________________________________________ Phone: _______________________
Attorney’s Address: _________________________________________________________________________
* Attach an additional sheet for each additional Appellant *
LB-1099 rev. 01/20 Page 1 of 2 RDA 11082
Employee Name: _______________________________________ Docket No.: _____________________ Date of Inj.: _______________
Appellee(s) (Opposing Party): ___________________________________________ ☐Employer ☐Employee
Appellee’s Address: ______________________________________________ Phone: ____________________
Email: _________________________________________________________
Attorney’s Name: _____________________________________________ BPR#: ________________________
Attorney’s Email: _____________________________________________ Phone: _______________________
Attorney’s Address: _________________________________________________________________________
* Attach an additional sheet for each additional Appellee *
CERTIFICATE OF SERVICE
I, _____________________________________________________________, certify that I have forwarded a
true and exact copy of this Notice of Appeal by First Class mail, postage prepaid, or in any manner as described
in Tennessee Compilation Rules & Regulations, Chapter 0800-02-21, to all parties and/or their attorneys in this
case on this the __________ day of ___________________________________, 20 ____.
______________________________________________
[Signature of appellant or attorney for appellant]
LB-1099 rev. 01/20 Page 2 of 2 RDA 11082 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488367/ | Filed 11/21/22 P. v. Franco CA4/1
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.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
THE PEOPLE, D080000
Plaintiff and Respondent,
v. (Super. Ct. No. SCS300168)
ANTHONY FRANCO,
Defendant and Appellant.
APPEAL from a judgment of the Superior Court of San Diego County,
Michael J. Popkins, Judge. Affirmed.
John L. Staley, under appointment by the Court of Appeal, for
Defendant and Appellant.
Rob Bonta, Attorney General, Lance E. Winters, Chief Assistant
Attorney General, Charles C. Ragland, Assistant Attorney General, Melissa
Mandel and Genevieve Herbert, Deputy Attorneys General, for Plaintiff and
Respondent.
Following Anthony Franco’s guilty plea to assault with a semi-
automatic firearm (Pen. Code, § 245, subd. (b); count 2)1 and his admission to
enhancement allegations that he personally inflicted great bodily injury
(§ 12022.7, subd. (e)) on victim R.S. under circumstances involving domestic
violence, the court sentenced Franco to a stipulated term of 15 years total.
The court also issued a 10-year protective order naming as protected parties
R.S. and her daughter with Franco, E.F.
Franco only appeals the protective order, contending that: (1) the order
is overbroad and should be modified to exclude daughter E.F. from its scope
because she was not a “victim,” her inclusion as a protected party has no
statutory basis, and the order is unconstitutionally overbroad; and (2) the
court erred in applying a preponderance of the evidence standard instead of a
clear and convincing standard.
We disagree with Franco’s contentions and conclude the court properly
issued the protective order under section 136.2, subdivision (i)(1) because
E.F. is a “victim” as broadly defined by statute. We further conclude that
Franco has failed to establish any reversible error as to the burden of proof
applied by the trial court. Accordingly, we affirm the judgment and
protective order.
FACTUAL AND PROCEDURAL BACKGROUND
R.S. and Franco began dating in 2016, and their daughter E.F. was
born in October 2017. They had an on-and-off relationship punctuated by
violent incidents, including times when Franco slapped R.S. and pulled her
hair. In January 2018, R.S. had to get stitches in her eyebrow because
1 Further statutory references are to the Penal Code unless otherwise
stated.
2
Franco punched her in the face. After R.S. sought a restraining order against
Franco, he sent her a picture of a gun and threatened to kill her.
In early April 2018, Franco got angry in R.S.’s apartment when she
asked him not to smoke methamphetamine around E.F., who was still an
infant. Franco pushed R.S., then beat her until she lost consciousness. A
week later, they got into another argument in R.S.’s bedroom after Franco
accused R.S. of infidelity. At one point Franco drew a gun and pointed it at
R.S.’s forehead at close range. R.S. swatted the gun away, but Franco raised
it again at R.S.’s chest with his finger on the trigger. R.S. turned just before
Franco shot her in the arm. E.F. was in the bed nearby in the same room
during the incident, and Franco picked her up with one arm while holding
the loaded gun in his other hand. He put E.F. on the sofa, but she rolled
down onto the floor. R.S. suffered a shattered humerus from being shot in
the arm and later required surgery.
After being charged with several counts in connection with the
shooting, including child abuse as to E.F. (§ 273a, subd. (a); count 4), Franco
pled guilty to one count of assault with a semi-automatic firearm (§ 245,
subd. (b); count 2) and admitted to enhancement allegations that he
personally inflicted great bodily injury (§ 12022.7, subd. (e)) on R.S. under
circumstances involving domestic violence.2 Franco also admitted to a strike
prior conviction pursuant to sections 667, subdivisions (b)-(i), and 1170.12.
Pursuant to the plea agreement, the remaining charges were dismissed with
2 The other charges included attempted murder of R.S. (§§ 187, subd. (a),
664; count 1); assault of R.S. with a semi-automatic firearm (§ 245, subd. (b);
count 3); possession of a firearm by a felon (§ 29800, subd. (a)(1); count 5);
unlawful possession of ammunition (§ 30305, subd. (a)(1); count 6); corporal
injury of a spouse or cohabitant (§ 273.5, subdivision (a); counts 7 and 8); and
making a criminal threat (§ 422; count 9).
3
a Harvey waiver. (See People v. Harvey (1979) 25 Cal.3d 754, 758 (Harvey)
[defendant may agree to the court’s consideration of dismissed counts for
sentencing purposes].) The court sentenced Franco to a stipulated term of 15
years total.
At the sentencing hearing, the court granted R.S.’s request for a 10-
year criminal protective order for herself and E.F. The court ordered that
Franco have “no personal, electronic, telephonic or written contact with” R.S.
and E.F. during the 10-year period. Franco’s attorney requested that the
court exclude E.F. from the order, asserting that Franco did not attempt to
harm his daughter during the altercation with R.S. The court denied his
request, noting that Franco “pointed a gun at [R.S.’s] head” and when the gun
went off, E.F. was present in the same room.
Franco timely appealed.
DISCUSSION
I
A. E.F. Was A “Victim” Within the Meaning of Section 136.2
Franco first contends the court erred by including E.F. as a protected
party in the protective order because she was not a “victim” who falls within
the scope of section 136.2. We disagree.
“When interpreting a statute, we view the statutory enactment as a
whole; consider the plain, commonsense meaning of the language used in the
statute; and seek to effectuate the legislative intent evinced by the statute.”
(People v. Beckemeyer (2015) 238 Cal.App.4th 461, 465 (Beckemeyer).) Section
136.2, subdivision (i)(1) provides, in relevant part: “When a criminal
defendant has been convicted of a crime involving domestic violence as
defined in [s]ection 13700 or in [s]ection 6211 of the Family Code, . . . , the
court, at the time of sentencing, shall consider issuing an order restraining
4
the defendant from any contact with a victim of the crime. The order may be
valid for up to 10 years, as determined by the court. . . . It is the intent of the
Legislature in enacting this subdivision that the duration of a restraining
order issued by the court be based upon the seriousness of the facts before the
court, the probability of future violations, and the safety of the victim and the
victim’s immediate family.”
Section 13700, subdivision (b), defines “ ‘[d]omestic violence’ ” as “abuse
committed against an adult or a minor who is a spouse, former spouse,
cohabitant, former cohabitant, or person with whom the suspect has had a
child or is having or has had a dating or engagement relationship.” Family
Code section 6211, subdivision (e), includes abuse perpetrated against “[a]
child of a party” in the definition of “ ‘domestic violence.’ ”
For purposes of a protective order issued under section 136.2, “victim”
is defined in section 136 as “any natural person with respect to whom there is
reason to believe that any crime as defined under the laws of this state . . . is
being or has been perpetrated or attempted to be perpetrated.”
In Beckemeyer, supra, 238 Cal.App.4th at page 463, this court
concluded a third person who was assaulted during a domestic violence
incident met the definition of a victim for purposes of a protective order
issued pursuant to section 136.2, subdivision (i)(1). In that case, an adult
child of the person being beaten attempted to intervene, and the perpetrator
then attacked the adult child. (Beckemeyer, at p. 464.) We noted that the
broad definition of “victim” in section 136 for purposes of a protective order
included “any person against whom there is reason to believe a crime has
been committed.” (Beckemeyer, at p. 466.) We concluded “the Legislature
was aware of this broad definition of victim generally applicable to section
136.2 protective orders, and it did not enact a provision narrowing its scope
5
for purposes of a postconviction domestic violence protective order.” (Ibid; see
People v. Clayburg (2012) 211 Cal.App.4th 86, 90–93 (Clayburg) [restraining
order appropriate under section 646.9, subd. (k)(1), for child of stalking victim
who suffered fear and emotional harm from defendant’s conduct because the
child was also a victim even though she was “not a named victim of the
stalking”].)
Similarly, we conclude E.F. was a victim of domestic violence within
the statutory scheme’s broad definition because the evidence establishes
reason to believe a crime was committed against her. Franco agreed to a
Harvey waiver, and the court was entitled to consider facts related to the
dismissed child abuse count under section 273a, subdivision (a) (count 4).
(See Harvey, supra, 25 Cal.3d at p. 758; see also People v. Race (2017) 18
Cal.App.5th 211, 220 (Race) [“in considering the issuance of a criminal
protective order, a court is not limited to considering the facts underlying the
offenses of which the defendant finds himself convicted, regardless of the
execution of a Harvey waiver . . . . [A] court may consider all competent
evidence before it.”].)
Section 273a, subdivision (a), makes it a felony to, “under
circumstances or conditions likely to produce great bodily harm or
death,” willfully cause or permit a child in one’s care or custody “to be placed
in a situation where his or her person or health is endangered[.]” (See also
CALCRIM No. 821 [jury instruction on “Child Abuse Likely to Produce Great
Bodily Harm or Death”].) As stated in CALCRIM No. 821, the child “does not
need to actually suffer great bodily harm[]” for a defendant to be liable. (See
People v. Cortes (1999) 71 Cal.App.4th 62, 80 [“there is no requirement that
the victim suffer great bodily harm”].) Moreover, the Legislature has
recognized that “[c]hildren, even when they are not physically assaulted, very
6
often suffer deep and lasting emotional effects” of domestic violence. (Welf. &
Inst. Code, § 18290.) Section 136.2, subdivision (a)(2), likewise recognizes
that for purposes of obtaining a pre-conviction protective order, a minor who
is present during an act of domestic violence is deemed to have suffered
harm.
Here, E.F. was present in the same room when Franco aimed his
loaded firearm at R.S. multiple times, with his finger on the trigger, before
shooting R.S. in the arm. When R.S. swatted the gun away, it could have
discharged and shot E.F. After the shooting, Franco picked E.F. up and held
her while holding the loaded firearm in his other hand, then placed her on
the couch before she fell onto the floor. These facts established reason to
believe that Franco committed a crime against E.F. (§ 273a, subd. (a).)
The facts here are distinguishable from People v. Delarosarauda (2014)
227 Cal.App.4th 205, 211–212 (Delarosarauda), in which the Court of Appeal
determined that a victim’s children should not be included in the protective
order under section 136.2, subdivision (i)(1), because “no evidence suggest[ed]
that [the defendant] ever attempted to harm” the children. The victim in
Delarosarauda stated the defendant “ ‘never touched’ ” the children, and she
believed they were in another room at the time of the incident.
(Delarosarauda, at p. 211.) There was also no evidence that the defendant
used or discharged a loaded firearm in the presence of the children. And
unlike in this case, the defendant in Delarosarauda was not bound over on a
child abuse charge naming the children as victims. (Id. at p. 208.)
Although Franco was not ultimately convicted of child abuse because
he pled guilty to a different charge, the evidence shows there was reason to
believe Franco endangered E.F.’s health under circumstances likely to
produce great bodily harm or death. Accordingly, we conclude E.F. is a
7
“victim” as broadly defined under section 136.2, and the court properly
included E.F. in the protective order.
B. Factors in Section 136.2, Subdivision (i)(1), Relate to Protective Order’s
Duration
Franco next argues that statutory factors listed in section 136.2,
subdivision (i)(1), do not support including E.F. in the protective order.
Franco cites the portion of that subdivision which states: “It is the intent of
the Legislature in enacting this subdivision that the duration of a restraining
order issued by the court be based upon the seriousness of the facts before the
court, the probability of future violations, and the safety of a victim and the
victim’s immediate family.” (§ 136.2, subd. (i)(1), italics added.) He contends
that E.F. should be excluded because he will be incarcerated while the
protective order is in effect, so there is no probability of future violations and
E.F.’s safety will not be threatened.
California appellate courts have differed over whether trial courts
should rely on these factors when it comes to the scope, and not just the
duration, of protective orders issued under statutes containing similar
language. In Clayburg, supra, 211 Cal.App.4th at pages 89, 91–92, the court
affirmed the inclusion of a stalking victim’s daughter in a protective order by
applying a similar sentence listing factors for determining the “length of any
restraining order” in section 646.9, subdivision (k)(1), and reading it together
with the preceding sentence addressing “victim[s]” more broadly.3 In
3 Section 646.9, subdivision (k)(1) provides: “The sentencing court shall
also consider issuing an order restraining the defendant from any contact
with the victim, that may be valid for up to 10 years, as determined by the
court. It is the intent of the Legislature that the length of any restraining
order be based on the seriousness of the facts before the court, the probability
of future violations, and the safety of the victim and his or her immediate
family.”
8
contrast, the Court of Appeal in Delarosarauda, supra, 227 Cal.App.4th at
page 212, disagreed with Clayburg and interpreted such language “to mean
what it says: the court should consider, among other factors, the ‘safety of
the victim and his or her immediate family’ in determining the length of the
restraining order[,]” ultimately concluding that “[n]othing suggests” those
factors also modify “the scope of the restraining order.”
Given the plain language of section 136.2, subdivision (i)(1), we agree
with the reasoning in Delarosarauda and conclude that the listed factors
apply when determining the duration of a postconviction protective order
under section 136.2, not the scope. Because Franco does not challenge the
order’s 10-year duration in his appeal, and because we have already
determined that E.F. is a “victim” who falls within the ambit of a protective
order under section 136.2, subdivision (i)(1), we reject Franco’s argument that
factors such as safety and probability of future violations support excluding
E.F. from the order.
C. The Protective Order Is Not Overbroad
Franco contends that by limiting his contact with E.F., the protective
order is overbroad and must be modified because it violates his liberty
interest as a parent. We disagree, concluding that the state’s compelling
interest in protecting domestic violence victims justifies the scope of the order
imposed here.
We acknowledge that Franco does have a constitutional liberty interest
in being permitted to contact his child. (See Santosky v. Kramer (1982) 455
U.S. 745, 752–756.) But a parent’s constitutional liberty interests must
sometimes yield temporarily in situations like these, where a child falls
victim to that parent’s violent actions. (See, e.g., In re S.H. (2003) 111
Cal.App.4th 310, 317 [“the parents’ interest in the care, custody and
9
companionship of their children is not to be maintained at the child’s
expense”].) “The elimination of domestic violence is a compelling state
interest. The Legislature’s stated purpose in enacting the Law Enforcement
Response to Domestic Violence Act (§§ 13700-13731; Stats. 1984, ch. 1609,
§ 3, p. 5713) was ‘to address domestic violence as a serious crime against
society and to assure the victims of domestic violence the maximum
protection from abuse which the law and those who enforce the law can
provide.’ (Stats. 1984, ch. 1609, § 1, p. 5711.)” (People v. Jungers (2005) 127
Cal.App.4th 698, 704.) Although the protective order curtails Franco’s rights
as a parent, we conclude that the order legitimately and reasonably operates
to accomplish the state’s compelling interest in protecting victims of domestic
violence, including children who are put at risk by violence committed by one
parent against another in their presence.
Additionally, as the People note in their brief, Franco is not without
avenues for seeking subsequent relief because “section 136.2 provides
mechanisms for cooperation between the criminal, juvenile, and family law
courts to permit communication by the subject of the criminal protective
order with members of his family if appropriate.” (Race, supra, 18
Cal.App.5th at p. 220; § 136.2, subds. (e)(3), (f); Delarosarauda, supra, 227
Cal.App.4th at p. 211.)
We therefore find no grounds for modifying the court’s order based on
Franco’s argument that it is overbroad.
II
Franco argues next that the court erred in applying a preponderance of
the evidence standard instead of a clear and convincing standard.
Specifically, he contends that due process requires that the more heightened
standard apply to adequately protect his liberty interest as a parent.
10
As an initial matter, it is unclear from the record which standard of
proof the court applied because none was mentioned at Franco’s sentencing
hearing. Both parties presume the court applied a preponderance of the
evidence standard because section 136.2, subdivision (i)(1) does not specify
which standard applies, and Evidence Code section 115 provides that
“[e]xcept as otherwise provided by law, the burden of proof requires proof by a
preponderance of the evidence.”
Even assuming that the trial court did apply a preponderance of
evidence standard—and even if it should have applied a clear and convincing
evidence standard—Franco makes no persuasive argument as to why any
such error would be prejudicial. Although Franco claims in his brief that the
location of the parties at the time of the shooting “is not entirely clear,” he
does not dispute the critical fact that he shot R.S. in the bedroom when E.F.
was nearby on the bed in the same room. Nor does he dispute that he held
E.F. with a loaded gun in his hand and moved her to the sofa, where she then
rolled onto the floor. Because the underlying facts establishing that E.F. was
a “victim” within the broad meaning of section 136.2 were essentially
undisputed, we conclude that any error in failing to apply the clear and
convincing evidence standard would be harmless under any standard. (See
Conservatorship of Maria B. (2013) 218 Cal.App.4th 514, 533 [finding no
prejudice where appellant “failed to explain how the result would have been
any different if the trial court had applied the clear and convincing evidence
standard of proof instead of the preponderance of the evidence standard”].)
Accordingly, we find no reversible error in the court’s application of the
standard of proof.
11
DISPOSITION
The judgment and protective order are affirmed.
BUCHANAN, J.
WE CONCUR:
MCCONNELL, P. J.
IRION, J.
12 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488368/ | NOTICE: This order was filed under Supreme Court Rule 23 and is not precedent except
in the limited circumstances allowed under Rule 23(e)(1).
2022 IL App (3d) 200244-U
Order filed November 21, 2022
____________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
THIRD DISTRICT
2022
THE PEOPLE OF THE STATE ) Appeal from the Circuit Court
OF ILLINOIS, ) of the 21st Judicial Circuit,
) Kankakee County, Illinois
Plaintiff-Appellee, )
) Appeal No. 3-20-0244
v. ) Circuit No. 18-CF-622
)
JACKIE NUNN JR., ) Honorable
) Kathy S. Bradshaw Elliott,
Defendant-Appellant. ) Judge, Presiding
____________________________________________________________________________
PRESIDING JUSTICE O’BRIEN delivered the judgment of the court.
Justices Holdridge and Hettel concurred in the judgment.
____________________________________________________________________________
ORDER
¶1 Held: State did not prove defendant possessed controlled substance with intent to deliver;
conviction reduced to possession of a controlled substance and cause remanded for
resentencing.
¶2 Defendant was convicted of unlawful possession of a controlled substance with the intent
to deliver and unlawful possession of a controlled substance. The trial court merged the possession
charge with the intent to deliver charge and sentenced defendant to a four-year term of
imprisonment. He appeals his convictions. We reduce his conviction for unlawful possession of a
controlled substance with intent to deliver to unlawful possession of a controlled substance and
remand for resentencing.
¶3 I. BACKGROUND
¶4 Defendant Jackie Nunn Jr. was arrested after police officers saw him in a parking lot at a
housing project in Kankakee. He was charged with possession of a controlled substance with intent
to deliver (720 ILCS 570/401(c)(2) (West 2018)) (count I) and unlawful possession of a controlled
substance (id. § 402(c)) (count II). Count I alleged that defendant possessed between 1 and 15
grams of cocaine with intent to deliver. Count II alleged that defendant possessed less than 15
grams of cocaine.
¶5 A jury trial took place. Kankakee police officer Brad Latham testified for the State. He was
involved in the tactical unit which dealt with narcotics investigations and suppression and gun
crimes, including participation by law enforcement officers and confidential informants in
“actively purchasing drugs off of the streets.” He had been involved in investigating more than 20
purchases. His narcotics training including Drug Enforcement Agency (DEA) training, courses in
street interviews, and narcotics identification classes. He was on patrol on October 17, 2018,
around 6:40 p.m. near the housing projects with his partner, Thomas Martin, who was driving a
Dodge Charger with a spotlight, inside emergency lights and municipal license plates. The vehicle
was an unmarked police car but Latham was in police uniform. The police department had an
agreement with the city and the housing authority that the police would enforce the rule that only
residents could be on housing project property and the police would ask nonresidents to leave the
premises. If the person returned after being told to leave, the police would arrest them. The role of
the police in monitoring the housing project was known in the community.
2
¶6 Latham noticed defendant and James Williams Jr., standing on housing project property
near the parking lot. He knew defendant did not live in the housing projects. He did not see the
men engaged in any transactions and did not see defendant holding anything. Martin pulled into
the parking lot and they attempted to make contact with defendant and Williams. Defendant began
walking across the parking lot and passed in front of the officers’ vehicle. Defendant began to run
when Latham exited the vehicle. Latham pursued him. When defendant rounded the front of a car
in the parking lot, “he’s leaning down with his left arm and shoulder in a release—you know, in a
releasing movement, to drop something, put something down, something of that nature;
completely, you know, goes downward.” Latham saw something fall out of defendant’s hands. At
that time, it was dark outside and Latham’s ability to see was diminished.
¶7 Defendant continued to run and Latham caught up to him a half block away and arrested
him. Latham found a cell phone and $746 in cash when he searched defendant. Based on his
training and on-the-job experience, Latham was familiar with items commonly used to consume
cocaine. Defendant did not have on his person a crack pipe, needle, spoons with burn marks,
lighters, hollow metal or glass items with steel wool-type filters or other items Latham knew to be
common for cocaine use. Latham immediately returned to the parking lot area where he saw
defendant drop something. No one else was in the area. Under the front bumper of the vehicle
defendant had rounded, he found two clear plastic bags that contained a white, rock-like substance,
which he knew to be crack cocaine. He photographed the bags before he removed them from under
the car and secured them as evidence. The photographs demonstrated the two bags were located
about two feet apart.
¶8 On cross-examination, Latham acknowledged that drug users do not always have
paraphernalia on them. He did not know whether defendant was a drug addict. It was not illegal to
3
carry money and he was unaware of the source of the $746 found on defendant. It could have been
lottery winnings or defendant’s cashed paycheck. It was dark outside when the events occurred.
Latham agreed defendant could have been running because he was on housing project property
and was not a resident. He was not aware of Williams’s actions while Latham chased defendant.
He did not ask Williams if he bought drugs from or sold drugs to defendant. Williams was not
arrested. Latham did not find any other contraband under the vehicle but he did not look for any
nonillegal items. There could have been rocks, sticks and bottles under the car and Latham agreed
defendant could have dropped any sort of item. He did not submit the recovered bags for DNA or
fingerprint testing.
¶9 Martin testified in accord with Latham regarding their patrol, coming upon defendant and
Williams in the parking lot, and the agreement to arrest nonresidents. He was aware neither
defendant nor Williams were residents of the housing project. He did not observe anything in
defendant’s hands or see him and Williams engage in any transactions. Defendant walked in front
of the police vehicle “[a]t an aggressive pace.” After defendant began to run, Martin told Williams
to remain where he was and he joined the chase after defendant. He caught up to Latham after
defendant was handcuffed. On cross-examination, Martin said he was unaware of Williams’s
actions during the foot chase but Martin saw Williams walk up the sidewalk to where they were
standing with defendant after his arrest. He did not know if Williams had drugs, guns, large
amounts of cash, or a spoon, needle or pipe for cocaine use on his person. Martin did not question
or arrest Williams. He did not see anything in defendant’s hands or see him throw anything. He
was unaware why defendant ran.
4
¶ 10 The parties stipulated that Kankakee police officer Scott Monferdini transported the two
bags of evidence to the Illinois State Police (ISP) Crime Lab for forensic testing and returned the
items to the Kankakee Police Department evidence vault when testing was completed.
¶ 11 Cynthia Koulis, a forensic scientist with the ISP, testified as an expert in forensic science
in the field of cannabis and controlled substances. She identified State’s exhibit No. 1 as 31 bags
containing an off-white, rock-like substance and State’s exhibit No. 2 as 17 bags with the same
substance. She analyzed and weighed 20 bags from exhibit No. 1 but did not do any further analysis
because the 20 bags weighed 1.3 grams, which was the weight needed for the charged offense. The
substance in the 20 bags tested positive for the presence of cocaine. On cross-examination, Koulis
said she did not analyze or weigh the other bags in exhibit No. 1 or any bags in exhibit No. 2. She
did not perform any purity tests and was unaware if other substances were in the samples. No DNA
or fingerprint testing had been requested, although the ISP had the ability to do so.
¶ 12 The State rested and defendant moved for a directed verdict, which the trial court denied.
The defense rested. Following closing arguments, the jury engaged in deliberations, during which
it submitted three questions to the trial court. The questions were:
(1) “Where is the sidewalk that the car is parked on?”
(2) “Did Williams walk on the sidewalk and walk past the car where the baggies were
found?”
(3) “Is there a diagram of the path both Nunn and Williams took in comparison to the
location of the baggies and the car?”
¶ 13 The trial court provided the following answer to the questions: “You have heard the
evidence and been instructed as to the applicable law. No other answer can be given to your
inquiry.”
5
¶ 14 The jury ultimately found defendant guilty of unlawful possession of a controlled substance
with intent to deliver and unlawful possession of a controlled substance. Defendant moved for a
new trial, which the court denied. The trial court merged the unlawful possession of a controlled
substance count into the unlawful possession of a controlled substance with intent to deliver count
and sentenced defendant to a four-year term of imprisonment. After his motion to reconsider his
sentence, defendant timely appealed.
¶ 15 II. ANALYSIS
¶ 16 The issue on appeal is whether the State proved defendant guilty beyond a reasonable doubt
of unlawful possession of a controlled substance with intent to deliver. Defendant argues that the
State failed to prove he possessed the cocaine found in the parking lot, and further failed to prove
that the possession was not for personal use but intended for delivery. He points to the fact that
neither Latham nor Martin saw him holding any drugs or engaging in a drug transaction. Latham
did not see the item that he testified he saw defendant drop near the car in the parking lot during
the foot pursuit. In the alternative, defendant points to the testimony that the cocaine amounted to
1.3 grams as support that it was for personal use and the State failed to prove intent to deliver.
¶ 17 Defendant was convicted of unlawful possession of a controlled substance with intent to
deliver 1 gram or more but less than 15 grams of a substance containing cocaine and unlawful
possession of a controlled substance. 720 ILCS 570/401(c)(2), 402 (West 2018). Possession may
be actual or constructive; to prove constructive possession, the State must establish beyond a
reasonable doubt that “defendant had knowledge of the presence of the contraband and exercised
‘immediate and exclusive’ control over the area where the contraband was discovered.” People v.
Terrell, 2017 IL App (1st) 142726, ¶ 18 (quoting People v. Tates, 2016 IL App (1st) 140619, ¶ 19).
To establish possession with intent to deliver, the State must establish beyond a reasonable doubt
6
that defendant knew of the drugs, they were in his immediate possession or control and he intended
to deliver them. People v. Robinson, 167 Ill. 2d 397, 407 (1995).
¶ 18 Knowledge may be demonstrated with evidence of the defendant’s acts, declarations or
conduct from which it can be fairly inferred that he knew the drugs existed where they were found.
People v. Maldonado, 2015 IL App (1st) 131874, ¶ 40. Possession may be proven even where
possession is joint or where other people have access to the area where the drugs were found. Id.
¶ 43. To determine whether possession is with the intent to deliver, the court considers the
following factors as probative of intent: the quantity of drugs and whether it is too large for
personal consumption; high purity of the drugs; weapon possession; possession of police scanners,
beepers or cell phones; possession of large amounts of cash; possession of drug paraphernalia; and
the manner in which the drugs are packaged. Robinson, 167 Ill. 2d at 408.
¶ 19 Defendant asserts that the State did not establish that he possessed the cocaine recovered
from the parking lot. In support of his assertion, defendant points to the following: neither officer
saw him engaged in a transaction with Williams, they did not identify that he had something in his
hands, they did not see what he threw under the vehicle, and Williams’s presence was unaccounted
for during the foot pursuit and defendant’s arrest. Contrary to defendant’s assertion, the State
proved constructive possession. Defendant attempted to avoid the officers as they pulled into the
parking lot, walking aggressively in front of their vehicle before beginning to run away from
Latham as he exited the unmarked police car. See People v. Moore, 2015 IL App (1st) 140051,
¶ 26 (evidence of flight tends to demonstrate defendant’s consciousness of guilt). While defendant
submits it is also feasible that he ran from the police to avoid being arrested for trespassing on
housing project property, it is also a reasonable inference that he ran because he was holding
cocaine. This inference is supported by him tossing an item later discovered to be cocaine.
7
Moreover, he never offered any evidence that he did not live in the housing project and thus fled
as a trespasser. Id. (“The inference of guilt which may be drawn from flight depends upon the
knowledge of the suspect that the offense has been committed and that he is or may be suspected.”).
¶ 20 Defendant relies on People v. Boswell, 19 Ill. App. 3d 619 (1974) as support for his claim
that the State failed to prove possession due to evidentiary gaps. Boswell is distinguished. In that
case, an officer in a squad car saw a bag thrown from the front passenger side of a vehicle he was
pursuing. Id. at 620. The package was recovered and determined to contain cannabis. Id. at 621.
The reviewing court reversed the defendant’s conviction for cannabis possession, finding the State
did not prove possession. Id. at 622. The court rejected the assumption that the defendant possessed
the cannabis on account of it being tossed from the front passenger seat of the vehicle where the
defendant was seated because other individuals were also in the vehicle and could have tossed the
drugs, noting speculation and conjecture were insufficient to sustain the conviction. Id. Contrary
to the circumstances in Boswell, defendant was the only person who Latham identified as tossing
the bags of cocaine.
¶ 21 Latham testified that he saw defendant lean down and release something as he turned in
front of a parked car during the foot pursuit. Latham could not identify the item defendant released.
However, immediately after catching and arresting defendant, Latham returned to the area of the
parking lot where he saw defendant toss something and discovered the two bags of cocaine.
According to Latham, the time he chased defendant after the toss, through the arrest and including
Latham’s return to the parking lot was under a minute. No one else was in the parking lot. Although
Williams was also in the parking lot initially, he was on the other side from where the drugs were
found and apparently travelled alongside the parking lot to the site of defendant’s arrest rather than
following defendant’s path through the parking lot. According to Martin, Williams had followed
8
the pursuit by walking up the sidewalk parallel to defendant’s route, ending up in the area
defendant was arrested. Unlike Boswell, defendant was the only person seen tossing an item in the
area where two bags of cocaine were shortly thereafter discovered.
¶ 22 Defendant’s flight, his attempt to hide the cocaine, the lack of other persons in the parking
lot and the immediacy of Latham’s discovery of the cocaine after witnessing defendant “release”
something establish defendant’s constructive possession of the cocaine. The State did not fail to
prove him guilty of possession.
¶ 23 The State did, however, fail to establish that defendant possessed the cocaine with an intent
to deliver. The only factors in support of an intent to deliver that the State proved were quantity
and packaging. Yet, the State did not present any evidence connecting either the quantity of
cocaine or its packaging with an intent to deliver. The State did not offer any evidence regarding
what amount would be considered reasonable for personal use and whether the quantity in
defendant’s possession exceeded that amount. Neither Latham nor Martin testified as to what is
considered an amount for personal consumption. People v. Ellison, 2013 IL App (1st) 101261,
¶ 15 (evidence insufficient to sustain conviction for possession with intent to deliver where State
did not present testimony regarding whether amount of seized contraband exceeded amount
reasonable for personal use). Here, the tested cocaine weighed 1.3 grams, an amount found
consistent with personal use in other cases. See Robinson, 167 Ill. 2d at 413 (2.2 grams of PCP
and 2.8 grams of cocaine may be consistent with personal use).
¶ 24 In Ellison, 2013 IL App (1st) 101261, ¶¶ 21-22, the reviewing court found that 3.12 grams
of cocaine and 0.04 grams of heroin were not inconsistent with personal use. The court rejected
the State’s argument that the quantity of contraband, along with the lack of drug paraphernalia on
the defendant, established an intent to deliver. Id. As here, “the police officers in this case did not
9
testify as ‘experts as to the packaging, cost, and typical personal usage of controlled substances.’
” Id. at ¶ 22 (quoting People v. Sherrod, 394 Ill. App. 3d 863, 866 (2009)). In Sherrod, the 1.8
grams of cocaine in 17 packages recovered from defendant, without more, was insufficient to
support an intent to deliver. Sherrod, 394 Ill. App. 3d at 866. Defendant had $35 in cash and did
not possess weapons, scanners, beepers, a cell phone or drug paraphernalia. Id. Defendant was not
seen engaging in any drug transactions. Id. at 867. Like Ellison and the instant case, the State did
not offer evidence of the contraband’s purity. Id. at 866. Similarly, in People v. Clinton, 397 Ill.
App. 3d 215, 226 (2010), the evidence was found insufficient to support a conviction for
possession with intent to deliver where defendant possessed 13 packets of suspected heroin and
$40 in cash. He did not have any drug paraphernalia, a cell phone, pager or weapons on his person.
Id. The State’s witnesses did not testify that the amount of contraband was inconsistent with
personal use, that it was packaged in a manner typical for sale, that the area was known for drug
activity, or that particular paraphernalia was required to consume the contraband. Id.
¶ 25 Neither Latham nor Martin testified as to common means of packaging drugs for sale or
the cost of cocaine. In fact, neither officer testified about the specific packaging of the seized
cocaine. Nor did the State present any evidence that the packaging was representative of drug
dealing, not drug use. The only testimony regarding the packaging of the contraband was provided
by Koulis, the forensic scientist and did not connect the packaging to an intent to deliver. In
addition, although Koulis testified regarding the cocaine she analyzed, she only tested enough to
reach the required weight for the offense charged. She did not analyze all the packets in exhibit
No. 1 or any of the packets in exhibit No. 2. While it is not unreasonable to assume the second bag
contained packages of cocaine, the combined quantity of the two bags does not definitively support
intent to deliver. Robinson, 167 Ill. 2d at 410 (quantity in excess of amount needed for statutory
10
minimum is one of “many factors” to consider when determining intent to deliver). Similarly,
Koulis testified that she did not test the purity of the cocaine and, in her opinion, the materials she
tested was a substance that contained cocaine. Her testimony regarding the purity was not based
on a forensic determination but on a lack of scientific determination. Thus, the State did not
establish whether it was “pure” or “cut” as is typical with cocaine for sale.
¶ 26 Defendant did not possess any weapons or drug paraphernalia. Latham testified to the
variety of items a drug addict might employ to use cocaine, none of which were discovered on
defendant. Latham also testified, however, that not all users carry their paraphernalia and that he
did not know whether defendant suffered from a drug addiction. Defendant was in possession of a
cell phone, a common item, and $746 in cash. There was no testimony as to the source of the cash
and Latham said he did not know if defendant had won the money on a lottery ticket or if it was
earnings from his employer. The amount of cash was not so excessive as to exclude that defendant
was carrying it in order to grocery shop or purchase a television. Finally, the discovered cocaine
was packaged in small bags divided among two larger bags. While the multiple small packages
could suggest drug sales, they could also indicate that defendant purchased the two bags for his
personal use and had not yet returned home with them. As Martin testified, Williams was not asked
whether he sold the cocaine to defendant.
¶ 27 We find the State did not produce the minimum evidence to sustain Nunn’s conviction for
intent to deliver. Where, as here, a small amount of drugs is seized, the minimum evidence to
sustain a conviction for intent to deliver is the drugs were packaged for sale and one additional
factor indicating intent to deliver. Clinton, 397 Ill. App. 3d at 225. The State did not provide any
testimony connecting the amount of cocaine recovered and the way it was packaged or present any
other Robinson factors sufficient to establish beyond a reasonable doubt defendant possessed the
11
cocaine with the intent to deliver. The State did not demonstrate the quantity could not be for
personal use. Neither the defendant’s cell phone nor his money could overcome the lack of other
factors supporting intent to deliver. We reduce defendant’s conviction for unlawful possession of
a controlled substance with intent to deliver to unlawful possession of a controlled substance and
remand for resentencing.
¶ 28 III. CONCLUSION
¶ 29 For the foregoing reasons, the judgment of the circuit court of Kankakee County is
reversed, conviction is reduced and case is remanded.
¶ 30 Reversed and remanded.
12 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488371/ | NOTICE: This order was filed under Supreme Court Rule 23 and is not precedent except
in the limited circumstances allowed under Rule 23(e)(1).
2022 IL App (3d) 210291-U
Order filed November 21, 2022
____________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
THIRD DISTRICT
2022
In re MARRIAGE OF ) Appeal from the Circuit Court
) of the 10th Judicial Circuit,
RAYMOND J. TRAPP, JR., ) Tazewell County, Illinois.
)
Petitioner-Appellee, )
) Appeal No. 3-21-0291
and ) Circuit No. 18-D-258
)
FELICIA E. TRAPP, ) Honorable
) Lisa Y. Wilson,
Respondent-Appellant. ) Judge, Presiding.
____________________________________________________________________________
PRESIDING JUSTICE O’BRIEN delivered the judgment of the court.
Justices Holdridge and Hettel concurred in the judgment.
____________________________________________________________________________
ORDER
¶1 Held: Trial court’s distribution of marital property, after a trial on disputed financial
issues, was not an abuse of discretion where the husband presented competent
evidence of the value of both of his businesses. The distribution of the businesses
to the husband, with a cash payment to the wife, as modified to reflect increased
equity, resulted in an equitable distribution of the marital assets. The trial court’s
child support order was reversed and remanded for recalculation of the husband’s
income.
¶2 The respondent wife appealed from a trial court’s judgment of dissolution of marriage from
petitioner husband, challenging a number of disputed financial issues.
¶3 FACTS
¶4 The petitioner husband, Raymond J. Trapp, Jr., and the respondent wife, Felicia E. Trapp,
were married on June 23, 2001. Two children were born of the marriage, Z.T., born on October
14, 2001, and R.T., born on October 18, 2003. On July 19, 2018, the husband filed a petition for
dissolution of that marriage. A trial on disputed financial issues was held on August 4, 2020.
¶5 Neil Gerber, a certified public accountant and certified business appraiser, who had been
doing business valuations for 30 years, was hired by the husband to conduct a business valuation
for both of the husband’s businesses: Ray Trapp Electric, Inc., and Trapp Properties, Inc. Both
valuations were as of August 31, 2019, and both reports were dated October 31, 2019. Gerber
testified that in valuing Ray Trapp Electric, Inc., he applied the asset method whereby he subtracted
the liabilities and debts from the fair market value of the assets and came up with an equity value
of $320,000. He valued the intangible assets of goodwill and a non-compete agreement as assets
of the husband at about $90,000. When asked if that value would have substantially changed since
the valuation date of August 31, 2019, especially with the COVID-19 pandemic, Gerber stated that
he was not asked to update his valuation. But, Gerber testified that service work had not generally
been impacted and if the husband were to testify that his income has not changed, then it was
reasonable to say the value of Ray Trapp Electric, Inc., had not changed either.
¶6 As for Trapp Properties, Inc., Gerber testified that he was asked to value the husband’s
equity in that real estate entity as of August 31, 2019. Two buildings were the major assets of that
entity. Gerber derived the fair market value of the original building from a July 30, 2018, Broker
Opinion of Value (hereinafter market analysis) by Justin Ferrill, which Gerber obtained from the
husband. The new building was just constructed in 2019, so Gerber used the cost of construction,
which he obtained from the corporation’s tax returns and depreciation schedules, to determine the
2
fair market value. Gerber personally inspected both buildings, and he believed it was reasonable
to rely on the information that he was provided. Gerber testified that he frequently was hired to
value equity in real estate partnerships, for which he relied on appraisals or other estimates of
value. Gerber believed that his valuation was accurate, even though he relied on a market analysis
rather than an appraisal to value the original building. Gerber determined the net equity value of
Trapp Properties, Inc., by taking those two values and subtracting the two mortgages. He
determined that the net equity value of Trapp Properties, Inc., as of August 31, 2019, was $20,000.
Gerber could not testify as to whether the market conditions in the year since his valuation would
have substantially changed the value, but Trapp Properties, Inc., had been making mortgage
payments during that time, so the equity value would likely be higher. If asked to revalue the
business as of the date of the hearing, Gerber testified that he would use the current loan balance,
which, based on the husband’s most recent financial affidavit, would make the equity value
somewhere between $55,000-$60,000.
¶7 Gerber also valued the wife’s Teacher’s Retirement System fund as of November 15, 2019.
Gerber determined the present marital value of the wife’s pension to be $288,000, if she retired at
age 55, and $275,000, if she retired at age 60.
¶8 The husband testified that he was a self-employed electrician. During the marriage, he
started Ray Trapp Electric, Inc., in 2002 and Trapp Properties, Inc., in approximately 2015. The
husband was the only shareholder owner in Ray Trapp Electric, Inc. He was responsible for
bidding jobs and he had employees who went to the work sites. He paid himself a salary, which
was about $42,000 in 2019. In addition to his salary, the husband paid some personal bills directly
from Ray Trapp Electric, Inc., totaling about $1900 a month. The husband testified that the
increase in cash on hand for Ray Trapp Electric, Inc., from around $28,000 at the time the business
3
valuation was done in 2019, to $106,341 as of June 30, 2020, was partially due to COVID-relief
funding. Those funds had been placed in a separate account, and were used for the proper purposes,
which freed up other funds in the Ray Trapp Electric, Inc., account. Otherwise, the difference was
due to the timing during the month, and a large electrical supply bill had just been paid that would
exhaust most of the difference. The husband testified that his 2019 income tax return for Ray Trapp
Electric, Inc., indicated ordinary business income, or a profit, of $23,021. The husband testified
that was not profit but rather was a distribution to pay some bills for Trapp Properties, Inc.
¶9 The husband testified that, with respect to the two buildings owned by Trapp Properties,
Inc., $390,000 was owed on the original building and $434,000 was owed on the new building.
Although his financial affidavit also listed $000 a month in rental income, the costs of the
mortgages, insurance, and maintenance on the buildings exceeded that amount. The husband
testified that he started Trapp Properties, Inc., as basically his retirement plan; he intended to pay
the buildings off over time and collect rental income when he retires. He acquired the mortgage to
construct the new building after he filed for divorce. The market analysis was completed by Ferrill,
who was the husband’s friend and real estate broker, for the bank for the purpose of obtaining a
loan for the new building. The original building had five spaces for rent; two and a half were
occupied by Ray Trapp Electric, Inc., and two others were rented to tenants. The new building had
four tenants. On his financial affidavit, the husband valued the original building at $426,000 and
the new building at $480,000. The husband testified that he had two life insurance policies with
cash values, for which Ray Trapp Electric, Inc., paid the premiums.
¶ 10 With respect to the husband’s bank accounts, the husband’s financial affidavit indicated
that the husband had a checking (#9621) and a savings (#9962) account at CEFCU. The balance
in the savings account was the husband’s share from the sale of the marital home. He also had a
4
checking account (#1233) at Morton Community Bank. The husband was questioned regarding
some other bank accounts that were included in the discovery. Specifically, discovery revealed a
checking account (#6571) at Heartland Bank in the name of Raymond Trapp, with the balance of
that account ($34,206) withdrawn on July 3, 2018. The husband testified that Heartland account
#6571 was his father’s account (Raymond Trapp, Sr.), and the husband identified the handwriting
on the withdrawal slip as his father’s handwriting. Also, discovery revealed a checking account
(#2318) at Morton Community Bank, which was opened on June 13, 2020, with a balance of
$35,997. That account was in the name of Raymond Trapp, Sr., with the husband listed as POD
(payable on death). The husband denied that either account belonged to him, unless his father was
to pass away.
¶ 11 The wife’s attorney questioned the husband regarding July 2020 mortgage documents from
the bank. The loan documents regarding the new building showed a loan balance of $458,124,
with a collateral value of $1,850,000, and a monthly payment of $3305. The documents indicated
that the loan on the original building had a principal balance of $376,041, a collateral value of
$600,000, and a monthly payment of $2741. The husband testified that he did not know where the
bank arrived at those collateral values. The husband was also questioned regarding a September
2018 appraisal report completed for the bank in anticipation of the new building, which valued the
entire property (assuming construction of the new building) at $1,250,000. No one from the bank
testified.
¶ 12 The wife testified that she was a teacher for the Peoria public schools. She testified that her
gross income was $63,184 in 2019, with a net income of $57,572. The wife testified that she did
not pay into social security. She had credit card debt of $13,000-$14,000, but she did not provide
any bills or statements to the court. About $8000 of that debt was for attorney fees; she testified
5
that the remainder was for living expenses. She claimed both children on her taxes in 2019,
receiving federal and state tax refunds, along with a $1500 stimulus check in 2020. She did not
split any of that money with the husband. The wife did not dispute Gerber’s valuation of Ray Trapp
Electric, Inc. She did dispute the valuation of Trapp Properties, Inc., but she did not have a separate
valuation prepared.
¶ 13 The parties stipulated as to attorney fees. The husband had incurred around $20,000 in fees,
of which he had paid approximately $14,600. The wife had incurred fees and costs of $22,355 and
had paid $11,376. The wife still had an outstanding balance of $10,980.
¶ 14 The trial court entered a written order resolving all remaining financial issues on January
19, 2021. The trial court found that the husband’s annual gross income in 2019 from Ray Trapp
Electric, Inc., was $64,452. The wife’s 2019 annual gross income was $72,708. Based on the
respective incomes, the trial court found that maintenance was not appropriate and the wife’s
request for such was denied. The wife was ordered to pay child support in the amount of $60 a
month for the remaining minor child. The marital residence had been sold and the parties equally
divided the net proceeds. Each party was awarded their respective bank accounts, except the
husband’s CEFCU checking account (#9621), which was to be split equally between the parties.
The parties were awarded their respective vehicles along with their respective debts. The trial court
concluded that the fair market value of Ray Trapp Electric, Inc., was $320,000. It declined to
include the non-compete agreement and personal goodwill of $90,000 in the valuation. It found
that the fair market value of Trapp Property, Inc., using the net asset value method, was $20,000.
The husband was to retain both businesses; the court declined to partition or make the parties
partners in the businesses. The husband was ordered to pay the wife $170,000 as her share of the
businesses, plus half the additional cash on hand at Ray Trapp Electric, Inc., which amounted to
6
an additional payment to the wife in the amount of $39,193. The husband was ordered to sell the
two life insurance policies and turn over the cash values to the wife as payment toward the sums
owed the wife for her half of the businesses.
¶ 15 The wife filed a motion to reconsider, arguing that the trial court erred in its valuation and
distribution of the parties’ assets and debts and erred in calculating the parties’ respective incomes
for maintenance and child support purposes. The trial court denied the motion to reconsider and
entered the judgment of dissolution of marriage. The wife appealed.
¶ 16 ANALYSIS
¶ 17 The wife challenges a number of the trial court’s findings. She argues that the trial court’s
valuation of Trapp Properties, Inc., at $20,000, was against the manifest weight of the evidence.
She also argues that the trial court abused its discretion in its distribution of the marital assets and
debts. The wife also argues that the trial court’s determination of the parties’ respective gross
incomes for the purposes of calculating maintenance and child support was against the manifest
weight of the evidence.
¶ 18 Section 503(d) of the Illinois Marriage and Dissolution of Marriage Act (the Act) provides
for the division of marital property in “just proportions” and lists 12 factors for consideration. 750
ILCS 5/503(d) (West 2018). The division needs to be equitable, which does not necessarily mean
mathematically equal. In re Marriage of Zwart, 245 Ill. App. 3d 567, 572 (1993). The valuation
of marital assets generally presents a question of fact that will not be disturbed unless it was against
the manifest weight of the evidence. In re Marriage of Brill, 2017 IL App (2d) 160604, ¶ 56. The
trial court’s decision regarding the equitable distribution of the marital assets will not be disturbed
absent an abuse of discretion. In re Marriage of Schneider, 214 Ill. 2d 152, 162 (2005).
¶ 19 A. Valuation of Trapp Properties, Inc.
7
¶ 20 The wife argues that the trial court’s determination that the fair market value of Trapp
Properties, Inc., was $20,000 was against the manifest weight of the evidence. In addition, the wife
argues that the trial court abused its discretion in awarding the husband the two commercial
properties owned by Trapp Properties, Inc., and that the properties should be sold and the net
proceeds split evenly between the parties. The husband argues that the valuation was not against
the manifest weight of the evidence.
¶ 21 There must be competent evidence of value in order for a court to assign a value to an item
of marital property. In re Marriage of Abu-Hashim, 2014 IL App (1st) 122997, ¶ 29. Although the
value of real estate is generally proven through the testimony of experts who have conducted
appraisals of the subject property, there is no rule of law that dictates what type of evidence
constitutes “competent evidence.” In re Marriage of Hamilton, 2019 IL App (5th) 170295, ¶ 36.
That evidence must be supported by a proper foundation, based on a detailed “market analysis or
inspection of the home.” Id. ¶ 39. The burden of presenting the court with sufficient evidence to
equitable value and divide marital property falls on both parties. Blackstone v. Blackstone, 288 Ill.
App. 3d 905, 910 (1997). Valuing a business is “an art, not a science,” and there is not an exact
formula. In re Marriage of Gunn, 233 Ill. App. 3d 165, 183 (1992).
¶ 22 In this case, Gerber was not a real estate appraiser, but he was a certified business appraiser,
who was hired to appraise both businesses. Since Trapp Properties, Inc., was essentially the two
buildings, Gerber needed to assign values to those buildings. Gerber relied on a market analysis
on the original building, which was completed by Ferrill in 2018 for the purpose of securing
financing for the construction of the new building. Ferrill’s analysis was not completed for the
purposes of the dissolution proceedings. Since the new building was just constructed in August
2019, Gerber testified that he relied on the cost of construction, which he believed was the best
8
evidence of value for a new building. Gerber testified that he often valued equity in real estate
partnerships, relying on appraisals or other estimates of value from third parties. Gerber personally
inspected both buildings and, while he relied on the information that he was provided, he found
that information was reliable. Thus, we find that the trial court’s conclusions that there was a
sufficient foundation for Gerber’s determination of value, and that Gerber’s valuation constituted
competent evidence of the equity value in Trapp Properties, Inc., were not against the manifest
weight of the evidence.
¶ 23 Also, although Gerber’s valuation was completed a year before trial, it was not error for
the trial court to rely on his valuation, when it was the only expert valuation before the court. First,
the trial was delayed for reasons outside of the husband’s control—the wife filed a motion to
continue on August 30, 2019, because she needed to substitute attorneys when her original attorney
became a judge and then, the matter was set for trial on March 20, 2020, but the courthouse closed
for the pandemic. Moreover, the wife had a competing valuation of Ray Trapp Electric, Inc.,
completed, which she testified was valued at less than Gerber’s valuation. It is reasonable to
believe that she made a strategic choice to not get a competing valuation of Trapp Properties, Inc.
See Abu-Hashim, 2014 IL App (1st) 122997, ¶ 29 (“where a party does not offer evidence of an
asset’s value, the party cannot complain as to the disposition of that asset by the court”). Since
there was no testimony explaining the basis for the collateral values on the bank statements offered
by the wife, the statements were not competent evidence of value. Notably, the statements conflict
with the 2018 appraisal to the bank, which estimated that the proposed market value of the whole
property, after construction of the new building, would be $1,250,000. See Hamilton, 2019 IL App
(5th) 170295, ¶ 39 (homeowner’s testimony as to value of property and tax assessor fair market
value were not competent evidence as to value). While a more current valuation would have been
9
useful, due to the circumstances of the delay and the wife’s failure to seek her own valuation, we
cannot say that it was against the manifest weight of the evidence for the trial court to accept
Gerber’s valuation. See 750 ILCS 5/503(f) (West 2018) (the date of valuation is the trial date or
another agreed date).
¶ 24 Since there was competent evidence of the value of Trapp Properties, Inc., the trial court’s
distribution of the business to the husband, with a cash payment to the wife, was not an abuse of
discretion. However, absent an agreement or court order to the contrary, valuation is determined
as of the date of trial. Id. Gerber testified that the equity value of Trapp Properties, Inc., had
increased due to the fact that the mortgage payments had decreased the principal balance in the
year between the date of Gerber’s valuation and the date of trial. The husband testified that, as of
the date of trial, the balance due on both mortgages was $824,000. That was an increase in equity
of $31,454 from the balances relied upon by Gerber. Thus, the value of Trapp Properties, Inc.,
should have been $51,454, divided equally between the husband and the wife. Since the trial
court’s order required the husband to pay the wife half of $20,000, the husband owes the wife an
additional $15,727.
¶ 25 B. Other Financial Items
¶ 26 The wife argues that the trial court’s distribution of the other assets and debts was an abuse
of discretion. The husband contends that the trial court equitably distributed the parties’ marital
assets and debts, and there was no abuse of discretion.
¶ 27 The wife argues that the trial court abused its discretion in its distribution of the parties’
bank accounts. The husband contends there was no abuse of discretion. We find that the parties’
personal accounts were nominally different. The husband testified that two of the challenged bank
accounts were actually his father’s bank accounts and did not belong to the husband. The Morton
10
Community Bank savings account #2318 was in the husband’s father’s name (Raymond Trapp,
Sr.), and the husband’s only interest in the account was as a beneficiary upon his father’s death.
The question is whether those funds originated from Heartland Bank checking account #6571,
which was closed just prior to the dissolution filing. The husband testified that account #6571 was
also his father’s account and identified the handwriting on the withdrawal slip as his father’s
handwriting. There was no testimony regarding when that account was opened. We find no abuse
of discretion in the trial court’s decision to not award any interest in these two accounts to the wife
since the testimony indicates that these accounts were not the property of the husband or the wife.
See In re Estate of Sperry, 2017 IL App (3d) 150703, ¶ 19 n.4 (we may affirm the trial court’s
judgment on any basis supported by the record).
¶ 28 The trial court ordered the husband to cash in his two life insurance policies with cash
values and pay the proceeds to the wife as part payment of the money owed by the husband to the
wife for the value of the businesses. The wife argues that one-half of the policies should have been
her marital property. The husband argues that the trial court did not abuse its discretion. The life
insurance policies had been funded by the businesses. The husband testified that he could not
secure a loan for the money that he owed the wife for the total value of her share of the value of
the businesses.
¶ 29 A review of the record does not indicate that the life insurance policies were included in
the value of Ray Trapp Electric, Inc. Since they were marital property, the trial court’s order to
cash them both in and pay the proceeds to the wife was not in error, but the wife also should have
been credited with half of the proceeds. Thus, only $42,029 counts toward the total payment that
the trial court ordered the husband to pay to the wife.
11
¶ 30 With respect to debts, the wife argues that the trial court abused its discretion in not
equalizing the credit card debts. The husband contends that the wife incurred thousands of dollars
in debt after they separated. The wife acknowledged at trial that the credit card debt was incurred
after the dissolution was filed, and about $8000 of the $14,000 in credit card debt was for her
attorney fees.
¶ 31 The trial court found that the wife had incurred credit card debt in her own name in the
amount of $14,217.87, and the wife had an outstanding balance for her attorney fees in the amount
of $10,979.86. The husband had no personal credit card debts, but he did owe some attorney fees
to his own attorney. The trial court ordered the husband to contribute $5000 toward the wife’s
remaining attorney fees and pay any balance that he owed to his own attorney. The wife
acknowledges the $5000 but argues that the husband should have owed an additional $7598.87 to
equalize the debts.
¶ 32 The wife also argues that the husband should have been ordered to pay one-half of the
deficiency owed on the wife’s vehicle. The wife contends that she was paying her share of the debt
of the husband’s vehicle, since that vehicle was included in the valuation of Ray Trapp Electric,
Inc. At trial, the wife sought to retain her 2015 Chevrolet Equinox, which had a fair market value
of $10,935. The trial court awarded her that vehicle, including the responsibility for the loan of
$24,042.74. The wife contends that the husband is receiving an extra $6553.87 in equity by not
paying one-half of the deficiency. Since the wife requested at trial that the trial court order that she
keep her vehicle and the debt owed on it, we only consider whether it affects the equitable
distribution of the parties’ marital debt as a whole.
¶ 33 Like marital property, marital debts should be divided equitably. 750 ILCS 5/503(d) (West
2018). As noted above, the division needs to be equitable, but not necessarily mathematically
12
equal. Zwart, 245 Ill. App. 3d at 572. Considering the trial court’s order as a whole, including the
husband’s ordered contribution toward the wife’s attorney fees, we find that the trial court did not
abuse its discretion.
¶ 34 C. Gross Income Calculation for Child Support and/or Maintenance
¶ 35 The wife argues that the trial court’s calculation of the husband’s and the wife’s gross
incomes, and resulting maintenance and child support calculations, were against the manifest
weight of the evidence. Specifically, the wife argues that the husband’s annual gross income
should have included annual depreciation in the amount of $64,338 from Ray Trapp Electric, Inc.,
and $15,929 from Trapp Properties, Inc., in addition to personal expenses that were run through
the business. The wife also argues that her mandatory retirement contributions should have been
deducted from her gross annual income. The husband argues that his annual gross income, from
salary, rents collected, and personal expenses paid by the business, less ordinary and necessary
business expenses of mortgage payments and maintenance, left him with a gross income of
approximately $64,000 per year. He also argues that the current statutory scheme did not allow for
the deduction of retirement savings or contribution.
¶ 36 Pursuant to section 505(a)(3)(A) of the Act, gross income includes the total of all income
from all sources, not including such things as public assistance programs and child support. 750
ILCS 5/505(a)(3)(A) (West 2018). A trial court’s determination of the parties’ respective incomes
involves factual questions that we will set aside only if they are clearly against the manifest weight
of the evidence. In re Marriage of Wojcik, 362 Ill. App. 3d 144, 153 (2005). Of course, any
question of statutory interpretation is reviewed de novo. In re Marriage of Hochstatter, 2020 IL
App (3d) 190132, ¶ 21.
¶ 37 Section 505(a)(3.1) of the Act provides:
13
“Business income. For purposes of calculating child support, net business income from the
operation of a business means gross receipts minus ordinary and necessary expenses
required to carry on the trade or business. ***
*** The accelerated component of depreciation and any business expenses determined
either judicially or administratively to be inappropriate or excessive shall be excluded from
the total of ordinary and necessary business expenses to be deducted in the determination
of net business income from gross business income.” 750 ILCS 5/505(a)(3.1)(A) (West
2018).
¶ 38 Thus, nonaccelerated depreciation can be deducted in the calculation of net business
income. as long as it is an appropriate and necessary expense to carry in the business. Hochstatter,
2020 IL App (3d) 190132, ¶ 24.
¶ 39 As directed in section 505(a)(1.5) of the Act, the computation of each parent’s child support
obligation requires a determination of each parent’s monthly net income. Net income is calculated
by taking the parent’s gross income, “minus either the standardized tax amount calculated pursuant
to subparagraph (C) of this paragraph (3) or the individualized tax amount calculated pursuant to
subparagraph (D) of this paragraph (3), and minus any adjustments pursuant to subparagraph (F)
of this paragraph (3).” 720 ILCS 5/505(a)(3)(B) (West 2018).
¶ 40 In determining child support and maintenance, the trial court relied on the husband’s child
support calculation worksheet. The husband’s gross income included his salary from Ray Trapp
Electric, Inc., plus the personal expenses paid by Ray Trapp Electric, Inc., resulting in an annual
gross income of $64,452. As noted above, nonaccelerated depreciation may be excluded from the
husband’s gross income. There was no testimony at trial regarding whether any of the depreciation
was appropriate and necessary to carry on the businesses, and it appears that much of the
14
depreciation was accelerated. At a minimum, we find that $38,496 in special depreciation listed
on the Ray Trapp Electric, Inc., 2019 tax return was includable as income. We remand for a
recalculation of the husband’s gross income. Whether any depreciation can be excluded from the
husband’s gross income should be addressed on remand. Also, Ray Trapp Electric’s 2019 ordinary
business income of $23,021 is includable in the husband’s gross income pursuant to section
505(a)(3.1) of the Act.
¶ 41 The husband’s chart lists the wife’s gross income as $72,708, which is derived from the
wife’s January 2020 financial affidavit. The wife’s chart lists her gross income as $63,184, which
is derived from her 2019 W-2. The difference is primarily from the fact that the wife does not pay
Social Security taxes; rather, she has a mandatory teacher’s retirement deduction. The wife argues
that this deduction should have been deducted from her gross income. Section 505(a)(3)(A) of the
Act makes it clear that gross income includes the total of all income from all sources, with some
exceptions that do not include a mandatory retirement deduction. However, under section
505(a)(3)(B) of the Act, an individualized tax amount can be calculated, rather than a standardized
tax amount, to determine net income in certain situations. Id. § 505(a)(3)(B). The individualized
tax amount is the aggregate of federal income tax, state income tax, and “Social Security or self-
employment tax, if applicable (or, if none, mandatory retirement contributions required by law or
as a condition of employment) and Medicare tax calculated at the Federal Insurance Contributions
Act rate.” Id. § 505(a)(3)(D)(III). A review of the record indicates that the standardized tax amount
applied by the husband resulted in a net income for the wife that was lower than the amount
calculated by the wife. Thus, we find that the trial court’s adoption of the husband’s calculation of
the wife’s net income effectively allowed for the deduction of the wife’s mandatory retirement
contributions from her gross income, and it was not against the manifest weight of the evidence.
15
¶ 42 CONCLUSION
¶ 43 The judgment of the circuit court of Tazewell County is affirmed in part, as modified to
reflect the additional cash payments due from the husband to the wife, resulting from the
increased business equity and the wife’s marital interest in the life insurance policies. The child
support portion of the order is reversed and the matter is remanded for a recalculation of the
husband’s income for the purpose of calculating any child support or maintenance obligation.
¶ 44 Affirmed in part, as modified and reversed in part.
¶ 45 Cause remanded with directions.
16 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488373/ | 2022 IL App (2d) 220072
No. 2-22-0072
Opinion filed November 21, 2022
______________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
SECOND DISTRICT
______________________________________________________________________________
ASHER FARM LIMITED PARTNERSHIP, ) Appeal from the Circuit Court
) of Kane County.
Plaintiff-Appellant, )
)
v. ) No. 21-CH-83
)
KENNETH C. WOLSFELD, Individually and )
As Trustee of Kenneth C. Wolsfeld Trust )
No. 101, ) Honorable
) Kevin T. Busch,
Defendant-Appellee. ) Judge, Presiding.
______________________________________________________________________________
JUSTICE JORGENSEN delivered the judgment of the court, with opinion.
Presiding Justice Brennan and Justice Schostok concurred in the judgment and opinion.
OPINION
¶1 In this appeal, we consider whether the circuit court erred by dismissing with prejudice the
complaint plaintiff, Asher Farm Limited Partnership, filed to quiet title to a parcel of real estate it
was claiming by adverse possession. We also consider whether the court abused its discretion by
ordering plaintiff to pay to defendant, Kenneth C. Wolsfeld, individually and as trustee of Wolsfeld
Trust No. 101, $810 as sanctions under Illinois Supreme Court Rule 137 (eff. Jan. 1, 2018). Finally,
we consider defendant’s request for appellate sanctions. We affirm and grant defendant’s request.
¶2 I. BACKGROUND
2022 IL App (2d) 220072
¶3 On December 11, 2020, defendant purchased a parcel of real estate in Big Rock Township
that was adjacent and contiguous on its eastern boundary to a parcel that, according to plaintiff’s
complaint, had been owned and farmed by plaintiff and its predecessors in title for more than 50
years. A short time later, around February 1, 2021, defendant removed a common fence, which sat
upon a grass row, that had been in place and acted as a boundary line between the two parcels for
more than 50 years. Based on a survey defendant obtained in connection with his purchase of the
property, defendant claimed as his own the entire fence line, the grass row, and a tract of real estate
to its east.
¶4 On April 1, 2021, plaintiff sued defendant to quiet title to the disputed tract, alleging it had
acquired title to the disputed tract by adverse possession, in that it had occupied, used, and
maintained the tract openly, continuously, exclusively, and without interruption since 1964. On
April 15, 2021, plaintiff moved for a preliminary injunction, alleging that, on April 6, 2021,
defendant removed the grass row and began preparing it for cultivation. Plaintiff sought, among
other relief, an order barring defendant from farming the disputed tract.
¶5 On June 21, 2021, the parties appeared for a settlement conference. At the conclusion of
the conference, the parties advised the circuit court they had agreed to terms. The court continued
the matter to September 20, 2021, for status. On that date, the court again continued the matter to
November 22, 2021, for status.
¶6 On November 19, 2021, defendant moved to dismiss the complaint under section 2-619.1
of the Code of Civil Procedure (Code) (735 ILCS 5/2-619.1 (West 2020)) and for sanctions under
Illinois Supreme Court Rule 137 (eff. Jan. 1, 2018). In his motion, defendant asserted that, though
the complaint alleged plaintiff was the owner of the real estate adjacent and contiguous to their
property, the real estate was, in fact, owned by four trusts (the Landmeier trusts): (1) the Valerie
-2-
2022 IL App (2d) 220072
Landmeier 1992 Wheeler Road Trust Dated June 22, 1992; (2) the Jason Landmeier 1992 Wheeler
Road Trust Dated June 22, 1992; (3) the Hilary Landmeier 1992 Wheeler Road Trust Dated June
22, 1992; and (4) the Heather Landmeier 1992 Wheeler Road Trust Dated June 22, 1992. Thus,
defendant asserted, one entity (plaintiff) farmed the land and the other entities (the Landmeier
trusts) owned the land, and, as the owners, the Landmeier trusts were the proper plaintiffs.
Defendant also asserted the real estate legally described in the exhibit to plaintiff’s complaint was
“the incorrect parcel of land in dispute.” According to defendant, plaintiff’s attorney verbally
acknowledged that plaintiff was not the proper party to bring the complaint and that the incorrect
parcel of land was identified in the complaint.
¶7 Thus, defendant maintained, the complaint was defective as a matter of law (735 ILCS 5/2-
615 (West 2020)) and must be dismissed. On this same basis, defendant argued plaintiff lacked
standing (735 ILCS 5/2-619(a)(9)) (West 2020)). 1
¶8 On November 22, 2021, the parties appeared for status and presentment of defendant’s
motion. The court recalled that the matter had been settled, and defendant’s attorney responded
that defendant was frustrated because, though the matter was settled, the parties had not been able
to “get [it] over the finish line.” Defendant’s attorney told the court,
“[A]s you may recall, when we began that pretrial conference we were discussing
the nature of this case. I said one thing that I think [defendant] will succeed on is that
1
Defendant cited subsection (a)(2) of section 2-619 (735 ILCS 5/2-619(a)(2) (West 2020)),
but lack of standing is properly brought under subsection (a)(9) (id. § 2-619(a)(9)). See Glisson v.
City of Marion, 188 Ill. 2d 211, 220 (1999).
-3-
2022 IL App (2d) 220072
[plaintiff is] not going to be able to properly identify this property because it was
improperly identified in the complaint and the parties.
But for the sake of efficiency we do agree that there is a piece of property that
exists; that there was a dispute about it; it was just incorrectly identified. So we said okay,
let’s move forward.
We didn’t hear anything so we drafted deeds; we drafted the settlement agreement;
we sent it to counsel. And we have been sitting since September, early September, August.
My client has a settlement check at our office. If there are comments, we need to—
we need to know. And just nothing has moved forward, so we filed a motion to dismiss
and asked for sanctions.”
¶9 Defendant’s attorney then explained the basis for the request for sanctions:
“Improper/unnecessary delays; not conducting enough due diligence to properly
identify the parcels and the plaintiffs; and also, we notified [plaintiff] that [it] now [had] a
complaint on file that [did] not have the correct parties[ ] named or the parcel identified[,]
so it should be dismissed with prejudice and [plaintiff had] declined to do that, as well. It
means we need[ed] to keep coming back to court.”
¶ 10 The court set a briefing schedule on defendant’s motion and continued the matter for
hearing.
¶ 11 In its response to defendant’s motion, plaintiff asserted, “This litigation began as an
emergency motion because Defendant[ ] began to take action on the land, despite indicating they
would not.” Thus, plaintiff “filed to the best of [its] knowledge as to the parties and issues at bar.”
Further, plaintiff asserted, defendant agreed “there [was] a parcel under dispute [that] is owned by
similar Plaintiff’s [sic].” Defendant nevertheless sought dismissal, “which [would] only result in
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having a new cause of action levied, which [would] only further delay the outcome that both sides
are working towards.” Plaintiff asserted it had been diligent in its attempt to settle the matter with
the appropriate plaintiffs, had requested from defendant updated documentation, and was not
solely to blame for the delay, because defendant had been unwilling or unable to send plaintiff an
editable copy of the settlement agreement.
¶ 12 As to defendant’s request for sanctions, plaintiff asserted the primary basis for defendant’s
request was the delay in executing the settlement agreement. On that point, plaintiff maintained it
was “now dealing with multiple issues to resolve [the] matter,” including the resignation of one of
the trustees; the transfer of that trustee’s obligations to a bank; a question of who could legally
sign the settlement agreement in light of that change; and the fact that one of the trustees had
special needs, lived in Missouri, and was dependent on benefits, requiring scrutiny of the
distribution of any money to ensure her benefits were continued. Plaintiff also argued it had a
good-faith basis when it filed suit, based “on [its] knowledge and belief of the situation for which
suit was filed.” Finally, in response to defendant’s argument that sanctions were appropriate
because plaintiff’s actions had increased the cost of the litigation, plaintiff asserted it offered to
again continue the matter, to have the court sign the deed, or to dismiss the matter without prejudice
while the matter was resolved.
¶ 13 Nowhere in plaintiff’s written response did it dispute defendant’s assertions that it was the
wrong plaintiff to bring the complaint or that the complaint did not correctly identify the parcel of
land. Nor did plaintiff request leave to amend its complaint to name the proper plaintiffs and
correctly identify the parcel at issue.
¶ 14 In his reply, defendant emphasized that plaintiff did not deny the bases for his motion.
Rather, plaintiff sought to excuse its failure to correctly identify the parcel by claiming the case
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had been filed as an emergency. However, “[a] basic search of the land records in this matter would
have revealed that Plaintiff [did] not own the property which share[d] a boundary line with the
property purchased by Defendants [sic] in December 2020.” Further, defendant asserted, plaintiff
was not aware of its mistake until defendant’s attorney researched and explained the
misidentification to plaintiff’s attorney. According to defendant, the complaint was deficient as a
matter of law, because there was no dispute over the property that was identified in the complaint
and, therefore, by extension, plaintiff did not have standing to bring the action.
¶ 15 Defendant also disputed plaintiff’s characterization of the history of the case, contending
plaintiff misrepresented its attorney’s efforts to resolve it. Defendant alleged that, after the
settlement conference, his attorney reached out to plaintiff’s attorney for a status on the deed and
settlement agreement. Plaintiff’s attorney indicated he would prepare the documents but later
asked defendant’s attorney to prepare them. Since that time, defendant’s attorney had routinely
followed up with plaintiff’s attorney to correctly identify the parties and who would sign on their
behalf. On July 19, 2021, defendant’s attorney sent to plaintiff’s attorney a first draft of the
settlement agreement. Two months later, plaintiff’s attorney contacted defendant’s attorney and
asked if defendant’s attorney had obtained signatures from the proper parties. Defendant’s attorney
responded that she had not and would not attempt to do so (because they were represented by
plaintiff’s attorney). Thus, defendant asserted, the five-month delay was solely attributable to
plaintiff’s lack of due diligence, and it was not until defendant filed his motion to dismiss and for
sanctions “that [p]laintiff suddenly attempted to contact the appropriate parties and acquire the
correct signatures.” According to defendant, it was still unclear who the appropriate parties were
to the settlement agreement and deed. Defendant also stated that he never received a request for
an editable copy of the settlement agreement and deed. Finally, defendant maintained that plaintiff
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was “now asking for even more time to correct a myriad of problems it should have been aware of
months ago had it done the work necessary to proceed correctly with this case.” Defendant
contended he had, therefore, expended “an unnecessary amount of attorney’s fees for an agreement
that was reached at the [s]ettlement [c]onference with the court on June 21, 2021.”
¶ 16 At the January 5, 2022, hearing on defendant’s motion, the circuit court asked plaintiff’s
attorney whether he disagreed with defendant’s assertion that both the plaintiff and the parcel were
misidentified, and he responded, “Judge, I don’t think I disagree with any part of it.” The court
asked plaintiff’s attorney why plaintiff had refused to correct its pleadings, and he responded, “I
don’t know that I would say we refused, Judge. The similar plaintiffs are in both trusts.” The court
stated it “appreciate[d] the fact that the members of [plaintiff were] likely beneficiaries under the
trust” but found defendant’s point was well taken. The court explained that plaintiff had initiated
a complaint “by someone who doesn’t have standing and is a limited partnership who lacks
standing.” Further, it found plaintiff had “pled negligently.” In other words, plaintiff misidentified
the parcel at issue and had done nothing to attempt to correct it.
¶ 17 Plaintiff responded that there was no question that a piece of property was in dispute, and
it reiterated that the parties were trying to resolve that dispute. If the court dismissed the complaint,
it would return the parties to their positions as of March or April 2021 and the parcel at issue would
still be in dispute.
¶ 18 The court granted the motion to dismiss and imposed $810 in sanctions (which was
calculated by multiplying three hours of court time by defendant’s attorney’s $270 hourly rate).
The court recognized that the complaint would eventually be revisited, namely, in a new
proceeding. But the court stated it could not give relief to plaintiff but, rather, was compelled to
dismiss the case with prejudice because plaintiff lacked standing. The court indicated it “would
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have been more understanding if [plaintiff’s] response to the motion to dismiss would have been
to seek leave to file an amended complaint.” Instead, the court noted, plaintiff “doubled down”
and did not seek leave to amend. As to sanctions, the court explained that, had plaintiff sought
leave to amend, instead of litigating the motion to dismiss, it would have denied defendant’s
request for sanctions.
¶ 19 The next day, the circuit court entered a written order, stating, in part, that defendant’s
motion to dismiss and for sanctions had been granted for the reasons stated on the record.
¶ 20 On February 2, 2022, plaintiff moved to reconsider the dismissal and sanctions. Plaintiff
contended its misidentification of itself as the plaintiff was a misnomer and, under sections 2-401,
2-616(a), and 2-1005(g) of the Code (735 ILCS 5/2-401, 2-616(a), 2-1005(g) (West 2020)), it was
entitled to correct it at any time before final judgment. According to plaintiff, the circuit court
therefore abused its discretion when it dismissed the complaint with prejudice as opposed to
allowing plaintiff the opportunity to cure the deficiencies in the complaint, particularly given there
was a “justiciable dispute” at issue in the complaint. Moreover, plaintiff asserted, the circuit court’s
dismissal of the complaint with prejudice frustrated the strong public policy favoring settlements,
given the settlement posture of the case.
¶ 21 Plaintiff also took issue with the circuit court’s sanctions order, arguing the award could
not “be reasonable in this case because [d]efendant filed its motion [(to dismiss)] after [p]laintiff
agreed that it would dismiss the complaint, without prejudice, while the settlement details could
be effectuated.” According to plaintiff, a dismissal with prejudice was improper under the
circumstances. Citing Illinois Supreme Court Rule 219 (eff. July 1, 2002) and cases applying it,
plaintiff argued defendant had not shown there was a deliberate, contumacious, or unwarranted
disregard for the circuit court’s authority, such that sanctions were warranted. Nor had defendant
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established, under Rule 137, that sanctions were warranted, “because *** the merits of Plaintiffs
[sic] complaint did not proceed past summary dismissal.” Plaintiff maintained that the purpose of
Rule 137 was to prevent frivolous and false lawsuits that have no legal or factual foundation, “not
to penalize litigants and their attorneys simply because they were zealous but unsuccessful.”
Plaintiff concluded the circuit court’s ruling “violate[d] the American Rule on attorney fees,”
because the merits of the complaint were never addressed. Further, the court’s ruling “was penal
in nature and afoul of precedent and not reasonable given the settlement posture of this case along
with [p]laintiff’s willing[ness] to dismiss the case without prejudice at [d]efendant’s initial
request.”
¶ 22 Plaintiff’s motion to reconsider did not affirmatively request leave to amend the complaint.
Nor did plaintiff file a separate motion seeking that relief.
¶ 23 At the February 8, 2022, hearing on the motion, the circuit court told the parties it could
not remember “exactly the facts” but almost immediately recalled, “[t]hey had named the wrong
owner and they refused to amend their complaint and they dragged this thing out.” The court noted
the case was filed in April 2021 and asked when plaintiff’s attorney became aware of the fact the
complaint misidentified the plaintiff and real estate at issue. Defendant’s attorney responded that
the misidentifications had been discussed at the settlement conference, which occurred in June
2021. The court noted plaintiff’s motion did not allege new facts or assert a change in the law.
Thus, the court asked what plaintiff was asking it to reconsider. Plaintiff began to explain the basis
for its motion was the strong public policy in favor of amendments to pleadings. The court
interjected and denied the motion, stating as follows:
“You’re not seeking to amend. You’re not seeking to amend today. You never
sought to seek [sic] to amend then.
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When [defendant] first brought [his] motion, had you sought leave to amend then,
I might have paused and suggested let’s see what you’re gonna do and I’ll consider it and
enter and continue [his] motion.
But you didn’t do that.
Your response was, this doesn’t matter because we know what we’re talking about.
We understand what the dispute is.
We had a settlement and you didn’t want to settle, ultimately.
I mean[,] so in the meantime, you’re wasting [defendant’s] time and money. That’s
why your client got sanctioned, because you are spinning [his] wheels and that’s
inappropriate.
I mean, you can’t file a complaint that’s worthless and know it for at least nine
months and then come back and ask the Court to forgive that because, [defendant’s
attorney] knows that we know what we’re talking about.
I’m sorry, counsel. There is no basis to grant your motion to reconsider. There is
nothing to change the Court’s opinion.
Coming in here and saying I should have given you a chance to do something that
you’ve never even asked leave to do is just further evidence of a lack of diligence on your
part.”
¶ 24 This appeal followed.
¶ 25 II. ANALYSIS
¶ 26 On appeal, plaintiff contends the circuit court erred by (1) dismissing with prejudice its
complaint and (2) ordering plaintiff to pay as sanctions $810 to defendant. Before addressing the
merits of plaintiff’s contentions, we must first address two preliminary matters.
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¶ 27 A. The Parties’ Requests That We Strike Portions of the Other’s Brief
¶ 28 In his brief, defendant asks us to strike portions of plaintiff’s statement of facts because it
includes facts that are irrelevant and were neither presented to the circuit court nor supported by
the record. We decline to strike any portion of plaintiff’s brief. The record here is simple, and
plaintiff’s reference to the complained-of facts has not hindered our review. Hall v. Naper Gold
Hospitality, LLC, 2012 IL App (2d) 111151, ¶ 15. Instead, we will disregard any assertions of fact
that are not supported by the record.
¶ 29 After defendant filed its brief, plaintiff filed in this court a “motion to strike unsupported
arguments from defendants’ [sic] response brief,” and we ordered that motion to be taken with the
case. In the motion, plaintiff asks us to strike the entire conclusion section of defendant’s brief
because it does not contain citations of the record. Plaintiff also asks us to strike defendant’s
reference to a now-pending circuit court case, Kane County case No. 22-CH-6, in which the
deficiencies in plaintiff’s complaint were purportedly corrected, because that matter is referenced
nowhere in the record.
¶ 30 We deny plaintiff’s motion to strike and decline to strike the conclusion section of
defendant’s brief. With the exception of defendant’s reference to Kane County case No. 22-CH-6,
discussed below, the assertions made by defendant are supported by the record. Though he did not
include any citations in the conclusion section, his failure to do so has not hindered our review.
See id.
¶ 31 Additionally, we decline to strike defendant’s reference to Kane County case No. 22-CH-
6 and instead take judicial notice of those proceedings. Admittedly, the record is devoid of any
reference to that case and does not contain the complaint or any other documents from that case.
However, “[a]n appellate court may take judicial notice of readily verifiable facts if doing so will
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aid in the efficient disposition of a case, even if judicial notice was not sought in the [circuit]
court.” (Internal quotation marks omitted.) Aurora Loan Services, LLC v. Kmiecik, 2013 IL App
(1st) 121700, ¶ 37. Such readily verifiable facts include entries on a court’s docket showing that a
lawsuit involving a similar (if not the same) dispute has been filed. See Bayview Loan Servicing,
LLC v. Starks, 2022 IL App (2d) 210056, ¶ 14 (complaint and motion to dismiss were matters of
public record and, therefore, could be judicially noticed); Kramer v. Ruiz, 2021 IL App (5th)
200026, ¶ 32 n.3 (online court docket); People v. Johnson, 2020 IL App (1st) 171638, ¶ 29
(computer printout of court docket); Metropolitan Life Insurance Co. v. American National Bank
& Trust Co., 288 Ill. App. 3d 760, 764 (1997) (judicial notice of a money judgment and judgment
lien, which were “public documents that [were] included in the records of other courts”). And we
may take judicial notice of such records even without an explicit request. See In re N.G., 2018 IL
121939, ¶ 32 (appellate court was “well within [its] authority” to sua sponte judicially notice court
records).
¶ 32 The Kane County circuit clerk’s online court records (Kane County Circuit Clerk,
https://cic.countyofkane.org/pages/online-court-records.aspx (last visited Oct. 28, 2022)
[https://perma.cc/QYQ9-2GTU]) indicate that, after the circuit court dismissed the complaint in
this case, on January 18, 2022, the Landmeier trusts—the four entities defendant contended were
the proper plaintiffs to bring this action—filed against defendant a complaint to quiet title. The
case was docketed as Kane County case No. 22-CH-6, and the complaint was filed by the same
attorney who has at all times represented plaintiff in this matter. According to defendant, the
complaint in that case seeks the same relief sought in this case, i.e., to quiet title to the tract of real
estate on the eastern side of the land defendant purchased in December 2020. Though plaintiff has
had two opportunities (in its reply brief and its motion to strike) to dispute the accuracy of
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defendant’s assertion that the complaint in case No. 22-CH-6 seeks the same relief, plaintiff has
not done so. Accordingly, we take judicial notice that there is currently pending an action by the
Landmeier trusts to quiet title to the parcel of land (apparently) at issue in this complaint. We now
turn to the merits.
¶ 33 B. The Circuit Court Properly Dismissed With Prejudice the Complaint
¶ 34 Plaintiff first contends the circuit court erred by dismissing with prejudice its complaint.
Specifically, plaintiff argues that its identification of itself was a misnomer, which, under section
2-401 of the Code, is not a basis for dismissal. Rather, it was entitled to correct that misnomer by
amendment at any time before or after final judgment, and, therefore, the court erred by dismissing
the complaint with prejudice, as opposed to allowing plaintiff the opportunity to amend. Plaintiff
also argues the court erred by dismissing the complaint, where defendant’s motion was filed under
section 2-619.1 but did not comply with that statute and where defendant failed to support his
motion with an affidavit.
¶ 35 Initially, we must properly frame the issue presented by plaintiff, because it affects our
standard of review. This case comes before us from the dismissal of the complaint under sections
2-615 and 2-619 of the Code. Thus, at first glance, our review would be de novo. See Reynolds v.
Jimmy John’s Enterprises, LLC, 2013 IL App (4th) 120139, ¶¶ 25, 31.
¶ 36 However, the question presented is not whether the circuit court properly dismissed the
complaint because either it failed to state a claim, it was defeated by some affirmative matter, or
both occurred. See 735 ILCS 5/2-615, 2-619 (West 2020). In the circuit court, plaintiff never once
disputed that the underlying bases for defendant’s motion—that plaintiff was not the proper party
to bring the complaint and that the complaint identified the wrong parcel of land—were well
founded.
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¶ 37 In its initial brief to this court, plaintiff yet again failed to challenge the underlying basis
for the circuit court’s ruling. Rather, it argued dismissal was improper (1) under section 2-401 of
the Code, because plaintiff’s identification of itself as the plaintiff was a misnomer, which is not a
basis for dismissal and can be corrected by amendment at any time, and (2) because of technical
(albeit important) deficiencies in defendant’s motion.
¶ 38 It was not until plaintiff filed its reply brief that plaintiff challenged the circuit court’s
finding that it lacked standing to bring the complaint. It has therefore forfeited that contention. Ill.
S. Ct. R. 341(h)(7) (eff. Oct. 1, 2020) (arguments may not be raised for the first time in a reply
brief); Bank of New York Mellon v. Rogers, 2016 IL App (2d) 150712, ¶ 32 (arguments not raised
in the circuit court are forfeited). Plaintiff’s arguments in the circuit court and in its initial brief
make clear that it is challenging only the circuit court’s decision to dismiss the complaint with
prejudice, as opposed to without prejudice. In other words, the issue is whether the court should
have allowed plaintiff to amend the complaint.
¶ 39 This state has a strong public policy in favor of resolving disputes on their merits, as
opposed to on deficiencies in a party’s pleadings. See Avakian v. Chulengarian, 328 Ill. App. 3d
147, 154 (2002). Thus, courts must liberally construe the Code insofar as it relates to amendment
of pleadings. Hoffman v. Nustra, 143 Ill. App. 3d 259, 265 (1986). The decision to allow
amendments is a matter for the circuit court’s discretion. Id. at 266. Thus, we may reverse the
circuit court’s decision to dismiss plaintiff’s complaint with prejudice only if the court’s decision
was unreasonable. Blum v. Koster, 235 Ill. 2d 21, 36 (2009).
¶ 40 As noted, plaintiff invokes section 2-401 of the Code in support of its argument that the
complaint should not have been dismissed with prejudice. Section 2-401(b) of the Code states,
“[m]isnomer of a party is not a ground for dismissal but the name of any party may be corrected
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at any time, before or after judgment, on motion, upon any terms and proof that the court requires.”
735 ILCS 5/2-401(b) (West 2020). The converse of the concept of misnomer is mistaken identity.
See Guiffrida v. Boothy’s Palace Tavern, Inc., 2014 IL App (4th) 131008, ¶ 36. The determination
of whether a case involves a misnomer or mistaken identity is likewise reviewed for an abuse of
discretion. Id.
¶ 41 The First District recently explained the import of these distinct concepts:
“This distinction [(between misnomer and mistaken identity)] is important because, if this
case involves a misnomer, which ‘is a mistake in the name of [sic] the provision of an
incorrect name,’ then section 2-401(b) of the Code [citation] applies. [Citation.]
Conversely, if this matter involves a mistaken identity, then section 2-616 of the Code
governs.” (Internal quotation marks omitted.) Pennymac Corp. v. Jenkins, 2018 IL App
(1st) 171191, ¶ 25.
Most cases addressing misnomer arise in the context of misnamed, misidentified, or
mischaracterized defendants. Id. ¶ 26. But the same rules apply to cases in which a plaintiff
misnames itself. Id. ¶ 27.
¶ 42 “To determine whether a case involves a misnomer or mistaken identity, we must
determine the intent of the plaintiff.” Guiffrida, 2014 IL App (4th) 131008, ¶ 36. We do not look
solely to the plaintiff’s subjective intent as to whom he or she intended to sue. Id. Rather, our
primary focus is “the objective manifestations of that intent as contained in the record.” (Internal
quotation marks omitted.) Id. The most probative evidence of the plaintiff’s intent is the party
named in the complaint, and, if that party actually exists but is not a real party in interest, then a
court can conclude the plaintiff mistakenly sued the wrong party. Id.
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¶ 43 Initially, we note plaintiff did not raise the issue of misnomer until its motion to reconsider
the complaint’s dismissal. “Issues cannot be raised for the first time in the [circuit] court in a
motion to reconsider and issues raised for the first time in a motion to reconsider cannot be raised
on appeal.” American Chartered Bank v. USMDS, Inc., 2013 IL App (3d) 120397, ¶ 13. Plaintiff
could have raised misnomer in its response to the motion to dismiss but did not. Accordingly, we
find plaintiff has forfeited its argument. Triumph Community Bank v. IRED Elmhurst, LLC, 2021
IL App (2d) 200108, ¶ 48 (“A party may not raise a new legal theory for the first time in a motion
to reconsider.”).
¶ 44 Forfeiture aside, we conclude this case involves a clear case of mistaken identity, not a
mere misnomer. Here, the complaint named “Asher Farm Limited Partnership,” a legal entity that
actually exists, as plaintiff and alleged it owned and farmed the land adjacent to that purchased by
defendant in December 2020. There is no dispute that the proper parties to bring this action were
the Landmeier trusts, which are actual distinct legal entities that owned the adjacent land. Under
these circumstances, the parties’ intent is not clear, because the named plaintiff and the proper
plaintiffs have distinct interests. One farms the land and the others own it. Though, as the circuit
court recognized, there may be some overlap between the entities at issue, it is clear that this case
involves mistaken identity, as opposed to misnomer. See Pennymac, 2018 IL App (1st) 171191,
¶ 30.
¶ 45 Bristow v. Westmore Builders, Inc., 266 Ill. App. 3d 257 (1994), on which plaintiff relies,
is distinguishable. There, the plaintiff was a sole proprietor but sued in the name of a corporation
that did not, in fact, exist. Id. at 261. Here, the named plaintiff and the proper plaintiffs were actual
distinct legal entities.
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¶ 46 Because this case involves mistaken identity, we must analyze the dismissal with prejudice
under section 2-616 of the Code, not section 2-401. Pennymac, 2018 IL App (1st) 171191, ¶ 25.
Section 2-616(a) provides that amendments to pleadings may be allowed, on just and reasonable
terms, “[a]t any time before final judgment.” (Emphasis added.) 735 ILCS 5/2-616(a) (West 2020).
Thus, section 2-616(a) governs prejudgment requests to amend. See Tomm’s Redemption, Inc. v.
Hamer, 2014 IL App (1st) 131005, ¶¶ 13-14. Prejudgment requests to amend should be liberally
granted, and, when deciding whether to grant leave, courts should consider whether (1) the
amendment cures a defect in the pleadings, (2) the other party is prejudiced or surprised by the
proposed amendment, (3) the proposed amendment is timely, and (4) there were previous
opportunities to amend the pleadings. Id. ¶ 13.
¶ 47 However, these factors do not apply to postjudgment requests to amend. Id. ¶ 14. “After
final judgment, a plaintiff has no statutory right to amend a complaint and a court commits no error
by denying a [postjudgment request] to amend.” Id. After judgment is entered, a party cannot
amend his or her complaint to add new claims or theories or to correct other deficiencies. Id.
Rather, he or she can amend only to conform the pleadings to the proofs. Id. (citing 735 ILCS 5/2-
616(c) (West 2010)).
¶ 48 Thus, the threshold question is whether plaintiff sought leave to amend before or after final
judgment. Here, the circuit court dismissed the complaint with prejudice, and plaintiff did not
request leave to amend until its postjudgment motion to reconsider. (Its request was implied by its
reliance on section 2-401, but plaintiff never affirmatively requested leave to amend.) Thus, the
dismissal order was a final judgment, and plaintiff’s request for leave was not timely. Id. ¶ 15.
Upon entry of the dismissal order, plaintiff no longer had a statutory right to amend the complaint.
Id. Rather, it could amend the complaint only to conform the pleadings to the proofs, not to correct
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other deficiencies. Id. ¶ 14. Accordingly, the circuit court did not abuse its discretion by dismissing
the complaint with prejudice.
¶ 49 We briefly address and reject plaintiff’s argument that defendant’s motion to dismiss was
deficient and should not have been granted. Plaintiff asserts that defendant’s motion failed to
comply with section 2-619.1 of the Code, because, in one part of the motion, defendant sought
dismissal under sections 2-615 “and[/]or” 2-619(a)(2). See Reynolds, 2013 IL App (4th) 120139,
¶¶ 20-21 (hybrid motion practice is not proper under section 2-619.1 and circuit courts should
sua sponte reject such motions). Additionally, plaintiff asserts defendant failed to support his
section 2-619 motion with an affidavit, such that he did not meet his burden to establish plaintiff
lacked standing. See id. ¶ 37.
¶ 50 Plaintiff, however, never brought these purported deficiencies to the circuit court’s
attention. Moreover, plaintiff’s attorney agreed the factual bases for defendant’s motion, i.e., that
the Landmeier trusts owned the land adjacent to that purchased by defendant and that the complaint
identified the wrong parcel, were accurate. Plaintiff has therefore forfeited its argument. Rogers,
2016 IL App (2d) 150712, ¶ 32.
¶ 51 We also briefly address and reject plaintiff’s argument, made for the first time in its reply
brief, that its lack of legal ownership of one of the adjoining parcels has no bearing on its standing
to bring its complaint. As noted above, plaintiff forfeited this argument by failing to raise it at any
time before its reply brief in this court. Ill. S. Ct. R. 341(h)(7) (eff. Oct. 1, 2020); Rogers, 2016 IL
App (2d) 150712, ¶ 32. Moreover, this position is inconsistent with the position plaintiff took in
the circuit court. At the hearing on the motion to dismiss, plaintiff’s attorney stated plaintiff did
not “disagree” with the assertions in defendant’s motion. See Unique Insurance Co. v. Tate, 2022
IL App (1st) 210491, ¶ 22 (party is estopped from taking a position on appeal that is inconsistent
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with that which the party took in the circuit court). Further, even if it had timely raised this
argument, there was never any dispute that plaintiff misidentified the parcel of real estate at issue.
See Brandhorst v. Johnson, 2014 IL App (4th) 130923, ¶ 37 (though not one of the five elements
of an adverse-possession claim, the claimant must clearly and convincingly prove “the exact
location of the boundary line to which they claim” (emphasis added)). Plaintiff contends this
deficiency was inconsequential because the identification of the parcel is not an element of the
claim. But this overlooks the fact that the circuit court could not have awarded to plaintiff the
parcel identified in the complaint, because that was not the parcel to which it laid claim. Simply
put, it was a deficiency that needed to be corrected, and plaintiff refused to do so.
¶ 52 C. The Circuit Court Did Not Abuse Its Discretion by Awarding Sanctions
¶ 53 Plaintiff also contends the circuit court abused its discretion when it imposed sanctions of
$810. Specifically, plaintiff argues the circuit court had no factual or legal basis on which to impose
the sanctions and violated the American rule on attorney fees. We are not persuaded.
¶ 54 “Rule 137 allows a court to impose sanctions against a party or counsel who files a pleading
or motion that is not well grounded in fact, is not warranted by existing law or a good-faith
argument for the extension, modification, or reversal of existing law, or is interposed for any
improper purpose.” Garlick v. Bloomingdale Township, 2018 IL App (2d) 171013, ¶ 43. The rule’s
purpose is to prevent the filing of false or frivolous lawsuits, and it places on a party and his or her
attorney a duty to make a reasonable inquiry into the facts to support a legal claim before pleadings
are filed. A&A Acoustics, Inc. v. Valinsky, 202 Ill. App. 3d 516, 522 (1990). The duty to make a
reasonable inquiry continues after a suit is filed, and an attorney is professionally obligated to
dismiss a baseless suit, even over his or her client’s objection, when the attorney learns the client
no longer has grounds for a case. Id.
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¶ 55 We conclude the circuit court did not abuse its discretion by imposing $810 in sanctions
(equivalent to three hours of defendant’s attorney’s time). The circuit court sanctioned plaintiff
because it refused to request leave to amend its complaint, even though it admitted its complaint
was deficient in the manner alleged by defendant, and instead litigated the well-founded motion to
dismiss with a nonresponsive position.
¶ 56 The record wholly supports the circuit court’s decision. It shows that plaintiff became
aware of the deficiencies in its complaint, at the latest, at the June 2021 settlement conference.
Instead of filing a simple motion for leave to amend, together with an amended complaint
correcting already-identified deficiencies, plaintiff chose to persist in its defective complaint for
the next five months, until defendant filed his motion to dismiss and for sanctions, which again
identified the same deficiencies in plaintiff’s complaint and would not have been necessary had
plaintiff amended the complaint. Plaintiff again chose not to file a simple motion for leave to
amend. Instead, it filed a response to defendant’s motion that did not contest the bases for dismissal
but, rather, nonresponsively asserted dismissal was improper because the parties had settled and
dismissal would return them to their prelitigation positions.
¶ 57 Here, plaintiff’s actions in this case after it became aware of the deficiencies in its
complaint needlessly increased the costs of the litigation. See Kellett v. Roberts, 276 Ill. App. 3d
164, 170-71 (1995). We are perplexed by plaintiff’s refusal to request leave to amend its complaint,
especially given a new complaint to quiet title to the parcel in dispute has been brought in the name
of the proper plaintiffs. Even if, as plaintiff asserts, this matter was filed as an emergency, thus
limiting plaintiff’s opportunity to properly formulate the complaint, the reasonable course of action
would have been to request leave to amend as soon as it became aware of the deficiencies or, at
the latest, in response to the motion to dismiss. See Valinsky, 202 Ill. App. 3d at 522. Instead,
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2022 IL App (2d) 220072
plaintiff’s position required the parties to appear for a contested hearing on a well-founded motion
that was opposed only by a nonresponsive position. Under these circumstances, we cannot find the
circuit court’s sanctions award was unreasonable. Blum, 235 Ill. 2d at 36.
¶ 58 Plaintiff argues the circuit court lacked a factual or legal basis for its sanctions award. We
disagree. As noted above, Rule 137 permits a court to impose sanctions when a party’s actions
needlessly increase the cost of litigation, and the record supported the circuit court’s determination
here. We also reject plaintiff’s argument that the sanctions order violated the “American rule” on
attorney fees, as a sanction is not a fee award. See Toland v. Davis, 295 Ill. App. 3d 652, 658
(1998).
¶ 59 We likewise reject plaintiff’s assertion that the sanctions order was “an abuse of discretion
because the merits of Plaintiffs [sic] complaint did not proceed past summary dismissal.” In
support of this assertion, plaintiff cites Toland. Admittedly, the Toland court recognized that no
determination was ever made on the merits of the plaintiffs’ claims against the party who was
seeking sanctions. Id. at 657. But nothing in Toland’s analysis supports plaintiff’s position that
sanctions may not be imposed if the complaint never makes it past the dismissal stage. In Kellett,
we rejected a similar argument, noting,
“Such a construction of the rule [(that a motion for sanctions can be filed at any time)] is
consistent with and promotes the rule’s prior objective to provide a plain, speedy, and
efficient remedy. To accept [the defendant’s attorneys’] position would preclude the filing
of the motion for sanctions until after the frivolous proceedings had been finally
terminated. Such an interpretation would further delay the timely disposition of frivolous
matters, increase the cost of litigation, and constitute an inefficient use of judicial
resources. [The defendant’s attorneys’] interpretation of the rule provides a remedy that is
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2022 IL App (2d) 220072
neither plain, nor speedy, nor efficient. We cannot contemplate that the supreme court
could have intended such a result.” Kellett, 276 Ill. App. 3d at 171.
Simply put, nothing in Rule 137 prevents the imposition of sanctions when a case has not moved
past the dismissal stage.
¶ 60 Plaintiff also asks us to set aside the sanctions award because the circuit court did not
comply with Rule 137(d), which states, “[w]here a sanction is imposed under this rule, the judge
shall set forth with specificity the reasons and basis of any sanction so imposed in either the
judgment order itself or in a separate written order.” Ill. S. Ct. R. 137(d) (eff. Jan. 1, 2018). This
argument has no merit.
¶ 61 The purpose of paragraph (d) of Rule 137 “is to allow the reviewing court to make an
informed and reasoned review of the decision to impose sanctions.” Kellett, 276 Ill. App. 3d at
172. “[T]he better practice is for the [circuit] court to explicitly state its reasons for the sanctions
in [a] written order,” but strict compliance with Rule 137(d) is not required when the record
otherwise establishes the circuit court’s reasoning for the award. Id. Here, the court’s written order
expressly incorporated the court’s detailed explanation, on the record, of why it found sanctions
were appropriate in this case. See Law Offices of Brendan R. Appel, LLC v. Georgia’s Restaurant
& Pancake House, Inc., 2021 IL App (1st) 192523, ¶ 79. We find this sufficient to comply with
the rule and, therefore, decline to set aside the sanctions award. Id.
¶ 62 D. Defendant’s Request for Rule 375 Sanctions
¶ 63 In his brief, defendant asks that we impose appellate sanctions against plaintiff under
Illinois Supreme Court Rule 375 (eff. Feb. 1, 1994). He argues that plaintiff’s maintenance of this
appeal while also pursuing the same action, this time with the proper parties, in the circuit court
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2022 IL App (2d) 220072
(Kane County case No. 22-CH-6) has needlessly increased the cost of litigation or is intended to
harass defendant.
¶ 64 Plaintiff does not specifically respond to defendant’s request for sanctions. Rather, its
motion to strike, discussed above, requested that we strike the section of defendant’s brief that
contains the request.
¶ 65 Under Rule 375(b), this court has discretion to impose sanctions against any party or the
party’s attorney if, after considering an appeal, we determine the appeal “is frivolous, *** was not
taken in good faith, [or was taken] for an improper purpose, such as to harass or to cause
unnecessary delay or needless increase in the cost of litigation.” Ill. S. Ct. R. 375 (eff. Feb. 1,
1994); see Garlick, 2018 IL App (2d) 171013, ¶ 59. We judge whether an appeal is frivolous based
on an objective standard. Id. An appeal is frivolous when “it is not reasonably well grounded in
fact and not warranted by existing law or a good-faith argument for the extension, modification,
or reversal of existing law.” Ill. S. Ct. R. 375(b) (eff. Feb. 1, 1994). “The purpose of Rule 375(b)
is to condemn and punish the abusive conduct of litigants and their attorneys who appear before
us.” (Internal quotation marks omitted.) Garlick, 2018 IL App (2d) 171013, ¶ 59.
¶ 66 We conclude the appeal here was frivolous and not taken in good faith. Plaintiff’s argument
regarding the denial of leave to amend the complaint is premised entirely on a mischaracterization
of the record. Indeed, plaintiff maintains the circuit court refused its request for leave to amend the
complaint. However, the record shows it was plaintiff who refused to ask for leave amend its
plainly defective complaint until it was too late and despite having ample opportunity to do so. We
fail to see how a court can abuse its discretion by not granting a request that was never timely
made.
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2022 IL App (2d) 220072
¶ 67 Moreover, 13 days after the complaint was dismissed, before plaintiff moved to reconsider,
plaintiff’s attorney filed a new complaint, which named the proper plaintiffs, i.e., the Landmeier
trusts, and sought the same relief sought in this matter. Plaintiff nevertheless filed a motion to
reconsider, which, if granted, would have resulted in two actions pending for the same relief.
¶ 68 We find the filing of the new action—with the proper plaintiffs and the correct parcel
identified—is an implicit admission that the circuit court’s dismissal of plaintiff’s complaint was
correct. Additionally, as with its motion to reconsider, if we were to grant plaintiff the relief it
seeks—reversal of the circuit court’s order with an instruction to allow plaintiff to amend its
complaint—there would be pending in the circuit court two actions between similar parties seeking
the same relief.
¶ 69 Further, plaintiff’s appeal pushes a legal theory—misnomer—that it plainly forfeited by
not raising it until its motion to reconsider and, in any event, clearly does not apply. Additionally,
plaintiff raises several arguments that are based on clearly inapposite authorities. For example,
plaintiff cites section 2-1005(g) of the Code in support of its argument that “Illinois civil procedure
allows complaints [to] be amended, even after judgment.” Section 2-1005 has no application here.
That statute governs summary judgment and plainly states that amendments to pleadings may be
made on just and reasonable terms “after *** summary judgment.” (Emphasis added.) 735 ILCS
5/2-1005(g) (West 2020). For another example, in regard to the sanctions order, plaintiff cites
Illinois Supreme Court Rule 219 (eff. July 1, 2002) and cases interpreting that rule. However, Rule
219 governs discovery sanctions, which were never at issue here.
¶ 70 Under these circumstances, we cannot conclude a reasonable, prudent attorney would have
brought this appeal. See Penn v. Gerig, 334 Ill. App. 3d 345, 357 (2002) (an appeal is frivolous if
it would not have been brought in good faith by a reasonable, prudent attorney). Accordingly, we
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2022 IL App (2d) 220072
grant defendants request that we impose sanctions. Within 14 days, defendant shall file with this
court a statement of reasonable expenses and attorney fees incurred as a result of this appeal.
Plaintiff and its attorneys shall then have seven days to respond. This court will then file a
supplemental order determining the amount of sanctions. See id.
¶ 71 III. CONCLUSION
¶ 72 For the reasons stated, we affirm the judgment of the circuit court of Kane County.
¶ 73 Affirmed.
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2022 IL App (2d) 220072
Asher Farm Ltd. Partnership v. Wolsfeld, 2022 IL App (2d) 220072
Decision Under Review: Appeal from the Circuit Court of Kane County, No. 21-CH-83;
the Hon. Kevin T. Bush, Judge, presiding.
Attorneys C. Nicholas Cronauer and Bradley D. Melzer, of Cronauer Law,
for LLP, of Sycamore, for appellant.
Appellant:
Attorneys Carrie L. Thompson, of Foster, Buick, Conklin, Lundgren &
for Gottschalk, LLC, of Sycamore, for appellees.
Appellee:
- 26 - | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488375/ | FILED
Nov 21, 2022
02:47 PM(CT)
TENNESSEE COURT OF
WORKERS' COMPENSATION
CLAIMS
TENNESSEE BUREAU OF WORKERS’ COMPENSATION
IN THE COURT OF WORKERS’ COMPENSATION CLAIMS
AT MURFREESBORO
REAZKALLAH ABDELSHAHAED, ) Docket No. 2021-05-0272
Employee, )
v. )
TAYLOR FRESH FOODS, INC., ) State File Nos. 800172-2021
Employer, )
And )
ZURICH AMERICAN INS. CO. ) Judge Dale Tipps
Carrier. )
EXPEDITED HEARING ORDER GRANTING MEDICAL BENEFITS
The Court held an Expedited Hearing on November 15, 2022, on whether Mr.
Abdelshahaed is likely to prove at trial that he suffered a compensable injury and is entitled
to medical and temporary disability benefits. For the reasons below, the Court cannot find
he is likely to prove this but holds Mr. Abdelshahaed is entitled to a panel of physicians.
History of Claim
Mr. Abdelshahaed claimed he cut his left forefinger with a knife while opening
boxes at Taylor Farms on November 4, 2020. He described being intentionally pushed by
his supervisor, which caused the knife to slip. Although Mr. Abdelshahaed claimed his
finger was bleeding profusely, he said Taylor Farms provided no medical treatment other
than a band-aid. Not long after this incident, Taylor Farms terminated him.
Lisa Pomeroy, Taylor Farms’s safety coordinator, testified that on November 4, Mr.
Abdelshahaed was brought to her office because he was upset about an argument on the
floor. She noticed a little blood on his hand, but not on the index finger he now claims was
cut, and she gave him a band-aid. He did not mention a work injury, and the first time she
knew of any claim was when Mr. Abdelshahaed filed his petition for benefit determination.
At the hearing, Mr. Abdelshahaed requested medical treatment and disability
1
benefits.1 Taylor Farms contended that Mr. Abdelshahaed is not entitled to benefits
because he did not prove his injury was primarily caused by work and it was a “first-aid
only” injury.2
Findings of Fact and Conclusions of Law
For the Court to grant Mr. Abdelshahaed’s request, he must prove he is likely to
prevail at a hearing on the merits. Tenn. Code Ann. § 50-6-239(d)(1) (2022); McCord v.
Advantage Human Resourcing, 2015 TN Wrk. Comp. App. Bd. LEXIS 6, at *7-8, 9 (Mar.
27, 2015).
To prove a compensable injury, Mr. Abdelshahaed must show that his alleged
injuries arose primarily out of and in the course and scope of his employment. This
includes the requirement that he must establish a work-related incident, or specific set of
incidents, identifiable by time and place of occurrence. Tenn. Code Ann. § 50-6-
102(12)(A). The parties presented two very different versions of the incident. But they
agreed on one important aspect: Mr. Abdelshahaed was bleeding at work. Under these
circumstances, Mr. Abdelshahaed appears likely to prove the existence of a “work-related
incident” as required by this section.
The question then becomes whether Mr. Abdelshahaed appears likely to prove that
this workplace incident was the primary cause of his alleged need for treatment. The Court
cannot find at this time that he is likely to meet this burden. Neither party offered any
medical evidence addressing the cause of Mr. Abdelshahaed’s current symptoms. Without
a doctor’s causation opinion, he cannot prove “to a reasonable degree of medical certainty”
that his work “contributed more than fifty percent (50%) in causing the . . . disablement or
need for medical treatment, considering all causes,” as required by Tennessee Code
Annotated section 50-6-102(12)(C).
However, even without a causation opinion, an employee may still prove
entitlement to a panel if he presents sufficient evidence in an expedited hearing that a work
event resulted in injury. See Lewis v. Molly Maid, 2016 TN Wrk. Comp. App. Bd. LEXIS
19, at *8-9 (Apr. 20, 2016). Thus, the question is whether Mr. Abdelshahaed is entitled to
a panel of physicians.
1
He also complained of mistreatment by his supervisors, wrongful termination for filing a claim, and
substantial debt arising from his job loss. The Court explained that it has no authority to address these
allegations. Any recourse he might have for those allegations lies outside of the Court of Workers’
Compensation Claims.
2
Taylor Farms also presented testimony about whether Mr. Abdelshahaed was wearing a safety glove at
the time of the incident. However, failure to use a safety device was not listed as a defense on the Dispute
Certification Notice, so the Court will not consider this affirmative defense.
2
Taylor Farms contended that Mr. Abdelshahaed’s injury was minimal and only
required basic first aid. However, it presented no evidence to support this argument.
Further, even if the injury was minor, Mr. Abdelshahaed now claims that it caused
problems with his hand from which he still suffers. The Court is constrained to the record
before it because “judges, like lawyers, are poorly positioned to formulate expert medical
opinions.” Love v. Delta Faucet Co., 2016 TN Wrk. Comp. App. Bd. LEXIS 45, at *15-
16 (Sept. 19, 2016). Similarly, parties cannot rely solely on their own medical
interpretations to support their arguments. Lurz v. Int’l Paper Co., 2018 TN Wrk. Comp.
App. Bd. LEXIS 8, at *17 (Feb. 14, 2018).
Therefore, the Court holds Mr. Abdelshahaed offered sufficient evidence to show at
this interlocutory stage that he is entitled to a panel of physicians. Taylor Farms shall
provide a panel, from which Mr. Abdelshahaed may choose an authorized doctor for
evaluation and, if appropriate, treatment of his alleged injuries under Tennessee Code
Annotated section 50-6-204(a)(1)(A).
Mr. Abdelshahaed also seeks temporary disability benefits. An injured worker is
eligible for temporary total disability benefits if: (1) the worker became disabled from
working due to a compensable injury; (2) there is a causal connection between the injury
and the inability to work; and (3) the worker established the duration of the period of
disability. Jones v. Crencor Leasing and Sales, TN Wrk. Comp. App. Bd. LEXIS 48, at
*7 (Dec. 11, 2015). As noted above, Mr. Abdelshahaed failed to show he is likely to meet
his burden of proving a work-related injury. Therefore, the Court cannot find at this time
that he appears likely to prevail at trial on a claim for temporary disability benefits.
IT IS, THEREFORE, ORDERED as follows:
1. Taylor Farms shall offer Mr. Abdelshahaed a panel of physicians and any medical
treatment made reasonably necessary by his November 4, 2020 injury.
2. Mr. Abdelshahaed’s request for temporary disability benefits is denied at this time.
3. A status hearing will take place on February 2, 2023, at 9:30 a.m. Central Time.
The parties must call 615-532-9552 or toll-free at 866-943-0025 to participate.
Failure to call might result in a determination of issues without your participation.
4. Unless an interlocutory appeal of the Expedited Hearing Order is filed, compliance
with this Order must occur no later than seven business days from the date of entry
of this Order as required by Tennessee Code Annotated section 50-6-239(d)(3). The
Employer must submit confirmation of compliance with this Order to the Bureau by
email to WCCompliance.Program@tn.gov no later than the seventh business day
after entry of this Order. Failure to submit confirmation within seven business days
may result in a penalty assessment for non-compliance. For questions regarding
3
compliance, contact the Workers’ Compensation Compliance Unit via email at
WCCompliance.Program@tn.gov.
ENTERED November 21, 2022.
_____________________________________
Judge Dale Tipps
Court of Workers’ Compensation Claims
APPENDIX
Exhibits:
1. Mr. Abdelshahaed’s June 2, 2022 Rule 72 Declaration Under Penalty of Perjury
2. Notice of Denial and written statements of Carmen Mendoza (identification only)
3. Wage Statement
Technical record:
1. Petition for Benefit Determination
2. Dispute Certification Notice
3. Request for Expedited Hearing
4
CERTIFICATE OF SERVICE
I certify that a copy of the Expedited Hearing Order was sent as indicated on
November 21, 2022.
Name Certified Email Service Sent To
Mail
Reazkallah Abdelshahaed X X 456 Cedar Park Circle
Lavergne, TN 37086
reazkallahabdelshahaed@yahoo.com
Peter Rosen, X prosen@vkbarlaw.com
Employer’s Attorney
______________________________________
PENNY SHRUM, COURT CLERK
wc.courtclerk@tn.gov
5
Expedited Hearing Order Right to Appeal:
If you disagree with this Expedited Hearing Order, you may appeal to the Workers’
Compensation Appeals Board. To appeal an expedited hearing order, you must:
1. Complete the enclosed form entitled: “Notice of Appeal,” and file the form with the
Clerk of the Court of Workers’ Compensation Claims within seven business days of the
date the expedited hearing order was filed. When filing the Notice of Appeal, you must
serve a copy upon all parties.
2. You must pay, via check, money order, or credit card, a $75.00 filing fee within ten
calendar days after filing of the Notice of Appeal. Payments can be made in-person at
any Bureau office or by U.S. mail, hand-delivery, or other delivery service. In the
alternative, you may file an Affidavit of Indigency (form available on the Bureau’s
website or any Bureau office) seeking a waiver of the fee. You must file the fully-
completed Affidavit of Indigency within ten calendar days of filing the Notice of
Appeal. Failure to timely pay the filing fee or file the Affidavit of Indigency will
result in dismissal of the appeal.
3. You bear the responsibility of ensuring a complete record on appeal. You may request
from the court clerk the audio recording of the hearing for a $25.00 fee. If a transcript of
the proceedings is to be filed, a licensed court reporter must prepare the transcript and file
it with the court clerk within ten business days of the filing the Notice of
Appeal. Alternatively, you may file a statement of the evidence prepared jointly by both
parties within ten business days of the filing of the Notice of Appeal. The statement of
the evidence must convey a complete and accurate account of the hearing. The Workers’
Compensation Judge must approve the statement before the record is submitted to the
Appeals Board. If the Appeals Board is called upon to review testimony or other proof
concerning factual matters, the absence of a transcript or statement of the evidence can be
a significant obstacle to meaningful appellate review.
4. If you wish to file a position statement, you must file it with the court clerk within ten
business days after the deadline to file a transcript or statement of the evidence. The
party opposing the appeal may file a response with the court clerk within ten business
days after you file your position statement. All position statements should include: (1) a
statement summarizing the facts of the case from the evidence admitted during the
expedited hearing; (2) a statement summarizing the disposition of the case as a result of
the expedited hearing; (3) a statement of the issue(s) presented for review; and (4) an
argument, citing appropriate statutes, case law, or other authority.
For self-represented litigants: Help from an Ombudsman is available at 800-332-2667.
NOTICE OF APPEAL
Tennessee Bureau of Workers’ Compensation
www.tn.gov/workforce/injuries-at-work/
wc.courtclerk@tn.gov | 1-800-332-2667
Docket No.: ________________________
State File No.: ______________________
Date of Injury: _____________________
___________________________________________________________________________
Employee
v.
___________________________________________________________________________
Employer
Notice is given that ____________________________________________________________________
[List name(s) of all appealing party(ies). Use separate sheet if necessary.]
appeals the following order(s) of the Tennessee Court of Workers’ Compensation Claims to the
Workers’ Compensation Appeals Board (check one or more applicable boxes and include the date file-
stamped on the first page of the order(s) being appealed):
□ Expedited Hearing Order filed on _______________ □ Motion Order filed on ___________________
□ Compensation Order filed on__________________ □ Other Order filed on_____________________
issued by Judge _________________________________________________________________________.
Statement of the Issues on Appeal
Provide a short and plain statement of the issues on appeal or basis for relief on appeal:
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
Parties
Appellant(s) (Requesting Party): _________________________________________ ☐Employer ☐Employee
Address: ________________________________________________________ Phone: ___________________
Email: __________________________________________________________
Attorney’s Name: ______________________________________________ BPR#: _______________________
Attorney’s Email: ______________________________________________ Phone: _______________________
Attorney’s Address: _________________________________________________________________________
* Attach an additional sheet for each additional Appellant *
LB-1099 rev. 01/20 Page 1 of 2 RDA 11082
Employee Name: _______________________________________ Docket No.: _____________________ Date of Inj.: _______________
Appellee(s) (Opposing Party): ___________________________________________ ☐Employer ☐Employee
Appellee’s Address: ______________________________________________ Phone: ____________________
Email: _________________________________________________________
Attorney’s Name: _____________________________________________ BPR#: ________________________
Attorney’s Email: _____________________________________________ Phone: _______________________
Attorney’s Address: _________________________________________________________________________
* Attach an additional sheet for each additional Appellee *
CERTIFICATE OF SERVICE
I, _____________________________________________________________, certify that I have forwarded a
true and exact copy of this Notice of Appeal by First Class mail, postage prepaid, or in any manner as described
in Tennessee Compilation Rules & Regulations, Chapter 0800-02-21, to all parties and/or their attorneys in this
case on this the __________ day of ___________________________________, 20 ____.
______________________________________________
[Signature of appellant or attorney for appellant]
LB-1099 rev. 01/20 Page 2 of 2 RDA 11082 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488372/ | 2022 IL App (2d) 220418-U
No. 2-22-0148
Order filed November 21, 2022
NOTICE: This order was filed under Supreme Court Rule 23(b) and is not precedent
except in the limited circumstances allowed under Rule 23(e)(l).
______________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
SECOND DISTRICT
______________________________________________________________________________
BUTLER BROTHERS SUPPLY DIVISION, ) Appeal from the Circuit Court
LLC, ) of Lake County.
)
Plaintiff-Appellant, )
)
v. ) No. 21 L 583
)
HN PRECISION COMPANY, SCOTT )
NARROL, JEANNE PERRON, and )
PREMIER INDUSTRIAL GROUP, LLC, )
d/b/a HN Precision, ) Honorable
) Luis A. Berrones,
Defendants-Appellees. ) Judge Presiding.
______________________________________________________________________________
JUSTICE HUDSON delivered the judgment of the court.
Presiding Justice Brennan and Justice Schostok concurred in the judgment.
ORDER
¶1 Held: (1) Appellate court had jurisdiction to consider appeal from portion of count of
plaintiff’s complaint which was dismissed without prejudice and referred to
arbitration pursuant to Illinois Supreme Court Rule 307(a)(1); (2) appellate court
had jurisdiction to consider appeal from remaining counts, which were dismissed
with prejudice, pursuant to Illinois Supreme Court Rule 304(a); (3) trial court
correctly dismissed without prejudice and referred to arbitration count against
defendant company; (4) trial court properly dismissed with prejudice portions of
complaint against defendant company’s president and employee because plaintiff
failed to adequately plead with specificity promissory fraud or aiding and abetting
promissory fraud; and (5) trial court correctly dismissed with prejudice count
2022 IL App (2d) 220148-U
against third-party purchaser because plaintiff failed to specifically plead facts from
which actual knowledge or willful ignorance of fraud could be inferred.
¶2 I. INTRODUCTION
¶3 Plaintiff, Butler Brothers Supply Division, LLC, filed a three-count complaint in the circuit
court of Lake County against defendants, HN Precision Company (HN), Scott Narrol (Narrol),
Jeanne Perron (Perron), and Premier Industrial Group, LLC d/b/a HN Precision (Premier). Count
I of the complaint alleged that HN, Narrol, and Perron committed common-law fraud by
perpetuating a scheme to induce plaintiff to deliver goods to HN for which HN did not intend to
pay. Count II alleged, in the alternative, that Narrol and Perron aided and abetted HN in its scheme
to defraud plaintiff. Count III was directed against Premier and alleged that Premier had accepted
the fruits of the allegedly fraudulent scheme orchestrated by HN, Narrol, and Perron. Premier
moved to dismiss the count against it pursuant to section 2-615 of the Code of Civil Procedure
(Code) (735 ILCS 5/2-615 (West 2020)). HN, Narrol, and Perron filed a combined motion to
dismiss the counts against them pursuant to sections 2-615 and 2-619 of the Code (735 ILCS 5/2-
615, 2-619, 2-619.1 (West 2020)). Following oral argument, the trial court dismissed without
prejudice count I against HN and referred the matter to arbitration pursuant to the arbitration clause
in a contract between plaintiff and HN. The court dismissed the remaining defendants (Narrol,
Perron, and Premier) with prejudice. Plaintiff now appeals, arguing that the trial court erroneously
dismissed count I of its complaint against HN based on the premise that the common-law fraud
claim asserted therein was based on a breach of its contract with HN. Plaintiff further argues that
the trial court erred in dismissing the counts against Narrol, Perron, and Premier because its
complaint set forth adequate facts to support the claims against each of those defendants. We
affirm.
¶4 II. BACKGROUND
-2-
2022 IL App (2d) 220148-U
¶5 Plaintiff’s complaint alleged in relevant part as follows. Plaintiff is an industrial supply
distributor with its headquarters in Lewiston, Maine. In addition to supplying industrial materials
to companies across the country, plaintiff offers its customers other services, including full
stockroom management, vendor-managed inventory, and point-of-use vending machines. HN was
a full-service precision machining manufacturer. HN provided design and manufacturing services
to businesses in the general transportation, off-highway vehicles, industrial, and armaments
markets. HN’s headquarters and manufacturing facility were based in Lake Bluff, Illinois.
¶6 The business relationship between plaintiff and HN began in December 2011 when they
signed an integrated supply agreement. The parties renewed their integrated supply agreement
several times thereafter. The most recent integrated supply agreement (Agreement) was executed
in December 2019 and was for a three-year term commencing on January 1, 2020, and expiring on
December 31, 2022. The Agreement provided that plaintiff would manage HN’s storeroom and
tool-crib functions, including purchasing, receiving, issuing, stocking, and controlling certain
categories of items and plaintiff would provide staffing for these services. Based on the
Agreement, HN could purchase supplies from plaintiff through a catalog of items approved by HN
available at HN’s facility (Tool Crib Inventory) or through one-time or spot purchases (Spot Buys)
outside of the list of items in the Tool Crib Inventory. The Agreement also provided that plaintiff
would consign a maximum of $50,000 in inventory to HN. The Agreement required HN to pay
plaintiff no later than 75 days from receipt of invoice. In connection with the consigned inventory,
plaintiff filed a UCC-1 financial statement as a consignment creditor of HN.
¶7 In practice, one of plaintiff’s employees worked on-site at HN’s facility to maintain the
storeroom and tool crib by monitoring and replenishing the Tool Crib Inventory when supplies
were low, based on minimum and maximum levels set by HN. Plaintiff would then invoice HN
-3-
2022 IL App (2d) 220148-U
for the products it had replenished. In addition, HN also made Spot Buy purchases. HN would
request a certain product in a certain quantity, and plaintiff would provide a quote for the requested
items. Once HN approved the quote in writing (via email), plaintiff would deliver the order to HN
and then send an invoice to HN. Perron, who served as HN’s materials manager, was regularly
involved in either the actual ordering or in the confirmation of orders on behalf of HN. Each month,
plaintiff and HN would meet to go over the month’s ordering, pricing, and other issues. Perron
regularly attended these meetings. Perron directly reported to Narrol, HN’s president and chief
financial officer (CFO), as well as to John Devine, HN’s chief executive officer.
¶8 In March 2020, HN began to fall behind on the payment of some of its invoices to plaintiff.
Plaintiff emailed Narrol regarding the accounts receivable, noting that HN had more than $378,000
in overdue payments. Following additional correspondence between plaintiff and Narrol, they
agreed to a payment plan for the amount in arrears.
¶9 In August 2020, HN requested an extension of payment terms, seeking a temporary 90-day
payment term instead of the 75-day term provided for in the Agreement. Plaintiff agreed to HN’s
request. As of December 2020, HN was still paying plaintiff on a 90-day payment term. At that
time, Perron began communicating with plaintiff through phone calls and emails about formally
extending the 90-day payment term. During a January 8, 2021, phone call between Perron and two
of plaintiff’s employees—Kelly John (John) and Ron Cote (Cote)—Perron stated that she would
discuss the payment terms with Narrol and report back at a meeting on January 13, 2021. At the
January 13, 2021, meeting, Perron requested that the 90-day payment term be extended until April.
Plaintiff agreed to the extension.
¶ 10 The extension of the 90-day payment term was included as an agenda item for meetings
between plaintiff and HN held in the months of February, March, and April 2021. Perron attended
-4-
2022 IL App (2d) 220148-U
each of those meetings. During the February 2021 meeting, Perron emphasized HN’s desire to
extend the 90-day payment term until April. By March 2021, HN was not meeting the extended
90-day payment term. During the March 2021 meeting, HN and plaintiff discussed cost-saving
measures and inventory reduction. During the same meeting, Perron stated how pleased she was
with the work that plaintiff and HN were doing together. According to John, who attended the
March meeting, HN emphasized during the March meeting that “they should be back to normal by
April,” referring to the extended payment terms. The April 2021 meeting was held on the 14th of
the month. Perron attended the meeting and discussed HN’s relationship with plaintiff, inventory
needs, ordering, and other matters. In addition, at the April meeting, Perron asked to continue the
90-day terms through April.
¶ 11 From December 2020 through April 2021, HN continued to order goods and services from
plaintiff through the various platforms noted above. Perron was involved throughout this period,
both in the specific ordering of goods and in confirming orders, often providing the necessary
approval to proceed with certain orders. As of April 15, 2021, plaintiff’s total accounts receivable
for HN was approximately $660,225.88.
¶ 12 On or about April 20, 2021, plaintiff learned that on April 15, 2021, Premier had acquired
HN’s assets from PNC Bank (HN’s bank and senior secured lender) through a secured party sale.
Premier is an Illinois limited liability company that was formed on March 17, 2021. Premier is
owned and was established by Ventoux Industrial Holdings, LLC (Ventoux), a private equity firm
that established Premier for the purpose of purchasing HN’s assets. According to an April 20,
2021, email to plaintiff from Gregory Wales, a managing partner at Ventoux and a manager of
Premier, Ventoux “began *** conversations with [HN’s] ownership group several months ago”
and “negotiated a deal with [HN’s] secured creditor, PNC Bank” before purchasing HN’s assets
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through the sale. Wales explained that Ventoux, through Premier, had the “intent *** to focus on
rebuilding the company, while retaining as many of the employees as possible.” Wales also
explained that Premier had purchased “the assets of [HN], and did not assume any trade payables.”
Wales attached a copy of the notice of the impending sale dated March 24, 2021. According to
Wales’s email, the notice was sent to all of HN’s creditors, including plaintiff. However, plaintiff
represented that it had not seen or received the notice prior to Wales’s email. In a subsequent email
dated April 21, 2021, Wales reiterated that “[a]ny tooling sold to [HN] prior to April 15, 2021 is
not the responsibility of Premier” but “any new products sold on or after April 15, 2021 should be
invoiced to Premier.”
¶ 13 Plaintiff filed its three-count complaint against HN, Narrol, Perron, and Premier on August
4, 2021. Plaintiff’s complaint alleged that, beginning in December 2020, after 10 years of doing
business with plaintiff, HN, through the acts of Narrol and Perron, among others, initiated a
months-long scheme to defraud plaintiff by placing orders with plaintiff for which it had no
intention to pay. Plaintiff alleged that each of the orders was a promise by HN to pay plaintiff for
the ordered goods, despite that HN had no intention to pay for the orders due to its knowledge of
the impending sale of HN’s assets and the sale terms. Plaintiff then alleged that, in addition to the
orders themselves, HN engaged in the following conduct between approximately December 2020
and the sale to induce plaintiff to fulfill the orders despite the fact that it had no intention to pay:
“(a) HN, through Perron, negotiated with [plaintiff] in e-mail and telephone in
December 2020 and January 2021 for the extended payment terms of 90 days until April
2021.
(b) HN held the customary [m]onthly [m]eetings with [plaintiff] in January,
February, March, and April 2021 to discuss the month’s ordering, future orders, and any
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other issues, including discussion of the extension of the 90-day payment term. The last of
these [m]onthly [m]eetings occurred on April 14, 2021, the day before the [s]ale. At no
point during any of the [m]onthly [m]eeting [sic] was the upcoming [s]ale disclosed. These
[m]onthly [m]eetings, including the one on April 14, were attended by Perron, who has
admitted that she learned of the [s]ale prior to April 14, 2021.
(c) Perron held weekly calls with [plaintiff] employees John and Cote, discussing
payment terms and ordering.
(d) HN continued to maintain a [plaintiff] employee on-site at the [f]acility as part
of the Tool Crib management without mention of the upcoming [s]ale.”
Plaintiff also alleged that it relied upon the truth of the orders and representations and thus fulfilled
the orders. Plaintiff stated that it “had every reason to believe, based on its long business
relationship with HN and on the [r]epresentations themselves, that everything was business-as-
usual, and that HN would be current on its payments.” Plaintiff further stated that it had no means
to know the truth of HN’s financial situation, the plans for the sale, or HN’s intention not to pay
plaintiff.
¶ 14 Count I of plaintiff’s complaint is entitled “Common Law Fraud (Promissory Fraud)” and
is directed against HN, Narrol, and Perron. Count I alleged that HN, Narrol, and Perron perpetuated
a scheme to induce plaintiff to deliver goods to HN for which HN did not intend to pay.
Specifically, plaintiff alleged that, at least from January 15, 2021, onward, HN, Narrol, and Perron
were aware that HN was in default, that HN’s assets would be sold at a secured party sale, and that
plaintiff’s invoices arising out of goods delivered in the 90 days before the sale would not be paid
for. Plaintiff further alleged that HN, Narrol, and Perron perpetrated a fraudulent scheme by
placing orders with plaintiff for which HN had no intention to pay and that HN, through Perron,
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made representations designed to convince plaintiff that it would make payment in accordance
with the modified payment terms. Plaintiff asserted that as a result of the fraudulent scheme
orchestrated by HN, Narrol, and Perron, it sustained damages of not less than $660,225.88. Count
II is entitled “Aiding and Abetting Common Law Fraud” and alleged, in the alternative, that Narrol
and Perron aided and abetted HN in its scheme to defraud plaintiff. Plaintiff asserted that as a result
of the fraudulent scheme aided and abetted by Narrol and Perron, it sustained damages of not less
than $660,225.88. Count III is entitled “Common Law Fraud (Fruits of the Fraud)” and is directed
against Premier. Count III alleged that Premier had accepted the fruits of the allegedly fraudulent
scheme orchestrated by HN, Narrol, and Perron. Plaintiff asserted that, as a result of Premier’s
acceptance of the fruits of the promissory fraud described in count I, plaintiff sustained damages
of not less than $660,225.88. Plaintiff requested compensatory and punitive damages, as well as
interest, costs, fees, and “any other damages to which it proves itself entitled.” Plaintiff attached
to the complaint a copy of the Agreement and a list of HN’s outstanding invoices.
¶ 15 On October 22, 2021, Premier filed a motion to dismiss count III of plaintiff’s complaint
pursuant to section 2-615 of the Code (735 ILCS 5/2-615 (West 2020)). Premier argued that the
count against it must be dismissed because plaintiff failed to allege with specificity how it was
aware of the allegedly fraudulent scheme perpetrated by HN, Narrol, and Perron.
¶ 16 On November 5, 2021, HN, Narrol, and Perron filed a combined motion to dismiss counts
I and II of plaintiff’s compliant pursuant to sections 2-615 and 2-619 of the Code (735 ILCS 5/2-
615, 2-619, 2-619.1 (West 2020)). HN, Narrol, and Perron argued that plaintiff’s complaint should
be dismissed because plaintiff’s claims concern the alleged nonpayment of purchase orders and
the Agreement between plaintiff and HN mandates arbitration of claims that arise from the
“Agreement and any associated purchase orders.” In support of this position, HN, Narrol, and
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Perron observed, among other things, that the amount of damages claimed by plaintiff
($660,225.88) makes up plaintiff’s outstanding accounts receivables. Although not parties to the
Agreement, Narrol and Perron further argued that the claims against them should be submitted to
binding arbitration under the theory that arbitration is a favored method of dispute resolution or as
third-party beneficiaries to the Agreement. In the event that the trial court denied its argument
based on the Agreement’s arbitration clause, HN, Narrol, and Perron alternatively argued that
plaintiff’s complaint should be dismissed because, among other reasons, (1) plaintiff is improperly
seeking to convert a breach of contract claim into a fraud claim in an attempt to expand its potential
damages, (2) plaintiff cannot meet the elements necessary to plead its fraud claims because the
parties never agreed to change the payment terms for the purchase orders, and (3) plaintiff fails to
plead fraud with specificity as to Narrol.
¶ 17 On January 10, 2022, plaintiff filed a response to defendants’ motions to dismiss. As to
HN, Narrol, and Perron, plaintiff argued that the action should not be dismissed in favor of
arbitration because the claims against those defendants do not fall within the Agreement’s
arbitration clause. Plaintiff contended that the arbitration clause limits arbitrable matters to those
“arising in connection” with the Agreement, language which, under applicable law, must be
interpreted narrowly. Plaintiff asserted that the fraud claims pleaded in the complaint did not arise
in connection with the Agreement and any associated purchase orders, relate to any matters
specifically mentioned in the Agreement, or require the construction of a single provision of the
Agreement. Rather, the dispute arose “in connection with *** Defendants’ lies, deceptions and
fraudulent conduct.” Plaintiff further asserted that the fact that the amount of damages alleged in
the complaint equals the value of the unpaid orders does not convert the complaint into a contract
claim. Additionally, plaintiff argued that HN, Narrol, and Perron failed to refute the well-pleaded
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claims of promissory fraud asserted in the complaint and that the complaint sets forth ample facts,
from which necessary or probable inferences may be drawn, to support counts I and II of plaintiff’s
complaint. Plaintiff also disputed the remaining arguments made by HN, Narrol, and Perron.
Plaintiff contended that Narrol and Perron cannot invoke the arbitration provisions as third-party
beneficiaries to the Agreement because they are not parties to the contract. Plaintiff also
maintained that the fact that the parties did not amend the Agreement to extend the payment terms
is immaterial to the claims alleged in the complaint. Finally, plaintiff claimed that it adequately
pleaded fraud with specificity as to Narrol.
¶ 18 As to Premier, plaintiff argued that, having satisfied the underlying fraud claim (as set forth
in its response to HN’s, Narrol’s, and Perron’s motion to dismiss), its complaint had to set forth
facts that demonstrate that Premier accepted the fruits of the promissory fraud knowing the means
by which they were obtained. Plaintiff argued that it satisfied this requirement because Premier
purchased the assets of HN, which had been “enhanced” as a result of HN’s fraudulent conduct,
without assuming any of HN’s trades payable. Further, plaintiff argued that the complaint
establishes that Premier knew about the underlying fraud, or at the very least, was willfully
ignorant about the consequences of the sale on vendors like plaintiff, based on Wales’s emails and
the timing of the creation of Premier as an entity.
¶ 19 Thereafter, defendants filed replies in support of their motions to dismiss plaintiff’s
complaint. On April 27, 2022, the trial court heard oral argument on the motions to dismiss and
entered an order granting both motions.1 The court’s order provides as follows:
1
The record on appeal does not contain a report of proceedings for the April 27, 2022,
hearing on the motions to dismiss or an acceptable substitute. See Ill. S. Ct. R. 323(c) (eff. July 1,
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“After reading the parties’ briefs and hearing oral argument on Defendants’ Motions to
Dismiss, the Court[:]
1) Dismisses the claims against HN *** without prejudice, on the basis that [plaintiff]
and HN *** should arbitrate their dispute pursuant to clause 22(a) of their ***
Agreement; and
2) Dismisses the remaining defendants (Premier, Narrol and Perron) with prejudice.
3) The Court finds that pursuant to [Illinois Supreme Court] Rule 304(a) [(eff. Mar. 8,
2016)], there is no just reason for delaying enforcement or appeal of this order.”
On May 4, 2022, plaintiff filed a notice of appeal from the April 27, 2022, order.
¶ 20 III. ANALYSIS
¶ 21 On appeal, plaintiff argues that the trial court erred in dismissing without prejudice its claim
for common-law fraud against HN and referring the matter to arbitration because the arbitration
2017). Plaintiff, as the appellant, bears the burden of presenting a sufficiently complete record of
the proceedings to support its claim of error. Foutch v. O’Bryant, 99 Ill. 2d 389, 391 (1984); Short
v. Pye, 2018 IL App (2d) 160405, ¶ 48. Although we resolve against plaintiff any doubts arising
from the record’s incompleteness (see Foutch, 99 Ill. 2d at 392), our review here is limited to the
pleadings, motions, and supporting documents, which are part of the record. See Bezanis v. Fox
Waterway Agency, 2012 IL App (2d) 100948, ¶ 11. In addition, as we discuss more thoroughly
below, the issues raised in this appeal present questions of law that we review de novo without
showing deference to the trial court’s reasoning. See Bezanis, 2012 IL App (2d) 100948, ¶ 11. As
such, the lack of a transcript from the April 27, 2022, hearing, or an acceptable substitute therefor,
does not hinder our review.
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provision in the Agreement between plaintiff and HN does not apply to this dispute. Plaintiff
further argues that count I of its complaint properly sets forth facts sufficient to support its claim
of promissory fraud against HN. Plaintiff also argues that the trial court erred in dismissing with
prejudice (1) its claims for common-law fraud (count I) and aiding and abetting fraud (count II)
against Narrol and Perron and (2) its claim for common-law fraud (count III) against Premier. Prior
to addressing plaintiff’s claims, we must first discuss the issue of appellate jurisdiction.
¶ 22 A. Jurisdiction
¶ 23 Although none of the parties has questioned our jurisdiction to consider plaintiff’s appeal,
a reviewing court has an independent duty to confirm its jurisdiction and to dismiss an appeal, or
portion thereof, if jurisdiction is lacking. Johnson v. Armstrong, 2022 IL 127942, ¶ 18; In re
Marriage of Alyassir, 335 Ill. App. 3d 998, 999 (2003). We find it necessary to address the issue
of jurisdiction in this case because, while the trial court dismissed the counts against Narrol,
Perron, and Premier with prejudice, it dismissed the count against HN without prejudice and
referred the matter to arbitration.
¶ 24 Plaintiff’s notice of appeal indicates that it was filed pursuant to Illinois Supreme Court
Rules 303(a) (eff. July 1, 2017) and 304(a) (eff. Mar. 8, 2016). The jurisdictional statement in
plaintiff’s opening brief specifies that the appeal was brought “under Illinois Supreme Court Rule
301 from a final judgment entered on April 27, 2022.” Rules 301 and 303 allow for the appeal of
a final judgment of the circuit court in civil cases. Ill. S. Ct. R. 301 (eff. Feb. 1, 1994) (“Every final
judgment in a civil case is appealable as of right.”); Ill. S. Ct. R. 303(a) (eff. July 1, 2017) (setting
forth the time, filing, transmission, form, contents, and service requirements for notices of appeal
in civil cases). An order is final and appealable if it terminates the litigation between the parties on
the merits or disposes of the rights of the parties, either on the entire controversy or a separate part
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of the controversy. In re Marriage of Gutman, 232 Ill. 2d 145, 151 (2008). Rule 304(a) states that
“an appeal may be taken from a final judgment as to one or more but fewer than all of the parties
or claims only if the trial court has made an express written finding that there is no just reason for
delaying either enforcement or appeal or both.” Ill. S. Ct. R. 304(a) (eff. Mar. 8, 2016). “By its
terms, Rule 304(a) applies only to final judgments or orders.” Blumenthal v. Brewer, 2016 IL
118781, ¶ 24. The special finding contemplated in Rule 304(a) makes a final order appealable,
“but it can have no effect on a nonfinal order.” Blumenthal, 2016 IL 118781, ¶ 24. If an order is
not in fact final, the inclusion of Rule 304(a) language in the trial court’s order does not confer
jurisdiction on the appellate court. Blumenthal, 2016 IL 118781, ¶ 24. In this case, the trial court’s
April 27, 2022, order included Rule 304(a) language. Accordingly, the question becomes whether
the order is in fact a final order given that count I against HN was dismissed without prejudice and
referred to arbitration.
¶ 25 We conclude that the April 27, 2022, order is not a final order as to HN. As noted above,
the trial court dismissed the count against HN “without prejudice” and referred the matter to
arbitration. Our supreme court has stated that the inclusion of language in an order stating that a
dismissal is “without prejudice,” such as occurred here, “clearly manifests the intent of the court
that the order not be considered final and appealable.” Flores v. Dugan, 91 Ill. 2d 108, 114 (1982);
but see Schal Bovis, Inc. v. Casualty Insurance Co., 314 Ill. App. 3d 562, 568 (1999) (stating that
“the effect of a dismissal order is determined by its substance, and not by the incantation of any
particular magic words”). Further, an order compelling arbitration is not a final order. Royal
Indemnity Co. v. Chicago Hospital Risk Pooling Program, 372 Ill. App. 3d 104, 107 (2007); see
also Pekin Insurance Co. v. Benson, 306 Ill. App. 3d 367, 375 (1999). Rather, such an order is
interlocutory because it is injunctive in nature. Salsitz v. Kreiss, 198 Ill. 2d 1, 11 (2001); In re
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Marriage of Golden, 2012 IL App (2d) 120513, ¶ 17; Nagle v. Nadelhoffer, Nagle, Kuhn, Mitchell,
Moss and Saloga, P.C., 244 Ill. App. 3d 920, 924 (1993). Because the portion of the April 27,
2022, order dismissing count I against HN was not a final order, we do not have jurisdiction to
consider that portion of the appeal under either Rule 301 or Rule 303. Moreover, as noted above,
the inclusion of Rule 304(a) language did not confer jurisdiction to this court as the addition of
such language cannot convert a nonfinal order into a final, appealable order. Blumenthal, 2016 IL
118781, ¶ 24.
¶ 26 Rules 301, 303, and 304(a) are the only rules cited by plaintiff as the bases for our
jurisdiction. Nevertheless, we are not deprived of jurisdiction by an appellant’s citation to the
wrong rule in a notice of appeal. O’Banner v. McDonald’s Corp., 173 Ill. 2d 208, 211 (1996)
(holding that the citation to an incorrect rule does not deprive the court of jurisdiction to consider
appeal). As noted above, orders to compel or stay arbitration are considered interlocutory orders
because they are injunctive in nature. Salsitz, 198 Ill. at 11; In re Marriage of Golden, 2012 IL
App (2d) 120513, ¶ 17; Nagle, 244 Ill. App. 3d at 924. Illinois Supreme Court Rule 307(a)(1) (eff.
Nov. 1, 2017) provides that an appeal may be taken from an interlocutory order “granting,
modifying, refusing, dissolving, or refusing to dissolve or modify an injunction.” Because the trial
court dismissed count I against HN and referred the matter to arbitration, that portion of the court’s
order granted injunctive relief. Therefore, we have jurisdiction under Rule 307(a)(1) to consider
the merits of plaintiff’s appeal with respect to the dismissal of count I against HN. Salsitz, 198 Ill.
2d at 11 (“An order of the circuit court to compel or stay arbitration is injunctive in nature and
subject to interlocutory appeal under paragraph (a)(1) of [Rule 307].”).
¶ 27 We also have jurisdiction over the dismissal of the claims against Narrol, Perron, and
Premier, albeit under a different rule. In this regard, we note that the April 27, 2022, order
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dismissed the claims against those three defendants “with prejudice.” The order was therefore a
final order as it terminated on the merits the litigation between plaintiff and Narrol, Perron, and
Premier. See Dubina v. Mesirow Realty Development, Inc., 178 Ill. 2d 496, 502 (1997) (“A
dismissal with prejudice is usually considered a final judgment ***.”); Ally Financial, Inc. v. Pira,
2017 IL App (2d) 170213, ¶ 29 (same). Although the portion of the April 27, 2022, order directed
at the count against HN was interlocutory, the order included language pursuant to Rule 304(a)
that there was “no just reason for delaying enforcement or appeal of [the] order.” This language
rendered the dismissal of the counts against Narrol, Perron, and Premier appealable. Blumenthal,
2016 IL 118781, ¶ 24; see also Hwang v. Tyler, 253 Ill. App. 3d 43, 45-46 (1993) (“Rule 304(a)
applies to final orders that do not dispose of an entire proceeding and requires a finding that the
order is appealable.”), abrogated on other grounds by Salsitz, 198 Ill. 2d at 11-12. Therefore, we
also have jurisdiction to consider the merits of plaintiff’s appeal with respect to the dismissal of
the counts against Narrol, Perron, and Premier.
¶ 28 B. Merits
¶ 29 As noted earlier, plaintiff challenges the trial court’s dismissal of its complaint on various
grounds. Initially, we address the dismissal without prejudice of count I against HN. We will then
address the dismissal of counts I and II against Narrol and Perron. Finally, we will address the
dismissal of count III against Premier.
¶ 30 1. Count Against HN
¶ 31 The trial court dismissed count I against HN without prejudice and referred the matter to
arbitration. The ruling was premised on the arbitration clause contained in paragraph 22(A) of the
Agreement between plaintiff and HN. That paragraphs states in pertinent part as follows:
“Customer and Supplier shall strive to settle amicably and in good faith any dispute
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arising in connection with this Agreement and any associated Purchase Orders. If they are
unable to do so, the dispute shall be resolved by binding arbitration conducted under the
rules of the American Arbitration Association, as presently in force, by one arbitrator
mutually agreed upon between them or appointed in accordance with said rules.”
Plaintiff argues that this matter should not have been referred to arbitration because the arbitration
provision in the Agreement does not apply to this dispute. Plaintiff observes that courts considering
arbitration clauses that provide for the arbitration of disputes “arising in connection” with a
contract have been read narrowly to apply only to claims relating to matters specifically mentioned
in the contract. See State Farm Mutual Automobile Insurance Co. v. George Hyman Construction
Co., 306 Ill. App. 3d 874, 882 (1999). According to plaintiff, its complaint against HN does not
relate to any matters specifically mentioned in the Agreement or require the construction of a single
provision of the Agreement. Instead, plaintiff maintains, the dispute “arose solely out of, and
therefore ‘in connection with,’ the fraudulent conduct of HN, Narrol, and Perron.” Plaintiff further
argues that count I of its complaint properly sets forth facts sufficient to avoid dismissal of its
claim for promissory fraud against HN.
¶ 32 HN responds that, in granting its motion to dismiss, the trial court correctly determined that
the Agreement’s arbitration provision applied to this matter. HN contends that, regardless of the
moniker plaintiff assigned to the claim, its complaint “arose in connection with the Agreement
and/or [HN’s] purchase orders” because plaintiff “framed its entire case as premised on the
Agreement,” attached a list of the purchase orders HN allegedly failed to pay as an exhibit to the
complaint, and alleged compensatory damages in the exact same amount as the allegedly unpaid
purchase orders. As such, HN reasons, the count against it was subject to binding arbitration.
¶ 33 We previously determined that because an order compelling arbitration is injunctive in
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nature, we have jurisdiction to consider the dismissal of count I against HN pursuant to Illinois
Supreme Court Rule 307(a)(1) (eff. Nov. 1, 2017). Salsitz, 198 Ill. 2d at 11. In an appeal under
Rule 307(a)(1), we are limited to considering whether there was a sufficient showing to sustain the
trial court’s order compelling arbitration. Postma v. Jack Brown Buick, Inc., 157 Ill. 2d 391, 399
(1993); Hollingshead v. A.G. Edwards & Sons, Inc., 396 Ill. App. 3d 1095, 1098-99 (2009). Where,
as here, the trial court enters an order compelling arbitration without an evidentiary hearing, our
review is de novo. Hollingshead, 396 Ill. App. 3d at 1099. Additionally, the scope of an arbitration
clause presents a question of contract interpretation, which is also subject to de novo review. Fiala
v. Bickford Senior Living Group, LLC, 2015 IL App (2d) 141160, ¶ 17.
¶ 34 In Illinois, arbitration is a favored method of resolving disputes. CAC Graphics, Inc. v.
Taylor Corp., 154 Ill. App. 3d 283, 286 (1987). An agreement to arbitrate is a matter of contract.
Liu v. Four Seasons Hotel, Ltd., 2019 IL App (1st) 182645, ¶ 25. However, the parties to an
agreement are bound to arbitrate “only those issues they have agreed to arbitrate, as shown by the
clear language of the agreement and their intentions as expressed in the language.” Royal
Indemnity Co., 372 Ill. App. 3d at 110; see also Flood v. Country Mutual Insurance Co., 41 Ill. 2d
91, 94 (1968). Thus, the key factor in determining arbitrability is the intent of the parties and the
paramount factor in determining that intention is the scope of the arbitration clause in the parties’
agreement. Green v. Bank One LaGrange, 266 Ill. App. 3d 344, 348 (1994). When the language
of the agreement is clear, the court determines the parties’ intent solely from the express language
of the agreement, giving the language its plain and ordinary meaning. Liu, 2019 IL App (1st)
182645, ¶ 25. Courts also consider the agreement as a whole and cannot make a new agreement
by supplying provisions or giving plain and unambiguous language a distorted construction. Liu,
2019 IL App (1st) 182645, ¶ 25.
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¶ 35 Where an arbitration clause is “generic,” meaning that it is nonspecific in designating the
arbitrable issues, the court is required to examine the wording of the arbitration clause along with
the other terms of the contract in which the arbitration clause is found. Keeley & Sons, Inc. v.
Zurich American Insurance Co., 409 Ill. App. 3d 515, 520-21 (2011). A “generic” arbitration
clause is characterized by language providing that “ ‘all claims “arising out of” or “relating to” an
agreement’ ” shall be decided by arbitration. Keeley & Sons, Inc., 409 Ill. App. 3d at 520 (quoting
A.E. Staley Manufacturing Co. v. Robertson, 200 Ill. App. 3d 725, 729 (1990)). By contrast, where
an arbitration clause contains the phrase, “arising out of the agreement” (or a variation thereof),
but fails to also include the phrase “or relating to [the agreement]” (or a variation thereof), it is
narrower than a generic clause, and any arbitration should be limited to the specific terms of the
contract or agreement containing the arbitration clause. Fiala, 2015 IL App (2d) 141160, ¶ 19; see
also State Farm Mutual Automobile Insurance Co., 306 Ill. App. 3d at 882-83.
¶ 36 With the foregoing principles in mind, we conclude that the trial court correctly determined
that the Agreement’s arbitration clause applied to the dispute between plaintiff and HN. The
Agreement’s arbitration clause applies to “any dispute arising in connection with this Agreement
and any associated Purchase Orders.” Irrespective of whether the arbitration provision is
interpreted broadly or more narrowly, plaintiff’s claim against HN is subject to the arbitration
clause because it clearly is “in connection with” the “Agreement and any associated Purchase
Orders.” In this regard, plaintiff’s claim is predicated upon the alleged failure of HN to pay for
orders placed between January 15, 2021, and the date of HN’s sale to Premier. Indeed, the very
first numbered paragraph of the complaint alleged that “HN—through the acts of Narrol and
Perron, among others—initiated a months-long scheme to defraud [plaintiff] by placing orders
with [plaintiff] for which it had no intention to pay.” (Emphasis added.) Plaintiff further alleged
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that the extension of the Agreement’s 75-day payment terms to 90 days allowed HN to conceal the
fact it did not intend to pay for its orders. Similarly, plaintiff alleged that HN’s “business-as-usual
conduct” in continuing to place orders pursuant to the Agreement continued the purported fraud.
These allegations arose from and concerned the Agreement. Additionally, plaintiff attached to its
complaint a list of the purchase orders HN allegedly failed to pay pursuant to the terms of the
Agreement and requested compensatory damages in an amount equal to the allegedly unpaid
purchase orders. Thus, without HN ordering materials pursuant to the Agreement and the alleged
failure to pay for the purchase orders pursuant to the terms of the Agreement, there would be no
claims. Under these circumstances, it strains logic for plaintiff to suggest that the tort claims are
the primary basis for their complaint and that they are in no way related to the Agreement and
associated purchase orders. Accordingly, we conclude that there is a sufficient relationship with
the Agreement to make plaintiff’s claim against HN arbitrable. See Bass v. SMG, Inc., 328 Ill.
App. 3d 492, 503 (2002) (holding that the plaintiff’s own characterization of the acts at issue
established “a sufficient relationship with [the parties’] agreement to make his counts arbitrable”).
¶ 37 In so holding, we acknowledge authority stating that when a contract is silent on the issue
sought to be arbitrated, it does not fall within an arbitration clause providing for arbitration of
disputes “arising in connection with” the contract. For instance, in Silver Cross Hospital v. S.N.
Nielsen Co., 8 Ill. App. 3d 1000 (1972), the plaintiff entered into a contract with the defendant, a
general contractor, to build an addition to its facility. The contract provided that “all disputes
arising in connection with this contract shall be submitted to arbitration.” The contract also
provided that the contractor “shall at all times protect his excavation, trenches, and construction
from damage by rainwater, springwater, ground water, backing up of drains or sewers, and all
other water” and that “[a]ll work damaged by failure to provide protection shall be removed and
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replaced with new work at expense of Contractor.” During the course of construction rains caused
flooding to the site, resulting in $300,000 in damages. After repairing the damage at its own
expense, the defendant served a demand for arbitration upon the plaintiff. The plaintiff refused to
arbitrate and brought an action for a declaratory judgment and an injunction to restrain the
defendant from proceeding to arbitration. The trial court ruled in the plaintiff’s favor and the
defendant appealed.
¶ 38 At issue on appeal, was whether the terms of the parties’ contract required plaintiff to
submit to arbitration. Silver Cross Hospital, 8 Ill. App. 3d at 1001. The defendant argued that all
disputes arising “in connection with” the contract are arbitrable, and liability for water damage is
covered by the contract, so the dispute over liability for the water damage was arbitrable. Silver
Cross Hospital, 8 Ill. App. 3d at 1002. The plaintiff responded that liability of the owner to the
contractor for water damage was not covered by the contract, so the dispute over the plaintiff’s
liability to the defendant for water damage was not arbitrable. Silver Cross Hospital, 8 Ill. App.
3d at 1002. The reviewing court held that the plaintiff did not agree to arbitrate its liability to the
defendant for water damage because the contract provisions spoke only of the contractor’s
responsibilities with respect to water, and made no reference to any responsibilities of the owner
relating to water. Silver Cross Hospital, 8 Ill. App. 3d at 1002.
¶ 39 The court in Silver Cross Hospital relied on Harrison F. Blades, Inc. v. Jarman Memorial
Hospital Building Fund, Inc., 109 Ill. App. 2d 224 (1969). Harrison F. Blades, Inc. also involved
a construction contract. The contractor sought to arbitrate an adjustment of the contract
consideration to reflect an additional $200,000 in costs due to changes and delays perpetrated by
the owner. The trial court stayed arbitration on the basis that the subject matter proposed to be
arbitrated was not an issue encompassed within the parties’ contract. The reviewing court agreed.
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Harrison F. Blades, Inc., 109 Ill. App. 3d at 226-31. The court held that an agreement to arbitrate
damages to an owner caused by a contractor’s changes and delays could not be read as an
agreement to arbitrate damages to the contractor caused by the owner’s changes and delays.
Harrison F. Blades, Inc., 109 Ill. App. 3d at 229-31. The court considered the subject matter which
the parties had agreed to arbitrate was not simply liability for changes and delays, but rather, more
narrowly, the liability of the contractor for changes and delays, as distinguished from the liability
of the owner for changes and delays. Harrison F. Blades, Inc., 109 Ill. App. 3d at 229-31.
¶ 40 In Silver Cross Hospital and Harrison F. Blades, Inc. the contracts were silent on the issues
to be arbitrated. This is not the case here. The Agreement governs the terms of payment of HN’s
orders with plaintiff. As noted above, plaintiff’s claim against HN is predicated upon HN “placing
orders with [plaintiff] for which it had no intention to pay.” As such, the dispute between the
parties “aris[es] in connection with” the Agreement and associated purchase orders. It is therefore
arbitrable. Thus, while plaintiff has couched its claim against HN as sounding in tort, the
allegations stem from the nonpayment of purchase orders, which is clearly governed by the
Agreement.
¶ 41 In short, we conclude that the trial court was correct in finding that plaintiff’s claim against
HN was subject to binding arbitration pursuant to the Agreement. Because our jurisdiction under
Rule 307(a)(1) is limited to considering whether there was a sufficient showing to sustain the trial
court’s order compelling arbitration (Postma, 157 Ill. 2d at 399; Hollingshead, 396 Ill. App. 3d at
1098-99), we do not address plaintiff’s argument that count I of its complaint properly sets forth
facts sufficient to avoid dismissal of its claim for promissory fraud against HN.
¶ 42 2. Counts Against Remaining Defendants
¶ 43 The trial court granted the motions of Narrol, Perron, and Premier and dismissed the counts
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against them with prejudice. Plaintiff argues that the trial court erred in dismissing the counts
against Narrol, Perron, and Premier because its complaint set forth adequate facts to support the
claims against each of those defendants.
¶ 44 a. Standard of Review
¶ 45 The portion of the appeal involving Narrol, Perron, and Premier results from a trial court
order granting motions to dismiss plaintiff’s complaint under sections 2-615 and 2-619 of the Code
(735 ILCS 5/2-615, 2-619 (West 2020)). A dismissal motion filed under section 2-615 of the Code
(735 ILCS 5/2-615 (West 2020)) challenges the legal sufficiency of the complaint. Wilson v.
County of Cook, 2012 IL 112026, ¶ 14. In ruling on a section 2-615 motion, all well-pleaded facts
and all reasonable inferences that may be drawn from those facts are accepted as true. Marshall v.
Burger King Corp., 222 Ill. 2d 422, 429 (2006). However, a plaintiff may not rely on mere
conclusions of law or fact unsupported by specific factual allegations. Pooh-Bah Enterprises, Inc.
v. County of Cook, 232 Ill. 2d 463, 473 (2009). The critical inquiry in reviewing a section 2-615
motion is whether the allegations in the complaint, construed in the light most favorable to the
plaintiff, are sufficient to state a cause of action upon which relief may be granted. Jane Doe-3 v.
McLean County Unit District No. 5 Board of Directors, 2012 Il 112479, ¶ 16. Thus, only those
facts apparent from the face of the pleadings, documents attached to a complaint (including
exhibits, depositions, and affidavits), matters of which the court can take judicial notice, and
judicial admissions in the record may be considered in ruling on a section 2-615 motion. Bruss v.
Przybylo, 385 Ill. App. 3d 399, 405 (2008); Brock v. Anderson Road Ass’n, 287 Ill. App. 3d 16,
21 (1997). Where allegations made in the body of the complaint conflict with facts disclosed in
the exhibits, the exhibits control and the allegations will not be taken as true in evaluating the
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sufficiency of the complaint. Bajwa v. Metropolitan Life Insurance Co., 208 Ill. 2d 414, 430-431
(2004).
¶ 46 In contrast, a motion to dismiss based on section 2-619 of the Code (735 ILCS 5/2-619
(West 2020)) admits the legal sufficiency of the complaint but raises defects, defenses, or other
affirmative matter, appearing on the face of the complaint or established by external submissions,
that defeat the claim. Orlak v. Loyola University Health System, 228 Ill. 2d 1, 6-7 (2007); Jaros v.
Village of Downers Grove, 2020 IL App (2d) 180654, ¶ 35; Malinski v. Grayslake Community
High School District 127, 2014 IL App (2d) 130685, ¶ 6. An “affirmative matter” for purposes of
a section 2-619 motion is something in the nature of a defense that negates the cause of action
completely or refutes crucial conclusions of law or conclusions of material fact contained in or
inferred from the complaint. Cwikla v. Sheir, 345 Ill. App. 3d 23, 29 (2003). The purpose of section
2-619 is to afford litigants a means to dispose of issues of law and easily proven issues of fact at
the outset of litigation. Brummel v. Grossman, 2018 IL App (1st) 162540, ¶ 22.
¶ 47 Our review under either section 2-615 or section 2-619 of the Code is de novo. Hadley v.
Doe, 2015 IL 118000, ¶ 29; Malinski, 2014 IL App (2d) 130685, ¶ 6. Further, we may affirm the
trial court’s judgment on any basis in the record, regardless of the court’s reasoning. Northwestern
Illinois Area Agency on Aging v. Basta, 2022 IL App (2d) 210234, ¶ 33.
¶ 48 b. Counts Against Narrol and Perron
¶ 49 Plaintiff argues that the trial court erred in dismissing with prejudice its claims for (1)
common-law (promissory) fraud (count I) against Narrol and Perron and (2) aiding and abetting
fraud (count II) against Narrol and Perron. According to plaintiff, its complaint sets forth adequate
facts to support its claim of promissory fraud against Narrol and Perron because they were active
participants in the scheme to defraud it. Alternatively, plaintiff contends that the complaint sets
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forth adequate facts to support its claim that Narrol and Perron aided and abetted HN’s fraud.
¶ 50 Narrol and Perron respond that the trial court correctly dismissed the claims against them
because plaintiff’s promissory fraud claim was nothing more than a misnomer breach-of-contract
action. Narrol and Perron further claim that plaintiff’s fraud claim fails as a matter of law because
there was never an agreement to change the payment terms and plaintiff’s fraud claim against
Narrol was inadequately pleaded. Alternatively, Narrol and Perron argue that the trial court could
have granted their motion to dismiss based on the Agreement’s arbitration provision. In this regard,
Narrol and Perron contend that they were third-party beneficiaries of HN and acted as HN’s agents.
Thus, Narrol and Perron argue, in the event that this court were to find that the trial court should
not have dismissed them from the case with prejudice, we should affirm Narrol’s and Perron’s
dismissal on this alternative basis.
¶ 51 i. Fraud—Count I
¶ 52 The elements of common-law fraud are (1) a false statement of material fact by the
defendant, (2) the defendant’s knowledge that the statement was false, (3) the defendant’s intent
that the statement induce the plaintiff to act, (4) the plaintiff’s reliance upon the truth of the
statement, and (5) the plaintiff’s damages resulting from reliance on the statement. Connick v.
Suzuki Motor Co., 174 Ill. 2d 482, 496 (1996).
¶ 53 Generally, promissory fraud—a promise of future intent or conduct—is not actionable in
Illinois. Abazari v. Rosalind Franklin University of Medicine & Science, 2015 IL App (2d) 140952,
¶ 15. The supreme court articulated the rationale for such a rule as follows:
“If a promise is made to do something in the future and at the time it is not intended to
perform the promise, that fact does not constitute fraud in the law. If an intention not to
perform constituted fraud, every transaction might be avoided where the facts justified an
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inference that a party did not intend to pay the consideration or keep his agreement. A mere
breach of a contract does not amount to a fraud, and neither a knowledge of inability to
perform, nor an intention not to do so, would make the transaction fraudulent.” Miller v.
Sutliff, 241 Ill. 521, 526-27 (1909).
Thus, typically, misrepresentations alleged in a fraud claim must be of preexisting or present facts.
Abazari, 2015 IL App (2d) 140952, ¶ 15. However, there is an exception for the rule that
promissory fraud is not actionable if the alleged false promises or misrepresentations of future
conduct are “alleged to be the scheme employed to accomplish the fraud.” Henderson Square
Condominium Ass’n v. LAB Townhomes, LLC, 2015 IL 118139, ¶ 69.
¶ 54 To adequately state a claim, the complaint must allege facts that, if proven, would establish
the elements of the claim asserted. Abazari, 2015 IL App (2d) 140952, ¶ 13. Fraud-based claims
are held to a higher standard of pleading, as there must be specific allegations from which fraud is
the necessary or probable inference, including what representations were made, when they were
made, who made them, and to whom they were made. Feis Equities, LLC v. Sompo International
Holdings, Ltd., 2020 IL App (1st) 191072, ¶ 53; Abazari, 2015 IL App (2d) 140952, ¶ 13. A
plaintiff pleading fraud must allege facts sufficient to establish his or her reliance on the alleged
misrepresentations was reasonable or justified in light of all the facts the plaintiff knew and the
facts the plaintiff could have learned by exercising ordinary prudence. Dvorkin v. Soderquist, 2022
IL App (1st) 201368, ¶ 87. Conclusory allegations are insufficient. Aasonn, LLC v. Delany, 2011
IL App (2d) 101125, ¶ 28.
¶ 55 At the outset, we observe that the distinguishing features of a “scheme” are not well
articulated in Illinois case law. General Electric Credit Auto Lease, Inc. v. Jankuski, 177 Ill. App.
3d 380, 384 (1988). Here, plaintiff contends that its complaint sets forth adequate facts to support
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its claim of promissory fraud against Narrol and Perron because they were active participants in
the scheme to defraud it. In particular, plaintiff’s complaint asserted that HN, through the acts of
Narrol and Perron, initiated a months-long scheme to defraud plaintiff by placing orders with
plaintiff for which HN had no intention to pay. Plaintiff further asserted that during this time, HN
repeatedly promised to pay plaintiff for the goods it ordered while simultaneously requesting
extended payment terms and covertly negotiating a secured party sale of HN’s assets to a third
party. Plaintiff relies principally on HPI Health Care Services, Inc. v. Mt. Vernon Hospital, Inc.,
131 Ill. 2d 145 (1989) in support of its position. We therefore turn to that case for guidance.
¶ 56 In HPI Health Care Services, Inc., the supreme court found the plaintiff’s allegations were
sufficient to allege a scheme to defraud where the complaint set forth “a number of specific factual
allegations” supporting its claim that the defendants employed a scheme of repeated and numerous
false promises and representations. HPI Health Care Services, Inc., 131 Ill. 2d at 168-69. In this
regard, the complaint detailed 11 “knowingly false promises” that each of the defendants allegedly
made to induce the plaintiff to continue providing certain goods and services, providing the
approximate dates of those representations and factual details regarding the content of those
representations. HPI Health Care Services, Inc., 131 Ill. 2d at 165-68. The representations included
promises regarding the payment of services, the obtaining of loans, and the implementation of a
payment plan. HPI Health Care Services, Inc., 131 Ill. 2d at 165-67. The supreme court concluded
the false promises were “the scheme or device to accomplish the [alleged] fraud.” HPI Health
Care Services, Inc., 131 Ill. 2d at 169.
¶ 57 This case is distinguishable from HPI Health Care Services, Inc. As noted above, the
plaintiff in HPI Health Care Services, Inc. alleged 11 different misrepresentations and provided
facts regarding the specific content of those misrepresentations and the dates on which they were
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made. By contrast, plaintiff fails to allege what specific misrepresentations were made by Narrol,
when they were made, or to whom they were made. The only conceivable factual allegation
regarding Narrol pertains to an email dated March 2020, which, according to plaintiff’s allegations,
was months before the alleged fraudulent conduct began. See HPI Health Care Services, Inc., 131
Ill. 2d 145, 169-70 (1989) (concluding that the plaintiff’s complaint did not state a cause of action
against one of the named defendants; the complaint failed to provide any specific factual
allegations in support of its claim that the defendant at issue participated in a fraudulent scheme,
the defendant’s conduct occurred prior to the commencement of the alleged fraudulent scheme,
and none of the 11 specific factual allegations regarding the alleged scheme mentioned the
defendant). Accordingly, we find that the trial court was correct in dismissing count I of the
complaint with prejudice as it pertains to Narrol.
¶ 58 Plaintiff insists that its complaint adequately pleaded promissory fraud with the requisite
specificity as to Narrol because the complaint establishes that Narrol served as the president and
CFO of HN; he supervised Perron; and Perron, during her conversations with plaintiff’s
representatives, stated that she would discuss payment terms with Narrol. Plaintiff’s arguments are
not well taken since plaintiff’s claims against Perron were also dismissed. And, as we discuss in
the following paragraph, the trial court was correct in dismissing count I of the complaint with
prejudice as it pertains to Perron.
¶ 59 In particular, plaintiff failed to allege sufficient facts to establish that Perron knew any of
the alleged promises to pay were false. Plaintiff cites the fact that Perron repeatedly ordered from
HN and requested extended payment terms. However, Perron’s requests on HN’s behalf for a 90-
day payment term, instead of the Agreement’s 75-day payment term, were not “false” or “true.”
There was no assertion of fact by Perron, only a request for extension of payment terms. Thus, this
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assertion is without merit. Plaintiff also claims that Perron knew about the secured party sale of
HN’s assets to a third-party prior to the sale’s closing and therefore knew that HN would not be
able to pay for the items it ordered. Plaintiff alleges that Perron knew such statements were false
based on her role at HN and the acknowledgment that HN was in negotiations with PNC Bank and
Ventoux (and later Premier) regarding the sale of its assets for months prior to the sale. However,
plaintiff’s allegations of Perron’s knowledge of HN’s sale are well outside of its personal
knowledge and is therefore made upon information and belief. See United States ex rel. Grenadyor
v. Ukrainian Village Pharmacy, Inc., 772 F.3d 1102, 1114 (7th Cir. 2014) (stating that allegations
based on information and belief “won’t do in a fraud case—for it can mean as little as ‘on
rumor.’ ”). While plaintiff notes that the knowledge element of a fraud claim may be inferred based
on circumstantial evidence (see Mother Earth, Ltd. v. Strawberry Camel, Ltd., 72 Ill. App. 3d 37,
50 (1979)), plaintiff fails to allege any facts indicating that Perron, in her role as an employee of
HN, would have been involved in negotiations for the sale of HN’s assets or knew the
consequences of a secured party sale, i.e., that the third-party purchaser of HN’s assets would not
assume any trade payables. Moreover, although plaintiff’s complaint alleges that Perron
“admitted” that she learned of the sale of HN’s assets prior to its closing, it fails to specify exactly
when she learned of the sale other than the vague statement that it was prior to the sale closing.
Accordingly, we conclude that the trial court was also correct in dismissing count I of the
complaint with prejudice as it pertains to Perron.
¶ 60 ii. Aiding and Abetting—Count II
¶ 61 Plaintiff alternatively argues that its complaint sets forth adequate facts to support its claim
that Narrol and Perron aided and abetted HN’s fraud. “Under Illinois law, to state a claim for aiding
and abetting, one must allege (1) the party whom the defendant aids performed a wrongful act
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causing an injury, (2) the defendant was aware of his role when he provided assistance, and (3) the
defendant knowingly and substantially assisted the violation.” Hefferman v. Bass, 467 F.3d 596,
601 (7th Cir. 2006) (citing Thornwood v. Jenner & Block, 344 Ill. App. 3d 15, 27-28 (2003)).
¶ 62 Plaintiff argues that the complaint sets forth facts that establish the elements for aiding and
abetting as to both Narrol and Perron. First, HN perpetrated a scheme of promissory fraud, which
resulted in plaintiff incurring not less than $660,225.88 in damages. Second, in the winter and
early spring of 2021, by virtue of their positions at HN, both Narrol and Perron knew HN was in
default with PNC Bank and that a sale of HN’s assets was being negotiated. Further, both Narrol
and Perron knew of the actual sale before it occurred, and knew that HN could not—and because
of the sale, would not—pay for any goods and services provided to plaintiff. Despite this, Narrol
and Perron continued to place and authorize orders with plaintiff. Third, Narrol and Perron
knowingly and substantially assisted in the fraud by continuing a business-as-usual approach with
plaintiff during that time by requesting extended payment terms for HN with plaintiff and promises
to pay its arrearages, promises they knew would not be kept.
¶ 63 We find plaintiff’s argument unpersuasive. As noted earlier, Perron was merely an
employee of HN. Plaintiff fails to allege any facts indicating that Perron, in her role as an employee
of HN, would have been involved in negotiations for the sale of HN’s assets or knew the
consequences of a secured party sale, i.e., that the third-party purchaser of HN’s assets would not
assume any trade payables. Moreover, although plaintiff’s complaint alleges that Perron
“admitted” that she learned of the sale of HN’s assets prior to its closing, it fails to specify exactly
when she learned of the sale other than the vague statement that it was prior to the sale closing.
Moreover, plaintiff’s failure to allege what specific misrepresentations were made by Narrol, when
they were made, or to whom they were made renders the allegations against him insufficient.
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Accordingly, we conclude that the trial court was also correct in dismissing count I of the
complaint with prejudice as it pertains to Perron.
¶ 64 c. Count Against Premier
¶ 65 In addition to the counts against HN, Narrol, and Perron, plaintiff also asserted a count of
common-law fraud against Premier, as the third-party purchaser of HN’s assets, for benefitting
from the fruits of the allegedly fraudulent scheme orchestrated by HN, Narrol, and Perron. The
trial court dismissed the count against Premier with prejudice. Plaintiff argues that the trial court
erred in doing so because the complaint clearly sets forth facts demonstrating that Premier accepted
the fruits of the promissory fraud knowing the means by which they were obtained, or at the very
least, with willful ignorance about the consequences of the sale on vendors like plaintiff. Premier
responds that the trial court properly dismissed the count against it because plaintiff has not alleged
specific facts that it had either actual knowledge of, or was willfully blind to, any facts of alleged
fraudulent activity.
¶ 66 Under Illinois law, if a third party “accepts the fruits of fraud knowing the means by which
they were obtained he is liable even though he did not personally participate in the fraud.” Moore
v. Pinkert, 28 Ill. App. 2d 320, 333 (1960). To recover under a claim for knowingly accepting the
fruits of purportedly fraudulent conduct, the plaintiff must demonstrate the elements of the
underlying fraud claim. See Pulphus v. Sullivan, 2003 WL 1964333, at *20 (N.D. Ill. 2003)
(applying Illinois law); Shacket v. Philko Aviation, Inc., 590 F. Supp. 664, 668 (N.D. Ill. 1984)
(same). As noted above, to state a claim for common-law fraud, a plaintiff must allege that any
misrepresentation was: (1) a false statement of material fact; (2) known or believed to be false by
the party making them; (3) intended to induce the other party to act; (4) acted upon by the other
party in reliance upon the truth of the representations; and (5) resulted in damages to the other
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party. Connick, 174 Ill. 2d at 496. Additionally, to properly state a cause of action for accepting
the fruits of common law fraud, the plaintiff must allege that the beneficiary accepted the benefit
of the alleged fraud while knowing how it was obtained. Moore, 28 Ill. App. 2d at 333. The
knowledge element may be satisfied by demonstrating either actual knowledge or willful
ignorance of the fraud. Pulphus, 2003 WL 1964333 at *20. Moreover, in Illinois, fraud must be
pleaded with specificity and particularity, and a plaintiff must set forth, with specificity, what
representations were made, when they were made, who made the representations, and to whom
they were made. Feis, 2020 IL App (1st) 191072, ¶ 53; Abazari, 2015 IL App (2d) 140952, ¶ 13.
As such, conclusory statements are insufficient in law to state a cause of action based on fraud.
Aasonn, LLC, 2011 IL App (2d) 101125, ¶ 28.
¶ 67 Putting aside whether plaintiff adequately pleaded the elements of the underlying fraud
claim, we conclude that the trial court correctly granted the motion to dismiss as to Premier.
Plaintiff argues that the complaint clearly sets forth facts that demonstrate that Premier accepted
the fruits of the promissory fraud knowing the means by which they were obtained. Plaintiff asserts
that Premier accepted the fruits of the underlying fraud by purchasing the assets of HN, which had
been “enhanced” as a result of the fraudulent conduct of HN, Narrol, and Perron, yet Premier did
not compensate plaintiff for HN’s unpaid invoices. And, according to plaintiff, its complaint
establishes that Premier knew about the underlying fraud based on (1) Wales’s roles at both
Ventoux and Premier, (2) the timing of the creation of Premier as an entity, and (3) Wales’s email
explaining that Ventoux, and eventually Premier, had been in negotiations with HN for “several
months” prior to the sale.
¶ 68 However, construing the allegations of plaintiff’s complaint in the light most favorable to
plaintiff, as we must, we find them insufficient to state a cause of action against Premier for
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accepting the fruits of common-law fraud. In particular, plaintiff does not detail how the facts
alleged in its complaint, standing alone or cumulatively, demonstrate that Premier accepted the
fruits of the promissory fraud knowing the means by which they were obtained, or at the very least,
with willful ignorance about the consequences of the sale on vendors like plaintiff. Plaintiff does
not explain how fraud can be inferred from the fact that a manager at a private equity firm became
the manager of a limited liability company established to acquire the assets of a different company.
Likewise, plaintiff does not explain how the knowledge element is satisfied by the mere fact that
Ventoux created Premier a month prior to the purchase of the assets of HN from PNC Bank. As
Premier observes, Ventoux could have purchased the assets of HN itself, thereby demonstrating
the irrelevance of the timing of the creation of Premier as an entity. Additionally, the knowledge
element cannot be inferred from Wales’s email to plaintiff regarding the timing of the negotiations
of the secured party sale. Plaintiff posits that, “[g]iven the length of the negotiation period, Premier
was aware the [sic] HN was still operating and still buying product thorough [sic] and including
the date of the Sale because it acquired an operating business.” We fail to see how the fact that HN
was still operating and buying product during the period of time Premier was negotiating the
purchase of HN’s assets establishes that Premier had actual knowledge of (or was willfully
ignorant of) any underlying, allegedly fraudulent conduct by HN, Narrol, or Perron.
¶ 69 Plaintiff also posits that Premier accepted the fruits of the promissory fraud knowing the
means by which they were obtained because it knew that a secured party sale pursuant to Article
9 of the Uniform Commercial Code would allow Premier to purchase the assets of HN without
assuming its trade payables. However, it is assumed in sales that take place in accordance with
Article 9 of the Uniform Commercial Code that the debtor’s debt will be unpaid. See 810 ILCS
5/9-617 (West 2020) (providing that a secured party’s disposition of collateral after default: (1)
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transfers to a transferee for value all of the debtor’s rights in the collateral, (2) discharges the
security interest under which the disposition is made, and (3) discharges any subordinate security
interest or other subordinate lien). As Premier cogently observes, if negotiations between a third
party and a secured creditor regarding the secured party sale of an insolvent business creates an
inference that the third party is purchasing with knowledge of a fraudulent scheme, then the process
for foreclosing on a security interest under Article 9 would collapse, since it would necessarily
involve fraudulent conduct every time. Accordingly, while one can infer that Premier had actual
knowledge of how Article 9 works to eliminate unsecured debts, plaintiff has not alleged in its
complaint specific facts that Premier had either actual knowledge of, or was willfully ignorant of,
any facts of alleged fraudulent activity by HN, Narrol, or Perron. Further, the record is devoid of
anything that would explain how Premier could have become aware of the allegedly fraudulent
scheme. For instance, plaintiff does not allege that Narrol or Perron were officers or managers of
Premier at the time of the sale such that any knowledge they had could be imputed to Premier. See
Campen v. Executive House Hotel, Inc., 105 Ill. App. 3d 576, 586 (1982) (“[K]nowledge which a
corporate agent receives while acting within the scope of his or her agency is imputed to the
corporation if the knowledge concerns a matter within the scope of the agent’s authority.”). To the
contrary, plaintiff has alleged that Narrol and Perron were not Premier’s employees prior to the
sale. Similarly, plaintiff does not allege that Narrol or Perron had any decision-making authority
for Premier when Premier purchased HN’s assets.
¶ 70 In short, plaintiff’s pleadings fall short of specifying any manner by which Premier became
aware of an allegedly fraudulent scheme that was purportedly perpetrated largely before its
corporate existence began. As a result, the trial court correctly dismissed plaintiff’s complaint
against Premier with prejudice.
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¶ 71 IV. CONCLUSION
¶ 72 For the reasons set forth above, we affirm the judgment of the circuit court of Lake County.
¶ 73 Affirmed.
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https://www.courtlistener.com/api/rest/v3/opinions/8488369/ | NOTICE: This order was filed under Supreme Court Rule 23 and is not precedent except
in the limited circumstances allowed under Rule 23(e)(1).
2022 IL App (3d) 190447-U
Order filed November 21, 2022
____________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
THIRD DISTRICT
2022
THE PEOPLE OF THE STATE OF ) Appeal from the Circuit Court
ILLINOIS, ) of the 10th Judicial Circuit,
) Tazewell County, Illinois.
Plaintiff-Appellee, )
) Appeal No. 3-19-0447
v. ) Circuit No. 15-CF-506
)
STEPHEN L. KING, ) Honorable
) Kim L. Kelley,
Defendant-Appellant. ) Judge, Presiding.
____________________________________________________________________________
JUSTICE McDADE delivered the judgment of the court.
Presiding Justice O’Brien and Justice Hettel concurred in the judgment.
ORDER
¶1 Held: (1) Sufficient evidence was presented to establish defendant’s driving as a
proximate cause of the victim’s death; and (2) defendant’s conviction for
aggravated driving under the influence under count II violates the one-act, one-
crime doctrine.
¶2 Defendant, Stephen L. King, appeals from his convictions for aggravated driving under
the influence (DUI) of drugs. Defendant argues that the State failed to present sufficient evidence
that defendant’s driving was a proximate cause of Ricky Nelson’s death. Alternatively, defendant
argues that his multiple convictions for aggravated DUI violate the one-act, one-crime doctrine.
We affirm in part and vacate in part.
¶3 I. BACKGROUND
¶4 On April 17, 2015, defendant was involved in a single-car accident that resulted in the
death of Nelson. The State filed a two-count indictment on November 19, 2015. Each of the
counts alleged that defendant committed DUI in that he operated a motor vehicle “while there
was any amount of drug, substance, or compound” in his body “resulting from the unlawful use
or consumption of cannabis *** or a controlled substance.” See 625 ILCS 5/11-501(a)(6) (West
2014). Both counts charged defendant with aggravated DUI; count I alleged that the accident
was the proximate cause of Nelson’s death (id. § 11-501(d)(1)(F)), while count II alleged that
defendant had at least two prior DUI violations (id. § 11-501(d)(1)(A)).
¶5 In August 2018, defendant gave notice that he would be asserting the affirmative defense
of an intervening cause: that a blowout of the right front tire was the sole proximate cause of the
accident. On February 22, 2019, the case proceeded to a bench trial on count I. Prior to the start
of the trial, defendant entered an open plea of guilty to count II. The State presented the
following factual basis.
“As to Count 2, the State’s evidence would be as follows: On April 17,
2015, at approximately 2:25 p.m., Deputy Linton of the Tazewell County
Sheriff’s Office was dispatched to 5203 Delavan Road to investigate the report of
a traffic crash with injuries. Upon arrival Deputy Linton found a silver truck lying
upside down in the west side ditch. A white male, later identified as *** the
defendant, was being tended to by rescue personnel and admitted he was the one
driving the truck. Further investigation showed the truck was driving southbound
2
on Delavan Road when it left the roadway, struck a culvert and went airbound,
striking a guy wire and overturning.
There would be testimony that would indicate that there were injuries
from the crash that did result in the defendant being taken to OSF St. Francis
Hospital, and Deputy Petsas of the Tazewell County Sheriff’s Office responded to
OSF St. Francis Hospital to talk to the defendant who gave information about the
crash. There would be testimony that a blood and urine sample was taken from
the defendant and that it did indicate the presence of THC and cocaine
metabolites in the defendant’s system. I believe priors would be something that
the State would need to prove up for purposes of sentencing but not relevant to a
factual basis.”
¶6 After defendant’s plea on count II was completed, the bench trial on count I commenced.
The parties entered a multi-page stipulation containing the following evidence. Deputy Chuck
Linton of the Tazewell County Sheriff’s Department would testify that at approximately 2:25
p.m. on April 17, 2015, he was dispatched to the scene of an accident near 5203 Delavan Road.
He observed a silver truck, facing west, overturned in the ditch. He spoke with defendant who
admitted to being the driver of the truck. While defendant was driving, the right front tire blew
out, which caused the truck to enter the ditch, hit the culvert, and overturn. Linton identified a
rear passenger who had been ejected from the truck as Joe Woodard and the front seat passenger
as Nelson. Nelson demonstrated no signs of life and was removed from the scene by the
coroner’s office.
¶7 Deputy Chris Petsas of the Tazewell County Sheriff’s Department would testify that he
spoke with defendant at the hospital. He learned that defendant and Woodard had purchased a
3
12-pack of beer before arriving at Nelson’s house. Defendant intended to borrow Nelson’s truck
to move tables. The three men stayed at Nelson’s house for approximately 20 minutes before
leaving, during which time, defendant drank one beer. Prior to leaving, defendant noticed “the
front passenger side tire was in bad shape and had a knot on the sidewall.” When defendant
drove the truck on Delavan Road the front passenger tire blew out, causing him to lose control of
the truck and leave the roadway. Defendant hit a culvert which caused the truck to overturn.
Woodard was unrestrained and ejected from the truck. Nelson was caught in his seatbelt, hanging
outside of the truck. Defendant noticed Nelson turning blue as he tried to extract him from the
seatbelt. Two young men arrived and used a box cutter to free Nelson from the seatbelt.
Defendant consensually provided blood and urine samples for testing.
¶8 Michelle Harper would testify that she drove up on the crash site. She observed the truck
overturned in the ditch, Woodard and defendant outside of the truck, and Nelson inside the truck
with his legs hanging out. She helped extract Nelson from the truck. Nelson was alive when they
removed him from the truck but died shortly thereafter.
¶9 Hunter Moreland would testify that he and a friend observed the crashed truck from his
residence on Delavan Road. They went to the scene of the accident to see if they could help.
They helped move Woodard out of the roadway then cut the seatbelt that was holding Nelson
inside the truck and helped to extract him. Moreland’s friend called 911 and they remained on
scene until emergency personnel arrived.
¶ 10 Stefanie Clarke would testify that she was a registered nurse working at OSF St. Francis
Hospital on the afternoon of the crash. She cared for defendant when he arrived at the hospital.
He admitted to her that he was operating the crashed truck. She collected samples of blood and
urine from defendant, sealed them, and turned them over to police.
4
¶ 11 Forensic scientist Alexandra Baluka would testify that she analyzed defendant’s blood
and urine samples. No volatiles were detected in defendant’s blood, and she ran no drug testing
on defendant’s blood. THC and cocaine metabolites were detected in defendant’s urine. Another
forensic scientist, Cathy Anderson, would testify that she also analyzed defendant’s blood and
urine. No THC or cocaine metabolites were detected in defendant’s blood but were detected in
defendant’s urine.
¶ 12 Dr. Scott Denton would testify that he conducted an autopsy on Nelson. In his medical
opinion, Nelson’s cause of death was “multiple blunt injuries of the head, neck, and chest due to
a pickup crash.”
¶ 13 The court heard live testimony from Captain Gerald Kempf of the Tazewell County
Sheriff’s Department. Kempf conducted a follow-up interview with defendant, who he identified
in open court, on April 20, 2015. At that time, defendant consented to a search of his cell phone.
The downloaded information revealed that defendant was not using his cell phone at the time of
the crash. Defendant informed Kempf that he and Woodard went to Nelson’s house. Defendant
consumed one beer, then left the residence to pick up tables in Nelson’s truck. Defendant
indicated that when he was driving down the road, he could feel the tires wobble. He thought
there was some type of defect with the tire. Defendant informed Kempf that when he drove at
speeds between 60 and 65 miles per hour, the wobbling became less pronounced. When the tire
blew out, the truck left the road. Defendant attempted to correct that but was unable, and the
crash occurred. Defendant indicated that he and Nelson had discussed the condition of the tire
and he had offered Nelson another set of tires that were in better condition. Defendant admitted
to smoking marijuana two to three times each day. He smoked “two bowls or hitter pipes full of
cannabis” between noon and 1 p.m. on the day of the crash.
5
¶ 14 Deputy Jason Kedzior of the Tazewell County Sheriff’s Department testified that on
April 17, 2015, he was a certified accident reconstruction officer. He completed a reconstruction
of the accident. Upon arriving, Kedzior observed tire marks on the roadway, three regular and
one irregular. Kedzior described the irregular tire mark as very distinct, with a wavy pattern
which indicated that the weight was imbalanced. The tire marks started within the lane lines on
the roadway then went off the road to the west. The truck struck the north side of the culvert,
overturned, and came to a rest on the south side of the culvert. Kedzior observed the front
passenger side tire had failed. The failed tire possessed a noticeable defect and “the abnormality
or the failure [went] from the outside to the inside of the tire.” Photographs of the damage to the
tire were admitted into evidence. Kedzior indicated that very rarely do tire failures of that sort
necessarily cause crashes. He repeatedly refused to characterize the failure as a blowout,
maintaining that “[y]ou have to be careful with that language, with blowout. We don’t use that;
we use tire failure.” Kedzior explained that tire failure is an abnormality of some sort and not
attributable to normal wear and tear of the vehicle. He concluded that the cause of the crash was
operating the truck on an unsafe pneumatic tire.
¶ 15 At the close of evidence, the court took the matter under advisement. On February 28,
2019, the court returned a guilty verdict. In rendering its decision, the court noted that the only
contested element was whether defendant’s act of driving while there was any amount of drug in
his system was a proximate cause of the death of Nelson. Regarding proximate causation, the
court made the following findings.
“So proximate cause, two parts: First part is cause-in-fact; the Court finds
as follows: The defendant’s driving was a material element and substantial factor
in bringing about the crash in Mr. Nelson’s death. Driving first and foremost is a
6
choice. An alternative and more prudent choice on that day would have been not
to drive, especially when he saw before he got into that truck the tire’s condition
before he began, even more so when he felt the tire wobble, and he learned that a
certain speed he could hit some harmonics on it and get the wobble to even out.
So absent Defendant’s conduct, the choice to continue driving with a known bad
tire, injury would not have occurred ***.
***
*** The second prong of probable cause is the legal cause. Was the crash
and injury and resulting death a type that a reasonable person would see as a
likely result of his conduct? I respectfully suggest crashes leaving the roadway
and death are exactly the type of accident and injury foreseeable by driving a
great rate of speed on a bad tire. Reasonably prudent people don’t drive on bad
tires; they change the tire. Or they limp on a tire to get to a gas station at a very
low rate of speed.
*** [T]he defendant noticed the bulge on the side of the tire before
deciding to drive. He noticed the tire was bad. He offers to give Mr. Nelson
another set of tires, which to me is clear that it was within his knowledge that this
was an unsafe set of tires or bad set of tires. He didn’t pull over and change a bad
tire after he noticed the initial wobble. He tried to smooth it out by trying to find
the speed where he hit the harmonics and evened out the ride. So I cannot say
therefore that the bad tire, although it was a catastrophic failure, was wholly
unexpected ***. I think you had to show the tire failure being wholly unexpected,
a condition unnoticed and totally took him by surprise. ***
7
*** He foresaw the possibility; he foresaw the bad tire; he felt the wobble
but continued to drive. So at a minimum it was negligent, possibly reckless, action
of driving on a known bulging tire that wobbled while he’s driving, and ultimately
that tire gave way, and a catastrophic crash leading in death is a reasonably
foreseeable result.”
¶ 16 The court sentenced defendant to five years and eight months’ imprisonment on count I
and three years’ imprisonment on count II to run concurrently. Defendant appeals.
¶ 17 II. ANALYSIS
¶ 18 Defendant argues that the State failed to prove him guilty of aggravated DUI under count
I, where it failed to prove that defendant’s driving was a proximate cause of Nelson’s death.
Further, defendant argues that, if his conviction for aggravated DUI under count I is affirmed, his
conviction for aggravated DUI under count II violates the one-act, one-crime doctrine where the
conviction stems from the same act of DUI.
¶ 19 A. Sufficiency of the Evidence
¶ 20 In a challenge to the sufficiency of the evidence, we must determine whether any rational
trier of fact could have found the essential elements of the crime beyond a reasonable doubt.
People v. Baskerville, 2012 IL 111056, ¶ 31. In making this determination, we view the evidence
in the light most favorable to the State. Id. It is not the function of a reviewing court to retry a
defendant who challenges the sufficiency of the evidence. People v. Ross, 229 Ill. 2d 255, 272
(2008). “A criminal conviction will not be set aside unless the evidence is so improbable or
unsatisfactory that it creates a reasonable doubt of the defendant’s guilt.” People v. Collins, 106
Ill. 2d 237, 261 (1985).
8
¶ 21 There are multiple ways for a person to commit DUI in Illinois. Some violations require
proof of impairment, whereas others are “ ‘strict liability’ ” offenses. People v. Martin, 2011 IL
109102, ¶ 26 (quoting People v. Ziltz, 98 Ill. 2d 38, 42 (1983)). “[W]hether proof of impairment
is necessary to sustain a conviction for aggravated DUI under section 11-501(d)(1)(F) depends
upon whether impairment is an element of the underlying misdemeanor DUI.” Id. Where, as
here, the underlying misdemeanor DUI alleges a violation of section 11-501(a)(6), “[a] driver
with controlled substances in his body violates section 11-501(a)(6) simply by driving.” Id.
Accordingly, “the State is not required to prove that the marijuana or other drug in the
defendant’s system (or any impairment caused by such drug) was the proximate cause of the
victim’s injuries; rather, it must merely prove beyond a reasonable doubt that the defendant’s
driving was a proximate cause of his or her injuries.” (Emphasis in original.) People v.
Mumaugh, 2018 IL App (3d) 140961, ¶ 27.
¶ 22 To sustain a charge of aggravated DUI under count I, the State must prove that defendant:
(1) drove a motor vehicle; (2) while there was any amount of THC or cocaine in defendant’s
body; (3) was involved in a motor vehicle accident; (4) which resulted in the death of Nelson;
and (5) his driving with any amount of drug in his body was a proximate cause of the death of
Nelson. See 625 ILCS 5/11-501(a)(6), (d)(1)(F) (West 2014). The only element at issue in this
case is whether defendant’s driving was a proximate cause of Nelson’s death.
¶ 23 Proximate causation is comprised of two distinct requirements: cause in fact and legal
cause. People v. Hudson, 222 Ill. 2d 392, 401 (2006). Cause in fact occurs where there is a
reasonable certainty that a defendant’s conduct is a material element and a substantial factor in
causing the injury. First Springfield Bank & Trust v. Galman, 188 Ill. 2d 252, 258 (1999). A
defendant’s conduct constitutes a material element and a substantial factor if, without that
9
conduct, the injury would not have occurred. Id. Legal cause involves an assessment of
foreseeability. Mumaugh, 2018 IL App (3d) 140961, ¶ 28. “The relevant inquiry is whether the
injury is of a type that a reasonable person would see as a likely result of his or her conduct.” Id.
¶ 24 Defendant does not dispute that the evidence presented was sufficient to establish cause
in fact. We agree. Defendant’s physical act of driving constituted a material element and
substantial factor in the crash and subsequent fatal injury to Nelson.
¶ 25 Next, we determine legal causation. The relevant question is whether the injury, the death
of Nelson in a roll-over crash, is a result that a reasonable person could see as a likely result of
defendant’s conduct. Here, the evidence indicated that defendant observed that “the front
passenger side tire was in bad shape and had a knot on the sidewall” prior to driving Nelson’s
truck. He offered to give Nelson a better set of tires for his truck. As he drove, he felt the tire
wobble. Instead of driving slowly or stopping, he increased his speed to 60 to 65 miles per hour
until he felt the wobble decrease. The tire blew out causing defendant to lose control of the truck.
It subsequently left the roadway, hit the culvert, and overturned.
¶ 26 Defendant’s assessment of the condition of the tire, while relevant to the determination of
legal causation, is separate from his physical act of driving. The evidence clearly demonstrates
that both defendant and Nelson were aware of the condition of the tire on Nelson’s truck.
Defendant offered Nelson a better set of tires and, whether Nelson accepted, the tires were not
changed before defendant drove the truck that day. Defendant relied, at least in part, on Nelson’s
opinion of the roadworthiness of his truck where Nelson continued to allow defendant to use the
truck that day and rode along with him, even after observing the visible defect and having a
conversation about changing the tires. However, Nelson’s unsafe decisions regarding the use of
his truck do not negate defendant’s own actions.
10
¶ 27 Turning to defendant’s physical act of driving, the evidence demonstrates that the tire
began to wobble while defendant drove. Upon feeling the tire wobble, rather than driving
cautiously at a slower speed, or stopping, defendant increased his speed to 60 to 65 miles per
hour. Considering what defendant knew about the condition of the tire prior to driving, his
decision to increase his speed when faced with the poor condition and performance of the tire
was an unreasonable and improper response.
¶ 28 Defendant argues that Kedzior’s testimony that it is very rare for a motor vehicle crash to
be necessarily caused by this type of tire failure renders it an unforeseeable result of defendant’s
driving. However, whether the number of motor vehicle crashes caused by tire failure is minimal
does not change the fact that when defendant chose to accelerate when a tire, which he knew to
be visibly defective, began to wobble, only two options existed. Either the tire would hold, or the
tire would fail. Where the tire fails, especially in the face of defendant’s decision to increase his
speed when he felt the tire wobble, the likely result was a vehicle crash. Injury and death are a
reasonably foreseeable result of vehicle crashes, especially when a vehicle leaves the roadway.
Accordingly, we conclude that a rational trier of fact could have found Nelson’s death to be a
reasonably foreseeable result of defendant’s actions, and the State proved defendant guilty
beyond a reasonable doubt of aggravated DUI under count I.
¶ 29 B. One-Act, One-Crime
¶ 30 Defendant argues that his conviction for aggravated DUI under count II violates the one-
act, one-crime doctrine. Defendant acknowledges that he forfeited this issue but requests plain
error review. The plain error doctrine permits a reviewing court to remedy a forfeited “clear or
obvious error” when “that error is so serious that it affected the fairness of the defendant’s trial
and challenged the integrity of the judicial process.” People v. Piatkowski, 225 Ill. 2d 551, 565
11
(2007). “[I]t is well established that a one-act, one-crime violation affects the integrity of the
judicial process, thus satisfying the second prong of the plain-error test.” In re Samantha V., 234
Ill. 2d 359, 378-79 (2009).
¶ 31 Under the one-act, one-crime doctrine, a defendant may not be convicted of multiple
offenses arising out of a single physical act. People v. King, 66 Ill. 2d 551, 565-66 (1977). Where
the same physical act supports multiple convictions, only the most serious conviction can stand.
People v. Artis, 232 Ill. 2d 156, 170 (2009).
¶ 32 Here, the State concedes that both of defendant’s convictions were based upon the single
act of defendant driving a vehicle on Delavan Road in the afternoon of April 17, 2015, while he
had THC and cocaine metabolites in his system. We agree. The factual basis presented by the
State on count II mirrors the evidence presented at trial on count I which both showed that
defendant was driving a silver truck on the afternoon of April 17, 2015, on Delavan Road. A
crash occurred in which the truck left the roadway, hit a culvert, and overturned. Defendant’s
blood and urine were drawn and tested. At the time of the incident, defendant had THC and
cocaine metabolites in his system. Consequently, the lesser of defendant’s convictions must be
vacated.
¶ 33 When determining which conviction is more serious, a reviewing court will compare the
potential punishments for each offense. Id. Both of defendant’s convictions are Class 2 felonies.
Generally, a Class 2 felony is punishable by no less than three to seven years’ imprisonment. 730
ILCS 5/5-4.5-35(a) (West 2014). Except as otherwise provided in the Code, a sentence of
probation may be imposed. Id. § 5-4.5-35(d). Aggravated DUI under count II falls within this
standard range of sentencing.
12
¶ 34 Authorized dispositions differ for aggravated DUI under count I. Probation may not be
granted to a defendant convicted under this section unless “the court determines that
extraordinary circumstances exist and require probation.” 625 ILCS 5/11-501(d)(2)(G) (West
2014). Further, the range of imprisonment increases as the number of deaths increase. Here, the
violation resulted in the death of one person. Where one person dies, the range of imprisonment
is 3 to 14 years’ imprisonment. Id. Accordingly, defendant’s conviction for aggravated DUI
under count I carries increased penalties and is the more serious conviction. We therefore vacate
defendant’s conviction for aggravated DUI under count II.
¶ 35 III. CONCLUSION
¶ 36 The judgment of the circuit court of Tazewell County is affirmed in part and vacated in
part.
¶ 37 Affirmed in part and vacated in part.
13 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488378/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0248
No. DA 22-0248
STATE OF MONTANA,
Plaintiff and Appellee,
v.
CODY RAY TUNNELL,
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 28, 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 21 2022 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488379/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0226
No. DA 22-0226
STATE OF MONTANA,
Plaintiff and Appellee,
v.
BRADLEY JAY HILLIOUS,
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 28, 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 21 2022 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488380/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0014
No. DA 22-0014
IN THE MATTER OF:
M.T.H.,
Respondent 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 28, 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 21 2022 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350194/ | People v Culbreath (2022 NY Slip Op 07409)
People v Culbreath
2022 NY Slip Op 07409
Decided on December 23, 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 December 23, 2022
PRESENT: WHALEN, P.J., SMITH, LINDLEY, BANNISTER, AND MONTOUR, JJ. (Filed Dec. 23, 2022.)
MOTION NO. (1611/98) KA 00-02623.
[*1]THE PEOPLE OF THE STATE OF NEW YORK, RESPONDENT,
vJEFFREY M. CULBREATH, DEFENDANT-APPELLANT.
MEMORANDUM AND ORDER
Motion for writ of error coram nobis denied. | 01-04-2023 | 12-23-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350267/ | Baeumler v Moses (2022 NY Slip Op 07382)
Baeumler v Moses
2022 NY Slip Op 07382
Decided on December 23, 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 December 23, 2022
SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., PERADOTTO, NEMOYER, CURRAN, AND BANNISTER, JJ.
903 CA 21-01578
[*1]RYAN BAEUMLER, PLAINTIFF-RESPONDENT,
vCONNOR J. MOSES, DEFENDANT-APPELLANT.
NASH CONNORS, P.C., BUFFALO (JAMES J. NASH OF COUNSEL), FOR DEFENDANT-APPELLANT.
SHAW & SHAW, P.C., HAMBURG (LEONARD D. ZACCAGNINO OF COUNSEL), FOR PLAINTIFF-RESPONDENT.
Appeal from an order of the Supreme Court, Erie County (Mark A. Montour, J.), entered October 6, 2021. The order denied defendant's motion for summary judgment dismissing the complaint.
It is hereby ORDERED that the order so appealed from is unanimously modified on the law by granting the motion in part and dismissing the complaint insofar as the complaint, as amplified by the bill of particulars, alleges that plaintiff sustained a serious injury under the permanent loss of use category of serious injury within the meaning of Insurance Law § 5102 (d) and that plaintiff sustained a serious injury to his thoracic spine and both shoulders under the permanent consequential limitation of use category, and as modified the order is affirmed without costs.
Memorandum: In this action to recover damages for injuries allegedly sustained in an automobile accident, defendant appeals from an order that denied his motion for summary judgment dismissing the complaint on the ground that plaintiff did not sustain a serious injury within the meaning of Insurance Law § 5102 (d) under the permanent loss of use, significant limitation of use, permanent consequential limitation of use, or 90/180-day categories. We agree with defendant that Supreme Court erred in denying the motion with respect to the permanent loss of use category (see Booth v Carlson, 195 AD3d 1594, 1595 [4th Dept 2021]; Swift v New York Tr. Auth., 115 AD3d 507, 509 [1st Dept 2014]) and with respect to the permanent consequential limitation of use category insofar as it relates to plaintiff's thoracic spine and bilateral shoulder injuries (see Gamblin v Nam, 200 AD3d 1610, 1613 [4th Dept 2021]). We therefore modify the order accordingly. We reject defendant's remaining
contentions.
Entered: December 23, 2022
Ann Dillon Flynn
Clerk of the Court | 01-04-2023 | 12-23-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/9350400/ | COURT OF APPEALS FOR THE
FIRST DISTRICT OF TEXAS AT HOUSTON
ORDER
Appellate case name: Joe Escobedo v. The State of Texas
Appellate case number: 01-20-00253-CR
Trial court case number: 18-CR-3020
Trial court: 212th District Court of Galveston County
Appellant was convicted of the offense of arson and was sentenced to 40 years in the
Institutional Division of the Texas Department of Criminal Justice. Appointed counsel on appeal
filed an Anders brief and a motion to withdraw. The State filed a brief waiver. Although appellant
filed a request for access to the record, which was granted, appellant did not file a pro se response
to the Anders brief filed by appointed counsel. The case was submitted on the briefs on June 21,
2022.
On July 26, 2022, this Court struck the Anders brief, determining that the brief did not
demonstrate a conscientious examination of the record, and ordered appointed counsel to file a
new brief within 30 days. Appointed counsel has not complied with this Court’s order. Counsel
has filed no new brief and has not requested an extension of time to file the new brief.
Accordingly, we must abate this appeal and remand the case to the trial court for a hearing.
See TEX. R. APP. P. 38.8(b)(2)–(3). We direct the trial court to conduct a hearing at which a
representative of the Harris County District Attorney’s Office, appointed counsel Thomas Martin,
and appellant shall be present.1 The trial court shall have a court reporter record the hearing. The
trial court is directed to make appropriate findings on these issues:
(1) whether appellant wishes to prosecute these appeals; and, if so,
(2) whether appointed counsel Martin has abandoned the appeal by failing to timely file
the brief ordered by this Court;
1 If appellant is incarcerated, at the trial court’s discretion, appellant may participate in the hearing
by closed-circuit video teleconferencing. Any such teleconference must use a closed-circuit video
teleconferencing system that provides for a simultaneous compressed full motion video and
interactive communication of image and sound between the trial court, appellant, and any attorneys
representing the State or appellant. On request of appellant, appellant and his counsel shall be able
to communicate privately without being recorded or heard by the trial court or the attorney
representing the State.
(3) and, if appointed counsel has abandoned the appeal, whether appellant is presently
(a) indigent, in which case the trial court should appoint new appellate counsel at no
expense to appellant and establish a date by which counsel will file a brief, no
later than 30 days from the appointment; or
(b) not indigent, in which case the trial court should establish a date by which
appellant shall retain new counsel;
(4) or, if appointed counsel Martin has not abandoned the appeal, make appropriate
findings and recommendations regarding the reason that counsel has failed to file
briefs and establish a date by which counsel will file appellant’s briefs, no later
than 30 days from the date of the hearing.
TEX. CODE CRIM. PROC. ANN. arts. 1.051(d), 26.04; TEX. R. APP. P. 38.8(b)(2), (3), (4).
The trial court shall cause a supplemental clerk’s record containing its findings and
recommendations, including the name, address, telephone number, and State Bar number of any
substitute counsel, and the reporter’s record of the hearing to be filed in this Court no later than
January 20, 2023. If the hearing is conducted by video teleconference, a certified video recording
of the hearing shall be filed in this Court no later than January 20, 2023.
The case is removed from the submission docket and will be resubmitted at a later date.
The appeal is abated, treated as a closed case, and removed from this Court’s active docket.
The appeal will be reinstated on this Court’s active docket when a supplemental clerk’s record that
complies with this order, and the reporter’s record of the hearing, have been filed in this Court.
The trial court coordinator shall set a hearing date and notify the parties and the Clerk of this Court
of such date.
It is so ORDERED.
Judge’s signature: _____/s/ Peter Kelly_______
Acting individually Acting for the Court
Date: ___December 20, 2022___ | 01-04-2023 | 12-26-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488382/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0322
No. DA 22-0322
IN THE MATTER OF:
E.W.,
Respondent 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 28, 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 21 2022 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488384/ | IN THE SUPREME COURT OF PENNSYLVANIA
IN RE: : NO. 922
:
APPOINTMENT TO THE CONTINUING : SUPREME COURT RULES DOCKET
LEGAL EDUCATION BOARD :
ORDER
PER CURIAM
AND NOW, this 21st day of November, 2022, Barry M. Simpson, Esquire, Dauphin
County, is hereby appointed as a member of the Continuing Legal Education Board for a
term of three years, commencing January 1, 2023. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488386/ | IN THE SUPREME COURT OF PENNSYLVANIA
EASTERN DISTRICT
COMMONWEALTH OF PENNSYLVANIA, : No. 152 EAL 2022
:
Respondent :
: Petition for Allowance of Appeal
: from the Order of the Superior Court
v. :
:
:
ADELBERTO SULIT, :
:
Petitioner :
ORDER
PER CURIAM
AND NOW, this 21st day of November, 2022, the Petition for Allowance of Appeal
is DENIED. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488383/ | IN THE SUPREME COURT OF PENNSYLVANIA
IN RE: : NO. 924
:
APPOINTMENTS TO THE : SUPREME COURT RULES DOCKET
ORPHANS’ COURT PROCEDURAL :
RULES COMMITTEE :
ORDER
PER CURIAM
AND NOW, this 21st day of November, 2022, the Honorable John J. McNally, III,
Dauphin County, and the Honorable Sara J. Seidle-Patton, Clarion County, are hereby
appointed as members of the Orphans’ Court Procedural Rules Committee for a term of
five years, commencing January 1, 2023. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488385/ | IN THE SUPREME COURT OF PENNSYLVANIA
IN RE: : NO. 923
:
APPOINTMENT TO CONTINUING : SUPREME COURT RULES DOCKET
JUDICIAL EDUCATION BOARD OF :
JUDGES :
:
ORDER
PER CURIAM
AND NOW, this 21st day of November, 2022, the Honorable Charles A. Ehrlich,
Philadelphia, is hereby appointed to the Continuing Judicial Education Board of Judges
for a term of three years, commencing December 31, 2022. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488388/ | United States Court of Appeals
For the First Circuit
No. 21-1568
THOMAS SWARTZ,
Plaintiff, Appellant,
v.
NORMAN SYLVESTER; TOWN OF BOURNE,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. F. Dennis Saylor, IV, U.S. District Judge]
Before
Barron, Chief Judge,
Lynch and Gelpí, Circuit Judges.
Joseph L. Sulman, with whom Law Office of Joseph L. Sulman,
Esq. was on brief, for appellant.
Gareth W. Notis, with whom Morrison Mahoney LLP was on brief,
for appellees.
November 21, 2022
GELPÍ, Circuit Judge. Plaintiff-Appellant Thomas Swartz
("Swartz") appeals from the decision of the district court for the
District of Massachusetts granting summary judgment to Defendants-
Appellees Norman Sylvester ("Sylvester") and the Town of Bourne,
Massachusetts. Swartz contends that his constitutional rights
under the Free Exercise Clause of the First Amendment were violated
when Sylvester, in his role as Fire Chief of the Bourne Fire
Department ("BFD"), ordered Swartz, a firefighter, to sit for a
photograph in violation of Swartz's religious beliefs. Swartz
refused to take the photograph and was disciplined as a result of
his refusal. Swartz brought suit against Sylvester under 42 U.S.C.
§ 1983 asserting the discipline constituted a violation of his
constitutional rights under the Free Exercise Clause. In addition,
he alleged that the Town of Bourne and Sylvester violated his
rights under the Massachusetts Wage Act, Mass. Gen. Laws ch. 149,
§ 148, by failing to pay him for certain unused vacation and other
accrued time off following his subsequent retirement from the BFD.
On the Section 1983 claim, the district court granted summary
judgment to Sylvester on qualified immunity grounds. The district
court declined to exercise supplemental jurisdiction over the
state law claim pursuant to 28 U.S.C. § 1367(c). It then dismissed
the state law claim without prejudice. We affirm.
- 2 -
I. Background
When reviewing a district court's decision on a motion
for summary judgment, "we always recount [the facts] in the light
most favorable to the nonmovant (here, that's [Swartz])." Johnson
v. Johnson, 23 F.4th 136, 139 (1st Cir. 2022). Thomas Swartz was
a firefighter working for the BFD in Bourne, Massachusetts from
July 1997 until August 2018, when he retired. Norman Sylvester
began in his role as the BFD's Fire Chief in February 2015. All
members of the BFD had an identification card as well as an
accountability tag, which both featured a picture of the
firefighter.1 The photographs on the identification cards and
accountability tags were inconsistent -- some firefighters wore t-
shirts in their photographs while others wore ties. In 2016,
Sylvester, seeking consistency among the photographs on the
identification cards, began a policy of photographing the
firefighters in their Class A uniforms for these photographs. The
Class A uniform is a formal dress uniform worn at occasions such
as ceremonies, weddings, and funerals.
1 The accountability tag and the identification card looked
the same but served different purposes. Accountability tags had
a hole in the top of the card which was used to keep track of
personnel at fire scenes and was attached to the firefighter's
gear, while the identification card stayed in the firefighter's
wallet and was used to identify firefighters in circumstances when
they were not in their gear.
- 3 -
Sylvester stated that he wanted consistent photographs
of all the firefighters in their Class A uniforms "so everybody
looked the same [and] so we had a professional department." He
also planned to hang the headshots on a bulletin board in the main
lobby of the fire station so members of the public could identify
firefighters who had done a good or bad job at a fire scene and be
aware of who worked for the BFD. He noted that the firefighters'
names would not accompany the photographs. Other members of the
BFD said they understood that the photographs would be used for
media and promotional purposes. BFD Lieutenant Richard Emberg
stated that Sylvester told him that the photographs would be used
on a display wall and could also be submitted to the media in the
case of a firefighter's death in the line of duty. BFD Lieutenant
Paul Weeks similarly stated that Emberg had told him that the
photographs would be used on a display board and also in response
to requests from the media if there was, for example, a promotion
or a tragedy.
Sylvester enlisted Emberg to help him organize the
photographs of the firefighters in their Class A uniforms. On
November 4, 2015, Emberg sent an e-mail to all BFD employees which
read, "Anyone wishing to have a class A photo done. The
photographer will be available Friday. If interested contact me
please for times." On January 30, 2016, Deputy Fire Chief Joseph
Carrara e-mailed all BFD employees, stating that "Lt. Emberg has
- 4 -
been working to arrange professional photos for all department
members." Carrara said Emberg was compiling a list in regards to
Class A uniforms and, in preparation for the photographs, implored
the firefighters to check in with their deputies if they were
missing any part of the Class A uniform that would be needed for
the photograph. On March 11, 2016, Emberg e-mailed all BFD
employees, stating "[i]n the next few weeks all members will be
getting a department photo taken by the department photographer"
in their Class A uniforms. On April 11, 2016, Emberg sent another
e-mail to all BFD employees, setting forth a schedule when the
Class A uniform photographs would be taken for all employees, which
were split into four groups. Weeks was the deputy chief
supervising group three, to which Swartz was assigned.
On May 1, 2016, Emberg sent an e-mail which read that
group three's Class A photographs would be taken the following day
at noon, and if employees were unable to make that time slot, they
should try to attend another one of the scheduled dates.2 The next
day, May 2, 2016, Weeks verbally informed the members of his group,
which included Swartz, that they would have their photographs taken
that day in their Class A uniforms. Swartz responded that he did
not want to have his photograph taken. This caught the attention
of Sylvester, who had the office next to Weeks and overheard the
It is unclear from the record whether this e-mail was sent
2
to the entire department, though it appears it was.
- 5 -
exchange. Sylvester asked Swartz to step into his office to
discuss the matter further and Swartz asked if they could shut the
door and speak privately. Swartz asked whether the photographs
were going to be used for identification tags or other department
identification. Sylvester responded by asking Swartz, "What if
you get promoted and I want to send a picture of you to the
newspaper?" Swartz then informed Sylvester that he didn't want to
have his photograph taken for religious reasons. He further
explained that having his photograph taken for promotional
purposes is against his religious beliefs.3 Sylvester asked Swartz
if he had a driver's license to which Swartz responded that he
did. Sylvester asked how he took that photograph, but he did not
recall Swartz's answer.4 Sylvester then asked Swartz to put his
objection in writing.
Swartz did so. On that same day, May 2, 2016, he sent
Sylvester an e-mail, stating that he requested not to participate
in "portrait photography for use other than accountability"
because "[p]ortrait photography for personal recognition goes
against [his] religious beliefs." In response, Sylvester stated
Swartz described himself as a confirmed Catholic and stated
3
that he currently practices Christianity. He stated that he
attends Mass almost every Sunday at a Catholic church. He
elaborated that he derives his belief that he cannot participate
in acts of self-promotion from the First Commandment.
Although Sylvester testified to these facts, the district
4
court did not make a finding on them.
- 6 -
that his request was respectfully denied because the "photos are
in fact for use by the [BFD] as a form of accountability and
Department Identification as a member of [BFD]," that his
participation was "a requirement as an order from the Town of
Bourne Fire Chief" and "[f]ailure to follow this order will result
in disciplinary action." On May 5, 2016, Emberg sent an e-mail
stating that May 6 and May 9 would be the last two days for
firefighters to have a photograph taken in their Class A uniform.
The e-mail further stated that "[t]he chief has mandated these
photos." The parties agree that this e-mail was sent to all BFD
employees. Swartz did not have his photograph taken on either May
6 or May 9.
For disobeying Sylvester's direct order to have his
photograph taken in his Class A uniform, Swartz was subsequently
disciplined. Swartz was placed on administrative leave for the
night shift on May 10, 2016, and the day shift on May 12, 2016,
per Sylvester's order. Following a disciplinary meeting on May
13, 2016, the disciplinary action taken against Swartz was twenty-
four hours of unpaid administrative leave (which he had already
served on May 10 and May 12) and that he would not be eligible for
"out of grade" opportunities (which result in higher pay) for a
period of at least six months, a decision which would be
reevaluated after six months. Following a discussion with
- 7 -
Sylvester, Swartz opted to take the unpaid administrative leave
out of his vacation time.
As of May 13, 2016, there were four other BFD employees
who had not had their photographs taken in their Class A uniforms.
According to Sylvester, this was because those employees were off
duty when the photographer came in, unlike Swartz, who was on duty
when the photographer was there. Sylvester also noted that none
of the other four employees who missed their photograph opportunity
declined to sit for the photograph, as Swartz had. As of October
1, 2019, all BFD employees had ID cards and accountability tags
with photographs, with the exception of a recently hired employee.
However, Sylvester was still working to ensure that the
identification photographs all depicted the firefighters in their
class A uniforms. Swartz ended his employment with the Town of
Bourne on August 22, 2018, when he retired.
Swartz filed the instant complaint against Sylvester in
December 2018 under 42 U.S.C. § 1983 for violation of his rights
under the Free Exercise Clause of the First Amendment. In March
2019, he moved to amend his complaint to add a claim against the
Town of Bourne and Sylvester under the Massachusetts Wage Act,
Mass. Gen. Laws ch. 149, § 148, for failure to pay him for certain
unused vacation time and other accrued time off following his
separation from the BFD. The motion to amend the complaint was
granted. Following discovery, in November 2020, Sylvester and the
- 8 -
Town of Bourne moved for summary judgment on both counts. In June
2021, the district court granted Sylvester's motion for summary
judgment. Swartz v. Sylvester, 546 F. Supp. 3d 37, 57 (D. Mass.
2021).
The district court concluded that Sylvester was entitled
to qualified immunity on the Section 1983 claim. It found that
there was no genuine dispute of material fact and that Sylvester
satisfied both prongs of the qualified immunity analysis.
Accordingly, the district court granted summary judgment in favor
of Sylvester. The district court then declined to exercise
supplemental jurisdiction over the state court claim and dismissed
it without prejudice.
II. Discussion
A. First Amendment Claim and Qualified Immunity
1. Standard of Review
We review a district court's order granting summary
judgment de novo. Conlogue v. Hamilton, 906 F.3d 150, 154 (1st
Cir. 2018). Qualified immunity protects government officials,
such as Sylvester, from liability when they act under color of
state law, Gray v. Cummings, 917 F.3d 1, 9 (1st Cir. 2019), and
when their actions or decisions, "although injurious, 'do[] not
violate clearly established statutory or constitutional rights of
which a reasonable person would have known.'" Conlogue, 906 F.3d
at 154 (alteration in original) (quoting Harlow v. Fitzgerald, 457
- 9 -
U.S. 800, 818 (1982)). Qualified immunity protects "all but the
plainly incompetent or those who knowingly violate the law." City
of Tahlequah v. Bond, 142 S. Ct. 9, 11 (2021) (quoting District of
Columbia v. Wesby, 138 S. Ct. 577, 589 (2018)).
"Under the familiar two-prong framework, courts ask (1)
whether the defendant violated the plaintiff's constitutional
rights and (2) whether the right at issue was 'clearly established'
at the time of the alleged violation." Est. of Rahim by Rahim v.
Doe, 51 F.4th 402, 410 (1st Cir. 2022) (quoting Conlogue, 906 F.3d
at 155). Though we refer to them as the first and second prong,
the two prongs need not be addressed in that order. Conlogue, 906
F.3d at 155. "[A]n [official] may be entitled to immunity based
on either prong." Est. of Rahim, 51 F.4th at 410. Upon de novo
review, we agree with the district court in that Sylvester did not
violate Swartz's constitutional rights and is entitled to
qualified immunity based on the first prong.
2. District Court Decision
The district court found that Sylvester was entitled to
qualified immunity. As to the first prong, whether the facts are
sufficient to establish a violation of a constitutional right, the
district court found that they were not. First, the district court
noted that the parties agreed that Sylvester's order and Swartz's
subsequent discipline were facially neutral. The district court
then evaluated whether reasonable jurors could conclude that the
- 10 -
purpose of the neutral directive was to coerce Swartz into
violating sincere religious principles, and found that they could
not. Despite Swartz's contention that the timing evidenced
Sylvester's hostility towards Swartz's religious beliefs
(specifically, making the photographs mandatory in response to
Swartz's denial), the district court disagreed. It concluded that
there was no evidence that Sylvester's reasons for the directive
were pretextual and that it was generally applicable to all
firefighters. The district court further found that the initial
order was mandatory, but that even if it had not been, that fact
would not permit an inference that Sylvester's order was enacted
because of his religious beliefs as opposed to in spite of them.
Because the order was facially neutral and generally applicable,
the district court applied rational basis review, and found that
the policy of taking the photographs of the firefighters in their
Class A uniforms -- namely, to promote the integrity of the BFD -
- fell within said standard. Therefore, under the first prong of
the qualified immunity analysis, the district court found no
violation of Swartz's rights under the Free Exercise Clause.
The district court proceeded to analyze the second prong
of the qualified immunity test. It concluded that, even assuming
that there was a violation of Swartz's rights under the Free
Exercise Clause, "the contours of those rights were not
sufficiently clear such that a reasonable official would have
- 11 -
understood that what he was doing was a violation." The court
noted that neither party pointed to an analogous case and, in cases
where the officer was acting under "similar circumstances," City
of Escondido v. Emmons, 139 S. Ct. 500, 504 (2019) (quoting Wesby,
138 S. Ct. at 590), courts had declined to find a constitutional
violation. Finally, the court concluded that in the instant case,
"a reasonable officer would not have understood [that] his conduct
would violate the right to the free exercise of religion." The
district court elaborated that it was reasonable that Sylvester
did not immediately understand Swartz's religious beliefs.
Further, it found that once Swartz clarified that he refused to
have his photograph taken for promotional purposes, a reasonable
official would not think that a photograph taken for accountability
and identification purposes would violate Swartz's religious
beliefs. Accordingly, the district court concluded that Sylvester
was entitled to qualified immunity on the second prong as well.
3. Analysis
We first discuss the free exercise principles that will
guide our analysis of the first prong of the qualified immunity
framework, on the issue of whether Sylvester violated Swartz's
constitutional rights. The First Amendment's Free Exercise Clause
provides: "Congress shall make no law respecting an establishment
of religion, or prohibiting the free exercise thereof . . . ." It
has been incorporated against the states by the Fourteenth
- 12 -
Amendment. Church of the Lukumi Babalu Aye, Inc. v. City of
Hialeah, 508 U.S. 520, 531 (1993) (citing Cantwell v. Connecticut,
310 U.S. 296, 303 (1940)). "[Swartz]'s claim was properly brought
pursuant to 42 U.S.C. § 1983, which allows individuals to 'sue
certain persons for depriving them of federally assured rights'
under color of state law." Fincher v. Town of Brookline, 26 F.4th
479, 485 (1st Cir. 2022) (quoting Gagliardi v. Sullivan, 513 F.3d
301, 306 (1st Cir. 2008)). The parties do not dispute, and we
agree, that Sylvester, as Fire Chief of the BFD, could be held
liable under Section 1983 if he did indeed violate Swartz's
constitutional rights. We turn to that question now.
"[T]he right of free exercise does not relieve an
individual of the obligation to comply with a 'valid and neutral
law of general applicability on the ground that the law proscribes
(or prescribes) conduct that his religion prescribes (or
proscribes).'" Emp. Div., Dep't of Hum. Res. of Or. v. Smith, 494
U.S. 872, 879 (1990) (quoting United States v. Lee, 455 U.S. 252,
263 n.3 (1982) (Stevens, J., concurring in judgment)). Therefore,
we decline to find a constitutional violation when a neutral and
generally applicable law or policy "incidentally burdens free
exercise rights . . . if it is rationally related to a legitimate
governmental interest." Does 1-6 v. Mills, 16 F.4th 20, 29 (1st
Cir. 2021), cert. denied sub nom. Does 1-3 v. Mills, 142 S. Ct.
1112 (2022). We utilize heightened scrutiny when a law or policy
- 13 -
is not neutral or generally applicable, "sustain[ing] it only if
it is narrowly tailored to achieve a compelling governmental
interest." Id. To qualify as neutral, a policy must not target
religious beliefs or practices "because of their religious
nature." See Fulton v. City of Philadelphia, 141 S. Ct. 1868,
1877 (2021) (first citing Masterpiece Cakeshop, Ltd. v. Colo. C.R.
Comm'n, 138 S. Ct. 1719, 1730-32 (2018); and then citing Lukumi,
508 U.S. at 533). If the policy's objective is to impede or
constrain religion, the policy is not neutral. See Lukumi, 508
U.S. at 533 (citation omitted). Additionally, a policy must be
generally applicable to avoid heightened scrutiny. To qualify as
generally applicable, a policy cannot selectively burden conduct
motivated by religion while simultaneously exempting the conduct's
secular counterpart. See Lukumi, 508 U.S. at 543. If a policy
permits "individualized governmental assessment of the reasons for
the relevant conduct," it is not generally applicable. See Dep't
of Hum. Res. of Or., 494 U.S. at 884.
Swartz argues that a reasonable juror could find that
Sylvester's conduct (i.e., his directive regarding the photograph
and Swartz's subsequent discipline) was not neutral or generally
applicable. As to the evidence supporting this contention, Swartz
cites the sequence of events surrounding his refusal to be
photographed and his subsequent discipline. Specifically, he
contends that Sylvester's directive to have a photograph taken
- 14 -
only became a mandatory order when Swartz objected on religious
grounds, and that fact raises an inference of discriminatory intent
and hostility towards Swartz's religious beliefs. Swartz contends
that the evidence, viewed in the light most favorably to him,
permits a reasonable juror to infer that
Sylvester's decision to order Swartz and the
rest of the BFD to participate in the Class A
photograph was predicated on Sylvester's
hostility towards Swartz's religious-based
objection and thus to his religious beliefs,
or in the alternative, that the purpose of
Sylvester's order was to coerce Swartz into
violating his sincerely held religious
beliefs.
Accordingly, Swartz argues, Sylvester's conduct should be analyzed
under strict scrutiny and, when so analyzed, Sylvester cannot
establish that his conduct furthered a compelling government
interest and was narrowly tailored.
First, we cannot agree that Sylvester's conduct was not
neutral. Clearly, it was facially neutral. See Swartz, 546 F.
Supp. 3d at 50 ("Here, the parties agree that Sylvester's
directive, and the subsequent discipline administered to Swartz,
were facially neutral."). Swartz must therefore prove that
Sylvester's conduct was undertaken because of Swartz's religious
beliefs. See Fulton, 141 S. Ct. at 1877 ("[The g]overnment fails
to act neutrally when it proceeds in a manner intolerant of
religious beliefs or restricts practices because of their
religious nature."); Lukumi, 508 U.S. at 533 ("[I]f the object of
- 15 -
a law is to infringe upon or restrict practices because of their
religious motivation, the law is not neutral"). We are mindful
that the Free Exercise Clause "'forbids subtle departures from
neutrality' and 'covert suppression of particular religious
beliefs.'" Lukumi, 508 U.S. at 534 (first quoting Gillette v.
United States, 401 U.S. 437, 452 (1971); and then quoting Bowen v.
Roy, 476 U.S. 693, 703 (1986)). When assessing neutrality, "a
court must 'survey meticulously' the totality of the evidence,
'both direct and circumstantial.'" New Hope Fam. Servs., Inc. v.
Poole, 966 F.3d 145, 163 (2d Cir. 2020) (quoting Lukumi, 508 U.S.
at 534, 540). This includes the series of events leading to the
conduct, as well as the historical background. Id.
Swartz's evidence on this point is primarily the
sequence of events leading to the Class A photographs becoming
mandatory -- specifically, the speed with which they became
mandatory after he objected on religious grounds, which he claims
raises an inference that the order was because of his religious
exemption.5 Even assuming arguendo that it is true the photographs
became mandatory immediately after Swartz objected to them, that
fact alone does not establish that Sylvester took that action
because of Swartz's religious beliefs. See Lukumi, 508 U.S. at
5 We note that Swartz's argument on this point contradicts
the district court's finding that communications sent before
Swartz objected indicate that the photographs were in fact
mandatory prior to his objections. Swartz, 546 F. Supp. 3d at 50.
- 16 -
540-41 (determining object of ordinances was discriminatory as
they "were enacted '"because of," not merely "in spite of"' their
suppression of [the relevant] religious practice" (quoting
Personnel Adm'r of Mass. v. Feeney, 442 U.S. 256, 279 (1979))).
Unlike in Lukumi, where hostile statements were made regarding the
religious practice prior to the law's enactment, 508 U.S. at 540-
41, Sylvester did not show hostility toward Swartz's religious
beliefs, but instead asked further questions about it to determine
if he could implement the policy without infringing on Swartz's
beliefs. When Swartz clarified that he could not have his
photograph taken for promotional purposes (for example, to be sent
to the media), Sylvester attempted to avoid infringing on Swartz's
religious beliefs by clarifying that the photographs would be used
for identification and accountability purposes.
Additionally, in Lukumi, both the text of the ordinances
and their effect "compel[led] the conclusion that suppression of
the central element of the [religious practice] was the object of
the ordinances." 508 U.S. at 534. The record before us does not
compel such a finding. Beyond pure speculation, Swartz offers no
evidence that would allow a reasonable juror to conclude that the
requirement to have Class A photographs taken became mandatory
because of his religiously motivated objection to having his
photograph taken, rather than simply because he objected. See
Medina-Rivera v. MVM, Inc., 713 F.3d 132, 140 (1st Cir. 2013) ("[A
- 17 -
plaintiff] cannot deflect summary judgment with pure speculation
. . . ."); Ahern v. Shinseki, 629 F.3d 49, 54 (1st Cir. 2010) ("A
properly supported summary judgment motion cannot be defeated by
relying upon conclusory allegations, improbable inferences,
acrimonious invective, or rank speculation."). Swartz has not
proffered sufficient evidence that would permit a reasonable juror
to conclude that the rule was not neutral.6
Sylvester's conduct was also generally applicable.
"[Policies] burdening religious practice must be of general
applicability." Lukumi, 508 U.S. at 542. "To be generally
applicable, a law may not selectively burden religiously motivated
conduct while exempting comparable secularly motivated conduct."
Mills, 16 F.4th at 29. A policy or course of conduct may run afoul
of general applicability if it "'invite[s]' the government to
consider the particular reasons for a person's conduct by providing
6 We note that, although Swartz mentions that other employees
in his department did not get their photographs taken on the
initial dates set by the department and were not subsequently
disciplined, he does not develop an argument that explains how
that fact could support a finding that the policy at issue was not
neutral. Therefore, any such argument is waived. See United
States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990). Nevertheless,
even if Swartz had developed such an argument, it would not
succeed. As we will explain in our discussion below regarding
Swartz's contention that the policy was not generally applicable,
there is no evidence in the record that anyone else in the
department objected to it, and so the treatment of those employees
does not support a finding that the policy was enacted because
Swartz objected for religious reasons rather than the fact that
Swartz objected, independent of the reason for the objection.
- 18 -
'a mechanism for individualized exemptions.'" Fulton, 141 S. Ct.
at 1877 (quoting Smith, 494 U.S. at 884).
As the district court found, the directive was generally
applicable to all firefighters in the BFD. Swartz, 546 F. Supp.
3d at 52. By the time Swartz was disciplined on May 10, when he
was placed on administrative leave, all firefighters had been
informed that Sylvester mandated the photographs. Insofar as
Swartz can be read to argue that Sylvester granted an exemption
from the photograph requirement to the other firefighters who did
not get their photographs taken on the initial dates set by the
department and were not subsequently disciplined, and that this
rendered the policy not generally applicable, we disagree. As a
preliminary matter, Swartz develops no argument on how the fact
that other firefighters were not disciplined created an exemption
and, if so, how the presence of this exemption would bear on
whether the policy was generally applicable, so these arguments
are waived. See United States v. Zannino, 895 F.2d 1, 17 (1st
Cir. 1990). But even addressing these arguments on the merits
would not help Swartz. Swartz failed to bring forth any evidence
of Sylvester granting exemptions from the photograph requirement
to other firefighters (if any) that objected, and indeed conceded
in his briefing to us that though "Sylvester disciplined Swartz
and no other BFD members," "it is not in dispute that these other
BFD employees did not object to having their Class A photograph
- 19 -
taken." The fact that some BFD employees did not have their
photographs taken because they were not on duty when the
photographer came to the station does not change our conclusion
that the directive was generally applicable, because they did not
object to having their photographs taken as Swartz did. Further,
Swartz did not bring forth any evidence that there was a mechanism
for individualized exemptions within Sylvester's directive or that
the directive invited Sylvester to consider the reasons for
requesting an exemption.
Accordingly, finding that Sylvester's conduct was both
neutral and generally applicable, we do not apply heightened
scrutiny, but will "sustain the [policy] against constitutional
challenge if it is rationally related to a legitimate governmental
interest." Mills, 16 F.4th at 29. Sylvester's directive passes
rational basis review. As both parties agree that one purpose of
the photographs was for a public bulletin board and for media
requests as needed, Swartz, 546 F. Supp. 3d at 53, the photograph
policy is rationally related to the legitimate governmental
interest of publicizing the BFD and promoting the integrity of
government institutions. In his brief, Swartz does not challenge
the district court's conclusion that Sylvester's directive would
pass rational basis review. Instead, he focuses his briefing on
whether the directive would pass strict scrutiny and argues that
it would not. We agree with the district court that the directive
- 20 -
easily satisfies rational basis review. See Gonzalez-Droz v.
Gonzalez-Colon, 660 F.3d 1, 9 (1st Cir. 2011) ("Rational basis
review 'is a paradigm of judicial restraint.'" (quoting FCC v.
Beach Commc'ns, Inc., 508 U.S. 307, 314 (1993))). Moreover, as we
explained supra, strict scrutiny is not triggered in this instance.
See Mills, 16 F.4th at 30-32 (declining to apply strict scrutiny
when emergency rule was both neutral and generally applicable).
Upon de novo review, we agree with the district court's
conclusion that Sylvester did not violate Swartz's constitutional
rights as required by the first prong of the qualified immunity
analysis. Because we may find qualified immunity under either
prong of the two-prong test, Est. of Rahim, 51 F.4th at 410, we
accordingly affirm the district court's decision that Sylvester
was entitled to qualified immunity as to the federal claim against
him.
B. Supplemental State Law Claim
1. Standard of Review
"We review a district court's decision regarding the
exercise of supplemental jurisdiction for abuse of discretion."
Allstate Interiors & Exteriors, Inc. v. Stonestreet Constr., LLC,
730 F.3d 67, 72 (1st Cir. 2013). "[I]n any civil action of which
the district courts have original jurisdiction, the district
courts shall have supplemental jurisdiction over all other claims
that are so related to claims in the action within such original
- 21 -
jurisdiction that they form part of the same case or controversy
. . . ." 28 U.S.C. § 1367(a). The district court may decline to
exercise said jurisdiction when it "has dismissed all claims over
which it has original jurisdiction." Id. § 1367(c)(3).
2. Analysis
Swartz argues that because the district court erred in
dismissing his Section 1983 claim, it also abused its discretion
in dismissing his Massachusetts Wage Act claim against Sylvester
and the Town of Bourne. Concluding, as we do, that the district
court did not err in granting Sylvester's motion for summary
judgment on the federal law claim, we see no abuse of discretion
in its decision to decline to exercise supplemental jurisdiction
over the remaining state law claim. See Signs for Jesus v. Town
of Pembroke, NH, 977 F.3d 93, 114 (1st Cir. 2020) ("We have held
that a district court may decline to exercise supplemental
jurisdiction when it has dismissed all claims over which it has
original jurisdiction, 28 U.S.C. § 1367, and absent certain
circumstances inapplicable here, doing so is not an abuse of
discretion.").
III. Conclusion
The judgment of the district court is
AFFIRMED.
- 22 - | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488387/ | United States Court of Appeals
For the First Circuit
No. 21-1721
UNITED STATES OF AMERICA,
Appellee,
v.
JULIANIE RIJOS-RIVERA,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Pedro A. Delgado-Hernández, U.S. District Judge]
Before
Barron, Chief Judge,
Selya and Kayatta, Circuit Judges.
Philip R. Horowitz on brief for appellant.
W. Stephen Muldrow, United States Attorney, Mariana E. Bauzá-
Almonte, Assistant United States Attorney, Chief, Appellate
Division, and Francisco A. Besosa-Martínez, Assistant United
States Attorney, on brief for appellee.
November 21, 2022
SELYA, Circuit Judge. In this sentencing appeal,
defendant-appellant Julianie Rijos-Rivera challenges the
procedural and substantive reasonableness of her 108-month prison
sentence. Concluding, as we do, that the defendant's complaint
about the applicability of a four-level abduction enhancement
cannot withstand scrutiny and that the challenged sentence falls
within the broad universe of reasonable outcomes, we affirm.
I
We briefly rehearse the relevant facts and travel of the
case. "Where, as here, a sentencing appeal follows a guilty plea,
we glean the relevant facts from the change-of-plea colloquy, the
unchallenged portions of the presentence investigation report (PSI
Report), and the record of the disposition hearing." United States
v. Vargas, 560 F.3d 45, 47 (1st Cir. 2009).
In the early hours of August 24, 2019, the defendant's
live-in boyfriend, Randy Rivera-Nevarez (Rivera), called the
defendant and told her that he and an associate, Domingo Emanuel
Bruno-Cotto (Bruno), "had just made a hit on an Uber Driver." He
also boasted that "they had the individual (victim) with
them . . . withdrawing money from the victim's account." That
conversation ended with the defendant telling Rivera that she would
see him at home.
The next day, Rivera asked the defendant "to take him on
a ride." Understanding Rivera to be bent on carrying out a
- 2 -
robbery, the defendant nonetheless agreed to Rivera's request.
The pair then set out in a Ford Explorer that Rivera and Bruno had
previously carjacked. After Bruno joined them, the trio made their
way to a public beach in Dorado, Puerto Rico. On their way, they
stopped at a gas station where Bruno bought condoms. According to
the defendant, Bruno stated "that he purchased the condoms because
he was desperate to make a hit on a woman and bone her."
Once they arrived at the beach's parking lot, Rivera
told the defendant to wait in the car. The defendant saw both men
exit the vehicle carrying firearms and make their way to the beach.
Once there, the two men proceeded to rob a young man and woman.
During the robbery, they sprayed mace on the man, moved the woman
to a different location on the beach, and sexually assaulted her.
At one point, the woman was taken by one of the men to her vehicle
(a Jeep Cherokee) to retrieve a debit/credit card.
Roughly thirty minutes after leaving the Ford Explorer,
Rivera returned. He told the defendant that Bruno was "'sticking
it into' the woman (referring to a sexual act)." Rivera then
returned to the beach, and the defendant continued to wait in the
car.
Later, Rivera and Bruno came back to the parking lot and
drove off in the Jeep Cherokee. The defendant took the same route,
driving the Ford Explorer. Both vehicles stopped at a gas station,
where the two men transferred items from the Jeep Cherokee to the
- 3 -
Ford Explorer. Bruno then gave the defendant the debit/credit
card along with the woman's PIN number, telling the defendant "to
withdraw everything she could." The defendant went to an ATM and
withdrew money from the woman's account. Two days later, the
defendant was arrested.
In due course, a federal grand jury sitting in the
District of Puerto Rico charged the defendant with one count of
carjacking resulting in serious bodily injury. See 18 U.S.C.
§ 2119. Although the defendant initially maintained her
innocence, she subsequently entered a guilty plea. The district
court accepted her change of plea and ordered the preparation of
a PSI Report.
In the PSI Report, the probation office recommended
several sentencing enhancements, including a four-level
enhancement for abduction in order to facilitate the commission of
the offense of conviction. See USSG §2B3.1(b)(4)(A). The
defendant objected to the abduction enhancement on the ground that
her participation in the offense was "limited." The probation
office, however, held firm. Based on a total offense level of
thirty-one and a criminal history category of I, the PSI Report
recommended a guideline sentencing range of 108 to 135 months.
At the disposition hearing, the district court heard
argument from both parties. Pursuant to the plea agreement, the
government recommended a sentence of seventy months' imprisonment.
- 4 -
Defense counsel joined in this recommendation, but again objected
to the abduction enhancement "in light of the evidence and in light
of the role of the defendant." The court made clear that it agreed
with the probation office on that point.
After hearing the defendant's allocution, the court
adopted the guideline calculations limned in the PSI Report. The
court noted that because "the female victim was moved multiple
times on the beach . . . taken by one of the assailants to the
Jeep Cherokee, and she was moved against her will to facilitate
the commission of the offense, a four-level increase is warranted."
The court then denied the defendant's request for a mitigating-
role adjustment, see USSG §3B1.2, because the defendant possessed
"previous knowledge of the car-jacking crimes committed by her co-
defendants, that she drove the vehicle used to commit the offense
and knew that it had also been car-jacked and [Bruno had] expressed
to her his intent of committing a rape prior to the offense."
The court proceeded to weigh the sentencing factors
adumbrated in 18 U.S.C. § 3553(a). It considered, among other
things, the defendant's age, family history, education, physical
and mental health, prior drug use, and the offense of conviction.
In the court's view, the seventy-month recommended "sentence would
fail to provide just punishment and address the harm caused."
Instead, the court imposed a 108-month term of immurement, stating
that "[t]his is the sentence the Court would have imposed,
- 5 -
irrespective of the guideline, based on the facts I reviewed."
The sentence imposed was at the bottom of the guideline sentencing
range for the offense of conviction.
This timely appeal followed.
II
"Appellate review of claims of sentencing error entails
a two-step pavane." United States v. Matos-de-Jesús, 856 F.3d
174, 177 (1st Cir. 2017). Under this bifurcated methodology, we
first assess any claims of procedural error. See id. If the
sentence is procedurally sound, we then assess any claim of
substantive unreasonableness. See id. The defendant presses both
types of claims, and we treat them separately.
A
We start with the defendant's claim of procedural error.
This claim centers on the district court's imposition of a four-
level abduction enhancement under USSG §2B3.1(b)(4)(A).
Specifically, the defendant contends that this enhancement was
inapposite because the abduction was not reasonably foreseeable to
her and that, in any event, the district court did not make an
individualized determination with respect to foreseeability.
The parties clash over whether this claim of error was
sufficiently raised below. This clash affects the applicable
standard of review: preserved claims of sentencing error are
reviewed for abuse of discretion. See United States v. Vélez-
- 6 -
Andino, 12 F.4th 105, 112 (1st Cir. 2021). Unpreserved claims of
sentencing error, though, are reviewed only for plain error. See
id. at 112-13; United States v. Duarte, 246 F.3d 56, 60 (1st Cir.
2001). In this instance, we need not resolve the parties' clash
over what standard of review applies. Even if we assume, favorably
to the defendant, that review is for abuse of discretion, the
defendant's claim of error founders.
"The abuse of discretion standard is not monolithic but,
rather, encompasses 'de novo review of abstract questions of law,
clear error review of findings of fact, and deferential review of
judgment calls.'" United States v. Padilla-Galarza, 990 F.3d 60,
73 (1st Cir. 2021) (quoting United States v. Lewis, 517 F.3d 20,
24 (1st Cir. 2008)). In applying this nuanced standard here, we
begin with the text of the enhancement itself.
The abduction enhancement calls for a four-level
increase in the defendant's base offense level when, as relevant
in this case, "any person was abducted to facilitate commission of
the offense." USSG §2B3.1(b)(4)(A). The offense of conviction in
this case was carjacking, but robbery was part and parcel of that
offense (indeed, its raison d'être). The background note to
section 2B3.1 makes pellucid that this guideline provision applies
"for robberies where a victim was forced to accompany the defendant
to another location. . . ." Id. cmt. background.
- 7 -
The defendant does not dispute that this guideline
controls.1 Nor does she dispute that a woman was abducted by one
of her confederates: Bruno and/or Rivera forced the woman to move
to a different location (the Jeep Cherokee) to retrieve the
debit/credit card and, thus, to facilitate the commission of the
robbery. The question, then, reduces to whether her confederates'
perpetration of the abduction can reasonably be attributed to her.
In the case of jointly undertaken criminal activity, a
defendant is liable both for harm resulting from any acts or
omissions directly attributable to her and for harm resulting from
the acts or omissions of other persons acting in concert with her
that were "reasonably foreseeable in connection with th[e]
criminal activity." USSG §1B1.3(a)(1)(B)(iii). As with all upward
sentencing adjustments, the government bears the burden of proving
the applicability of this enhancement by a preponderance of the
evidence. See United States v. Soto-Villar, 40 F.4th 27, 35 (1st
We need not linger long over the defendant's suggestion that
1
she and the government "agreed" that the abduction enhancement
"did not apply." In support, she notes only that the enhancement
was not mentioned in the plea agreement. There is, however,
nothing to show either that the plea agreement was conditioned
upon the denial of the abduction enhancement or that the government
affirmatively agreed to oppose such an enhancement. The mere fact
that a plea agreement is silent concerning a possible enhancement,
without more, does not foreclose a sentencing court from exploring
and applying such an enhancement. See United States v. Trujillo,
537 F.3d 1195, 1201 (10th Cir. 2008) (stating that a "plea
agreement cannot preclude the court from considering the facts
underlying" relevant conduct when considering application of
enhancement not endorsed in plea agreement).
- 8 -
Cir. 2022); United States v. Flores-De-Jesús, 569 F.3d 8, 36 (1st
Cir. 2009).
As a general matter, we deem the Sentencing Commission's
commentary to the sentencing guidelines to be authoritative. See
United States v. Rivera-Berríos, 902 F.3d 20, 24-25 (1st Cir.
2018). The commentary to section 1B1.3 outlines how a sentencing
court ought to make an individualized determination as to whether
another person's act, committed in furtherance of jointly
undertaken criminal activity, was reasonably foreseeable to the
defendant. "[T]he court must first determine the scope of the
criminal activity the particular defendant agreed to jointly
undertake." USSG §1B1.3, cmt. n.3(B). Then, "[t]he court must
determine if the conduct . . . of others was in furtherance of the
jointly undertaken criminal activity." Id. cmt. n.3(C). Finally,
"[t]he court must . . . determine if the conduct . . . was
reasonably foreseeable in connection with that criminal activity."
Id. cmt. n.3(D).
Before us, the defendant contends that the district
court abused its discretion by not employing this tripartite
framework in making an individualized determination. The
defendant's premise is borne out by the record: the district court
did not employ the tripartite framework (at least in so many
words). But the district court, in effect, covered the same
ground. We think that its findings were sufficiently explicit to
- 9 -
warrant a conclusion that the court did not abuse its discretion
in imposing the enhancement. We explain briefly.
Despite the district court's eschewal of the tripartite
framework, the court's factfinding (including its adoption of the
PSI Report's account of the offense of conviction) fully supports
findings to the effect that the robbery was within the scope of
the jointly undertaken criminal activity; that the conduct of Bruno
and/or Rivera in abducting the victim was in furtherance of that
activity; and that such conduct was reasonably foreseeable to the
defendant. The defendant does not dispute that the record supports
both the "scope" and the "in furtherance of" elements of the
tripartite framework. Rather, she takes aim at the third element.
With respect to that element, the court found — and the
defendant does not contest — that the defendant agreed to go along
with Rivera and Bruno to commit a robbery. She joined in that
criminal enterprise knowing that Rivera and Bruno had carjacked a
vehicle and abducted a man to retrieve money from an ATM the night
before. In the course of committing the new carjacking and
robbery, Bruno and/or Rivera abducted a woman, forcing her to go
to her car and retrieve a debit/credit card and divulge her PIN
number. Given the defendant's knowledge of what had gone before
and the nature and circumstances of the offense of conviction, the
record strongly supports a finding that the abduction was
- 10 -
reasonably foreseeable to the defendant.2 So viewed, application
of the abduction enhancement was appropriate, and the defendant
cannot succeed in showing that the district court abused its
discretion in imposing the enhancement.
We add a coda. "[W]e have consistently held that when
a sentencing court makes clear that it would have entered the same
sentence regardless of the Guidelines, any error in the court's
Guidelines calculation is harmless." United States v. Ouellette,
985 F.3d 107, 110 (1st Cir. 2021). Here, the sentencing court
explicitly stated that it would impose the same 108-month sentence
without regard to the sentencing guidelines. Given this statement,
any error in the guideline calculations would be harmless in view
of the evident basis in the record for a finding that the
defendant's relevant conduct warranted a sentence of that length
regardless of whether the abduction enhancement applied. See id.
B
This leaves the defendant's challenge to the substantive
reasonableness of her sentence. Our review is for abuse of
For present purposes, it is enough that the abduction during
2
the commission of the carjacking and robbery was reasonably
foreseeable to the defendant. In the interest of completeness,
however, we add that the defendant's knowledge that Bruno wanted
to commit a rape arguably expanded the scope of the criminal
enterprise to include rape. Because the defendant knew that Bruno
wanted to rape a woman that night and that he had stopped to
purchase condoms along the way, it was also reasonably foreseeable
to her that a woman would be abducted for that purpose.
- 11 -
discretion. See Holguin-Hernandez v. United States, 140 S. Ct.
762, 766-67 (2020).
In sentencing, "reasonableness is a protean concept."
United States v. Martin, 520 F.3d 87, 92 (1st Cir. 2008). As
such, "[t]here is no one reasonable sentence in any given case
but, rather, a universe of reasonable sentencing outcomes."
United States v. Clogston, 662 F.3d 588, 592 (1st Cir. 2011).
When determining whether a challenged sentence is substantively
reasonable, we ask "whether the sentence falls within this broad
universe." United States v. Rivera-Morales, 961 F.3d 1, 21 (1st
Cir. 2020). In the end, a sentence will be deemed substantively
reasonable as long as it rests on "a plausible rationale
and . . . represents a defensible result." Id.
The defendant's sentence was at the bottom of — but
within — the guideline sentencing range. Where, as here, a
defendant challenges a within-the-range sentence, she "faces a
steep uphill climb to show that the length of the sentence is
unreasonable." United States v. deJesús, 6 F.4th 141, 150 (1st
Cir. 2021).
In our view, the sentence here rests on a plausible
rationale. The district court mulled the section 3553(a) factors
and determined that "the facts in this case are predominantly
heinous in setting it apart from the typical car-jacking case."
The court emphasized that what stood out most to it were "the
- 12 -
defendant's prior knowledge of the car-jacking being committed by
the co-defendants . . . and her knowledge of [Bruno's] intent of
committing rape on the night of the events." The court found
"chilling" the defendant's lack of reaction on the night of the
offense and found that she lacked empathy for the victims during
sentencing. This rationale easily passes the test of plausibility
for a bottom-of-the-range sentence.
So, too, the challenged sentence represents a defensible
result. The defendant was a willing participant in a
carjacking/robbery offense. She knew that her confederates
carried firearms and that Bruno wanted to rape a woman. As we
have explained, the defendant was complicit in the carjacking,
the robbery, and the rape. See supra Part II(A) & n.2. Given
the totality of the circumstances, it would strain credulity to
conclude that a 108-month sentence is indefensible.
This conclusion is not undermined by the fact that both
the government and the defendant, pursuant to the plea agreement,
urged the district court to impose a seventy-month term of
immurement. The customary rule is that the district court is not
bound by the parties' recommendations as to the length of the
sentence to be imposed, see United States v. Mulero-Vargas, 24
F.4th 754, 759 (1st Cir. 2022), and this case falls squarely
within the sweep of that customary rule.
- 13 -
That ends this aspect of the matter. When — as in this
case — a sentence rests on a plausible rationale and reflects a
defensible result, that sentence is substantively reasonable. The
defendant's claim of error therefore fails.
III
We need go no further. For the reasons elucidated above,
the challenged sentence is
Affirmed.
- 14 - | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488390/ | 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 21, 2022
Before
DIANE P. WOOD, Circuit Judge
AMY J. ST. EVE, Circuit Judge
JOHN Z. LEE, Circuit Judge
Nos. 21-1136 & 21-1162
REGINA WILBURN, personal Appeals from the United States District
representative of Keith Cleveland, Court for the Northern District of Indiana,
deceased, South Bend Division.
Plaintiff-Appellant,
Nos. 3:19-CV-420-JD-MGG & 3:19-CV-483-
v. JD-MGG
KRISTOPHER KACZKA, et al., Jon E. DeGuilio,
Defendants-Appellees. Chief Judge.
ORDER
In two suits consolidated for appeal, Keith Cleveland, a deceased inmate whose
personal representative is the appellant, contends that prison staff violated his Eighth
Amendment rights by stripping his cell of his personal items and by later moving him
*
We have agreed to decide these cases 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).
Nos. 21-1136, 21-1162 Page 2
to another area of the prison. The district court entered summary judgment for the
defendants. On the cell-stripping claim, it ruled that the deprivation lasted only a day,
not long enough to violate the Eighth Amendment. For the claim about the intra-prison
move, Cleveland did not exhaust his administrative remedies. Viewing the record
de novo in the light most favorable to Cleveland, see Perry v. Sims, 990 F.3d 505, 511
(7th Cir. 2021), we affirm because Wilburn offers no valid reason to disturb these
rulings.
I. Stripping of Cleveland’s Cell (No. 21-1136)
When Cleveland was housed at Indiana State Prison in 2019, he spat at and
disobeyed an officer. Sergeant Gordon responded by ordering that Cleveland’s cell be
“stripped” of personal items like his clothing, bedding, and inhaler (Cleveland is
asthmatic). He asserts that he had to sleep naked and uncovered on a rusted metal bed,
aggravating the pain in his neck (where a bullet was lodged) and his asthma, which he
says Gordon knew about. As a result, he adds, he required medical care.
Cleveland sued Gordon for damages and his warden for injunctive relief under
42 U.S.C. § 1983, alleging that the removal of his clothing, bedding, and inhaler violated
his Eighth Amendment rights. The district court allowed Cleveland to proceed on his
claim against Gordon regarding his clothing and bedding and against the warden for
injunctive relief. But because the claim about the disregard of his asthma duplicated his
claim in another then-pending suit, Cleveland v. Indiana State Prison Warden, No. 3:19-
CV-406-RLM-MGG, 2020 WL 1905157, at *1 (N.D. Ind. Apr. 17, 2020), the court did not
allow it to proceed. Later, it entered summary judgment for the defendants. It ruled that
the claims against the warden were moot because Cleveland had moved to another
prison. As for Cleveland’s claim about clothing and bedding, the court concluded that
this deprivation lasted only 24 hours, not long enough to violate his Eighth Amendment
rights. After the district court entered judgment, Cleveland died (for unknown reasons),
and we allowed Regina Wilburn (his mother and personal representative) to proceed
with the appeal. See FED. R. APP. P. 43(a)(1).
On appeal, Wilburn fails to engage with the district court’s conclusion that a 24-
hour deprivation of clothes and bedding does not violate the Eighth Amendment. And
we have ruled that, although “disquieting,” an inmate who had to sleep for two-and-a-
half days on a “slab of metal” without bedding and in wet clothes suffered no Eighth
Amendment violation, only a “temporary inconvenience” not “compounded by” the
lack of other necessities. Johnson v. Pelker, 891 F.2d 136, 138–39 (7th Cir. 1989). We are
mindful of Wilburn’s pro se status, see Anderson v. Hardman, 241 F.3d 544, 545–46
(7th Cir. 2001), but she is still required to comply with Rule 28(a) of the Federal Rules of
Nos. 21-1136, 21-1162 Page 3
Appellate Procedure and explain why the district court’s decision was incorrect. Cole v.
Comm'r, 637 F.3d 767, 772–73 (7th Cir. 2011); see Klein v. O'Brien, 884 F.3d 754, 757
(7th Cir. 2018). She has not.
Still, we prefer to decide cases on the merits when we can, Boutros v. Avis Rent A
Car Sys., LLC, 802 F.3d 918, 924 (7th Cir. 2015), and we can do so here. Rather than argue
that Gordon violated Cleveland’s rights by having him sleep naked on a bare frame,
Wilburn contends that Gordon is culpable because he denied Cleveland his inhaler and
treatment for asthma. We may assume that asthma is a serious condition and denying
an asthmatic inmate his inhaler and treatment might violate the Eighth Amendment.
See Board v. Farnham, 394 F.3d 469, 485 (7th Cir. 2005). But the district court ruled that,
because Cleveland raised this claim in a separate suit, it would not let him duplicate the
claim here. Wilburn does not contest this decision, nor could she: Courts have broad
discretion to prevent duplicative suits. McReynolds v. Merrill Lynch & Co., 694 F.3d 873,
888–89 (7th Cir. 2012). The district court reasonably exercised that discretion here.
II. Moving Cleveland within the prison (No. 21-1162)
Medical staff authorized prison personnel to house Cleveland in the lower tiers
of the prison because climbing many stairs aggravated Cleveland’s asthma. Knowing
this, Cleveland asserts, Sergeant Kristopher Kaczka twice moved him to cells in the
upper tiers. After the second move, Cleveland fainted while walking up the stairs.
Cleveland sued Kaczka under § 1983 for violating his Eighth Amendment rights
by deliberately ignoring his asthma. Kaczka moved for summary judgment, arguing
that Cleveland did not exhaust his administrative remedies for relief. See 42 U.S.C.
§ 1997e(a). The Indiana State Prison requires that complaints about intra-facility
transfers must be grieved through a procedure that includes a written, timely appeal if
the offender is dissatisfied with the initial decision. Cleveland did not timely file the
internal appeal. Accordingly, the district court granted Kaczka’s motion.
Again, on appeal Wilburn ignores the court’s ruling that Cleveland did not
exhaust his administrative remedies. As we said above, we could dismiss this appeal for
failure to comply with Rule 28(a) of the Federal Rules of Appellate Procedure, but we
can decide the case on the merits. Boutros, 802 F.3d at 924.
Wilburn asserts that she called the prison multiple times, asking staff to move
her son back to the lower tier. These calls are not part of the district court’s record, but
even if they were, they would not impair the ruling that Cleveland failed to exhaust. To
exhaust, an inmate must comply with the prison’s rules for filing written grievances
Nos. 21-1136, 21-1162 Page 4
and appeals. See Lockett v. Bonson, 937 F.3d 1016, 1025 (7th Cir. 2019); Pozo v.
McCaughtry, 286 F.3d 1022, 1024 (7th Cir. 2002). Wilburn’s phone calls did not satisfy
those rules.
Finally, Wilburn’s opening briefs raises new claims—such as asserting that
prison staff retaliated against Cleveland for past grievances and lawsuits. But because
Cleveland never advanced these claims before the district court, they are waived.
See Siddique v. Laliberte, 972 F.3d 898, 905 (7th Cir. 2020).
AFFIRMED | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494515/ | OPINION AND ORDER
SCOTT W. DALES, Bankruptcy Judge.
I.INTRODUCTION
This matter is before the court on the Complaint of Astera Credit Union (the “Credit Union”) against Chapter 7 Debtor Doris E. Russell (“Ms. Russell”) in which the Credit Union seeks an order excepting its debt from discharge under 11 U.S.C. § 523(a)(2)(A). The court conducted a bench trial in Grand Rapids, Michigan on January 23, 2012 at which the Credit Union appeared through counsel and Ms. Russell appeared pro se. At the trial, the court heard testimony from four witnesses, and admitted nine exhibits, without objection. This opinion constitutes the court’s findings of fact and conclusions of law in accordance with Fed.R.Civ.P. 52 made applicable to this adversary proceeding by Fed. R. Bankr.P. 7052. For the following reasons, the court will enter judgment for the Credit Union.
II.JURISDICTION
The court has jurisdiction over Ms. Russell’s bankruptcy case pursuant to 28 U.S.C. § 1334(a). The case and all related proceedings, including this adversary proceeding, have been referred to the United States Bankruptcy Court pursuant to L.Civ.R. 83.2(a) (W.D.Mich.) and 28 U.S.C. § 157(a). The court concludes that it has authority to enter a final judgment in this matter which it regards as a core proceeding. 28 U.S.C. § 157(b)(2)(I). At the pretrial conference, the parties consented to the court’s entering final judgment, notwithstanding the possible applicability of Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
III.ANALYSIS
The Credit Union seeks to except a debt that Ms. Russell admittedly owes arising from her purchase of a 2006 Ford F-150 pickup truck (the “Truck”). To fund the purchase, Ms. Russell borrowed $19,934.58 from the Credit Union and traded-in a Dodge Caravan titled in her name but used by her father. As Ms. Russell credibly explained at trial, she purchased the Truck for her father, Charles Russell, just as she previously did with the Caravan. She admitted that at the time she signed the promissory note, she had no intention of paying the Credit Union for the Truck because she expected that her father would repay the loan, again as he did with the Caravan.
According to Ms. Russell, the salesperson at the Harold Ziegler Ford Dealership in Lowell, Michigan (the “Dealership”) structured the transaction so that it appeared she was financing the car because Ms. Russell’s father’s credit precluded him from qualifying for a car loan in his own name. In order to complete the purchase, *466Ms. Russell signed a credit application in her own name, which the Dealership forwarded to the Credit Union as part of the latter’s indirect lending program. See Exh. 1. In the credit application, which Ms. Russell signed, she falsely adopted the following statement:
[X] You are applying for individual credit in your own name and are relying on your own income or assets and not the income or assets of another person as the basis for repayment of the credit requested.
Exh. 1. Ms. Russell later explained to the court that she was relying on her father to repay the loan, contrary to this representation. Such a statement is material to a lender who reasonably needs to know that the person who agrees to make payments is the person who has the incentive to do so. In other words, it is reasonable to assume that a borrower will be more inclined to make payments in order to keep a vehicle that she is actually using, than to make payments to keep collateral for a third party’s benefit. This, in part, prompted the Credit Union to address this issue on the credit application, and made Ms. Russell’s misrepresentation material to the Credit Union’s decision to extend credit.
After the Credit Union approved Ms. Russell’s application, Mr. Van Dyken called Ms. Russell’s father to say, “Charlie, you got yourself a truck.”
Testimony from the Credit Union’s loan officer, Darcy Krause, established that the Credit Union relied upon the application and a credit report that it reviewed in deciding to lend Ms. Russell the money. After the Credit Union advised the Dealership that it would fund the loan, Ms. Russell signed financing documents including a promissory note (Exh. 3), security agreement, an agreement to provide insurance, and an application for a Michigan title and registration on or about October 12, 2010 at the Dealership. Ms. Russell also purchased a warranty for the Truck.
Ms. Krause confirmed what is patent from the documents admitted at trial: the documents nowhere revealed the real nature of the transaction, namely that Ms. Russell was purchasing the Truck for her father, and that she did not intend to either use or pay for it unless something happened to her father. Ms. Krause believed that the Credit Union would look to its borrower — Ms Russell — for payment. For her part, however, Ms. Russell agreed with Mr. Van Dyken that she needed to conceal her father’s role if her father was going to get the Truck. She knew that the documents submitted to the Credit Union were not true, but she signed them anyway.1
The Credit Union funded the loan and Ms. Russell purchased the Truck from the Dealership. Within a month after purchasing the Truck, and before the first payment to the Credit Union became due, Ms. Russell concluded that she needed to seek protection under the Bankruptcy Code. She called the Credit Union to make *467arrangements to put the Truck loan in her father’s or mother’s name, but the Credit Union refused. Accordingly, Ms. Russell (or her father) returned the Truck to the Dealership, from whom the Credit Union repossessed it.
After giving notices required under Article 9 of the Uniform Commercial Code, the Credit Union sold the Truck and applied the proceeds to reduce Ms. Russell’s debt. According to the credible testimony from the Credit Union’s collection manager, Kathleen M. Disher, Ms. Russell owes $10,793.54 on account of the loan she obtained to purchase the Truck.
At the first meeting of creditors held under 11 U.S.C. § 341 in Ms. Russell’s case, and again at the trial, Ms. Russell candidly admitted that she had no intention of repaying the indebtedness. Indeed, the evidence established that at no time did Ms. Russell or her father make any payments on account of the loan, although she did surrender the Truck to the Credit Union.
Although the court does not doubt Ms. Russell’s testimony to the effect that the Dealership’s salesperson proposed structuring the transaction to hide its true nature, that testimony does not undercut the fact that Ms. Russell herself played a crucial role in persuading the Credit Union to part with the loan proceeds. She provided documentation representing falsely that she intended to repay the debt, when in fact she had no such intention. In other words, the unsavory business practices that Ms. Russell described on the part of the Dealership’s salesperson do not excuse Ms. Russell’s own role in deceiving the Credit Union.
To except the debt from discharge under 11 U.S.C. § 523(a)(2)(A), the Credit Union must prove, by a preponderance of the evidence, that:
(1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of loss.
Rembert v. AT & T Universal Card Services, Inc. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir.1998). The court finds that Ms. Russell misrepresented the transaction and her intent to repay, and that the Credit Union justifiably relied on the representations when it funded the loan and parted with $19,934.58. Ms. Russell intended to deceive the Credit Union because she, and the Dealership’s salesperson, believed that the Credit Union would not make the loan if it knew the true nature of the transaction. Ms. Krause confirmed that supposition at trial. The Credit Union’s reliance was the proximate cause of its loss.
In addition, the record did not permit the court to infer an agency relationship between the Credit Union and the Dealership that would justify imputing the salesperson’s knowledge to the Credit Union.
The court further finds, pursuant to its ancillary jurisdiction, that Ms. Russell owes the Credit Union $10,793.54, after giving her credit for the proceeds of the Article 9 disposition. Longo v. McLaren (In re McLaren), 3 F.3d 958, 965 (6th Cir.1993) (bankruptcy court has authority to render a money judgment on a nondis-chargeable debt). Accordingly, the debt in that amount shall be excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A).
IV. CONCLUSION
Ms. Russell was a candid and eminently credible witness at trial, but her testimony established that she played a significant *468and causative role in perpetrating a fraud against the Credit Union by inducing it to make a loan that it would not otherwise have made. Although the Dealership’s former salesperson may have encouraged Ms. Russell to participate in the dishonest transaction, his complicity does not excuse her independent role in the deception.
Accordingly, the court will enter a judgment establishing that Ms. Russell owes the Credit Union $10,793.54, and that the debt shall survive her discharge under 11 U.S.C. § 523(a)(2)(A).
NOW, THEREFORE, IT IS HEREBY ORDERED that the Clerk shall serve a copy of this Opinion and Order pursuant to Fed. R. Bankr.P. 9022 and LBR 5005-4 upon Stephen L. Langeland, Esq., Doris E. Russell, the United States Trustee, and all parties requesting notice of these proceedings.
IT IS SO ORDERED.
JUDGMENT IN AN ADVERSARY PROCEEDING
This adversary proceeding was tried by the court without a jury, and for the reasons set forth in the court’s Opinion dated January 25, 2012, the court reached the following decision.
IT IS HEREBY ORDERED that Ant-era Credit Union shall recover from Doris E. Russell $10,793.54, plus costs, and that this debt is excepted from discharge under 11 U.S.C. § 523(a)(2)(A).
IT IS FURTHER ORDERED that the Clerk shall serve a copy of this Judgment pursuant to LBR 5005-4 and Fed. R. Bankr.P. 9022 upon Stephen L. Langeland, Esq., Doris E. Russell, and all parties requesting notice of these proceedings.
IT IS SO ORDERED.
. At trial, a former employee of the Dealership, Marlin Jeffrey, Jr., testified that the Dealership’s files contained no documents corroborating Ms. Russell's version of events and that Mr. Van Dyken would not have played the part that Ms. Russell says he played in the deception. The court gives less weight to Mr. Jeffrey’s testimony than to Ms. Russell’s because he did not work in the Dealership’s location in Lowell at the relevant time, and because it would be surprising if the Dealership’s records reflected any attempt to disguise from the Credit Union the true nature of the transaction. Moreover, the Credit Union did not offer testimony from the one former employee — Mr. Van Dyken — who would have had the most to say about his role. The court credits Ms. Russell’s version of events. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494517/ | MEMORANDUM DECISION
ROBERT D. MARTIN, Bankruptcy Judge.
Renew Energy LLC filed for bankruptcy relief under chapter 11 on January 20, 2009. On July 1, 2010, a plan was confirmed, which vested U.S. Bank National Association (“trustee”) with the right to administer all remaining assets of the debtor, including any funds recovered through preference claims. The trustee commenced this action against Plains Marketing Canada (“Plains”) on January 28, 2011 under § 547(b) to recover roughly $808,000 in payments made by the debtor in the ninety days before filing bankruptcy. Plains has moved for summary judgment.
The debtor operated an ethanol plant in Aztalan, Wisconsin. In its operations, it used large amounts of denaturant grade natural gasoline (“natural gasoline,”) which it purchased from Plains. Plains is a transporter and supplier of crude oil, liquefied petroleum gas, and other petroleum products. It buys and sells natural gasoline, but does not produce it. Because the price of gasoline fluctuates, Plains’ profitability is subject to the volatility of the natural gasoline market. Plains manages this risk by entering into sales contracts to sell gasoline at specified prices for future delivery.
In February 2008, Plains entered into two contracts with the debtor for the sale of natural gasoline, referred to as Contract 954 and Contract 955. Each had a cover sheet, on Plains letterhead, with the title “sales contract.” Contract 954 was negotiated on February 1, 2008, and required Plains to deliver “220 tank trucks approximately” over the term of the contract, with “up to 20 trucks” delivered each month. Payment for each delivery was due within 10 days of the invoice date, and the negotiated price was set at “Mont Belvieu Non TET Month Average C5 + Plus .32” per gallon delivered. The term “Mont Belvieu Non TET Month Average C5 + ” referred *478to an index price commonly used in the industry. Listed under the “additional terms,” section of the contract was a term stating that “the first (8) trucks per month will fall under a separate fixed price contract and the remainder will go under this basis priced contract.” Contract 954 expired on December 31, 2008. The contract was signed by a representative from Plains on February 5, 2008, and by a representative of the debtor on February 19, 2008. On February 26, 2008, Plains made its first delivery of gasoline pursuant to this contract.
On February 4, 2008, the debtor and Plains negotiated Contract 955. Pursuant to that contract, the debtor agreed to pay Plains $2.29 a gallon for Plains to deliver “88 tank truck” of natural gasoline over the term of the contract, with 8 trucks to be delivered each month. Like Contract 954, this contract expired on December 31, 2008, and required payment within 10 days of each invoice date. On February 5, 2008, a representative from Plains signed the contract, which was followed by the debt- or’s signature on February 19, 2008. On February 4, 2008, Plains delivered its first shipment under this contract.
On October 28, 2008, the debtor and Plains entered into a third contract, Contract 1060. This contract was negotiated on October 28, 2008, and expired four days later on October 31, 2008. Pursuant to the contract, Plains was to deliver “3 tank truck” at a fixed price of $1.60 per gallon. The contract was signed by a Plains representative on October 30, 2008 and a representative for the debtor on November 17, 2008. The first delivery under Contract 1060 occurred on October 28, 2008, with two additional deliveries occurring on October 29 and October 30, 2008. The contract required payment from the debtor within five days from the invoice date.
From February 2008 until December 31, 2008, Plains delivered natural gasoline pursuant to the terms of Contracts 954 and 955. Several weeks to one month after each delivery, Plains would send the debt- or an invoice. During the eleven-month relationship the debtor rarely, if ever, submitted timely payments. All payments were made via wire transfer, and most payments were for multiple invoices. Pri- or to the preference period, the debtor made payments from 7 to 40 days after the invoice date, averaging 18 days after. During the ninety days before the debtor filed for bankruptcy, the debtor paid its invoices to Plains from 7 to 26 days after the invoice date, averaging 15 days after. During the preference period, the debtor made payments of roughly $808,000 to Plains under the three contracts.
Summary judgment is appropriate “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.” See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The primary purpose of summary judgment is to avoid trial where there is no genuine issue of material fact in dispute. See Trautvetter v. Quick, 916 F.2d 1140, 1147 (7th Cir.1990). Drawing all inferences in favor of the nonmoving party, each defense Plains raises is considered below.
A. Safe Harbor § 546(e)
Plains argues that the payments made for the delivery of gasoline are protected because they constitute “settlement payments” pursuant to three “forward contracts,” which cannot be avoided under § 546(e). Congress first enacted this safe harbor in 1982 to “minimize the displacement caused in the commodities and secu*479rities markets in the event of a major bankruptcy affecting [the financial] industries.” H.R.Rep. No. 97-420, p. 1 (1982), reprinted in 1982 U.S.C.C.A.N. 583, 583 (§ 546(e) was originally enacted as § 546(d), but was later designated as § 546(e)). Congress sought to prevent market instability when a commodities or securities firm became insolvent. Id. 1982 was near the start of an agricultural credit crisis in the United States, when many grain storage facilities and many more farmers were resorting to bankruptcy. There was a reasonable fear that the recovery of preferences from sellers of grain and other commodities would further destabilize crucial markets. In 1990, Congress expanded the scope of § 546(e) to apply to settlement payments made under forward contracts by forward contract merchants. H.R.Rep. No. 101-484, p. 4 (1990), reprinted in 1990 U.S.C.C.A.N 223, 226. The purpose of the amendment was to “keep pace in promoting speed and certainty in [ ] complex financial transactions” and once again to “minimize volatility” in the financial markets. Id. at 2.
When expanding § 546(e), Congress intended to distinguish between a forward contract and an ordinary commodity purchase or sale. Id. at 3. Congress noted that “[t]he primary purpose of a forward contract is to hedge against possible fluctuations in the price of a commodity. This purpose is financial and risk-shifting in nature, as opposed to the primary purpose of an ordinary commodity contract, which is to arrange for the purchase and sale of the commodity. If the price of a commodity — such as crude oil or soybeans — rises or falls on some future date, the buyer or seller can minimize the risk involved through the use of forward contracts to offset the fluctuation in price from the date of the agreement to the actual date of transfer or delivery” Id. Acknowledging the purpose behind protecting forward contracts from avoidance, several bankruptcy courts have looked to the contracts’ language, purpose, and the parties’ motives in order to determine whether a certain contract qualifies as a “forward contract.” See MBS Management, 432 B.R. 570, 575 (Bankr.E.D.La.2010); National Gas Distributors, 369 B.R. 884, 894-95 (Bankr.E.D.N.C.2007) (distinguishing the Olympic case, and concluding that the contracts were nothing more than “simple supply contracts.”). For example, in MBS Management, Judge Magner heard testimony from an expert in commodity trading of electricity, who described the common attributes of forward contracts for the sale of electricity. MBS Management, 432 B.R. at 575. The expert’s testimony regarding the hedging nature of the contract satisfied the court that it was indeed a forward contract. Id.
While this background information is helpful in determining if the contracts at issue are the type of contracts Congress had in mind when enacting the Safe Harbor Provision of § 546(e), a proper analysis begins with the statutory language. Bankruptcy Code § 546(e) in relevant part provides:
“Notwithstanding sections 544, 545, 547, ..., the trustee may not avoid a transfer that is a ... settlement payment, as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency ...”. 11 U.S.C. § 546(e) (emphasis added).1
*480To establish a defense under § 546(e), the evidence must show that debtor’s payments to Plains were: (1) settlement payments; (2) made to or by a “forward contract merchant.” These elements will be considered in turn.
1. Settlement Payment
The Bankruptcy Code defines “settlement payment” as, “for purposes of the forward contract provisions of this title, a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, a net settlement payment, or any other similar payment commonly used in the forward contract trade.” 11 U.S.C. § 101(51A). While the statute’s tautology does not provide defining characteristics, it is reasonably clear that a “settlement payment” follows the maturity of a forward contract and consists of the consideration to settle (or complete all obligations under) that contract. See generally In re Enron Creditors Recovery Corp., 422 B.R. 423, 440-41 (S.D.N.Y.2009) (implying that settlement payments generally arise at the maturity of a negotiable or financial instrument). Use of the phrase “settlement payment” rather than simply “payment” suggests that the obligation arose under a forward contract rather than a simple commodity purchase contract. Therefore, we must determine whether the contracts at issue are forward contracts before concluding that the payments fulfilling them qualify as settlerrient payments under § 546(e) and § 101(51A).
The Bankruptcy Code defines “forward contract” as “a contract (other than a commodity contract) for the purchase, sale, or transfer of a commodity, or product or byproduct thereof, with a maturity date more than two days after the date the contract is entered into ... ”. 11 U.S.C. § 101(25)(A). There is no doubt that natural gasoline is a commodity. See Mirant, 310 B.R. 548, 565 (Bankr.N.D.Tex.2004). The maturity date of these contracts is less clear.
To date, no court has explicitly defined the term “maturity date.” The trustee cites Lightfoot v. MXEnergy, Inc., 2011 WL 1899764, *4 (E.D.La. May 19, 2011), which implies that the date of first delivery is in fact the forward contract’s maturity date for the purposes of the two-day requirement under § 101(25). The trustee points out that Contract 955 was negotiated February 4, 2008, and the first date of delivery was also February 4, 2008. Likewise, Contract 1060 was negotiated the same day of the first delivery. In light of this, the trustee concludes that Contract 955 and Contract 1060 do not meet the statutory requirement of “maturity date,” more than two days after that contract was entered into. However, in Lightfoot, because the first date of delivery was clearly outside the two-day period, the court did not inquire further, as it concluded that the statutory requirement was met. Therefore, the trustee’s reliance on this case for a complete definition of “maturity date” is misplaced.
In the absence of any helpful definition in the Bankruptcy Code or the Uniform Commercial Code, a common sense (and usage) definition of “maturity date” is the date that all other obligations under the contract have been performed, and nothing else need be done except tender payment. Common usage in the context of forward contracts suggests that it refers to the *481date on which delivery has occurred and payment to “settle” is due. The word “mature,” used in § 101(25A), suggests a single date and meant the “due date for commencement of performance,” but Congress did not intend to restrict the number of times a forward contract can mature. See Mirant, 310 B.R. 548, 564 & n. 26 (Bankr.N.D.Tex.2004). In support of this broad interpretation, the Mirant court cited the legislative history, which states that “[A] forward contract merchant often has a series of forward contracts with the same customer, which are then set off and netted out.” Id. (citing H.R.Rep. No. 101-484, p. 4 (1990)), 1990 U.S.C.C.A.N. at pp. 223, 226. The court concluded that multiple maturity dates can arise under one or more forward contracts. Id. Providing further (though limited) guidance, Black’s Law Dictionary defines “date of maturity” as the date an obligation becomes due. BlacK’s Law Dictionary, 452 (9th ed. 2009). This implies that if there is more than one delivery date, there is more than one date an obligation becomes due.
In this case, Contracts 954 and 955 clearly fall under the definition of a forward contract in § 101(25). The portions of these contracts on which the disputed payments were made matured more than two days after the contracts were entered into. Contract 954 was negotiated on February 1, 2008. Neither party disputes that multiple deliveries occurred under this contract. The first payment in the preference period occurred November 14, 2008, pursuant to a delivery that occurred September 20, 2008. Since this contract’s maturity date is comfortably outside the two-day period, no further inquiry need be made. Likewise, Contract 955 was negotiated on February 4, 2008. The first payment in the preference period occurred November 14, 2008, pursuant to a delivery that occurred September 15, 2008. Therefore, because Contracts 954 and 955 involve a transfer of a commodity and matured more than two days after they were entered into, these contracts qualify as “forward contracts” under 11 U.S.C. § 101(25).
Contract 1060, however, does not qualify as a forward contract under this definition. It was negotiated on October 28, 2008. The first delivery date under this contract was October 28, 2008. The last delivery date was October 30, 2008. By October 30, all obligations under Contract 1060 were satisfied, except issuing the invoice and collecting the payment. This was a simple commodity purchase contract. It did not mature more than two days after it was entered into. It fails under the statutory definition and is not a forward contract for the purposes of § 546(e). Because it is not a forward contract, payments on it were not “settlement payments.”
This analysis may be supplemented by examining the nature of the contracts in hedging against market volatility. Plains has satisfactorily demonstrated that Contracts 954 and 955, by operating together, were formed to hedge the risks of an unstable gasoline market. While the first eight tank trucks delivered each month were subject to a flat rate of $2.29 per gallon of natural gasoline, protecting the debtor from higher market prices and Plains from lower, tank trucks twelve through twenty were subject to an index price, plus an additional $0.32 per gallon. The practice of “adding or subtracting from the index is done because the index does not represent the market price, but the value established through a calculation that takes into consideration the actual trades that were executed and reported of a certain type for a specified period of time.” (Def.’s Mem. Supp. Summ. J. at 7 (citing Broxson Aff. ¶ 12.)) When an index *482based price is adjusted with the use of an adder (or a discount as the case may be) to reach a negotiated price for a defined term, the index plus the adder “allows market participants to hedge transactions with more precision, and guard against negative price movement impacts in these transactions.” Id. This is precisely the type of contract Congress intended to protect when drafting 11 U.S.C. § 546(e) and the pertinent definitions in § 101. Because Contracts 954 and 955 qualify as “forward contracts” under 11 U.S.C. § 101(25), the payments associated with these contracts are settlement payments for the purposes of § 101(51A).
2. Forward Contract Merchant
The Bankruptcy Code defines “forward contract merchant” as “an entity the business of which consists in whole or in part of entering into forward contracts.” 11 U.S.C. § 101(26). Plains has demonstrated that it is a forward contract merchant by showing that Contracts 954 and 955 qualify as forward contracts. Plains is a Forward Contract Merchant under § 546(e), to whom settlement payments were made during the preference period.
There is no genuine issue of fact, and Plains has satisfied its burden and proved the elements of § 546(e). No fact that could be elicited at trial would change the analysis above. Therefore, Plains is entitled to summary judgment as to payments received under Contracts 954 and 955.
B. Ordinary Course of Business Defense
Plains argues that all payments from the debtor, paid within 90 days of the petition, were made in the “ordinary course of business” and are therefore, unavoidable under § 547(c)(2). We need now consider only the single payment made on Contract 1060. To establish that payment was made in the “ordinary course of business,” Plains must establish that either the payment: (A) was “made in the ordinary course of business or financial affairs of the debtor and the transferee;” or (B) was “made according to ordinary business terms.” 11 U.S.C. § 547(c)(2). When analyzing whether payments fall within § 547(c)(2), the court must look at the established practices of the parties’ business relationship. See In re Tolona Pizza Prods. Corp., 3 F.3d 1029, 1032 (7th Cir.1993). Whether a payment was made in the “ordinary course of business” depends on: (1) the length of time the parties were engaged in the transaction at issue; (2) whether the amount or form of tender differed from past practices; (3) whether the debtor or creditor engaged in unusual collection or payment activity; and (4) whether the creditor took advantage of the debtor’s financial distress. Eleven v. Household Bank F.S.B., 334 F.3d 638, 642 (7th Cir.2003). Late payments are considered within the “ordinary course of business” if the terms of the parties’ business agreement was modified prior to the preference period. Matter of Xonics Imaging Inc., 837 F.2d 763, 766 (7th Cir.1988). When analyzing the transactions, courts frequently look to the creditor’s billing cycle and pay close attention to the past payment history. See, e.g., Tolona Pizza, 3 F.3d at 1033.
Despite filing nearly 250 pages of documents relating to Plains’ business relationship with the debtor, a factual uncertainty remains. Plains provided the court with a spreadsheet showing that during the time prior to the preference period, the debtor paid its invoices from Plains anywhere from 7 to 40 days late, or on average 18 days late. In contrast, during the preference period the debtor made payments anywhere from 7 to 26 days late, or on average 15 days late. While *483the differences in these calculations may be minimal, more evidence as to the debt- or’s payment practice with Plains, as well as evidence of Plains general billing practices, is needed to establish the payment of Contract 1060 was made “in the ordinary course.” For this reason, there is still a genuine issue of fact that exists for a defense under § 547(c)(2), and summary judgment is not appropriate.
C. New Value Defense
Plains argues the payments made are nonavoidable under the “new value” defense. The new value defense under 11 U.S.C. § 547(c)(4) provides:
The trustee may not avoid under this section a transfer — to or for the benefit of a creditor, to the extent that, after such transfer, each creditor gave new value to or for the benefit of the debt- or—
(A) Not secured by otherwise unavoidable security interest; and
(B) On account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor. 11 U.S.C. § 547(c)(4).
A creditor establishes that “new value” was given if: (1) after receiving a preferential transfer, the creditor advanced additional credit to the debtor on an unsecured basis; and (2) the additional post-preference unsecured credit was unpaid in whole or in part as of the date of the bankruptcy petition. See In re Globe Bldg. Materials, Inc., 484 F.3d 946, 949 (7th Cir.2007). If a creditor establishes that it gave “new value” in exchange for the preferential transfer, then it may offset the value exchanged by the amount of new value paid. “New value” is measured at the time the debtor takes possession of the transferred goods. Id. at 951.
Based on the evidence provided, it cannot be determined whether Plains provided any new value to the debtor pursuant to Contract 1060 during the preference period. An affidavit provided by Donna Chi-zon suggests that two deliveries for gasoline were made to the debtor on January 5 and January 7, 2009. However, other than this affidavit, Plains has provided no evidence of these deliveries and no evidence as to whether they were connected to Contract 1060. Therefore, Plains has not met its burden to justify granting its motion for summary judgment under § 547(c)(4).
For the reasons stated above, Plains is entitled to summary judgment as to Contracts 954 and 955. It may be so ordered.
ORDER
The Court having reached the conclusion of law in the memorandum decision filed this date, it is hereby ORDERED that Plain’s motion for summary judgment as to Contracts 954 and 955 be GRANTED.
. Because neither Plains nor the debtor has argued that either is a "commodity broker,” it is not necessary to analyze or apply any definitions provided in 11 U.S.C. § 761, even though the section is referenced in § 546(e). See 11 U.S.C. § 103(d) (“[sjubchapter IV of *480chapter 7 of this title applies only in a case under such chapter concerning a commodity broker.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494518/ | MEMORANDUM OPINION
DENNIS R. DOW, Bankruptcy Judge.
The issue before the Court in these cases is whether above-median Chapter 13 debtors who own unencumbered vehicles over six years old or with mileage in excess of 75,000 miles may claim an additional $200.00 for monthly operating expenses in calculating their projected disposable income on their Form 22C. In each case, the Debtors have claimed such an additional operating expense and the Chapter 13 Trustee has objected contending that they are not entitled to the deduction pursuant to the Internal Revenue Service’s standards made applicable in Chapter 13 by § 707(b)(2) and § 1325(b)(3). The Trustee contends that by doing so the Debtors are not committing all of their projected disposable income to the payment of unsecured creditors pursuant to the plan as required by § 1325(b). This Court has jurisdiction over these proceedings pursuant to 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1). These are core proceedings, pursuant to 28 U.S.C. § 157(b)(2)(L), which this Court may hear and determine and in which it may issue final orders. The following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule 52 of the Federal Rules of Civil Procedure as made applicable to these proceedings by Rules 7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure. For the reasons set forth below, I conclude that the Debtors are not entitled to claim this additional operating *494expense and the Trustee’s motions to deny confirmation should be granted.
I. FACTUAL BACKGROUND
The facts cited below are taken from the pleadings filed on the Court docket of which the Court takes judicial notice pursuant to the consent of the parties. James and Jean Schultz filed a petition for relief under Chapter 13 of the Bankruptcy Code on February 9, 2011. They filed an Amended Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (Form 22C) reflecting total monthly income of $6,075.43. Annualized this amounts to $72,905.16 which is in excess of the applicable median family income for the state of Missouri of $68,705.00. As a result, these Debtors are above median and, in the process of calculating disposable income pursuant to § 1325(b)(2), required to determine then-expenses in accordance with the Internal Revenue Service (IRS) standards incorporated into the Bankruptcy Code by § 707(b)(2). The Debtors have deducted a total of $820.00 on line 27a for vehicle operating expenses pursuant to the IRS Local Standards. Utilizing that number, the Debtors’ monthly disposable income is a negative $92.16. Debtors have claimed an additional $400.00 for each of two unencumbered vehicles they own. Schedule J shows they incur actual transportation expense of only $500.00.
Milton and Jarrett Smith filed a petition for relief under Chapter 13 of the Bankruptcy Code on March 9, 2011. They filed a Form 22C reflecting total monthly income of $5,868.56. Annualized this amounts to $70,422.72 which is in excess of the applicable median family income for the state of Missouri of $50,295.00. As a result, these Debtors are above median and, in the process of calculating disposable income pursuant to § 1325(b)(2), required to determine then-expenses in accordance with the IRS standards incorporated into the Bankruptcy Code by § 707(b)(2). The Debtors have deducted a total of $620.00 on line 27a for vehicle operating expense pursuant to the IRS Local Standards. Utilizing that number, the Debtors’ monthly disposable income is $440.16. Debtors have claimed an additional $400.00 for each of two unencumbered vehicles they own. Schedule J shows they incur actual transportation expense of only $425.00.
David and Diana Fulton filed a petition for relief under Chapter 13 of the Bankruptcy Code on March 14, 2011. They filed a Form 22C reflecting total monthly income of $13,067.33. Annualized this amounts to $156,807.96 which is in excess of the applicable median family income for the state of Missouri of $50,295.00. As a result, these Debtors are above median and, in the process of calculating disposable income pursuant to § 1325(b)(2), required to determine their expenses in accordance with the IRS standards incorporated into the Bankruptcy Code by § 707(b)(2). The Debtors have deducted a total of $820.00 on line 27a for the vehicle operating expense pursuant to the IRS Local Standards. Utilizing that number, the Debtors’ monthly disposable income is $37.87. Debtors have claimed an additional $400.00 for each of two unencumbered vehicles they own. Schedule J shows they incur actual transportation expense of only $190.00.
Each of the vehicles mentioned above is more than six years old or has more than 75,000 miles or both. In each case, the Debtors base their entitlement to this additional operating expense not on a provision of the Bankruptcy Code or on a number in the tables comprising the IRS standards, but rather on language con*495tained in the IRS manual, Part 5, Chapter 8, Section 5.8.5.20.3, which offers guidance to IRS agents and provides as follows:
In situations where the taxpayer has a vehicle that is currently over six years old or has reported mileage of 75,000 miles or more, an additional monthly operating expense of $200.00 will generally be allowed per vehicle, (emphasis added)
The Trustee contends that the deduction is inappropriate and if disallowed would change the calculation of disposable income and result in a greater dividend to non-priority, unsecured creditors. As a result, the Trustee contends that the Debtors are not committing all of their projected disposable income to the payment of their unsecured creditors under the plan as required by § 1325(b).
II. DISCUSSION
Section 1325(b)(1) provides that upon objection by the trustee or the holder of an allowed, unsecured claim, the plan may not be confirmed unless the debtor pays all unsecured claims in full or the plan proposes to pay all the debtor’s projected disposable income for the applicable commitment period to unsecured creditors. Because each of the Debtors is above the applicable median income for a family of similar size in the state of Missouri, their disposable income is calculated in accordance with § 1325(b)(3) which incorporates the provisions of § 707(b)(2). In turn, that paragraph incorporates the standards promulgated by the IRS for assessing the ability of delinquent taxpayers to pay taxes owed to the government. The Local Standards component of the IRS standards includes ownership as well as operating expense deductions for debtors. The allowances for operating expenses are contained in tables which yield the appropriate number for the deduction based on the number of vehicles owned by the debtor and the region in which the debtor lives. In addition to these standards, the IRS has published a manual which contains guidance for its agents in interpreting and applying the standards, the relevant portion of which is quoted above.
Debtors contend that permitting the deduction would be consistent with an earlier decision of this Court, as well as of the Eighth Circuit Bankruptcy Appellate Panel.1 Specifically, they contend that the court in In re McGuire, 342 B.R. 608 (Bankr.W.D.Mo.2006) has already determined that debtors are entitled to take such a deduction. However, as the Trustee points out, the issue in McGuire was whether debtors who owned an unencumbered vehicle could nonetheless take the standard allowance for ownership expenses. The question of an additional operating expense for older vehicles was not decided in the case and any comments made on that issue were necessarily dicta. While the court did make the observation that the IRS manual would entitle the debtors to such a deduction, as noted earlier in the opinion, this issue was not a matter of contention between the debtors and the Chapter 13 trustee, as the trustee had in fact conceded that they would be allowed this additional operating expense. See McGuire, 342 B.R. at 612, n. 11. Similarly, the Debtors contend that the Eighth Circuit Bankruptcy Appellate Panel endorsed the deduction in Babin v. Wilson (In re Wilson), 383 B.R. 729 (8th Cir. BAP 2008). Once again, however, the issue in *496Wilson was the same one before the court in McGuire. The court in Wilson was not called upon to decide whether the debtors were entitled to take an additional operating expense for older vehicles. As was the case in McGuire, while the court noted that the IRS might interpret its standards so as to permit debtors to take such deductions, the issue was not litigated in the case, as the United States Trustee suggested the debtors could do so. Wilson, 383 B.R. at 732. Accordingly, neither case holds that above-median debtors are entitled to take such a deduction on older vehicles and the court is not bound by the comments made in those decisions on this question.
The Debtors also claim that the United States Supreme Court’s recent decision in Ransom v. FIA Card Services, N.A, — U.S.-, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011), supports their position. In Ransom, the Supreme Court took up the same question confronted in McGuire and Wilson, specifically whether a debtor with a vehicle not subject to a lien is nonetheless entitled to claim the ownership allowance provided by the IRS standards. The Supreme Court determined that the deduction was inappropriate. In the process, it cited those portions of the IRS manual suggesting that no deduction was appropriate in such cases. Debtors contend that this Court should use the same approach and utilize the language from the manual in allowing them to take an additional operating expense for their older vehicles. The Court declines to do so for a number of reasons.
Initially, the Court believes that using the language in the IRS manual to justify additional operating expense would be inconsistent with the way in which the manual was used in the Ransom decision. In Ransom, the Court stated that while the IRS guidelines are not incorporated into the Code, they might nonetheless be referred to by the courts in interpreting the standards which are incorporated. Ransom, 131 S.Ct. at 726. Arguably, the Court used the guideline commentary to assist it in interpreting the statutory language, specifically the meaning of the word “applicable.” In fact, the Court used the language of the manual to reinforce a conclusion it had already reached, employing recognized principles of statutory construction, that taking the deduction would be improper. In this instance, the guideline would be used to create a deduction which is present in neither the Code nor the standards. It would not be used in aid of the interpretation of statutory language as there is no language in the statute which purports to permit such a deduction. The statute in question, § 707(b)(2), provides that “the debtors’ monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards.” § 707(b)(2)(A)(ii)(I) (emphasis added). The deduction the Debtors claim here is not in the standards.
In Ransom, the Court said that in interpreting the statutory language, the court should consider the text, context and purpose of the statute. Ransom, 131 S.Ct. at 721. Here, the text clearly provides no support for the claimed deduction. The statute says the expenses “shall be” those “amounts specified” in the standards. The allowance sought here is not in the standards. See In re VanDyke, 2011 WL 1833186 at *4 (Bankr.C.D.Ill.2011). As the Court noted in Ransom, the appropriate context is the approximation of the debtors’ reasonable expenditures. Ransom, 131 S.Ct. at 724-725. Here the Schedule J filed in each case reflects that the Debtors incur expenses significantly less than amounts asserted in the Form 22C with the additional $200.00 or $400.00 in operat*497ing expenses. Accordingly, allowance of the deduction is inconsistent with approximating the Debtors’ reasonable expenses. The court in Ransom cautioned against allowing expenses which were essentially fictional. Ransom, 131 S.Ct. at 727. The same concern applies here. The Debtors in these cases do own older vehicles and do incur operating expenses. In that sense, their operating expense claims are not fictional. However, as their actual numbers show, they do not in fact incur an additional $200.00 to $400.00 in operating expenses by reason of the age of their vehicles. In that sense, the additional operating expenses claimed are fictional. It may make sense to assume, as Debtors argue, that debtors with older vehicles will incur additional operating expenses. However, the Court in Ransom rejected a similar argument as a justification for an expense deduction, observing that the debtors were not entitled to a “cushion.” If, during the course of the Chapter 13 proceeding, any of these debtors find it necessary as a result of the unreliability of their older vehicles to purchase another new or used vehicle, they may petition the court to modify their plan and incur additional debt, assessing that expense against their disposable income, if those amounts are reasonable and necessary. Ransom, 131 S.Ct. at 730. Finally, as far as statutory purpose is concerned, the Supreme Court acknowledged the much repeated suggestion that in enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress sought to require debtors to pay the maximum amount they could afford. Ransom, 131 S.Ct. at 725. Disallowance of the deduction in this situation, in which there is neither a statutory nor a factual basis for it, is consistent with that purpose.
Even if the Court were to conclude that it should utilize the guidance contained in the IRS manual, it would not necessarily produce the result the Debtors urge. For one thing, as noted by the emphasis added by the Court to the language cited above, the allowance of this additional operating expense is generally, but not universally allowed. It is therefore discretionary. Accordingly, Debtors would not be entitled to take the deduction in every case even if they owned an older automobile. In addition, as has been noted before, the IRS applies the Local Standards (of which the operating expense deduction is a part) as caps on expenditures asserted by taxpayers, not as allowances. McGuire, 342 B.R. at 613 n. 16; VanDyke, 2011 WL 1833186 at *2. Accordingly, the Debtors would only be entitled to the amount specified in the standard or their actual expenses, whichever is less.2 Since the Schedule J filed in these cases shows that the Debtors do not have actual monthly automobile operating expenses in the amount claimed on their Form 22C, they would not be entitled to that amount but rather to the lesser amount shown on their Schedule J as transportation expenses.
The Debtors cite two post-Ransom cases in support of their contention that the Court should allow the additional operating expense. The first is In re Baker, 2011 WL 576851 (Bankr.D.Mont.2011). The Baker court, however, relies primarily on its own previous decision and offers little additional analysis. It relies in part on the discussion in Ransom of the role of the guidelines, but, as indicated above, this *498Court respectfully disagrees with the assumption that the Supreme Court’s use of the guidelines in Ransom is consistent with allowing the additional operating expense.
The other case cited is In re Joest, 450 B.R. 381 (Bankr.N.D.N.Y.2011). Actually, Joest involves a different issue: whether an individual debtor can claim ownership cost deductions for two motor vehicles. The Chapter 13 trustee objected to the claim, based in part upon language in the IRS manual which would limit a single debtor to a single vehicle ownership expense deduction. The court overruled the trustee’s objection and permitted the deduction, observing that the language of the statute did not limit debtor’s ownership expense deductions and that to the extent they suggested otherwise, the guidelines in the manual were contrary to the statute. Joest, 450 B.R. at 392. Accordingly, neither the holding nor the rationale of Joest supports the Debtors’ position.
The Court finds more persuasive the two post-Ransom decisions in which the courts have held the debtor may not take this additional operating expense. In In re Hargis, 451 B.R. 174 (Bankr.D.Utah 2011), the court denied the claim on the basis that this additional allowance is not in the standards table incorporated by § 707(b)(2). The court noted that an additional $200 vehicle operating expense deduction is neither in the Local Standards nor in the Collection Financial Standards. The court therefore concluded that “as a matter of statutory interpretation ... the $200 additional operating expense is not an expense specified under the ... Local Standards within the meaning of § 707(b)(2)(A)(ii)(I).” Hargis, 451 B.R. at 177.
Likewise, in VanDyke, the court disallowed the additional operating expense deduction in part for the reason that the amount referred to in the guideline is not an applicable monthly expense amount specified under the Local Standards as required by the statute. For that reason, the court held that allowance of this additional amount set forth in the guidelines would be inconsistent with the statute. Making reference to the Supreme Court’s observation in Ransom about the role of the guidelines, the court concluded that “allowance of an additional amount as set forth in the IRS guidelines is not a matter of interpretation of the Local Standards for transportation, but one of its revision.” VanDyke, 450 B.R. at 841.3
For all these reasons, the Court holds that debtors with motor vehicles over six years old or with mileage in excess of 75,000 miles may not claim an additional $200.00 in operating expenses on line 27a of the Form 22C. Accordingly, the Trustee’s motions to deny confirmation of the proposed Chapter 13 plans in these cases are sustained.
. Debtors James and Jean Schultz filed a post-hearing brief which is the source of the arguments the Court attributes to "Debtors” in the opinion and to which it responds. Debtors in the other cases did not file a post-hearing brief, but the Court understands them to adopt the arguments made by the Debtors in the Schultz case.
. Whether in bankruptcy cases the standards should be applied as caps or as allowances was a question specifically left open by the Supreme Court in Ransom. Ransom, 131 S.Ct. at 728 n. 18. As the issue was not raised by the parties in this case, this Court likewise leaves the question open. It does not mean by its comments above to suggest how the issue should be decided.
. The court went on to consider other ways in which the debtors might justify taking the deduction including the doctrine of special circumstances. It ultimately concluded that it would permit debtors to claim additional operating expenses on line 60 of the Form 22C subject to a cap in the amount set forth in the manual. The Court does not embrace that position here as the argument was not made in this case and the Court has serious reservations about the statutory basis for such a claim. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494519/ | ORDER
MICHAEL E. ROMERO, Bankruptcy Judge.
THIS MATTER comes before the Court on the Complaint filed by Plaintiff Charles F. McVay, the United States Trustee (the “UST”), against Defendants Robert Louis and Hazel Mae DiGesualdo (“Mr. DiGe-sualdo” and “Mrs. DiGesualdo” individually, or the “DiGesualdos” or the “Debtors” collectively), seeking denial of discharge of the DiGesualdos’ debts pursuant to 11 U.S.C. § 727(a)(2) and (a)(4)1.
JURISDICTION
The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334(a) and (b) and 157(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(J), as the UST has objected to the Debtors’ discharge.
BACKGROUND FACTS2
Background Related to Debtors’ Business
Debtors owned all the stock of, and were employed by, A-Mac Aluminum Products, Inc. (“A-Mac”), which was in the metal roofing and gutter business.3 They operated the business for about 22 years.4 Mr. DiGesualdo is 66 years old. He has a twelfth-grade education, but also attended trade school. He did the majority of the work on the business and, according to Mrs. DiGesualdo, is a “workaholic” who rarely missed work, even when sick. Mrs. DiGesualdo also worked at A-Mac on a “very part-time” basis, doing some bookkeeping and then sending the records to *509an outside accountant. Though Mrs. DiGesualdo’s primary occupation was homemaking, she has also worked in elementary and high schools, has run a restaurant, and has delivered newspapers. Mrs. DiGesual-do attended high school through the tenth grade.
Throughout most of the time the DiGe-sualdos owned A-Mac, it was a successful business; however, in the last few years business declined, and the DiGesualdos were unable to pay their creditors. On May 15, 2008, the Debtors and A-Mac entered into an Asset Purchase Agreement with LeafGuard of Colorado, Inc. (“Leaf-Guard”), pursuant to which substantially all of A-Mac’s assets were sold to that entity.5
In conjunction with the sale, each of the Debtors executed a non-competition agreement, under which they agreed not to compete against LeafGuard in the gutter installation business for a five-year period.6 In consideration for A-Mac’s assets and the two non-competition agreements, Leaf-Guard paid a total of $302,994.70. Under the Asset Purchase Agreement and the non-competition agreements, the amount paid by LeafGuard was allocated as follows: $100,000 for Mr. DiGesualdo’s non-competition agreement, $100,000 for Mrs. DiGesualdo’s non-competition agreement, and $102,994.70 for the assets of A-Mac.7 The Schedule of Payments attached as Exhibit “B” to the Asset Purchase Agreement provided $132,279.69 of the total amount paid by LeafGuard would be wired to the secured creditors of A-Mac at closing. One or both of the Debtors had guaranteed each of these secured debts. The balance of $170,715.01 was to be paid into a certain “Personal Account — Bob & Hazel DiGesualdo.”8
The Debtors’ bank statements for their personal checking account at Guaranty Bank and Trust Company, Account Number * * * *01 (the “Personal Checking Account”), confirm $170,715.01 was transferred into such account by wire on May 15, 2008. Following this transfer, on May 15, 2008, the Debtors’ Personal Checking Account had a balance of $190,589.61.9
Debtors’ Pre-Petition Transfers
On April 4, 2008, the Debtors paid $20,000.00 to Ben Ledbetter by check no. 11910 drawn on the Debtors’ Personal Checking Account and signed by Mr. DiGesualdo.10 The $20,000 transfer to Ben Ledbetter was made for the benefit of Nick DiGesualdo, the Debtors’ nephew. The transfer was intended to repay a loan Nick DiGesualdo had made to the Debtors, by way of satisfying a debt owed by Nick DiGesualdo to Mr. Ledbetter.11
On May 21, 2008, the Debtors paid $25,000 to Lilian Melick, Mrs. DiGesual-do’s sister, by check no. 11975 drawn on the Debtors’ Personal Checking Account and signed by Mrs. DiGesualdo. The transfer was made in repayment of a loan or loans previously received from Ms. Mel-*510ick beginning in September 2004.12
On August 29, 2008, Mr. DiGesualdo purchased a 2006 Chrysler PT Cruiser from Go Chrysler Jeep. On that date, the Debtors transferred $10,389.71 to Go Chrysler Jeep via checks drawn on the Debtors’ Personal Checking Account and signed by Mrs. DiGesualdo.13
On September 3, 2008, the Debtors transferred $7,493 from their Personal Checking Account to Saxon Mortgage. The Debtors’ purpose in making this transfer was to prepay their home mortgage for five months, September 2008 through January 2009.14
After May 15, 2008, the Debtors made the following transfers from their Personal Checking Account to A-Mac’s checking account: (i) check no. 11960 dated May 15, 2008, in the amount of $6,000; (ii) check no. 11965 dated May 19, 2008, in the amount of $31,000; (iii) check no. 6 dated May 28, 2008, in the amount of $36,000; (iv) check no. 5001 dated June 2, 2008, in the amount of $20,000; (v) check no. 5041 dated June 27, 2008, in the amount of $1,500; and (vi) check no. 5090 dated July 30, 2008, in the amount of $3,000.15 In addition, on June 27, 2008, Mrs. DiGesual-do signed check no. 5042 drawn on the Debtors’ Personal Checking Account in the amount of $5,000 made out to “Cash.”16 The Debtors testified the $5,000 in cash was located at their home on the Petition Date.17
Debtors’ Pre-Filing Activity and the Client Information Worksheet
Mr. DiGesualdo testified the money from the A-Mac sale to LeafGuard was insufficient to pay off all of the Debtors’ creditors. Therefore, in the summer of 2008, Mr. DiGesualdo met twice with a bankruptcy attorney.18 When that attorney moved out of state, he referred Mr. DiGesualdo to attorney Cipriano Griego. Mr. DiGesualdo subsequently met twice with Mr. Griego about filing for bankruptcy.19 At one of the meetings, Mr. Griego provided Mr. DiGesualdo with a Client Information Worksheet (“Worksheet”) requesting information needed to prepare the Debtors’ petition, schedules, and statement of financial affairs (“SoFA”).20
Sometime after September 4, 2008, Mr. DiGesualdo filled out the Worksheet to the best of his ability.21 With respect to the Worksheet, the evidence reflects the following:
• Though Mr. DiGesualdo understood the term, he left the “cash on hand” section of the Worksheet blank.22
*511• Though he understood what the “deposits of money” section of the Worksheet was asking, Mr. DiGesualdo left that section blank and did not identify the Debtors’ personal checking account with Guaranty Bank.23
• Though he understood the term “payment,” Mr. DiGesualdo did not understand the term “insider.” Thus, on page 15 of the Worksheet, in the space below “3b. List all payments made to insider creditors (family) during the last year,” Debtors wrote “NA.”24
• On page 14 of the Worksheet, in the space below “1. Income from Employment or Operation of Business,” the Debtors listed 2008 income of $6,500 from LeafGuard and $5,200 from A-Mac.25
• On that same page, in the space below “2. Income other than from employment or operation of business,” the Debtors wrote “NA.”26
• On page 17 of the Worksheet, in response to section 10 concerning other property transferred out of the ordinary course to a creditor or family member during the past year, the Debtors wrote, “None.”27
Mr. DiGesualdo did indicate on the Worksheet he believed the Debtors owed $5,000 in federal income taxes and $1,500 in state income taxes payable in 2009 for the year 2008.28 He also indicated they had paid Mr. Griego $1,899 on September 4, 2008,29 and had made a payment to Saxon Mortgage in the amount of $1,873.25 on the “15th.”30 However, Mr. DiGesual-do did not mention the $7,493 pre-payment to Saxon Mortgage.31
Mr. DiGesualdo had a number of questions about the Worksheet. Both Debtors assert the provider of prepetition credit counseling declined to answer these questions.32 Therefore, Mr. DiGesualdo stated they left the Worksheet incomplete. Subsequently, when Mr. DiGesualdo returned the partially-completed Worksheet to Mr. Griego’s office, he told Mr. Griego’s assistant he had questions and would like to discuss them with Mr. Griego.33
Mr. DiGesualdo never discussed his questions with Mr. Griego. Instead, Mr. *512Griego’s assistant used the data from the Worksheet to create the original bankruptcy Petition, SoFA, and Schedules filed in this ease.34 No one from Mr. Griego’s office mailed copies of the original Petition, Schedules, or SoFA to the Debtors.35 The Debtors were not given an opportunity to review these documents, nor to sign the Petition, Schedules, and SoFA prior to their being filed by Mr. Griego’s assistant.36 Indeed, the DiGesualdos did not speak to anyone from Mr. Griego’s office until the § 341 meeting, which was held on December 5, 2008.37
Mr. DiGesualdo noted he did not list the income from the sale of A-Mac to Leaf-Guard on the Worksheet because he did not consider the money to be “income.” Instead, he considered the money to be money “to pay the bills.” He said, “I haven’t for 66 years done anything dishonest.... Why would I dishonor myself this way?”38
When asked why he did not list the payments to Ms. Melick and Mr. Ledbet-ter on the Worksheet, Mr. DiGesualdo explained he understood the Worksheet to relate to his personal bankruptcy and not to matters related to the proceeds from the business. According to Mr. DiGesual-do, Mr. Griego never really talked to him about the business. Further, Mr. Griego advised him the business “would just fade away” with the bankruptcy.39 Therefore, in considering the questions on the Worksheet, Mr. DiGesualdo was thinking more in terms of paying debts he felt he had personally incurred, as opposed to debts he considered business debts. According to Mr. DiGesualdo, Nick DiGesualdo had loaned him money for his business when he suffered a heart attack and could not work. Mr. DiGesualdo got the money to repay Nick DiGesualdo, through Mr. Led-better, from his IRA, before he even contemplated bankruptcy. Mr. DiGesualdo stated if he had received “good advice from a lawyer that was competent,” he would not be in court today.
When asked about the $7,493 payment to Saxon Mortgage, Mr. DiGesualdo testified he had made the payment because he asked Mr. Griego, “Could I make my house payments? He said ‘yes,’ so I made my house payments.”40 He said he tried to follow his counsel’s advice. Although inconsistent with the dates on the documents, Mr. DiGesualdo testified he did not think he had made the Saxon Mortgage payment before filling out the Worksheet.
The Trustee Information Sheet and § 341 Meeting
According to the Debtors, on the day of the § 341 meeting, Mr. Griego arrived late, and Mr. Griego gave them a Trustee Information Sheet,41 telling them to sign *513the document because there was no time to review it before they went into the § 341 meeting. The following statement appears above the signature line on the Trustee Information Sheet: “The Debtor(s) herein declare under penalty of perjury that the answer to the foregoing questions and statements contained herein are true, complete and correct to the best of the Debt- or’s (s’) knowledge and information.”42 According to Mr. DiGesualdo, he did not fill out the Trustee Information Sheet, nor did he read it before signing it. Further, he did not know who completed the document.
Mr. Griego did not review the document with the Debtors.43 Though he sat for approximately 15 minutes before being called for the hearing, Mr. DiGesualdo did not ask to review the document he had just signed. He explained he and Mrs. DiGe-sualdo had never been through the bankruptcy process and were nervous about what was to happen. He further testified Mr. Griego advised them to answer the questions at the § 341 meeting with “yes” or “no,”44 and to let him do most of the talking. Mrs. DiGesualdo echoed her husband’s testimony, stating she did not read the Trustee Information Sheet before signing it, and signed it because Mr. Griego told her to do so. Mrs. DiGesualdo testified she trusted Mr. Griego.
The pertinent portions of the Trustee Information Sheet read:
• The line next to question 1, “Cash on Hand,” states “-0-.”45
• The line next to “Undeposited Checks” was left blank.46
• Under question 2, “Bank Account Balances,” it states, “Guarantee Bank & Trust,” and next to that, “$1500 (Soc Sec Checks).”47
• Question 12, “Did the Debtor(s) pay any unsecured creditor more than $600 within 90 days immediately preceding the Case filing:” indicates, “Belleo-Saxon Mortgage.”
*514• Question 13, “Did Debtor(s) pay, give money, or transfer any real or personal property of any kind to or for the benefit of any friend or family member within two years immediately preceding the case filing:” indicates “no.”
• Next to question 14, “List the make, model, mileage and general condition of all motor vehicles which the Debtor(s) own or lease,” appear the words “2006 PT Cruiser — Doge [sic].” Below that, in response to “When did you by car/vehiele # 1?,” is stated, “Oct, 2008.”48
In regard to specific entries on the Trustee Information Sheet, Mr. DiGesual-do testified he did not know why Mr. Griego knew to identify a bank account with Guaranty Bank and Trust, unless it was because he had written Mr. Griego a check from that account. Further, Mr. DiGesualdo did not know why Mr. Griego indicated on the Trustee Information Sheet there was a $1,500 balance on the Guaranty Bank account. He stated Mr. Griego had been able to identify their ownership of the PT Cruiser on the Trustee Information Sheet because he had told Mr. Griego about their purchase of the car. Mr. DiGesualdo also told Mr. Griego in their first meeting he had American Family Insurance, as stated on the sheet.
The parties agree the Debtors first saw the original Petition, Schedules, and SoFA at the § 341 meeting,49 despite the fact they were filed by Mr. Griego’s assistant on October 27, 2008.50 In regard to the SoFA and Schedules, the parties have stipulated:
• The original SoFA, Question 1 (income from employment or operation of business) lists 2008 year-to-date income from employment of $9,535.00 and no other income for 2008. Question 2 of that document (income other than from employment or operation of business) only listed 2008 year-to-date Joint Social Security Income of $18,980.00.51
• The original SoFA, Question 3a (payments made within 90 days prior to the bankruptcy filing) only listed the following transfers: 1) payments of $1,116.00 made to Bélico Credit Union on September 15, 2008, and August 15, 2008, and 2) payments of $1,873.25 made to Saxon Mortgage on the “15th day of each month.”52
• The original SoFA, Question 3c (payments made within one year prior to the bankruptcy filing to creditors who are or were insiders) was checked “None.”53
• The original SoFA, Question 10 (other transfers within two years prior to the filing) was checked “None.”54
• The original Schedule B did not disclose any interest of the Debtors in cash. Item 1 of Schedule B (“Cash on hand”) was checked “None.”55
Dan Hepner, Chapter 7 Trustee, testified he prepared for the § 341 meeting by reviewing the Schedules and SoFA filed in the Debtors’ case, along with their tax return. He also stated he had been con*515tacted by a third party56 about the DiGe-sualdo case, which prompted him to look at the public records to find out whether Mr. DiGesualdo had interests in other businesses, about his interest in A-Mac Aluminum, and whether there were transfers of real property within the four-year period prior to the bankruptcy filing. He also looked at the Colorado Secretary of State records and did some asset searches of public records.
According to Mr. Hepner, if the Trustee Information Sheet had listed “$5,000” in the “cash on hand” section, he would have asked about the source of the money, inquired as to the location of the funds, and would have tried to determine what portions of the funds were exempt and nonexempt. Then he would have sought turnover of the non-exempt portions. Mr. Hepner stated if question 13 (regarding transfers to family members) had been answered in the affirmative, he would have asked about the transfer, when the debt was incurred and whether it was in payment of a debt owed by the Debtors to the transferee. If the transfer had been made in payment of a debt, he would have asked what the terms of repayment were, when the repayment was made, and what the purpose of the debt was. He would also have asked for the name and address of the lender, and asked questions regarding the financial situation of the lender so he could make a decision whether to initiate a recovery action.
After Mr. Hepner learned the Debtors had made transfers to relatives in this case — specifically, to Ms. Melick and to Mr. Ledbetter for the benefit of Nick DiGesualdo — he initiated avoidance actions against Ms. Melick and Nick DiGesualdo. He settled both cases and recovered portions of the sums transferred for the estate.57
At the § 341 meeting, Mr. Hepner asked Mr. DiGesualdo about his current employment, and then about his employment with A-Mac. Through this line of questioning he learned the Debtors had sold A-Mac. He also learned the Debtors had received about $300,000 from the sale of the business, which Mr. DiGesualdo stated he had used to “[pay] off creditors, materials, everybody I owed money to.”58 Approximately $20,000 to $25,000 remained59 and was deposited into Guaranty Bank.60 On further questioning, when Mr. Hepner asked what the Debtors had done with the money, Mr. DiGesualdo stated, “Paid our house payment up until January, bought a car, and that was it. Lived off the rest of it. Not much left.”61 At no time during the § 341 meeting did the Debtors state they had $5,000 in their possession.
*516Mr. Hepner noted the Debtors’ § 341 meeting was not typical and the questioning more extensive, because he had been contacted ahead of time and had issues brought to his attention. Mr. Hepner also thought Mr. DiGesualdo became nervous and agitated as the questioning proceeded.
At no time during the § 341 meeting did the Debtors inform Mr. Hepner of the transfers to Ms. Melick or Mr. Ledbetter, nor did they indicate they had unanswered questions about the information they were to provide in the case. They also did not tell Mr. Hepner they had not read the Trustee Information Sheet. In addition, when Mr. Hepner asked, “Did you sign the Petition, Schedules, and Statements filed with the Court in your case?,” both Mr. and Mrs. DiGesualdo answered, “Yes.”62 When Mr. Hepner asked, “Other than what we’ve discussed today, is the information in them true and correct to the best of your knowledge, information, and belief?,” Mrs. DiGesualdo answered, ‘Tes.”63 Both Debtors also testified they had previously identified all the assets they owned.64
The Debtors’ Pre-Trial Testimony
Subsequent to their § 341 meeting of creditors, the Debtors were examined on two other occasions.65 Prior to the 2004 Examination, the DiGesualdos provided their bank account statements to the UST. At the 2004 Examination, counsel for the UST asked Mr. DiGesualdo about a June 27, 2008 check made out to “cash” in the amount of $5,000 and if he remembered the purpose of that check. Mr. DiGesual-do stated, “Yeah, that’s to save for our taxes.”66 He further stated the money had been in the Debtors’ possession at the time they filed for bankruptcy.67 Mr. DiGesualdo also noted the Debtors still had the money at the their house.68
When asked why the Debtors did not disclose the $5,000, Mr. DiGesualdo answered, “Everybody says I could keep money out to pay my taxes....”69 As to why the Debtors did not leave the $5,000.00 in their checking account, Mr. DiGesualdo testified that everybody he talked to said the Debtors “couldn’t have money in [their] checking account” when they filed for bankruptcy.70 When counsel for the UST asked, “What would happen if you had money in your checking account?” Mr. DiGesualdo responded, “I guess you would attach it, I don’t know. I’ve never done this before so I’m not — I’m not trying to do anything wrong.”71
*517During the 2004 Examination, Mr. Hep-ner (who was also present) stated, “Well, I understand that you have the $5,000 that you need — set aside for your taxes. But that was cash on hand that you had on the date of the filing of the Petition. So, Mr. Griego, we’re going to need to make arrangements to get the $5,000 to me.” Mr. DiGesualdo then asked, ‘Well how.... Who’s going to pay our taxes?”72 At trial, Mr. Hepner pointed out had he not requested the Debtors’ bank statements, and had he and the UST’s counsel not asked specifically about particular transactions, he would not have discovered the Debtors were in possession of $5,000 in cash.
Following the 2004 Examination, and by April 15, 2009, the Debtors deposited all or most of the $5,000 into their personal checking account. From those funds, the Debtors paid $4,000 to the IRS in connection with an Application for Automatic Extension of Time to File U.S. Individual Tax Return, and paid $1,000 to the Colorado Department of Revenue in connection with an automatic extension of their state tax return.73 When completed, the Debtors’ 2008 Individual Income Tax Return showed the Debtors had no federal tax liability for 2008. Their total payments amounted to $4,193, including the $4,000 paid in connection with the extension. On the tax return, the Debtors elected to have the $4,193 applied to their 2009 estimated tax rather than receive a refund (as had been their past practice).74 Similarly, when completed, the Debtors’ Colorado Individual Income Tax Return for 2008 showed they owed state income tax of $350. Their total payments amounted to $1,083, including the $1,000 paid in connection with the extension, resulting in an overpayment of $733. Again, the Debtors elected to have the $733 applied to their 2009 estimated tax.75
Mr. DiGesualdo explained at trial that it was important to the Debtors to pay their taxes in full. He also stated Mr. Griego had advised the Debtors they could pay their 2008 taxes. Mr. DiGesualdo further noted “somebody” advised them to get estimated tax payment information. They got such an estimate, then withdrew $5,000 from their personal checking account via check no. 5042, made out to “Cash,” setting aside $5,000 to be applied to 2008 tax liability.76 Mr. DiGesualdo indicated he did not know how to pay estimated taxes, and had gotten no advice on that subject. However Mr. Griego did not advise him to withdraw the cash from his account, nor did he specifically advise him whether to disclose the cash. Moreover, Mr. DiGe-sualdo stated no one had advised him to pay the $5,000 to the IRS or to the bankruptcy estate. Generally, Mr. DiGesualdo received no advice as to whether transactions should or should not be disclosed. Mr. DiGesualdo understood the Debtors would be liable for 2008 taxes notwithstanding their receipt of a discharge in bankruptcy.77
*518Adversary Proceeding and Debtors’ Actions Thereafter
On April 21, 2009, the UST filed his Complaint commencing this adversary proceeding.78 On June 13, 2009, the Debtors, now represented by Sonja Becker, filed an Amended Petition, Amended Schedules, and Amended SoFA. Among other things, the Amended SoFA discussed the sale of A-Mac and listed the transfers to Saxon Mortgage, to Go Chrysler Jeep, to Lillian Melick, and for the benefit of Nick DiGe-sualdo. The Amended Schedule B listed the $5,000 of “cash on hand.”79 The Amended Schedule F listed creditors holding $670,145.00 in unsecured, nonpriority claims.80
On April 14, 2010, the Debtors turned $5,000 over to the Trustee.81 According to Mr. DiGesualdo, the Debtors did not pay the $5,000 to Mr. Hepner earlier because they did not have the money, but said as soon as possible after Ms. Becker informed the Debtors it needed to be paid, Mr. DiGesualdo borrowed money from his daughter and withdrew funds from his IRA to make the payment.
Mr. DiGesualdo asserted he was not trying to be dishonest about the $5,000, and had no intention to defraud anyone or to keep anything from anybody. He noted he had been honest at the 2004 Examination about holding onto the money to pay taxes, and stated he could have said the Debtors had used the money for expenses rather than being honest about still having the $5,000 on hand.
DISCUSSION
“[B]ankruptcy is a serious matter and when one chooses to avail himself of the benefits of Chapter 7 relief he assumes certain responsibilities, the foremost being to fully disclose his assets and to cooperate fully with the trustee.”82 Indeed, because a debtor’s full disclosure and cooperation are necessary for the functioning of our bankruptcy system, “those who seek shelter of the bankruptcy code must provide complete, truthful and reliable information.” 83
Section 727 provides:
(a) The court shall grant the debtor a discharge, unless&emdash;
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an 'officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed&emdash;
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition;
(4) the debtor knowingly and fraudulently, in or in connection with the case&emdash;
(A) made a false oath or account;
*519(B) presented or used a false claim;
(C) gave, offered, received, or attempted to obtain money, property, or advantage, or a promise of money, property, or advantage, for acting or forbearing to act; or
(D) withheld from an officer of the estate entitled to possession under this title, any recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial affairs.... 84
Exceptions to discharge are to be construed liberally in favor of the debtor, because a total bar to discharge is an extreme penalty.85 Indeed, denial of discharge should occur only in extreme circumstances.86
1. Section 727(a)(2)(A) and (B) Claims (First and Second Causes of Action)
A party objecting to discharge under § 727(a)(2)(A) must prove by a preponderance of the evidence: (1) the debtor transferred, removed, concealed, destroyed, or mutilated (2) property of the estate, (3) within one year prior to the bankruptcy filing, (4) with the intent to hinder, delay, or defraud a creditor [or an officer of the estate charged with custody of property of the estate].87 Similarly, to prevail under § 727(a)(2)(B), a party must prove by a preponderance of the evidence: “(1) the debtor transferred, removed, destroyed, mutilated or concealed property; (2) belonging to the estate; (3) post-petition; (4) intending to hinder, delay or defraud a creditor [or officer] of the estate.”88 Under § 727(a)(2), “[d]enial of discharge need not rest on a finding of intent to defraud. Intent to hinder or delay is sufficient.”89
In his first cause of action, the UST seeks denial of the Debtors’ discharge, arguing the $5,000 in cash withdrawn on June 27, 2008, was property of the estate, which the Debtors transferred, removed, and/or concealed within one year prior to the bankruptcy filing. The UST further argues Debtors took such action with the intent to hinder, delay, or defraud an officer of the estate. In his second cause of action under § 727(a)(2)(B) the UST alleges the $5,000 in cash constituted property of the estate which Debtors transferred, removed, or concealed post-petition, and the Debtors took such action with intent to hinder, delay, or defraud an officer of the estate.
“Fraudulent intent may be established by circumstantial evidence, or by inferences drawn from a course of con*520duct.”90 Further, a number of circumstances may evidence actual intent to defraud under § 727(a)(2)(A), including:
1) the lack or inadequacy of consideration; 2) the family, friendship or close associate relationship between the parties; 3) the retention of possession, benefit or use of the property in question; 4) the financial condition of the party sought to be charged both before and after the transaction in question; 5) the existence of a pattern or series of transactions after the onset of financial difficulties, or pendency or threat of suits by creditors; and 6) the general chronology of the events and transactions under inquiry.91
There is no dispute that on June 27, 2008, within one year prior to their bankruptcy filing, the Debtors withdrew $5,000 in cash from their Personal Checking Account, nor that they had possession of the cash at the time they filed for bankruptcy and, indeed, for some time thereafter. It is clear from the testimony that the Debtors made this withdrawal with the intention of holding the funds to pay their 2008 taxes. Having listened carefully to the testimony, the Court believes the DiGesualdos did so based upon an honest misunderstanding. Although Mr. Griego did not advise the Debtors specifically to withdraw cash and set it aside to pay their taxes, he did advise Mr. DiGesualdo he could pay his taxes.
In what appears to be an unfortunate pattern in this case, Mr. Griego did not ask his clients appropriate questions such as how they intended to pay their taxes, nor did he take the time to explain that Mr. DiGesualdo should pay his estimated taxes before filing. The Court finds Mr. DiGe-sualdo acted in a manner he believed comported with the advice he received from counsel pre-petition&emdash;not with an intent to hinder, delay, or defraud an officer of the estate.92 Further, the Court believes the Debtors’ failure to disclose the $5,000 cash was not due to any intention to conceal assets from an officer of the estate, but rather was attributable to Mr. Griego’s failure to go through the Worksheet, Petition, Schedules, and SoFA with the Debtors and to explain to them the scope of their disclosure obligations. Indeed, as Mr. DiGesualdo noted, had the DiGesual-dos intended to conceal the asset, they could have testified they used the $5,000 for living expenses rather than forthrightly acknowledging they still had the money in their possession. Accordingly, the Court finds there is no basis for denial of discharge under § 727(a)(2)(A).
There is also no dispute that, post-petition, after the 2004 Examination, the Debtors deposited the $5,000 into their checking account, nor that these funds *521were then applied toward the Debtors’ tax liability. In addition, the transcript from the 2004 Examination shows Mr. Hepner advised the Debtors the $5,000 would need to be turned over to him. Further, Mr. Hepner’s testimony that he directed his comment toward both Mr. Griego and Mr. DiGesualdo, and Mr. DiGesualdo responded, “Well how.... Who’s going to pay our taxes?”93 demonstrates Mr. DiGesualdo, at least, understood the money was subject to turnover. Therefore, the Court does not find credible Mr. DiGesualdo’s testimony he did not know he needed to turn the money over until he was so informed by Ms. Becker.94 The Debtors’ transfers of the money in light of such knowledge constitute a basis for denial of discharge under § 727(a)(2)(B).
2. Section 727(a)(2)(A) Claim (Third Cause of Action)
The UST contends the Debtors’ failure to disclose the transfer of substantially all of the funds in their personal checking account, which held $190,580.61 as of May 15, 2008, was knowing and fraudulent. The undisclosed transfers include: $97,500 to A-Mac, $25,000 to Ms. Melick, $10,389.71 to Go Chrysler Jeep, $7,493 to Saxon Mortgage as prepayment on their mortgage, and $5,000 from the Debtors’ checking account to be held by the Debtors in cash.
a. Transfers to A-Mac and Ms. Melick
The Court finds credible Mr. DiGesualdo’s testimony that the Debtors did not view the funds received from sale of their business to be personal funds and believed they were paying business debts with business funds. Though this understanding was in error, the Court does not believe a reasonable person with the Debtors’ education levels would necessarily have understood the funds received in exchange for the Debtors’ non-competition agreements were personal funds.95 Accordingly, the Court does not find the Debtors’ failure to disclose the transfers of $97,500 to A-Mac and $25,000 to Ms. Mel-ick was knowing and fraudulent.
b. Transfers to Go Chrysler Jeep
The Court also does not find the Debtors fraudulently concealed their payment for the PT Cruiser to Go Chrysler Jeep. Though the transfer of funds itself was not disclosed, the purchase of a vehicle in October 2008 is revealed on the Trustee Information Sheet in response to question 12.96 Further, Mr. DiGesualdo testified at the § 341 meeting he had bought a car with the money realized from the Leaf-Guard transaction. Since the transfer was adequately disclosed at the § 341 meeting, the objection under § 727(a)(2)(A) regarding transfers to Go Chrysler Jeep is not sustained.
*522c. Transfers to Saxon Mortgage and Cash Withdrawal
The Court also finds the Debtors’ failure to disclose the $7,493 prepayment to Saxon mortgage and the $5,000 cash likely would have been avoided had Mr. Griego done his job properly. The Court concludes the nondisclosure of these transfers does not evidence an intent to hinder, delay, or defraud, and therefore this does not provide a basis for denial of discharge under § 727(a)(2)(A).
3. Section 727(a)(4)(A) Claims (Fourteenth and Sixteenth Causes of Action)
In his fourteenth claim, the UST seeks denial of discharge on the ground that the Debtors made a false oath by knowingly and fraudulently failing to disclose the $5,000 on the Trustee Information Sheet. In his sixteenth claim, the Trustee contends discharge should be denied because the Debtors’ testimony in affirming their Schedules and SoFA listed all their assets was a false oath and because such oath was made knowingly and fraudulently.
Section 727(a)(4)(A) “is designed to ensure that the debtor provides honest and reliable information to the trustee and others interested in the administration of the estate without their having to conduct costly investigations to discover the debtor’s true financial condition.”97 In order to prevail under § 727(a)(4)(A), the UST must show by a preponderance of the evidence: (1) the debtor made a statement under oath; (2) the statement was false; (3) the debtor knew the statement was false; (4) the debtor made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case.98
“Fraudulent intent may be deduced from the facts and circumstances of a case.”99 “Fraudulent intent can also be demonstrated by showing that the debtor acted with ‘reckless disregard,’ or ‘the state of mind present when a debtor does not care about the truth or falsity of a statement,’ which is the equivalent of knowing that the representation is false and material.”100 However, “[a]n honest mistake or oversight is not sufficient to deny a debtor his discharge.” 101 “Even a false statement resulting from ignorance or carelessness does not rise to the level of ‘knowing and fraudulent’ sufficient to deny a discharge.” 102 “The subject matter of a false oath is ‘material,’ and thus sufficient to bar discharge if it bears a relationship to the bankrupt’s business transactions or estate, or concerns the disposition of assets, business dealings, or the existence and disposition of his property.” 103
A debtor’s statements at a § 341 meeting, and testimony given at a 2004 Examination, constitute statements under oath for purposes of § 727(a)(4).104 *523Further, since the Trustee Information Sheet stated, above the signature line, that the Debtors declared “under penalty of perjury” the answers to the questions therein were true, complete and correct to the best of the Debtors’ knowledge and information, the Trustee Information Sheet also constitutes a statement under oath for purposes of § 727(a)(4).
The Court believes Mr. Griego rushed through the Trustee Information Sheet with minimal assistance from the Debtors; therefore, the Court cannot conclude the answers on the Trustee Information Sheet were truly the Debtors’ statements. Accordingly, the Court finds any omissions on the sheet are not a basis for denial of discharge under § 727.
The Debtors’ testimony at the § 341 hearing presents a more difficult issue. Specifically, the Debtors’s testimony that they signed the Petition, Schedules, and Statements filed with the Court in their case was clearly false, as was their testimony that what was in those documents was true to the best of their knowledge, information and belief. Further, the Debtors’ testimony they had listed all their assets was also false. To a certain extent, the blame for this inaccuracy can be placed at Mr. Griego’s feet, for it was he who advised the Debtors to answer “yes” to those questions. However, it is hard to believe the Debtors did not know their testimony was false, or, notwithstanding advice from counsel, they did not understand they had an obligation to tell the truth during the meeting&emdash;particularly since they were duly sworn at the beginning of the proceeding.105 Such failure to be candid cannot be sanctioned, for the functioning of the bankruptcy system depends upon the honesty of debtors at all stages of the bankruptcy process. The Debtors’ false statement under oath thus constitutes a basis for denial of discharge under § 727(a)(4)(A).
4. Court’s Discretion Under § 727(a)
In cases such as this, where grounds for denying discharge are present, the language of § 727(a) nonetheless vests bankruptcy courts with the discretion to grant a discharge.106 When considering *524how to exercise this discretion, the Court must consider the purposes of the Bankruptcy Code.107 As the Tenth Circuit Court of Appeals recently noted:
A central purpose of the Bankruptcy Code is to give debtors a fresh start by discharging their preexisting debts. Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007); see also Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The Code, however, does not dole out this substantial benefit indiscriminately. Rather, the opportunity for “a completely unencumbered new beginning” is reserved only for “the honest but unfortunate debtor.” Grogan, 498 U.S. at 286-87 [111 S.Ct. 654] (quotations omitted); In re Duncan, 329 F.3d 1195, 1202 (10th Cir.2003).108
The Court also notes “[a]t the core of bankruptcy law is the policy of ‘obtaining a maximum and equitable distribution for creditors.’ ”109
The determination whether to deny discharge is “necessarily fact-bound and requires careful reflection by the court.” 110 Further, it requires the Court to evaluate whether “the debtors’ prepetition debt is of such magnitude that denial of a discharge would make life virtually impossible for them” and to balance that against “the degree of heinousness evidenced by the circumstances of the violation of the bankruptcy laws which constitutes the ground for denial of discharge.” 111
This case presents a very close call. Certainly, the evidence was more than sufficient to raise questions about the Debtors’ good faith and honesty during their bankruptcy case.112 However, the Court is not convinced the Debtors had other than honest intentions, nor that they acted with reckless disregard of the truth. Specifically, the Debtors’ honesty at the 2004 Examination, and their post-petition efforts (undertaken after receiving advice from new counsel), shows they meant to *525comply with their obligations, but, like so many, were out of their element in trying to navigate the complex waters of the bankruptcy system. The Court believes the Debtors’ missteps were unintentional, and made based upon misunderstandings that could have been corrected had their original counsel complied with his professional obligations to confer with his clients and to ask them questions about the sale of their business and disposition of the proceeds from the sale thereof. The Court also believes Debtors’ missteps might have been averted had their original counsel provided proper bankruptcy planning advice to them and advised them not merely that they could pay their taxes, but about the logistics of making such payment. Further, the post-petition misstep of failing to turn over the $5,000 after the 2004 Examination could have been avoided by a simple attorney-client discussion.113 Mr. Griego failed his clients by withdrawing after it became evident during the 2004 Examination that the Debtors had not disclosed various assets and transfers. In sum, the Court concludes the Debtors’ mistakes could have been avoided had Mr. Griego exercised reasonable diligence and provided appropriate representation.
In addition the Court believes a reasonable debtor should understand the obligation to testify honestly under oath, even without the advice of counsel. However, the Court also believes it was reasonable for the Debtors to rely upon the advice of their counsel, and to flounder when such advice was absent. The Court further notes when new counsel came to the aid of the Debtors, they took appropriate steps to turn over the funds to the Chapter 7 Trustee. Thus, in the end, the funds were available for distribution to creditors.
Here, given the magnitude of the Debtors’ debts and the Debtors’ ages, the denial of discharge would be an extremely severe penalty, particularly when weighed against the harm to creditors resulting from their actions.114 The penalty seems all the more severe when considered in light of the fact it appears Debtors’ missteps occurred because they were poorly represented, and in light of the Debtors’ efforts to fix their mistakes after receiving advice from new counsel.
CONCLUSION
Therefore, in light of the foregoing, and keeping in mind § 727(a) should be construed in favor of the Debtors, the Court finds the Debtors’ discharge should not be denied. Accordingly,
IT IS ORDERED that the UST’s first cause of action pursuant to 11 U.S.C. § 727(a)(2)(A) is hereby DENIED.
IT IS FURTHER ORDERED that the UST’s second cause of action pursuant to 11 U.S.C. § 727(a)(2)(B) is hereby DENIED.
IT IS FURTHER ORDERED that the UST’s third cause of action pursuant to 11 U.S.C. § 727(a)(2)(A) is hereby DENIED.
IT IS FURTHER ORDERED that the UST’s fourteenth cause of action pursuant to 11 U.S.C. § 727(a)(4)(A) is hereby DENIED.
*526IT IS FURTHER ORDERED that the UST’s sixteenth cause of action pursuant to 11 U.S.C. § 727(a)(4)(A) is hereby DENIED.
. Unless otherwise noted, all future statutory references in the text are to Title 11 of the United States Code.
. The background information is gleaned from the Stipulated and Uncontested Facts section of the Joint Pretrial Statement submitted by the parties and from testimony. The parties' Statement of Stipulated and Uncontested Facts is very comprehensive, and it is clear the parties put substantial work into it. The Court commends the parties for their diligence and cooperation in this regard.
. Joint Pretrial Statement, Stipulated and Uncontested Facts 116.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 7.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 8; Government Ex. 6.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 9.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 10.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 11.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 12.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 13.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 14.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 15.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 16.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 17.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 18.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 44.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶45. The Debtors' testimony at the Rule 2004 Examination and the trial were consistent. At trial, Mrs. DiGesual-do added that the $5,000 was in the Debtors' freezer on the Petition Date.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 19.
. Joint Pretrial Statement, Stipulated and Uncontested Facts V 20.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 21. The Worksheet was admitted into evidence as Government Ex. 5.
. Mrs. DiGesualdo did not participate in filling out the Worksheet.
. See Government Ex. 5 at 2; Joint Pretrial Statement, Stipulated and Uncontested Facts V 24.
. See Government Ex. 5 at 2; Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 24.
. See Government Ex. 5 at 17; Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 27.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶25. See also Government Ex. 5 at 17.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 26. See also Government Ex. 5 at 17.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 28. See also Government Ex. 5 at 17.
. See Government Ex. 5 at 7.
. See Government Ex. 5 at 17. When counsel for the UST pointed to the date indicated and asked Mr. DiGesualdo when he completed the Worksheet, Mr. DiGesualdo stated he must have completed it around September 4, 2008.
. See Government Ex. 5 at 16.
. The parties stipulate Debtors transferred these funds on September 3, 2008. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 17.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 23.
. On the Worksheet he gave to Mr. Griego's assistant, Mr. DiGesualdo included a note to Mr. Griego asking him to add another creditor to the list. The note did not indicate he had questions to discuss. Government Ex. 5 at 26. Mr. DiGesualdo said he did not know why he would need to make a written request to discuss his questions.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 29.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 30.
. See Joint Pretrial Statement., Stipulated and Uncontested Facts ¶ 31.
. See Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 35.
. April 7, 2011 Audio File at 10:37 a.m.
. April 7, 2011 Audio File at 10:56 a.m.
. April 7, 2011 Audio File at 10:31 a.m.
. See Government Ex. 7. Dan Hepner, the Chapter 7 Trustee, testified that a Trustee Information Sheet is a document debtors are asked to complete prior to being examined at their meeting of creditors. It is designed to summarize assets available to the Trustee for administration, as well as to list transfers shown on the bankruptcy schedules. It provides the Trustee with an overview of the debtors’ financial situation on the petition date, as well as a method to cross-check the information set forth on the schedules and statements which are filed with the Court. It *513is intended to furnish the Trustee with additional information accessible during the course of the § 341 examination to ensure nothing is overlooked.
. Government Ex. 7 at 2.
. Mr. Griego’s testimony at the August 4, 2010 hearing on the Debtors’ Request for Order to Show Cause and Cipriano Griego’s response thereto conflicts with the Debtors’ testimony that he did not go over the Trustee Information Sheet with them. However, the Court believes Mr. Griego arrived at the § 341 meeting late, as he testified he had driven from Denver to Fort Collins for the meeting, and therefore, prepared for the meeting in haste. Further, although the Court believes the bulk of the information on the Trustee Information Sheet came from the Worksheet or from initial client meetings, the Court does not believe all of the information on the Trustee Information Sheet could have come from these sources alone. In contrast to the Debtors’ testimony, it seems likely Mr. Griego asked a few questions and filled out the sheet just prior to the 341 meeting. However, given Mr. Griego's haphazard work in this case, the Court finds credible the Debtors' testimony that Mr. Griego did not go through the Trustee Information Sheet with them before they signed it. The Court also believes the Debtors did not really have a chance to look over the sheet while they waited for their turn at the § 341 meeting. The Debtors’ testimony that they were nervous and listening to other creditors' meetings and thus did not review the sheet is entirely plausible, and their reliance on counsel to make sure the sheet was properly completed is not unreasonable.
. April 7, 2011 Audio File at 11:15 a.m.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 48; Government Ex. 7 at 1.
. Government Ex. 7 at 1.
. Government Ex. 7 at 1.
. Government Ex. 7 at 2.
. See Joint Pretrial Statement, Stipulated and Uncontested Facts V 31.
. See Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 32.
. See Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 33.
. See Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 34.
. See Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 35.
. See Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 36.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 46.
. This individual was not specifically identified in Mr. Hepner's testimony.
. On October 13, 2010, the Trustee commenced Adv. No. 10-1751 MER against Lilian Melick seeking avoidance under 11 U.S.C. §§ 547 and 550 of the Debtors’ prepetition transfer of $25,000 to Ms. Melick. On January 31, 2011, the Court approved a settlement between the Trustee and Ms. Melick whereby Ms. Melick agreed to pay $17,000 to the estate. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 57. On October 13, 2010, the Trustee commenced Adv. No. 10-1752 MER against Nick DiGesualdo seeking avoidance under §§ 547 and 550 of the Debtors’ prepetition transfer of $20,000 for the benefit of Nick DiGesualdo. On March 11, 2011, the Trustee filed a motion to approve a settlement by which Nick DiGesualdo has agreed to pay $13,000 to the estate. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 58.
. Government Ex. 3 at 4:20-21.
. Government Ex. 3 at 4:22-25.
. Government Ex. 3 at 5:1-2.
. Government Ex. 3 at 5:3-6.
. Government Ex. 3 at 27:10-17.
. Government Ex. 3 at 27:18-21.
. Government Ex. 3 at 28:17-19.
. On April 7, 2009, the Debtors appeared at the offices of the UST and testified under oath at an examination pursuant to Fed.R.Civ.P. 2004 (the “2004 Examination”) (Government Exhibit 13 is the transcript of the 2004 Examination). Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 40. They also appeared on October 20, 2009, at the offices of the UST and testified under oath at a deposition (the “Deposition”) (Government Exhibit 14 is the transcript of the Deposition.). See Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 42 and Government Ex. 14. The pertinent information discussed herein comes from the 2004 Examination.
. Government Ex. 13 at 47:21-48:10.
. Government Ex. 13 at 48:11-18.
. Government Ex. 13 at 48:19-20.
. Government Ex. 13, at 66: 12-13.
. Joint Pretrial Statement, Stipulated and Uncontested Facts 11 49; Government Ex. 13 at 92:1-4.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 49; Gov Ex. 13 at 92:5-9.
. Government Ex. 13 at 88:23-89:5.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 51.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 52.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 53.
. This is consistent with the Debtors’ testimony at the 2004 Examination, where they stated they set aside the $5,000 to be applied toward 2008 tax liability. See Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 45.
.Mr. Griego ceased representing the DiGe-sualdos after the 2004 Examination. Therefore, the Debtors were not represented when they made the tax payments to the State and IRS; rather, they were seeking new counsel at the time.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 54.
. Government Ex. 2.
. Bankr.Case No. 08-26950 (Docket # 37), Schedule F.
. Joint Pretrial Statement, Stipulated and Uncontested Facts ¶ 56.
. United States Trustee v. Garland (In re Garland), 417 B.R. 805, 814-15 (10th Cir. BAP 2009) (internal quotation omitted).
. Job v. Calder (In re Calder), 907 F.2d 953, 956 (10th Cir.1990) (internal quotation omitted).
. 11 U.S.C. § 727(a)(2)(A) and (B) and (a)(4).
. Rosen v. Bezner, 996 F.2d 1527, 1534 (3rd Cir.1993); Martinez v. Los Alamos Nat’l Bank (In re Martinez), 126 Fed.Appx. 890, 897 (10th Cir.2005) (unpublished decision). Freelife Int’l, LLC v. Butler (In re Butler), 377 B.R. 895, 915 (Bankr.D.Utah 2006).
. Melarango v. Ciotti (In re Ciotti), 448 B.R. 694, 702, (Bankr.W.D.Pa.2011).
. OTE Canada v. Warren (In re Warren), 512 F.3d 1241, 1249 (10th Cir.2008) (quoting Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1293 (10th Cir.1997)) (brackets added to conform to § 727(a)).
. United States Trustee v. Vigil (In re Vigil), 414 B.R. 743, 746 (citing Butler, 377 B.R. at 915, in which the court stated that the elements of § 727(a)(2)(A) and (a)(2)(B) are "substantially the same ... except that the plaintiff must prove that the debtor transferred or concealed property of the estate after the bankruptcy petition was filed”) (brackets added).
. Butler, 377 B.R. at 915 (quoting Bernard v. Sheaffer (In re Bernard) 96 F.3d 1279, 1281 (9th Cir.1996) (emphasis in original)).
. Formers Coop. Ass’n of Talmage, Kan. v. Strunk, 671 F.2d 391, 395 (10th Cir.1982); see also Aweida v. Cooper (In re Cooper), 150 B.R. 462, 465 (D.Colo.1993).
. Cooper, 150 B.R. at 465 (citation omitted). This list is not exhaustive. Id. at n. 1.
. The Court is troubled by Mr. DiGesualdo's testimony at the 2004 Examination that he did not keep the $5,000 in the Debtors’ personal account because he knew any money in the account would be subject to attachment. However, the Court believes the Debtors withdrew the funds with the understanding it was lawful for them to pay their taxes with the funds post-petition, based on their conversation with Mr. Griego. The Court also believes had the DiGesualdos possessed a fraudulent intent or intent to conceal the funds, they would not have acknowledged they still possessed the funds at the time of the 2004 Examination. Indeed, it would have been very difficult for the UST or the Chapter 7 Trustee to establish the DiGesualdos had withheld the funds had the DiGesualdos not been honest during the 2004 Examination.
. Government Ex. 13 at 88:23-89:5.
. Mr. DiGesualdo’s fear of not paying his taxes appears to have blinded him to the potential consequences of withholding funds from the Chapter 7 Trustee. However, when the potential consequences of failing to turn over the funds were actually explained to Mr. DiGesualdo by new counsel, he borrowed money from his daughter and withdrew funds from his IRA in order to make sure the Trustee received the funds due to the estate. While the turnover came quite late (indeed, it did not occur until after this adversary proceeding was filed) the Court finds the DiGesu-aldos' eventual turnover of the funds mitigates, to some extent, the harm caused by their failure to disclose the cash earlier.
. This is another instance where Debtors’ counsel failed to provide them with appropriate advice.
. Government Ex. 7 at 2.
. Ciotti, 448 B.R. 694, 703 (Bankr.W.D.Pa.2011) (quoting In re Singh, 433 B.R. 139, 154 (Bankr.E.D.Pa.2010)).
. McVay v. Phouminh (In re Phouminh), 339 B.R. 231, 242 (Bankr.D.Colo.2005).
. Garland, 417 B.R. at 815.
. United States Trustee v. Mosher (In re Mosher), 417 B.R. 772, 784 (Bankr.N.D.Ill.2009) (quotations omitted).
. Ciotti, 448 B.R. at 704 (quoting Singh, 433 B.R. at 154).
. Id. at 703 (citing In re Oliver, 414 B.R. 361, 374 (Bankr.E.D.Tenn.2009)).
. In re Chalik, 748 F.2d 616, 618 (11th Cir.1984); Calder, 907 F.2d at 955 (quoting Chalik).
. Butler, 377 B.R. at 922 (citations omitted).
. Government Ex. 12 at 2:1-4.
. Union Planters Bank v. Connors, 283 F.3d 896, 901 (7th Cir.2002). See also In re Tauber, 349 B.R. 540, 546 (Bankr.N.D.Ind.2006) ("it is within the discretion of a bankruptcy court to grant a discharge even when grounds exist for the denial of a discharge”); In re Hacker, 90 B.R. 994, 997-98 (Bankr.W.D.Mo.1987) ("It is commonly said, however, that the existence of grounds for the denial of discharge, albeit a condition necessary to the actual denial of discharge, is not a sufficient condition; that it remains within the discretion of a bankruptcy court to grant a discharge even when grounds for denial of discharge are demonstrated to exist.”).
In construing § 727(a), some courts, including the United States Supreme Court, have substituted language for the statutory text indicating courts cannot grant a discharge if any of the conditions under subsection (a) are met. See, e.g., Kontrick v. Ryan, 540 U.S. 443, 447 n. 1, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004) ("Under § 727(a), the court may not grant a discharge of any debts [if any of the subsections is proved].”) (emphasis added). However, in these cases, including Kontrick, the courts have not decided the question of whether § 727(a) compels a denial of discharge. See, e.g., Kontrick, 540 U.S. 443, 124 S.Ct. 906 (deciding question of whether debtor forfeits right to rely on time limit for creditor to file objections to discharge when debtor does not raise issue before bankruptcy court raises merits of creditor’s objection); In re Connors, 273 B.R. 764 (S.D.Ill.2001) (under § 727(a)(3), the court "shall deny discharge” if debtor fails to produce records, but noting that court has discretion under section 727(a) to grant discharge even if condition of § 727(a)(3) is proved (emphasis added)). Indeed, the Fourth Circuit Court of Appeals has charac*524terized Kontrick’s statement about § 727(a) as "dicta.” Tidewater Fin. Co. v. Williams, 498 F.3d 249, 257 n. 9 (4th Cir.2007).
Looking to the plain language of § 727(a), which states, "the court shall grant a debtor a discharge unless ..the Court agrees with those authorities who have concluded § 727(a) is properly construed to "[compel] the grant of a Chapter 7 discharge if one of the paragraphs of § 727(a) does not apply,” but not to "compel the denial of such discharge if one of such paragraphs does apply.” Cellco Partnership v. Bane (In re Bane), 426 B.R. 152, 162 (Bankr.W.D.Penn.2010).
.See Creative Recreational Sys., Inc. v. Rice (In re Rice), 109 B.R. 405, 407 (Bankr.E.D.Cal.1989) (“The determination to deny a discharge is committed to the discretion of the court, taking into account the two-fold purposes of the Bankruptcy Code to secure equitable distribution of the estate among creditors and to relieve the honest debtor from the weight of oppressive indebtedness, thereby permitting a fresh start.”)
. Standiferd v. U.S. Trustee, 641 F.3d 1209 (10th Cir.2011).
. Holcomb v. Hardeman (In re Holcomb), 380 B.R. 813, 816 (10th Cir.BAP2008) (quoting BFP v. Resolution Trust Corp., 511 U.S. 531, 563, 114 S.Ct. 1757, 128 L.Ed.2d 556,(1994) (other citations omitted)).
. Rice, 109 B.R. at 407.
. Hacker, 90 B.R. at 997-98.
. Because the bankruptcy system relies so heavily upon debtors’ candor with officials of the estate, it is absolutely appropriate for officers of the estate to bring actions in cases where it appears a debtor may have hidden assets or attempted to "game the system.” Therefore, the Court commends the UST&emdash; and the Chapter 7 Trustee&emdash;-for pursuing this matter. It is clear this adversary proceeding was brought in an effort to protect the integrity of the bankruptcy system, which is exactly what the UST ought to do.
. Indeed, when Mr. DiGesualdo asked who would pay his taxes if he turned the funds over, Mr. Hepner stated, "Well, that’s something you'll have to take up with Mr. Griego, to the extent that ... taxes that are owed from ... prior to the filing....” (Ex. 13 at 89:4-9.)
. Because the $5,000 was turned over, its initial nondisclosure did not harm creditors. As for the transfers to Ms. Melick and Mr. Ledbetter, the Trustee was able to recover the bulk of the funds for distribution. To the extent that portions of the preferential transfers were not recovered, the effect on the overall distribution to creditors is minimal. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494521/ | *534ORDER
MICHAEL E. ROMERO, Bankruptcy Judge.
This matter involves the rise and fall of James Vaughn, an obviously intelligent man who made an extremely unintelligent decision. Through hard work and entrepreneurial talent, he gained experience in the options trading, venture capital, and cable television industries, rising to executive positions in several companies. In 1995, he started a successful cable company and began acquiring small cable companies with an eye to selling to a larger entity. The venture was sold in 1999 for a gross sales price of $2.1 billion, of which Mr. Vaughn received approximately $34 million in cash and stock. Sadly, this inspiring business success story then took a very negative turn when Mr. Vaughn made the investment which forms the subject of this action.
JURISDICTION
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(a) and (b) and 157(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) as it concerns the dischargeability of a particular debt.
BACKGROUND FACTS1
The Plaintiff in this action, James Charles Vaughn (“Vaughn”), graduated from high school in 1962. He completed some college courses, but did not earn a degree. Vaughn gained significant experience in business by working with several companies, primarily in the cable television industry. During the 1980s and 1990s, he served as the senior vice president of Triax Communications, a cable company, and was involved in budgeting, financial review, capital raising, acquisitions, and complex negotiations. During the time Vaughn was with Triax, it grew from 30,-000 subscribers to approximately 400,000 subscribers. In addition, early in his career, Vaughn began trading options and options futures. As he gained experience, he developed an understanding of the mechanics of investments.
In 1995, Vaughn started Frontier Vision Partners (“Frontier Vision”). He borrowed $500,000 from JP Morgan to start up the company. JP Morgan later invested an additional $25 million in the venture. Frontier Vision raised additional capital through Vaughn, JP Morgan agents, and from presentations to investors. Vaughn explained Frontier Vision’s business model was to become a world cable television acquirer, with the intent to buy smaller companies and eventually sell them to a larger entity. To that end, Frontier Vision purchased rural cable television providers and consolidated them into a single provider.
When Frontier Vision began in 1995, it hired the international accounting firm KPMG, LLP (“KPMG”) to review acquisition agreements, handle tax preparation and audit activities, document public bond offerings, and perform related services. Vaughn hired Mr. Jack Koo (“Koo”), an experienced commercial banker, as Frontier Vision’s chief financial officer. Mr. James McHose (“McHose”), a certified public accountant previously employed by KPMG as a senior tax manager, was also hired by Frontier Vision as vice president and treasurer.
*535In early 1999, Frontier Vision was sold to Adelphia Communications Corporation (“Adelphia”). From the sale, Vaughn received approximately $20 million in cash and $11 million in Adelphia stock. Koo also received significant cash and Adelphia stock from the sale.
Vaughn knew he would realize capital gains from the sale of Frontier Vision in excess of $30 million. Thus, after the sale was announced, McHose arranged meetings with financial advisors for Vaughn and Koo to suggest investment and tax strategies addressing their profits from the sale. In two meetings with KPMG partner Gary Powell (“Powell”), a product called Bond Linked Issue Premium Structure (“BLIPS”) was presented as an investment possibility. The BLIPS product was offered by a company known as Presi-dio Advisory Services, LLC (“Presidio”). In August 1999, Vaughn, as a potential investor, was issued a “Confidential Memorandum” which described the BLIPS program in detail.
A. The BLIPS Program
In the Confidential Memorandum, Presi-dio described BLIPS as a three-stage, seven-year program comprised of investment funds, or investment pools. The first stage, to last 60 days, involved relatively low risk strategies, while the second stage, lasting 120 days, and the third stage, lasting six and one-half years, increased the risk on the investment with the potential for higher returns. Investors, known as Class A members, could withdraw from the program after the first 60 days.2 In general, this strategy focused on investing in foreign currencies, including currencies “pegged” to the United States dollar.3 Specifically, these funds, in which a Class A member could invest through creation of a separate investment entity, would “invest in U.S. dollar and foreign currency denominated debt securities of corporate and governmental issuers and enter into forward foreign currency contracts, options on currencies and securities and other investments ....”4 Stated simply, this was an investment which could make money based on the volatility of foreign currencies.
What made BLIPS a “tax strategy” was how the investment was to be funded. Generally, an investor would contribute a relatively modest amount compared to the amount ultimately invested. The balance of the investment would be funded through a loan. The loan would be somewhat unconventional because it would charge a high rate of interest and also carry what was referred to as an “initial unamortized premium amount,” or loan premium. The loan premium created a lower, “market rate” of interest, by doing the following three things: 1) amortizing the loan premium; 2) paying interest on the loan amount; and 3) paying interest on the premium itself. Stated differently, while the aggregate of the loan and the loan premium was owed, the premium was being amortized as the loan went forward.5
*536The more important aspect of the investment would be the basis claimed by the taxpayer for such an arrangement. Under the BLIPS program, the taxpayer would claim a basis of the total amount contributed to the investment less the stated principal amount of the loan. As a result, the loan premium is added to the initial investor contribution. Thus, gains are protected by the high basis or, alternatively, in a case where a tax loss may be attractive, for a relatively little actual cash outlay, a claimed basis could result in a high tax loss “even though the taxpayer has incurred no corresponding economic loss.”6
B. The Investment
In July 1999, following their receipt of the Confidential Memorandum, Vaughn and Koo met with David Makov and Robert Pfaff of Presidio to discuss investments involving the Argentine Peso and the Hong Kong Dollar. The investments were to be accomplished through the creation of a fund called Sill Strategic Investment Fund (“Sill”), to which entities created by the individual investors would contribute funds through an account at Deutsche Bank AG (“Deutsche Bank”). Deutsche Bank would then provide loans for investments in the foreign currency markets through the BLIPS program.
Vaughn chose to invest in the BLIPS program, and in furtherance of this decision created an entity known as Pilchuck Ventures, LLC (“Pilchuck”). On October 7, 1999, pursuant to Presidio’s instructions, Vaughn wired $2.8 million to the Pilchuck account at Deutsche Bank to commence the BLIPS transaction.7 In Vaughn’s case, the corresponding loan from Deutsche Bank would be $66 million, plus a $40 million “premium.”8
Vaughn received closing documents to be reviewed, signed, and returned.9 The credit documents with Deutsche Bank were dated October 13, 1999. Sill was set up on October 22, 1999.10 Presidio’s letter to Vaughn of October 26, 1999 indicated Sill received contributions from Pilchuck on October 22, 1999 in a total amount of $109.5 million, which included the $2.8 million supplied by Vaughn and the amount loaned by Deutsche Bank.11 On October 22, 1999, Deutsche Bank sent confirmation notices showing transactions involving approximately $107 million, primarily purchases of Argentine Pesos and Hong Kong Dollars.12,13
*537On December 9, 1999, Vaughn received a report from Presidio showing a Pilchuck loss, as of December 8, 1999, of approximately $280,000.14 Thereafter, as planned, Vaughn “pulled out” of the investment after approximately 60 days.15 After deduction of fees and interest, Vaughn received approximately $900,000 back from his initial $2.8 million investment, comprised of U.S. dollars, Euros, and Adelphia stock.16
The large losses in the BLIPS transactions were generated because Pilchuck (and its sole owner, Vaughn) received only approximately $900,000 in returns on its investment, on a cost basis equal to the amount originally contributed by Vaughn, $2.8 million, plus the loan premium of $40 million, for a basis of approximately $43 million. Thus, a tax loss of approximately $42 million could potentially have been generated by this “investment.”
C. The Tax Problem
Thereafter, Lees prepared Vaughn’s 1999 tax return.17 This return reflected certain of the losses generated by the BLIPS investment. According to Lees, he relied on the opinions of KPMG and the law firm of Brown & Wood in taking a loss on that return.18 While Vaughn acknowledged the purpose of BLIPS was to generate losses to him of approximately $40 million, he noted the loss taken on his 1999 tax return did not reflect any real hard dollar loss to anybody at the time the return was filed. In fact, he had no actual losses in the amount claimed when the deduction was taken. He admitted he did not take the full amount of the BLIPS losses on his 1999 tax return. He did take sufficient tax losses to result in his reporting only a $2.4 million capital gain from the sale of Frontier Vision. However, he denied Powell instructed him to take less than the full loss to avoid arousing any IRS suspicions.
On September 5, 2000, the IRS issued Internal Revenue Bulletin Notice 2000-44 addressing tax avoidance using artificially high basis.19 That Notice stated in part:
Under the position advanced by the promoters of this arrangement, the taxpay*538er claims that only the stated principal amount of the indebtedness, $2,000X in this example, is considered liability assumed by the partnership that is treated as a distribution of money to the taxpayer that reduces the basis of the taxpayer’s interest under § 752 of the Internal Revenue Code. Therefore, disregarding any additional amounts the taxpayer may contribute to the partnership, transaction costs, and any income realized or expenses incurred at the partnership level, the taxpayer purports to have a basis in the partnership interest equal to the excess of cash contributed over the stated principal amount of the indebtedness, even though the taxpayer’s net economic outlay to acquire the partnership interest and the value of the partnership interest are nominal or zero. In this example, the taxpayer purports to have a basis of $1,000X (the excess of cash contributed ($3,000X) over the stated principal amount of the indebtedness ($2,000X)). On disposition of the partnership interest, the taxpayer claims a tax loss with respect to that basis amount, even though the taxpayer has incurred no corresponding economic loss.20
KPMG determined BLIPS investors should be contacted regarding the Notice. Specifically, Mr. Jeffrey Eischeid, a KPMG employee, through an email to Powell dated October 3, 2000, provided a script to be used in conversations with such clients and specifically identified Yaughn and Koo as investors who should be contacted.21 Vaughn did not recall attending a meeting with representatives of KPMG regarding Notice 2000-44, but Lees thought there may have been such a meeting on January 21, 2001, and remembered KPMG representatives continued to insist the transaction was legitimate and would back the transaction and fight the IRS on its interpretation.22 It is not clear whether, in any such meeting, Vaughn was informed of the increased likelihood of audit or the increased possibility KPMG would be required to provide to the IRS the names of clients engaged in transactions similar to those described in the Notice.23 On February 6, 2001, Lees sent a letter to Vaughn containing a copy of Notice 2000-44. Vaughn could not remember receiving this document.
On February 6, 2002, Victoria Sherlock (“Sherlock”), a KPMG in-house attorney, met with Koo and Vaughn to discuss an IRS settlement initiative, Notice 2002-2. Sherlock represented Koo, who had received an audit letter from the IRS in 2001 regarding his BLIPS investment. Koo stated he had not had much contact with Vaughn during 2001, and first informed him of his audit letter at the February 6, 2002 meeting. At this meeting, Sherlock, without making a representation about whether she believed BLIPS would ultimately result in additional taxes, informed Vaughn he should disclose his participation in BLIPS to the IRS.24 Vaughn’s disclosure was provided to the IRS on or about
*539March 28, 2002.25 Vaughn also provided other information requested by the IRS, and agreed to extensions of the statute of limitations to allow the IRS to continue its investigation concerning the losses on his 1999 tax return.
In May 2002, Vaughn and his then-wife Cindy Vaughn received letters from the IRS scheduling an appointment to examine their 1999 tax returns.26 On March 18, 2004, Lees filed amended tax returns for the Vaughns for 1997, 1998 and 1999, adding a net operating loss carryback incurred by Vaughn in 2003.27
On May 24, 2004, the IRS issued Announcement 2004-46, the so-called “Son of Boss Settlement Initiative.”28 Vaughn asserts he was aware by this time of misrepresentations and omissions made by KPMG and Presidio, through conversations with his attorney, with Koo and through review of a widely-known Senate Subcommittee Report critical of investment vehicles such as BLIPS.29 Specifically, Vaughn claims KPMG and Presidio hid information from their clients, made misrepresentations about the economic substance and leverage in investments, and misrepresentations about the validity of opinion letters. Vaughn mailed a Notice of Election to Participate in the Announcement 2004^16 Settlement Initiative on June 21, 2004. On June 24, 2004, Vaughn received a notice of deficiency showing taxes for the tax year ended December 31, 1999, in the sum of $8,617,902 (“the 2004 Assessment”).30 He could not pay these taxes within thirty days, and so could not meet the eligibility requirements of the Settlement Initiative.31
On November 3, 2006, Vaughn filed his Chapter 11 petition (the “Petition Date”). The IRS filed a proof of claim for $14,359,592 as a general unsecured claim, stating at that time the taxes were not entitled to priority under 11 U.S.C. § 507(a)(8)(A)32 because they were as*540sessed more than 240 days before the Petition Date. Almost a year after the Petition Date, and three years after the 2004 Assessment, the IRS realized its error. On October 29, 2007, the IRS abated the 2004 Assessment as unlawful, and on April 10, 2008, the IRS filed its amended proof of claim, asserting the taxes were entitled to priority.
ISSUES AT TRIAL AND THE PARTIES’ POSITIONS
Before the Court is the determination of the dischargeability of the 2005 assessments for the 1999 and 2000 taxes.33 Critical to this determination is whether Vaughn 1) made a fraudulent return; or 2) willfully attempted in any manner to evade or defeat tax for years 1999 and 2000, pursuant to § 523(a)(1)(C).
Vaughn seeks a finding the taxes assessed against him prepetition, which were abated postpetition and which will be reassessed postpetition, are discharge-able under §§ 105, 523(a), and 507(a)(8). Specifically, Vaughn alleges KPMG and its agents abused their fiduciary relationship with Vaughn by approaching and pressuring him to invest in BLIPS. Vaughn further asserts because of Koo’s financial expertise, he reasonably relied on Koo’s advice and representations by KPMG, Koo, and attorneys engaged by KPMG. Vaughn thus did not perform much, if any, personal due diligence of the BLIPS program.34 When Koo determined there was economic substance to the BLIPS investment, and based on KPMG’s promises, Vaughn invested. Finally, he notes he was also distracted by his wife’s serious medical problems at the time.
Vaughn contends KPMG committed fraud because it misrepresented the nature of the BLIPS transaction and did not timely provide promised opinion letters — not until after the investment was made.35 In addition, Vaughn asserts KPMG knew the investments and that it was being investigated by the Senate for its involvement in the BLIPS program, but did not timely disclose this information to him. Vaughn therefore states he did not willfully evade taxes either through the filing of his tax return or his actions following the filing of the tax return because he was counseled by KPMG that the transaction was legitimate and would ultimately be approved by the IRS.
The IRS asserts the tax assessments are nondischargeable under § 523(a)(1)(C). According to the IRS, Vaughn willfully attempted to evade his tax obligations for 1999 and 2000, and filed fraudulent returns for those years. The IRS states Vaughn *541knew or should have known, and in reckless disregard of the information that would have informed him, that BLIPS provided him with no reasonable opportunity to earn a reasonable pre-tax profit. He also knew or should have known BLIPS would not survive IRS scrutiny. The IRS contends Vaughn and Koo were too sophisticated to believe BLIPS was legitimate.
Moreover, in contrast to Vaughn’s arguments, the IRS points out on March 24, 2000, Vaughn signed off on the draft opinion letter to Pilchuck which KPMG planned to issue regarding BLIPS.36 The cover letter to the draft, signed by Gary Powell, directed Vaughn to sign the last page of the draft indicating Vaughn had read the draft letter and agreed with its contents. The IRS states Vaughn’s representations in this letter were false, and Vaughn knew the BLIPS investment had no reasonable prospect for earning a pretax profit, and, contrary to the letter, there was no economic reason for borrowing funds from Deutsche Bank at an excessive interest rate.
In addition, the IRS states Vaughn sought to conceal the BLIPS losses from the IRS by directing Presidio to cause Sill to purchase Euros and Adelphia stock in order to attach most of his tax losses to shares of Adelphia.37 According to the IRS, the Euros and Adelphia stock were purchased in such a fashion that the tax basis of approximately $40 million could be allocated, once Pilchuck had withdrawn from Sill, 8% to Euros and 92% to a capital asset — the stock.38 Moreover, the IRS states Vaughn evaded taxes associated with the sale of his company by transferring assets to family members and spending enough to reduce the value of his estate to far less than his taxes.
DISCUSSION
Section 523(a)(1) 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—
(1) for a tax or a customs duty—
(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;
(B) with respect to which a return, or equivalent report or notice, if required—
(i) was not filed or given; or
(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or
(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax ... 39
This subsection, to be read in the disjunctive, thus contains two separate exceptions to discharge: 1) for making a fraudulent return; and 2) for willfully attempting to defeat and evade tax.40 The IRS admits it *542bears the burden of proving the tax debts should be excepted from discharge by a preponderance of the evidence.41
A. Filing a Fraudulent Return
This Court can find no cases from the Tenth Circuit Court of Appeals discussing what constitutes a fraudulent return under § 523(a)(1)(C). The issue has been addressed, however, by other courts in this Circuit. These courts have focused on 1) knowledge of the falsehood of the return; 2) an intent to evade taxes; and 3) an underpayment of the taxes, items which have come to be referred to as the “Krause ” factors.42 These courts have also set forth additional “badges of fraud” signaling a fraudulent return, including: 1) consistent understatement of income; 2) failure to maintain adequate records; 3) failure to file tax returns; 4) implausible or inconsistent behavior by a debtor; 5) concealing assets; 6) failure to cooperate with taxing authorities; and 7) unreported income from an illegal activity.43
The facts set forth above lead to the conclusion Vaughn knew or should have known the returns he filed in 1999 and 2000 contained false information. Specifically, after receiving approximately $34 million in cash and stock from the sale of his company, he invested, through creation of Pilchuck, in a risky and complex transaction promoted by KPMG. He did not conduct his own investigation regarding the nature of the investment nor its tax consequences. Rather, he asserts he relied on the representations of KPMG, of KPMG’s attorneys, and of Koo after Koo had reviewed the information supplied by KPMG. Unfortunately for him, Vaughn signed several documents expressly representing he had made an independent investigation. Moreover, he knew, at least by the time he filed the 1999 and 2000 tax returns, the investment was considered suspect by the IRS, and was being investigated. He further acknowledges he now believes the investment had no economic basis.
The evidence makes clear Vaughn was, and is, a sophisticated businessman. What he may lack in formal education, he made up for with hard work, long experience, and intelligence, enabling him to build organizations and eventually create a business which he sold for $2.1 billion. He is a self-made, successful entrepreneur whose accomplishments merit admiration and respect. It is simply not credible such an individual would enter into a transaction like BLIPS without making an independent investigation. Nor it is credible a savvy businessman like Vaughn would not have identified the numerous red flags associated with the transaction — red flags suggesting the investment strategy was not sound and might be an abusive tax shelter.44
As his defense, Vaughn seeks to convince this Court he relied on the mis*543representations of others. The Court recognizes KPMG, KPMG’s attorneys, and others who may have made representations to Vaughn about BLIPS can certainly be argued to have committed malfeasance. However, it is simply not believable that a man of Vaughn’s experience and business acumen would risk endangering what at that time must have been the financial culmination of his career, the $34 million from the sale of his company, without much more personal involvement and a true independent investigation. It is not credible Vaughn could have failed to recognize a representation by KPMG, the promoter of the BLIPS program, or a representation by the lawyers hired by KPMG, might not constitute a truly unbiased opinion or serve as independent investment advice. As the promoter of BLIPS, KPMG and anyone working for KPMG had an inherent conflict of interest when rendering an opinion on BLIPS. Further, even though it stood to gain fees, the attorneys hired by KPMG to issue “opinion letters” only felt comfortable issuing such a letter with the conclusion that BLIPS stood at least a 50% chance of being disallowed by the IRS. For these reasons, the Court finds Vaughn knew or should have known BLIPS-related losses were improper to claim as an offset against taxes he owed on his income from selling his company, thus meeting the first prong of the Krause test.
For these same reasons, the Court questions Vaughn’s position he viewed BLIPS primarily as an investment versus a tax savings vehicle. According to DeRo-sa, the IRS’s expert witness, BLIPS could not reasonably have generated any gains for investors. DeRosa analyzed the currency transactions engaged in by Sill, and pointed out they had no economic impact. For example, Sill initially bought Euros on a “spot” transaction with the dollars and simultaneously sold the Euros “forward” one month.45 Such “short forward” transactions simply “washed out” at the U.S. dollar interest rate, and did not constitute meaningful economic transactions because there was no economic risk and the money never left Deutsche Bank. In DeRosa’s opinion, there was no prospect of making any money other than interest on such transactions.46 Sill also obtained “forward” positions with Hong Kong Dollars and Argentine Pesos. DeRosa stated these transactions were really a short-term bet the currencies would collapse and be *544worth much less in, for example, sixty-days, when an investor would be able to buy back U.S. Dollars with significantly less valuable Hong Kong Dollars or Argentine Pesos.
DeRosa opined the problem with this strategy was the Hong Kong Dollar and the Argentine Peso in 1999 were'extremely stable, with little to no chance of devaluation or collapse. He noted because the Hong Kong Dollar and the Argentine Peso are “hard pegged” to the U.S. Dollar, they are among the least volatile currencies.47 They have traditionally been stable even when other currencies fell in value. Therefore, there was virtually no possibility of an economic return on this transaction. To obtain one, according to DeRosa, Vaughn would have had to realize an unrealistic return of 67% on his $2.8 million — in DeRosa’s opinion, an impossible hurdle in 60 days.
DeRosa also noted the crippling restrictions placed on Sill by Deutsche Bank in their agreement. The investments Sill could make were extremely limited, and Deutsche Bank, according to DeRosa, could liquidate Sill’s positions essentially at will. Deutsche Bank also reduced the possibility of gain by charging fees based on forecasts of Sill’s portfolio fluctuation, the so-called “value at risk haircut.” Deutsche Bank further retained the right to call the loan if the value of the portfolio dropped below $108,033,750, or 101.25% of the $106.7 million funding amount, which, in DeRosa’s opinion, meant Sill could not invest in anything that would make money because it was prevented from taking any risks.48
Vaughn must have been aware of these “limitations” in light of his experience. Thus the Court finds Vaughn cannot have made the BLIPS investment because he thought it would be a way, even a risky way, to make money. He was simply too smart a businessman for that. Therefore, he must have had another motivation for placing approximately $2.8 million into BLIPS. Based upon the returns he filed, which showed significant tax losses, and based upon his testimony the returns were structured to show a small net capital gain rather than showing the entire amount of BLIPS losses, the Court concludes his motivation in making the BLIPS investment and filing tax returns using the losses from the BLIPS investment was designed to evade taxes on the income from the sale of his company. Accordingly, the second Krause prong (intent) is met.
As to the third prong, it should be noted Vaughn himself testified he underpaid the taxes, and has repeatedly expressed his intention to pay them. His dispute is with the assertion he knew of the impropriety of the BLIPS investment at the time it was made, or at the time he *545filed his 2004 amendment to his 1999 return. He contends he did not know of the true nature of the investment until much later. Because the Court finds, as described above, he knew or should have known about the problems with BLIPS at the time of the investment, the Court concludes this argument lacks merit. In addition, when he filed his amended 1999 return in 2004, he was aware KPMG was under investigation, and Mr. Lees told him in early 2001 the BLIPS losses would be disallowed. Therefore, the taxes were clearly underpaid and the third prong of the Krause test has been met.
The Court notes the other “badges of fraud” signaling a fraudulent return set forth in Krause, such as failure to keep records and failure to file returns, are not present. However, the “badge” of implausible and inconsistent behavior exists. Vaughn’s general investment manager, Robert Mueller, with whom he placed other investments, described Vaughn as a conservative investor who had never shown any interest in or knowledge of foreign currency based investments.49 Thus, Vaughn’s actions involving the BLIPS investment were inconsistent both with his other investment behaviors, and were both implausible and inconsistent with his business acumen and purported investment goals.
B. Willful Evasion
The most recent appellate decision addressing § 523(a)(1)(C) identified two components to a showing of willful evasion: 1) a conduct requirement; and 2) a mental state requirement.50 The Court stated:
To satisfy the conduct requirement, the government must demonstrate that the debtor avoided or evaded payment or collection of taxes through acts of omission, such as failure to file returns and failure to pay taxes, or through acts of commission, such as affirmative acts of evasion. Non-payment of tax alone is not sufficient to bar discharge of a tax obligation, but it is a relevant consideration in the overall analysis.
[In addition] non-dischargeability under 523(a)(1)(C) requires a “voluntary, conscious, and intentional evasion.” The government must prove that the debtor 1) had a duty to pay taxes, 2) knew she had a duty, and 3) voluntarily and intentionally violated that duty.51
1. Conduct
A recent case observed when a debtor affirmatively acted to avoid payment or collection of taxes, whether through commission or omission, these actions satisfy the conduct requirement of willful evasion of tax.52 The Hawkins court noted: “[L]arge discretionary expenditures, combined with nonpayment of a known tax, contribute to the conduct analysis. Moreover, nonpayment of a tax can satisfy the conduct requirement when paired with even a single additional culpable act or omission.”53 The Hawkins *546court went on to affirm the bankruptcy court’s finding a debtor met the conduct requirement of § 523(a)(1)(C) where he made “unreasonable and unnecessary discretionary expenditures at a time when he knew he owed taxes and knew he would be unable to pay those taxes.”54
Here, Vaughn admitted as of June 2001, he knew Koo was subject to an IRS audit regarding the BLIPS transaction. In addition, by January 2001, he was informed of the IRS notice questioning the validity of BLIPS by receiving a copy of the Notice 2000-44. He was also in possession of the opinion letter indicating he could be subject to an audit on the same basis. He therefore knew he had a potential liability on the full amount of his gain from the Frontier Vision sale. Nonetheless, although he had transferred approximately one-half of his post-Frontier Vision sale assets to Cindy Vaughn as part of then-divorce settlement, he failed to take any actions to preserve his remaining assets for the payment of additional taxes.
Specifically, he purchased a $1.7 million home in Evergreen, Colorado, but put the title in the sole name of his then-fiancee, Kathy St. Onge (“St. Onge”). Moreover, shortly before disclosing his participation in BLIPS to the IRS, Vaughn created and funded a $1.5 million trust for his stepdaughter, Stephanie Frank (“Frank”). In addition, after Vaughn married St. Onge in October, 2001, St. Onge obtained funds of approximately $97,000 from the couple’s accounts, spent funds to decorate the Evergreen home, and spent $42,000 on jewelry.55 Between 2002 and 2003, Vaughn himself spent approximately $20,000 on jewelry.56 Even if Vaughn himself did not retain access to the funds he spent after knowing of his large potential tax liability, his transfers ensured funds would not be available to satisfy his tax obligations.
2. Mental State
The Jacobs and Hawkins courts also summarize the case law interpreting the mental state component of willful evasion, noting the requirement is satisfied where the government shows the following three elements: 1) the debtor had a duty under the law; 2) the debtor knew he had the duty; and 3) the debtor voluntarily and intentionally violated the duty.57 The government does not need to demonstrate fraudulent intent, but only that a debtor acted “knowingly and deliberately.”58
Similarly, the Tenth Circuit has held a debtor’s actions are willful under § 523(a)(1)(C) if they are done voluntarily, consciously, or knowingly and intentionally.59 It agrees with other courts that more than non-payment of one’s taxes is required to establish a willful evasion.60 However, the Tenth Circuit also noted concealment of assets to avoid payment or collection of taxes may constitute a willful evasion.61 Indeed, the Tenth Circuit recognized “Congress did not define or limit the methods by which a willful attempt to *547defeat and evade might be accomplished .62 The Court also stated:
By way of illustration, and not by way of limitation, we would think affirmative willful attempt may be inferred from conduct such as keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one’s affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal.63
In addition, the United States District Court for the District of Massachusetts observed:
Conduct that constitutes circumstantial evidence of a debtor’s willful intent to evade taxes includes: 1) implausible or inconsistent explanations of behavior, 2) inadequate financial records, 3) transfers of assets that greatly reduce assets subject to IRS execution and 4) transfers made in the face of serious financial difficulties.64
In this case, as noted above, Vaughn exhibited behavior which was inconsistent with his business acumen and was implausible based on that acumen when he participated in the BLIPS investment. Further, by purchasing expensive homes, automobiles, and jewelry, following a divorce which significantly depleted his assets, he further demonstrated such inconsistent and implausible behavior. That is, knowing, as he must have, the BLIPS investment constituted an improper abusive tax shelter with no economic basis and no reasonable expectation of profit, he nonetheless continued to spend as if there would be no additional tax to pay. This is simply not logical, unless he had another motive for such spending.
The evidence before the Court not only demonstrates he spent the funds and made the transfers in the face of serious financial difficulties, but also indicates his motive in doing so was to reduce assets subject to potential IRS execution. In short, by transferring funds and assets to St. Onge and Frank, he attempted to take those funds and assets out of the reach of the IRS. The Court does not deny Vaughn may have had some altruistic goals in setting up a trust for Frank, and may have had some good intentions for transferring real property to and purchasing real property for St. Onge, but any such motivations are overshadowed and outweighed by the fact Vaughn knew of the impending tax debt, and took no reasonable actions to preserve assets to pay it.
In order to meet the requirements of § 523(a)(1)(C), a debtor need not exhibit fraud or an evil motive. Rather, choosing to satisfy other obligations or pay for non-essentials, while not paying taxes, sufficiently demonstrates intent to evade tax.65 The United States District Court *548for the Northern District of California, in affirming the Hawkins decision, stated:
This statement adequately places debtors on notice that their decision to prioritize other obligations or make nonessential purchases, rather than pay a known tax debt, can render their tax debts nondischargeable. Following the reasoning of other courts that have addressed the issue, the Court adopts this standard and affirms the bankruptcy court’s conclusion that unnecessary expenditures combined with nonpayment of a known tax constitutes a willful attempt under Section 523(a)(1)(C).66
This Court agrees with the reasoning set forth in these cases. Therefore, the Court finds Vaughn’s actions meet the state of mind test to show intent to evade tax.
CONCLUSION
Throughout this case, Vaughn has argued he is an innocent victim of the machinations and misrepresentations of KPMG and persons in the employ of or hired by KPMG. This Court does not disagree that such machinations and misrepresentations took place. However, a taxpayer cannot reasonably rely on the advice of a professional who has an inherent conflict of interest, such as the promoter or marketer of a tax investment.67 KPMG, its employees, and even the law firm employed by KPMG to issue “opinion letters” had such a conflict, because KPMG was the marketer of the BLIPS investment. It is simply not credible that an individual of Vaughn’s extensive business background and demonstrated business skill would have reasonably relied on any such representations, and would not have, if he were seriously considering BLIPS as a legitimate investment, obtained a truly independent opinion as to its potential and its tax implications.
For these reasons,
IT IS ORDERED Vaughn’s tax debts arising from the sale of Frontier Vision are not dischargeable under 11 U.S.C. § 523(a)(1)(C).
. The background facts in this Order are taken from the testimony at trial, as well as exhibits and designated portions of depositions presented by the parties. In order to avoid a distracting number of footnotes, the Court will only insert a citation in reference to a specific document or where clarification is needed.
. Joint Exhibit 3, Confidential Memorandum, pp. 7-8 and p. 15.
. Joint Exhibit 3, Confidential Memorandum, pp. 8-9.
. Joint Exhibit 3, Confidential Memorandum, p. 4 "Executive Summary.”
. Testimony of Dr. David DeRosa ("DeRosa”). To show how this would work, DeRosa posited an investor who borrows $100 for a year at 6% simple interest, where the interest at the end of the loan term is thus $6, and the investor would owe $106 at the end of the year. If, on the other hand, the investor borrowed $60 for one year at 76.67% interest, and received a $40 premium, the interest at the end of the loan term would be $46, and the investor would owe $106. In each case, the investor receives $100 and owes $106 at *536the end of the year. According to DeRosa, the loan Vaughn received follows the same model as the second example, but over seven years rather than one year. See Internal Revenue Service ("IRS”) Exhibit NNNNN.
. IRS Exhibit UUU, Internal Revenue Bulletin Notice 2000-44, p. 255.
. Joint Exhibit 5.
. See Joint Exhibit 7H, formation documents for Pilchuck, p. 9, approving credit agreement with Deutsche Bank; Joint Exhibit 7B, Credit Agreement between Pilchuck and Deutsche Bank; and IRS Exhibit C, noting a $1 million loan premium assigned for each $700,000 contributed by an investor.
. See Joint Exhibits 7A-7L.
. Joint Exhibit 8.
. Joint Exhibit 12.
. Joint Exhibits 9, 10, and 11.
. Sill then proceeded to change the interest rate structure by engaging in a "swap” derivative transaction with Deutsche Bank, which lowered the rate to the more conventional London Interbank Offer Rate ("LIBOR”) common in financial markets. Thus, Sill received, at least on paper, the 17.694 % times $66.7 million, that is, the $66.7 million plus the $40 million. Since, following the swap, Sill had to pay LIBOR on the whole indebtedness, it becomes apparent the transaction is really a simple loan at LIBOR interest on $106.7 million. Because Sill was able to swap the 17.694 % interest rate for interest at *537LIBOR, DeRosa stated the only purpose for the initial 17.694 % interest rate was to amortize the $40 million and pay interest at market levels. Thus, after the contribution by Pil-chuck, Sill now had a bargain rate, LIBOR, plus the $2.8 million put in by Vaughn, but the actual funds were still, and always were, physically held by Deutsche Bank.
. Joint Exhibit 13.
. See IRS Exhibit HH, consisting of a letter from KPMG employee Robert Lees ("Lees”) to Vaughn, dated December 16, 1999, confirming their discussion in which Vaughn directed KPMG to take steps to withdraw Pil-chuck from Sill, and a withdrawal request signed by Vaughn and dated December 10, 1999.
. Vaughn initially stated he did not authorize the purchase of Adelphia stock as part of the ending of the BLIPS transaction, but, upon review of his earlier deposition testimony, concluded he misspoke.
. IRS Exhibit V.
. As part of the promotion of BLIPS, KPMG provided a "more likely than not” opinion letter to investors, in which KPMG stated its belief it was more likely than not the IRS would accept the validity of the investment program. On March 23, 2000, Powell sent Vaughn ten pages of KPMG's opinion letter; after Vaughn had signed off on those pages, Powell provided the full opinion letter, dated December 31, 1999. Further, for an additional fee of approximately $50,000, Vaughn also received a similar opinion letter from the law firm of Brown & Wood, a firm engaged by KPMG, dated December 31, 1999. Joint Exhibit 19. However, Powell did not send Vaughn the Brown & Wood letter until May 24, 2000.
. IRS Exhibit UUU.
. Id., p. 255.
. Vaughn Exhibit 24.
. Joint Exhibit 20.
. See also Vaughn Exhibit 27, Memorandum of Oral Advice, dated March 25, 2002, signed by Tracy Henderson, another KMPG employee, commemorating the January 2001 meeting with Powell, Koo and Vaughn. Vaughn could not remember this meeting; however, he points out the Memorandum does not contain the paragraph in the script provided to Powell on October 3, 2000, indicating such probabilities had been discussed.
.Sherlock Deposition, pp. 54 and 67.
. Joint Exhibit 25.
. Joint Exhibit 26.
. IRS Exhibit XX.
. Vaughn Exhibit 47, IRS Announcement 2004-46, “Son of Boss Settlement Initiative.” The essence of this proposal by the IRS was to resolve the transactions described in IRS Notice 2000-44, like BLIPS, by allowing taxpayers to concede tax benefits from the transactions, including basis adjustments, and to treat their net out of pocket costs as either long term capital losses or ordinary losses. Taxpayers who participated in the initiative were required to make full payment of the liabilities under the initiative by the date the agreement with the IRS was executed.
. Vaughn Exhibit 38, United States Senate Report entitled "U.S. Tax Shelter Industry: The Role of Accountants, Lawyers, and Financial Professionals — Four KPMG Case Studies: FLIP, OPIS, BLIPS, and SC2”.
. Joint Exhibit 29. The liability was the result of conclusion of the IRS that the claimed basis for Vaughn’s BLIP investment was too high — the $40 million loan premium should not have been included because that obligation was taken over by Sill and never represented funds paid by Pilchuck or Vaughn. See IRS Exhibit UUU, p. 3, IRS Notice 2000-44, “Tax Avoidance Using Artificially High Basis.” As noted above, this Notice describes an example similar to the BLIPS transaction described here, and notes the taxpayer would claim a basis of the total amount contributed to the investment (in this case, $106.7 million) less the stated principal amount of the loan (in this case $66.7 million) for a basis (in this case $44 million) "even though the taxpayer has incurred no corresponding economic loss.” The Notice goes on to state the purported losses from such a transaction "do not represent bona fide losses reflecting actual economic consequences as required for purposes of [26 U.S.C.] § 165.”
. Vaughn Exhibit 45, IRS Announcement 2004-46 p. 2.
. Unless otherwise noted, all future statutory references in the text are to Title 11 of the United States Code.
. The Court’s record reflects the IRS’s tax claim arises from unpaid taxes for 1999 in the amount of $8,617,902, and for 2000 in the amount of $119,928.
. Vaughn admitted the following key language in KPMG’s engagement letter was incorrect: ‘'Client [Vaughn] has independently determined that there is a reasonable opportunity for Client to earn a reasonable pre-tax profit from the [BLIPS] Investment Program in excess of all associated fees and costs.”
. Specifically, Vaughn testified representatives from KPMG did not tell him KPMG’s opinion letter was predicated on Vaughn’s own representations about BLIPs, and that KPMG and Presidio representatives told him there was a reasonable possibility of a pre-tax profit from BLIPS. (However, as noted below, he did "sign off” on representations before receiving the final version of the KPMG opinion letter.) He further stated he did not receive the hundreds of pages of loan documents to be reviewed and signed until a few days before closing. With respect to KPMG’s opinion letter, Vaughn stated he did not receive anything until March 23, 2000, when Powell sent him the first ten pages of the opinion letter and requested he "sign off” on them in order to receive the full opinion letter. See Joint Exhibit 17.
. Joint Exhibit 17.
. See IRS Exhibit HH, Annex A, signed by Vaughn, withdrawing Pilchuck’s capital account balance from Sill and directing the purchase of Euros and shares of Adelphia stock.
. Id.., p. 3, Information Sheet containing instructions for allocation of "total notional” of $40,000,000 after withdrawal of Pilchuck from Sill.
. 11 U.S.C. § 523(a)(1).
. See In re Tudisco, 183 F.3d 133, 137 (2d Cir.1999); In re Epstein, 303 B.R. 280 (Bankr.E.D.N.Y.2004).
. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
. Wilson v. United States, 394 B.R. 531, 540-541 (Bankr.D.Colo.2008), rev’d in part on other grounds, 407 B.R. 405 (10th Cir. BAP 2009) (citing United States v. Krause (In re Krause), 386 B.R. 785, 825 (Bankr.D.Kan.2008) (collecting cases)). See also In re Fliss, 339 B.R. 481, 486 (Bankr.N.D.Iowa 2006); In re Schlesinger, 290 B.R. 529, 536 (Bankr.E.D.Pa.2002).
. Krause, 386 B.R. at 824 (citations omitted).
. Such "warning signals” include the overly complex nature of the Deutsche Bank loan, the reliance on a "loan premium” not contributed by Vaughn to create a tax basis for the investment and KPMG’s requirements for Vaughn to state, by signing a draft, that he agreed with KPMG’s opinions, before KPMG would issue its actual opinion.
. DeRosa explained a spot transaction is one which settles in two bank business days, with the last day, or "settlement day” as the day the currencies are valued. A forward transaction, by contrast, is one where the “settlement day” of the currency to be valued is beyond two days-anywhere from a week to any time in the future. A forward transaction is based on the difference of between one currency and the other, and because of differentials in interest rates, the forward rate cannot equal the spot except if the interest rates in both countries are equal to each other at that moment in time.
. DeRosa stated eventually, however, even in this "zero sum” game, interest parity will cost money over time, eroding the original investment. Specifically, according to DeRosa, under John Maynard Keynes's theory of interest parity, there are no free transactions. The "forward” is the same as the “spot” adjusted for the interest rate differential during the term of the transaction. In other words, the “forward” amount will differ from the “spot” amount by the gap in the interest rate — otherwise, an investor could make money simply by switching investments to the highest interest currency. DeRosa stated if an investor is “shorting” a currency like the Hong Kong Dollar or the Argentine Peso, the investor will pay, implicit in the price of the "forward,” a higher interest rate than the U.S. Dollar rate, creating a "cost of carry” which eats away at the investor’s position over time.
. A "pegged” currency means the exchange rate with other currencies is fixed by a country’s central bank. Some are called "soft pegs” because the government intends to keep the exchange rate fixed but could change the rate at any time. Some are "hard pegged,” which means the central bank of a country keeps on hand enough reserves of foreign currency, usually U.S. dollars, to exchange all of its currency in circulation at a fixed price, and promises to make a market continuously. Two hard pegged currencies, for purposes of this case, were the Hong Kong Dollar and the Argentine Peso.
. Moreover, DeRosa noted the cost of leaving the investment after 60 days, even though that was what Vaughn anticipated, was high, due to breakage fees and other penalties. Further, he pointed out the other fees associated with the transaction, including $1.1 million to Presidio and $500,000 to KPMG, did not make sense because an investor who could establish an account with approximately $1 million could have made the same trades without the Sill investment scheme.
. Mueller Deposition, p. 32, lines 19-20, and p. 36, lines 13-25.
. United States v. Storey, 640 F.3d 739, 744 (6th Cir.2011). See also United States v. Jacobs, (In re Jacobs), 490 F.3d 913, 921 (11th Cir.2007); United States v. Fegeley (In re Fegeley), 118 F.3d 979, 983 (3rd Cir.1997).
. Storey, 640 F.3d at 744-745 (citations omitted).
. Hawkins v. Franchise Tax Bd., 447 B.R. 291, 301 (N.D.Cal.2011) (citing Jacobs, 490 F.3d at 921).
. Id., at 301-302 (citing Jacobs, 490 F.3d at 926-27; Gardner, 360 F.3d at 560-61; Fegeley, 118 F.3d at 984; United States v. Fretz (In *546re Fretz), 244 F.3d 1323, 1329-30, Toti v. United States (In re Toti), 24 F.3d 806, 809 (6th Cir.1994)).
. Id., at 302.
. IRS Exhibit KKK.
. IRS Exhibit NNN.
. Id., at 300; Jacobs, 490 F.3d at 921.
. United States v. Mitchell (In re Mitchell), 633 F.3d 1319, 1328 (11th Cir.2011).
. Dalton v. Internal Revenue Service, 77 F.3d 1297, 1302 (10th Cir.1996) (citing Toti, 24 F.3d at 809).
. Id., at 1307.
. Id.
. Id. at 1301.
. Id., at 1301.
. United States v. Beninati, 438 B.R. 755, 758 (D.Mass.2010) (citations omitted). See also, Geiger v. Internal Revenue Service (In re Geiger), 408 B.R. 788, 791 (C.D.Ill.2009) (citations omitted).
. Hawkins v. Franchise Tax Board (In re Hawkins), 430 B.R. 225, 235 (Bankr.N.D.Cal. 2010), aff'd., 447 B.R. 291 (N.D.Cal.2011) (citing Lynch v. U.S. (In re Lynch), 299 B.R. 62, 64 (Bankr.S.D.N.Y.2003); Jacobs, 490 F.3d at 925-27; Stamper v. United States, (In re Gardner), 360 F.3d 551, 560-61 (6th Cir. 2004); Wright v. Internal Revenue Service (In re Wright), 191 B.R. 291, 293 (S.D.N.Y.1995); Hamm v. United States (In re Hamm), 356 B.R. 263, 285-86 (Bankr.S.D.Fla.2006)).
. Hawkins, supra, 447 B.R. at 297.
. See Goldman v. C.I.R., 39 F.3d 402, 408 (2nd Cir.1994) (taxpayers "cannot reasonably rely for professional advice on someone they know to be burdened with an inherent conflict of interest.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494522/ | ORDER MODIFYING THE AUTOMATIC STAY AND CONTINUING HEARING
MARY GRACE DIEHL, Bankruptcy Judge.
This is a factually complicated case, involving the interplay of an illiquid bankruptcy estate, a pending federal forfeiture action against the individual Debtor, and a series of loans by a non-traditional lender to a number of Debtor-affiliated entities. The case has been pending for over fifteen months and, given the factual complexities and the context, a final resolution in the foreseeable future is unlikely. The Mov-ant-lender, essentially an investment company serving as a pass-through entity for the loans at issue, has requested that the Court find the automatic stay inapplicable. The Movant asserts that the loans at issue were made to non-debtor entities and that the security deeds in favor of the Movant encumber property that is not titled in the name of this individual Debtor; therefore, Debtor’s bankruptcy estate is not implicated. Alternatively, the lender seeks relief from the automatic stay to exercise its state law rights. No adequate protection payments are being made to the Movant. The Chapter 7 Trustee opposes the Motion.
Although the Movant seeks termination of the automatic stay, the facts and evidence presented do not warrant such broad relief. The court will modify the stay for a limited purpose to allow the Movant to exercise some of its rights. Additionally, a continued hearing will be held in approximately 90 days to determine if any further relief is warranted at that time.
I. Factual Background
Roswell Holdings, LLC (“Roswell” or “RH”) has moved for a determination that the automatic stay of 11 U.S.C. § 362(a) is inapplicable to actions it may take to enforce its rights in properties which are titled in the names of The Guild, Incorporated (“The Guild”) and Roma Development Company, LLC (“Roma”). Alternatively, if the stay is applicable, Roswell seeks a modification of the stay. George Houser (“Houser” or “Debtor”) was the sole owner of both The Guild and Roma when the Chapter 7 case was filed. Both entities have been administratively dissolved but are subject to reinstatement.1 Debtor’s interests in these corporations are now property of his bankruptcy estate. Tracey Montz, the Chapter 7 Trustee (“Trustee”) opposes the relief, contending that the estate has some interest in the properties at issue and may have claims against Roswell which would be prejudiced if Roswell is permitted to foreclose on its collateral and distribute the proceeds to its investors.
The Court conducted a preliminary hearing on September 26, 2011 and an *582evidentiary hearing on November 14, 2011. At the evidentiary hearing, Howard “Woody” Alpern testified. Mr. Alpern is a half owner of Southwest 9th Street Group, LLC, which owns one-third of Roswell. He acts as the manager of Roswell, handling accounting functions. Roswell’s Exhibits 1 through 42, except Exhibit 28, were admitted into evidence without objection. The Chapter 7 Trustee’s Exhibits 1 and 2 were admitted without objection. Trustee’s Exhibits 15, 16, 20 & 24 were admitted over objection. The parties have submitted multiple filings, including post-hearing supplemental briefs, on this Motion. (Docket Nos. 92, 103, 105, 115, 116, & 118-120).
Roswell’s Motion concerns four loans. The relevant terms of each transaction will be addressed in turn. First, Roswell and Roma entered into a loan agreement on December 21, 2004 whereby Roma borrowed the original principal amount of $800,000.00 (Loan l).2 (RH Exhibit 1). Debtor executed Loan 1 as Member/Manager of Roma. Roma granted a security interest in an 18 acre tract on Highway 411 (“411 Property”). Also in connection with Loan 1, The Guild executed a Guaranty Agreement, signed by Debtor as President of The Guild. (RH Exhibit 4). To secure its guarantee, The Guild pledged two parcels of real estate: 427 Chulio Road and 481 Chulio Road. The security deeds were recorded. (RH Exhibits 5-6).
Real Estate Appraisals for these properties were entered into evidence without objection. Loan l’s collateral has the following appraised value: (1) 411 Property is valued at $870,000.00 (RH Exhibit 12); (2) 427 Chulio is valued at $130,000 (RH Exhibit 10); and (3) 481 Chulio is valued at $35,000 (RH Exhibit 11). As with each of the appraisals discussed herein, the Trustee indicated that she had no basis to dispute the appraised values and she had insufficient funds in the estate to procure her own appraisals.
Second, Roswell and Roma entered into a loan agreement on July 11, 2005 whereby Roma borrowed the original principal amount of $583,000 (Loan 2). (RH Exhibit 13). Debtor executed Loan 2 as Member/Manager of Roma. Roma granted a security interest in two properties commonly known as 209 and 147 Tuekawanna Drive, and the deed to secure debt was recorded. (RH Exhibit 15).
Real Estate Appraisals for these properties were entered into evidence. Loan 2’s collateral has the following appraised value: (1) 209 Tuekawanna is valued at $130,000 (RH Exhibit 18); and (2) 147 Tuekawanna is valued at $140,000 (RH Exhibit 19).
Third, Roswell and Roma entered into an installment note on January 2, 2008 whereby Roma borrowed $150,000, following repayment of a note in the original principal amount of $91,000 (Loan 3). (RH Exhibits 20 & 22). Debtor executed Loan 3 as Manager/Member of Roma. Roma granted Roswell a security interest in 553 Chulio Road and 555 Chulio Road and a deed to secure debt was recorded. (RH Exhibit 24). Fourth, Roswell and Roma executed an installment note on January 7, 2008 whereby Roma borrowed an additional $68,000 (Loan 4). (RH Exhibits 21 & 23). 553 Chulio Road and 555 Chulio Road also secure Loan 4.
Real Estate Appraisals for these properties were entered into evidence. The collateral for Loans 3 and 4 have appraised values of $200,000, collectively. 553 Chulio Road was appraised at $95,000 (RH Exhibit 29) and 555 Chulio Road was appraised at $105,000 (RH Exhibit 30).
*583II. Legal Discussion
The definition of “property of the estate” in 11 U.S.C. § 541 is broad and includes all legal and equitable interests of the debtor as of the commencement of the case. Patterson v. Shumate, 504 U.S. 753, 757, 112 S.Ct. 2242, 119 L.Ed.2d 519 (U.S. 1992); Official Comm, of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145, 1149 (11th Cir.2006). The Trustee alleges that she may have a cause of action which would result in the determination that the bankruptcy estate is the true owner of the real estate at issue. “Legal interests or equitable interests include any causes of action the debtor [or trustee, as the representative of the estate] may bring.” Official Comm, of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d at 1149. Rather than make a determination based upon partial facts and potential legal theories as to whether Debtor has an appropriate legal or equitable interest in the properties at issue under the broad reach of § 541, the Court will assume for purposes of this Order that the automatic stay is applicable.
Therefore, Roswell’s request for relief will be determined under § 362. Subsection (d)(2) provides:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—
(2) with respect to a stay of an act against property under subsection (a) of this section, if—
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization;
11 U.S.C. § 362(d)(2).3
In a Chapter 7 case, if there is no equity in the property, relief is appropriate because there is no reorganization in prospect. See § 721. As previously noted, appraisals for each of the properties were admitted into evidence without objection.4 The loan documents were likewise admitted. The property owned by Roma and pledged under the various security deeds secures all the Loans because the security deeds include cross-collateralization provisions. (RH Exhibits 5-7, 15 & 24). The property owned by The Guild (427 and 481 Chulio Road) secures only Loan 1, which was executed on December 21, 2004 in the original principal amount of $800,000.
At the evidentiary hearing, Roswell admitted into evidence Exhibit 37, which was described as an accounting of amounts due to Roswell for Loans 1 through 4. Mr. Alpern’s testimony was largely in reference to Exhibit 37. Exhibit 37 and Mr. Alperris corresponding testimony raise questions about the improper application of payments and commingling of funds among Debtor, The Guild, Roma, and other Debtor-affiliated entities. The Trustee raises a number of issues as to the amount *584of the debt and correctly notes that Roswell bears the burden of proof on the lack of equity in the property. 11 U.S.C. § 362(g)(1).
The exact amount of the debt owed to Roswell is subject to dispute, particularly as to the amount of attorneys fees and the allocation of repayments. No question, however, has been raised as to the original advances on each of the Loans. In light of the fact that only partial relief from the stay is being granted at this time, it is not necessary for the Court to determine the exact amount of Roswell’s claim. It is sufficient that the evidence supports the conclusion that there is no equity in the property even without consideration of late charges and attorneys fees. At the continued hearing on this matter, Roswell should be prepared to further support the amounts it contends are owed.
The principal amount of the debt is $1,562,2095, according to Roswell’s Proof of Claim.6 The interest reflected on the proof of claim through the petition date is $130,167. Thus, even without any fees or charges, the total owed to Roswell as of the petition date is $1,692,376. The value of the Roma properties totals $1,563,749 and the Guild properties total $165,000 based on the undisputed appraisals. As a secured creditor, Roswell is entitled to interest that accrues post-petition up to the value of its collateral. Under these facts, which are uncontested, there is no equity in any of the properties irrespective of additional costs, including attorneys fees or late charges.
The Trustee makes several other arguments in urging the Court to continue the automatic stay until she has the opportunity to conclude her analysis as to whether the legal entities who were the nominal borrowers on the loans were distinct from the individual Debtor. However, if the Trustee were to prevail on this claim, it would not change the calculation of equity established by the undisputed evidence. The Trustee also seeks to establish that she may have claims against Roswell based upon the commingling of loan payments and proceeds among the various borrowers and the individual Debtor. Indeed, the evidence at the hearing established that payments received by Roswell from other related borrowers may have been applied to the loans at issue here or advanced to the individual Debtor. These claims by the Trustee are not the subject of any current motion or adversary proceeding and, thus require speculation on the part of the court.
The Trustee has a legitimate concern that the nature of Roswell’s business model as a pass-through entity for investors may limit the ability of the Trustee to recover from Roswell if they liquidate the collateral and distribute such proceeds to their investors. See, e.g., In re Key Developers Group, LLC, 449 B.R. 148 (Bankr.M.D.Fla.2011). While this is a valid concern, the Court’s ruling — modifying the automatic stay for a limited purpose — preserves any potential action the estate may choose to pursue against Roswell. Accordingly, it is
ORDERED that the automatic stay as to Roswell Holdings, LLC is MODIFIED to allow it to take any and all actions up to, but not including, the placement of adver*585tisements for non-judicial foreclosure, including actions involving the pending action in the United States District Court for the Northern District of Georgia, Case No. 10-cr-00012, against Debtor George D. Houser, to determine the priority of Roswell’s claims vis-a-vis the claims of the United States.
It is FURTHER ORDERED AND NOTICE IS HEREBY GIVEN that this matter is otherwise continued to March 9, 2012 at 10:00 a.m. in Room 1201, United States Courthouse, 75 Spring Street, S.W., Atlanta, GA 30303.
. O.C.G.A. § 14-11-601 ef seq. governs administrative dissolution of a limited liability company.
. The Loan Agreement was later modified (RH Exhibit 2).
. Roswell also cites Section 362(d)(1) as grounds for relief. However, there is no evidence that the values of any of the collateral have declined during the case or are likely to decline in the future. The non-payment of taxes and lack of insurance can be remedied by Roswell by making advances and adding the sums to the loan.
. Debtor, George Houser, filed a response post-hearing that included a number of appraisals that were made a number of years ago. (Docket No. 118). These documents were not properly admitted as evidence. They are hearsay and thus not considered by the court. Further, the outdated nature of the appraisals makes their relevance minimal even if they were admissible.
. Roswell’s Exhibit 37 shows a principal amount owed of $1,601,000. The difference results from the principal amount of Loan 1 being reflected on Exhibit 37 as $800,000 rather than the $761,209 shown on the Proof of Claim. The Court will use the lower number for purposes of its analysis but notes that the discrepancy in itself raises issues as to the credibility of Exhibit 37.
. Roswell’s proof of claim is deemed allowed as no objection has been filed. § 502(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494523/ | MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.
I. INTRODUCTION
The matter before the Court is the Complaint filed by Janice W. Stevenson (“Ms. Stevenson” or the “Debtor”) against the Educational Credit Management Corporation (“ECMC”), through which Ms. Stevenson seeks a discharge of her student loan obligations, totaling $114,680.69 as of April II, 2011, pursuant to 11 U.S.C. § 523(a)(8). In her Complaint, Ms. Stevenson, who has appeared in the case and adversary proceeding pro se, alleged that, based upon her current circumstances, repayment of her student loans would constitute an undue hardship. She maintains that she would be unable to maintain a minimal living standard if she were required to repay the loans; that she has been chronically homeless for many years; and that she has made good faith efforts to repay her student loans.
The Court conducted a trial on April 13, 2011. The parties introduced four exhibits into evidence. At the trial, Ms. Stevenson was the only witness. Because she appeared pro se, the parties agreed that Ms. Stevenson could provide a narrative statement in presenting her case, that ECMC’s counsel could examine her, and that Ms. Stevenson could provide a further narrative statement in rebuttal. Ms. Stevenson provided a narrative of her educational and employment history, her marital and health status, and her reasons for her refusal to participate in the repayment plans for student loans available under the United States Department of Education William D. Ford Direct Loan Repayment Program, see 34 C.F.R. 685, §§ 685.100-685.402.
The issue is whether Ms. Stevenson sustained her burden of establishing that excepting the debt from discharge would impose an undue hardship upon her or her dependents. In accordance with Fed. R. Bankr.P. 7052, the Court now makes the following findings of fact and conclusions of law.
II. FACTS
Ms. Stevenson is a single female in her mid-fifties. She filed a voluntary Chapter 7 petition on June 3, 2008. On Amended Schedule F-Creditors Holding Unsecured Nonpriority Claims, which she filed on August 29, 2008, she listed claims totaling approximately $128,900, including ECMC with a claim of approximately $102,000. She did not list a claim for unpaid income taxes in the approximate amount of $8,000. At trial, Ms. Stevenson explained that she deliberately did not list the claim because she intended to proceed with an offer in compromise, and that she has not filed tax *588returns due to the ability of the IRS to set off any refund she may be owed.
Ms. Stevenson commenced the instant adversary proceeding on September 10, 2008, two days after the Trustee filed the Report of No Distribution and one day after she received her Chapter 7 discharge. Ms. Stevenson received her discharge of dischargeable debts on September 9, 2008. At trial, ECMC introduced evidence, which was unrebutted, that the amount of Ms. Stevenson’s student loan debt owed to it was $114,680.69.1 Moreover, there is no dispute that the obligations owed by Ms. Stevenson to ECMC are student loans.
Ms. Stevenson’s financial circumstances have been difficult for a number of years. She testified that she currently earns approximately $475.36 a month from her part-time employment as a photo specialist at Walgreens, where she works between 14.25 hours to 18.5 hours a week. In addition to her wages from Walgreens, Ms. Stevenson receives unemployment benefits of approximately $132 a week. Those unemployment benefits, however, are subject to change based upon her weekly earnings and are scheduled to terminate in or around July of 2011. Accordingly, at the time of trial, Ms. Stevenson’s total gross monthly income was approximately $1,000 per month.
Ms. Stevenson currently resides in Chelsea, Massachusetts in a rent subsidized apartment for which the monthly rent is $1,109. Before obtaining this apartment in 2009, Ms. Stevenson was homeless for a number of years and lived in shelters. Because she receives a $700 monthly housing subsidy from the Metropolitan Boston Housing Partnership designed to assist previously homeless persons, Ms. Stevenson’s monthly rental obligation is $409, substantially less than the monthly rent of $1,109. Ms. Stevenson introduced as Exhibit One, a document, entitled “March 2011 Monthly Budget Report.” In that exhibit, she reported monthly income of $475.36. Her budget did not include weekly unemployment benefits of $132. Ms. Stevenson’s monthly expenses consist of her rent obligation of $409, as well as $50 for transportation, and $25 for food. The amount of her expenses are obviously insufficient to cover those and other unlisted, reasonable and necessary expenses. Including the unemployment benefits in her *589income, she has $591 available per month to cover her expenses for food, transportation, and other necessities.
Ms. Stevenson testified that she initially received a rental subsidy in 2009 and is entitled to receive a subsidy for three years; however, she also indicated that she may be entitled to assistance for just two more years. If she does not qualify for a rental subsidy, Ms. Stevenson opined that she could become homeless again. She also observed that some homeless shelters have stringent rules which might prevent her from retaining her job at Wal-greens, further undermining her financial stability.
In 1976, Ms. Stevenson received a B.S. in business administration from Grambling State College, now known as Grambling State University, in Louisiana. After graduating from Grambling State, Ms. Stevenson continued to reside in Louisiana until she was forty years old. During that time, she married, subsequently divorced, and had four children, whom she raised as a single parent. According to her resume, which was introduced into evidence by ECMC as Defendant’s Exhibit One, Ms. Stevenson worked in various clerical positions for Kelly Services as a buyer and an Excel specialist between January 1992 to June 1997. During that time, she earned between $22,000 and $25,000 a year.
When she could no longer find work in Louisiana, in approximately 1997, Ms. Stevenson moved with her children to Texas. She drove with her family to Texas, leaving her furniture behind as she lacked the financial resources to engage movers. The family had no place to stay in Texas, and they lived in a homeless shelter where they stayed until about 2000 or 2001. In 1997 Ms. Stevenson obtained a job with Collin County Community College, where according to her resume she prepared and maintained data tracking spreadsheets, reconciled purchasing records, responded to purchasing information inquiries, certified vendor quotes, negotiated, and drafted contracts, and processed purchase orders. While working as a buyer at Collin County Community College, Ms. Stevenson took classes and, in 1999, received a certificate in Network Software Technology from that institution. Her course work for the certificate was paid for by the community college as part of its professional development program.
In 2001, Ms. Stevenson left Collin County Community College to work for Matrix Communication as an inventory analyst. The company was a start-up and after three months, in approximately March 2001, Ms. Stevenson lost her job and started receiving unemployment compensation. After losing her job with Matrix, Ms. Stevenson moved to another homeless shelter in Texas and, in August 2001, started working at Piccadilly’s restaurant for $7 an hour.
In September 2001, Ms. Stevenson left Texas and moved her family to New Hampshire where her oldest son was a student attending Dartmouth College. While living in New Hampshire, Ms. Stevenson worked for approximately nine months as a buyer for a research and development entity she identified as Spectra, which specialized in high caliber print-heads and other products. While there, she utilized software which she identified as the Oracle Purchase Module.
In 2002, Ms. Stevenson left New Hampshire and moved to Massachusetts without her family. After moving to Massachusetts, she lived in a homeless shelter. Soon after moving to Massachusetts, on January 17, 2003, Ms. Stevenson filed a Chapter 13 petition, Case No. 03-12304-JNF, which was dismissed on May 22, 2007 and later closed on September 17, 2009 following the disposition of an appeal *590filed in the case by Ms. Stevenson. As in the instant case, Ms. Stevenson represented herself.
Between March of 2003 and September of 2006, Ms. Stevenson was employed at the Metropolitan Boston Housing Partnership and, according to her resume, the Neighborhood House Charter School. She was a word processing specialist at the Partnership and the Finance Manager at the School. Ms. Stevenson was embroiled in litigation with the Charter School for a number of years.2
Ms. Stevenson found an apartment in the Boston area and brought her children to Massachusetts to live with her. Ms. Stevenson eventually lost whatever jobs she may have had and her apartment, which forced her and her youngest daughter to move to a homeless shelter in Massachusetts. Between March 2003 and September 2006, in addition to her association with the Partnership and the School, Ms. Stevenson found temporary employment through Ace Employment Services, earning $8 to $10 an hour. In March 2008, Ms. Stevenson found a temporary position with NECCO which paid $19 an hour, but as a result of taking the job, Ms. Stevenson and her daughter were “put out of the shelter” for exceeding the shelter’s income limits.
In May 2008, Ms. Stevenson began working at a Walgreens in Waltham, Massachusetts as a photo specialist. In June 2009, she began receiving the subsidy from the Metropolitan Boston Housing Partnership and moved to Franklin, Massachusetts. Ms. Stevenson originally commuted between Franklin and Waltham until sometime in the Spring of 2010 when Wal-greens opened a store in Franklin and she was transferred to that location. Her monthly rent in Franklin was $900. In March 2010, she moved to Chelsea, Massachusetts “to try to seek employment in a metropolitan area.” As’ noted above, her rent is now $1,109 per month for which she receives a $700 per month subsidy.
Ms. Stevenson worked at the Walgreens in Franklin until April 8, 2011 when she transferred to a Walgreens in Cambridge. Her schedule at Walgreens is currently Thursday, Friday, and either Saturday or Sunday from 8:00 AM to 3:15 PM. Her schedule is structured so that she has time to attend classes and look for additional employment. Since transferring to the Walgreens in Cambridge, Ms. Stevenson has asked for more hours, up to 30 hours a week, between Thursday and Sunday, but at the time of trial, there had been no change in the number of her hours.
While working at Walgreens, Ms. Stevenson has attended classes at Cambridge College and Boston University; she is currently attending Bunker Hill Community College. Ms. Stevenson began attending Cambridge College in 2008 and was seeking a Masters of Management, but she *591stopped going there in 2009. Ms. Stevenson took two courses at Boston University. Her tuition was paid from an Individual Development Account (“IDA”).3 Ms. Stevenson is in her last semester at Bunker Hill Community College, from which she expects to receive a Certifícate in Picture Archiving Communication Systems (“PACS”), a health care information technology program. Ms. Stevenson currently has an internship with the Cambridge Health Alliance. The Massachusetts Rehabilitation Commission is paying for the course work required for the certificate from Bunker Hill Community College.
Ms. Stevenson testified at trial that she intends “... to pursue employment that [is] sustainable, where I can pay my own rent and pay my bills; however, I have not been successful in obtaining additional work or work that will put me at an income level above poverty.” She explained that she “want[s] to be successful,” and, to that end, she testified that she hopes to find a job as a PACS administrator which she believes will pay her about $60,000 a year. Ms. Stevenson also hopes that she will be able to work at Walgreens long enough to participate in its 401(k) plan.
In addition to attending classes at Bunker Hill Community College and working at Walgreens, Ms. Stevenson is also trying to improve her financial situation by obtaining more hours at Walgreens or by finding additional or better employment. She testified that she recently has applied for employment as a secretary and retail at a convenience store called “Convenience,” at Home Depot, at T.J. Maxx, and at Home Goods. Additionally, she applied for a position as a financial aid administrator at Bunker Hill Community College, but that position which was filled by another candidate. She testified that she is proficient with computers, having skill in Microsoft’s Office Suite (Word, Excel, Access, and Power Point), as well as PeopleSoft Module, which she used at a temporary job with Massport.
To assist in her job search, Ms. Stevenson has a membership with the Career Center at South Street which provides counseling and resume classes, but not assistance in finding jobs. In the past, she has also registered with Jewish Vocational Services, where she received her initial IDA, for credit and financial management classes. Ms. Stevenson is, or has been, a member of the Cambridge Employment Program through which a job developer would send her leads for positions as a purchasing coordinator or in administration. In addition to counseling services and newspapers, Ms. Stevenson looks for possible employment on Linkedln and Career Builders, and employment related websites.
Ms. Stevenson testified that her job prospects are circumscribed by health issues. She has back problems, high cholesterol and Hashimoto’s Thyroiditis, an autoimmune disease for which she takes medication. She did not introduce any medical evidence to corroborate her testimony. However, ECMC did not introduce any evidence to rebut her testimony that she has health issues.
At trial, ECMC introduced into evidence a letter to Ms. Stevenson dated December 16, 2009, in which it set forth the five types of repayment plans under the Ford Program: 1) the Standard Repayment Plan Option; 2) the Extended Repayment Plan *592Option; 3) the Graduated Repayment Plan Option; 4) the Income Contingent Repayment Plan Option;4 and 5) the Income Based Repayment Plan Option.5 On cross-examination, Ms. Stevenson admitted receiving the letter and having an awareness of the Income-Based Repayment Plan Option. She expressed reluctance to commit to any of the programs offered pursuant to the Ford Program because of fear that her children would be liable for any tax liability arising out of debt forgiveness. When advised on cross-examination that her heirs would not be liable for any such debt, and asked whether she would consider consolidating her loans under that program, she stated: “If I knew that at the end of my life that there would be no issues, probably; but I’m not seeing that.” During the course of the trial, Ms. Stevenson rejected participation in the Ford Program, although the parties do not dispute that she is eligible to participate in the program.
*593III. POSITIONS OF THE PARTIES
Ms. Stevenson maintains that repayment of her student loan debt would present an undue hardship because she cannot currently afford to repay the debt, and she is unlikely to be able to repay it in the foreseeable future.
ECMC argues that Ms. Stevenson failed to sustain her burden of establishing the existence of undue hardship. It asserts that Ms. Stevenson failed to show that her future prospects are bleak enough to warrant the discharge of her student loan debt. It concludes that her request for an exception to discharge must be rejected in view of her right to consolidate her debts under the William D. Ford Direct Repayment Loan Program.
IV. DISCUSSION
A. Applicable Law
The Bankruptcy Code prohibits the discharge of student loan debt “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C. § 523(a)(8). In determining whether a debtor has satisfied her burden in showing undue hardship, courts are split on the proper test to apply. Several circuit courts have adopted the Second Circuit’s test set forth in Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir.1987) (“the Brunner test”). The Brunner test is a three-part test which requires the debtor to prove:
(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debt- or has made good faith efforts to repay the loans.
Brunner, 831 F.2d at 396. See e.g., Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1309 (10th Cir.2004); U.S. Dept. of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir.2003); Hemar Ins. Corp. v. Cox (In re Cox), 338 F.3d 1238, 1241 (11th Cir.), reh’g denied, 82 Fed.Appx. 220 (11th Cir.2003), cert. denied, 541 U.S. 991, 124 S.Ct. 2016, 158 L.Ed.2d 496 (2004); Ekenasi v. Educ. Res. Inst. (In re Ekenasi), 325 F.3d 541, 546 (4th Cir.2003); United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1112 (9th Cir.1998); Pa. Higher Educ. Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 306 (3d Cir.1995), cert. denied, 518 U.S. 1009, 116 S.Ct. 2532, 135 L.Ed.2d 1055 (1996); and In re Roberson, 999 F.2d 1132, 1135 (7th Cir.1993). See also Oyler v. Educ. Credit Mgmt. Corp. (In re Oyler), 397 F.3d 382, 385 (6th Cir.2005) (in which the Sixth Circuit abandoned its hybrid-Brunner test and adopted the Brunner test).
Other courts have adopted “the totality of the circumstances test” which requires the court to consider “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her dependent’s reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.” Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F,3d 549, 554 (8th Cir.2003). The United States Court of Appeals for the First Circuit has not adopted either test. In Nash v. Conn. Student Loan Foundation (In re Nash), 446 F.3d 188 (1st Cir.2006), the First Circuit stated:
We see no need in this case to pronounce our views of a preferred method of identifying a case of “undue hardship.” The standards urged on us by *594the parties both require the debtor to demonstrate that her disability will prevent her from working for the foreseeable future. Appellant has a formidable task, for Congress has made the judgment that the general purpose of the Bankruptcy Code to give honest debtors a fresh start does not automatically apply to student loan debtors. Rather, the interest in ensuring the continued viability of the student loan program takes precedence. TI Fed. Credit Union v. DelBonis, 72 F.3d 921, 937 (1st Cir.1995).
Nash, 446 F.3d at 190-91.
While the First Circuit has not adopted either test, this Court in Nash v. Conn. Student Loan Foundation (In re Nash), No. 02-1466, Slip op. (Bankr.D.Mass. June 18, 2004), aff'd, 330 B.R. 323, 327 (D.Mass.2005), and the United States Bankruptcy Appellate Panel for the First Circuit have adopted the “totality of the circumstances test.” Bronsdon v. Educ. Credit Mgmt. Corp. (In re Bronsdon), 435 B.R. 791, 801 (1st Cir. BAP 2010).6 The Bankruptcy Appellate Panel, and the majority of courts in Massachusetts, have adopted the “totality of the circumstances test” because “the Brunner test ‘test[s] too much’” and because the good faith requirement lacks support within the language of § 523(a)(8). Bronsdon, 435 B.R. at 800-801. While noting that undue hardship is measured at the time of trial, 435 B.R. at 800, the panel in Bronsdon observed:
Although the two tests do not always diverge in function, they do in form. In re Hicks, 331 B.R. at 26. As the In re Hicks court noted: “While under the totality of the circumstances approach, the court may also consider ‘any additional facts and circumstances unique to the case’ that are relevant to the central inquiry (i.e., the debtor’s ability to maintain a minimum standard of living while repaying the loans), the Brunner test imposes two additional requirements on the debtor that must be met if the student loans are to be discharged.” Id. (emphasis in original). Looking to the bankruptcy court’s extensive analysis of the predominant tests in In re Kopf, the In re Hicks court agreed with In re Kopf that the Brunner test “test[s] too much.” Id. at 27.
At first blush, the second Brunner requirement — a showing that the debtor’s “state of affairs is likely to persist for a significant portion of the repayment period of the student loan” — seems merely to resonate with the forward-looking nature of the undue hardship analysis. That is, under any undue hardship standard the debtor must show that the inability to maintain a minimum standard of living while repaying the student loans is not a temporary reality, but will continue into the foreseeable future.
Many courts interpreting and applying the second Brunner prong, however, place dispositive weight on the debtor’s ability to demonstrate “additional extraordinary circumstances” that establish a “certainty of hopelessness.” This has led some courts to require that the debtor show the existence of “unique” or “extraordinary” circumstances, such as the debtor’s advanced age, illness or disability, psychiatric problems, lack of usable job skills, large number of dependents or severely limited education.... And, in the absence of such a showing, *595the court may conclude that the debt- or has failed the second Brunner prong and the student loans will not be discharged....
Requiring the debtor to present additional evidence of “unique” or “extraordinary” circumstances amounting to a “certainty of hopelessness” is not supported by the text of § 523(a)(8). The debtor need only demonstrate “undue hardship.” True, the debtor must be able to prove that the claimed hardship is more than present financial difficulty. See Kopf, 245 B.R. at 742, 745. And the existence of any of the factors mentioned above may be highly relevant to a finding that the hardship will persist into the foreseeable future. But whether or not this Court subjectively views the debtor’s circumstances as “unique” or “extraordinary” is, in a word, overkill.
In re Hicks, 331 B.R. at 27-28. We agree with this rationale and conclude that Brunner takes the test too far. Furthermore, we agree that the “good faith” requirement of Brunner is “without textual foundation.” Id. at 28 (citing In re Kopf, 245 B.R. at 741). Ultimately, the debtor must establish by a preponderance of the evidence that her present and future actual circumstances would impose an undue hardship if her debts are excepted from discharge. Irrespective of the test, the decision of a bankruptcy court, whether the failure to discharge a student loan will cause undue hardship to the debtor and the dependents of the debtor under § 523(a)(8), rests on both the economic ability to repay and the existence of any disqualifying action(s). The party opposing the discharge of a student loan has the burden of presenting evidence of any disqualifying factor, such as bad faith. The debtor is not required under the statute to establish prepetition good faith in absence of a challenge. The debtor should not be obligated to prove a negative, that is, that he did not act in bad faith, and, consequently, acted in good faith.
Bronsdon, 435 B.R. at 800-801.
In addition to adopting the “totality of the circumstances test,” the Bankruptcy Appellate Panel, in Bronsdon, determined that the availability of the William D. Ford Direct Loan Program (“ICRP”), and the options offered through that program to borrowers, in particular the Income Based Repayment Plan (“IBRP”), was a factor to be weighed by the court but was not dis-positive as to the issue of undue hardship. It stated:
Courts considering the ICRP as a factor under the totality of the circumstances test evaluate both the benefits and drawbacks of the program for the individual debtor within his or her unique circumstances. Brooks v. Educ. Credit Mgmt. Corp. (In re Brooks), 406 B.R. 382, 393 (Bankr.D.Minn.2009). Although these courts acknowledge that the ICRP reduces the immediate debt burden of the student loan debtor, they are often concerned about the longer term debt and tax consequences of the program. They recognize that, although it may be appropriate to consider whether a debtor has pursued her options under the ICRP, participation in that program may not be appropriate for some debtors because of the impact of the negative amortization of the debt over time when payments are not made and the tax implications arising after the debt is cancelled. Because of these considerations, the ICRP may be beneficial for a borrower whose inability to pay is temporary and whose financial situation is expected to improve significantly in the future. See In re Vargas, 2010 WL *596148632, at *4-5, 2010 Bankr.LEXIS 63, at *12-13. Where no significant improvement is anticipated, however, such programs may be detrimental to the borrower’s long-term financial health. See id.; see also In re Wilkinson-Bell, 2007 WL 1021969, at *5, 2007 Bankr.LEXIS 1052, at *16.
Central to this analysis is the idea that because forgiveness of any unpaid debt under the ICRP may result in a taxable event, the debtor who participates in the ICRP simply exchanges a nondischargeable student loan debt for a nondis-chargeable tax debt. Such an exchange of debt provides little or no relief to debtors. See Thomsen v. Dep’t of Educ. (In re Thomsen), 234 B.R. 506, 514 (Bankr.D.Mont.1999); see also In re Booth, 410 B.R. at 675-76; Durrani v. Educ. Credit Mgmt. Corp. (In re Durrani), 311 B.R. 496, 509 (Bankr.N.D.Ill.2004), aff'd, 320 B.R. 357 (N.D.Ill.2005); but see In re Brunell, 356 B.R. at 580-81 (holding that “[t]o the extent that the Debtor satisfies the requirements for participation in the Ford program, any tax liability based on the forgiven balance at that time is discharged.”). For example, in In re Booth, the bankruptcy court stated:
Application of the ICRP does not result in a discharge of the debt nor relieve the debtor from personal liability on the debt. Further action may, and will, be taken to collect the obligation, even if that action is simply requiring the debtor to provide annual financial information to the Department of Education. The ICRP does not grant a discharge, but lapse of a period as long as 25 years may result in cancellation or forgiveness of the debt. There is no provision in the regulation for “partial” cancellation or forgiveness of the obligation. Unlike a discharge, cancellation or forgiveness of a debt results in a tax liability. As interest accrues during the 25 years or lesser repayment period, the amount of debt cancelled will be quite large. The resulting tax liability would not be subject to discharge in a later bankruptcy proceeding.
The focus of the ICRP is on deferral, not discharge, of debt. This is the antithesis of a fresh start. Congress has provided bankruptcy debtors relief which is not provided in the ICRP regulations. Compliance with ICRP regulations will not result in the same relief which can be granted by the courts under 11 U.S.C. § 523(a)(8).
410 B.R. at 675-76. In addition, many of these courts are concerned that the ICRP allows the Department of Education to substitute its administrative determination regarding undue hardship for the bankruptcy judge’s statutorily mandated discretion under § 523(a)(8). See id.; see also In re Durrani, 311 B.R. at 509.
Bronsdon, 435 B.R. at 802-803.
The ICRP allows student loans to be consolidated and payments on the loans to be adjusted after taking into account poverty guidelines and a debtor’s adjusted gross income. See 34 C.F.R. § 685.209.
B. Analysis
Regardless of whether this Court applies the Brunner test or the “totality of the circumstances test,” the Court concludes that Ms. Stevenson failed to satisfy her burden of establishing undue hardship as of the time of trial. Under the “totality of the circumstances test,” the Court first considers Ms. Stevenson’s past, present, and reasonably reliable future financial resources. Ms. Stevenson has had a history of homelessness and poverty. Ms. Stevenson is currently working at Walgreens, is *597seeking additional hours at work, has an apartment, and is enrolled in classes at Bunker Hill Community College. Ms. Stevenson also testified that she is in the last semester at Bunker Hill Community College, that she is participating in an internship program at Cambridge Health Alliance, and that she expects to receive her certificate in PACS Administration, which she hopes will lead to a well paying position in the medical field with an annual salary of approximately $60,000.
Ms. Stevenson has had a history of obtaining employment, and she has held a wide variety of responsible jobs. She has been employed by Walgreens for a number of years. Ms. Stevenson testified that, in addition to her wages from Walgreens, she is currently receiving unemployment benefits and a subsidy to assist her with the payment of her monthly rent. Currently, Ms. Stevenson’s monthly income is approximately $1,000 and her monthly expenses, while appearing to be understated in the amount of $474, are less than her income.
Ms. Stevenson’s part-time employment at Walgreens has enabled her to take advantage of educational opportunities and an internship which may increase her chances of obtaining a well-paying job. Ms. Stevenson is intelligent, resourceful, and persistent. She has enrolled in a number of college level courses designed to assist her in maintaining and polishing her computer and technology skills. She testified that she is well-versed in Microsoft’s Office Suite and other computer programs. Although her age and health issues pose some challenges, they are not debilitating in the sense that she is unable to work and her future prospects are not dim. Indeed, one could view her future prospects as brighter than they have been since she moved to Massachusetts. While Ms. Stevenson introduced evidence concerning her job history, her current employment situation, and her health issues, the evidence she presented, when coupled with her pending graduation with a certificate in PACS Administration, weighs against a finding of undue hardship.
Nevertheless, it would be cavalier for the Court not to recognize that Ms. Stevenson’s financial situation — the receipt of her existing income, especially her unemployment compensation, and the continuation of her exiting expenses which reflect a sizable rental subsidy — is precarious. Were she to lose her rental subsidy or her unemployment compensation, without a concomitant increase in her working hours at Walgreens or the acquisition of another better paying position, her financial position could collapse, leaving her homeless once again.
The final factor to be considered under the “totality of the circumstances test” requires the Court to consider any additional relevant facts and circumstances surrounding Ms. Stevenson’s particular bankruptcy case. Ms. Stevenson testified that she considered the ICRP proffered to her by ECMC, but that she had concerns about the tax ramifications resulting from debt forgiveness in the event she was unable to repay her student loans at the expiration of the 25-year term of the plan. As the panel in Bronsdon observed, in considering the ICRP as a factor in determining whether the debtor has shown undue hardship under the totality of the circumstances test, courts must “evaluate both the benefits and drawbacks of the program for the individual debtor within his or her unique circumstances.” 435 B.R. at 803 (citing Brooks v. Educ. Credit Mgmt. Corp. (In re Brooks), 406 B.R. 382, 393 (Bankr.D.Minn.2009)).
The Court concludes that Ms. Stevenson’s eligibility for an ICRP and, in particular, the existence of the Income Based Repayment Plan, which became available *598under the Ford Program on July 1, 2009, supports the Court’s determination that her student loan debt is not dischargeable. Nevertheless, the Court is mindful that the substitution of one nondischargeable debt for another, i.e., student loan debt for tax debt, would merely serve to saddle Ms. Stevenson with overwhelming debt and reduce her incentive to achieve her goal of putting poverty and homelessness behind her.
The Court observes that in In re Brunell, 356 B.R. 567 (Bankr.D.Mass.2006), the court determined that “to the extent that the Debtor is obligated under any tax liability as may exist under the tax laws in effect at that time, the presence of any such liability at the end of one’s working life would be a tremendous undue hardship incurred as the result of the student loan.” 356 B.R. at 580-81. Accordingly, the court held that “[t]o the extent that the Debtor satisfies the requirements for participation in the Ford program, any tax liability based on the forgiven balance at that time is discharged.” Id. at 581. See also Fahrenz v. Educ. Credit Mgmt. Corp. (In re Fahrenz), No. 05-1657, 2008 WL 4330312 (Bankr.D.Mass.2008).
This Court has reservations about the prospective discharge of a potential tax liability and elects to take a slightly different route to achieve the type of equitable result espoused by the court in Bruneil. The Court must recognize that, while Ms. Stevenson’s ability to repay at least a part of her student loan debt is now likely, it is by no means inconceivable that her financial circumstances may spiral downward in the future as they have so often done in the past, leading her back to shelters and joblessness. Thus, the Court finds that balancing 1) “the general purpose of the Bankruptcy Code to give honest debtors a fresh start,” 2) “the interest in ensuring the continued viability of the student loan program [which] takes precedence,” see Nash, 446 F.3d at 190-91 (citing TI Fed. Credit Union v. DelBonis, 72 F.3d 921, 937 (1st Cir.1995), and 3) Ms. Stevenson’s employment history and prospects as single woman in her mid-fifties with some health issues and long spells of poverty and homelessness is compelled by the circumstances of this case.
A number of courts of appeals have held that 11 U.S.C. § 105 permits a bankruptcy court “to take action short of total discharge.” Tenn. Student Assistance v. Hornsby (In re Hornsby,) 144 F.3d 433, 440 (6th Cir.1998); see also Miller v. Pa. Higher Educ. Assistance Agency (In re Miller), 377 F.3d 616, 620 (6th Cir.2004) (“when a debtor does not make a showing of undue hardship with respect to the entirety of her student loans, a bankruptcy court may — pursuant to its § 105(a) powers — contemplate granting the various forms of relief discussed in Hornsby, including granting a partial discharge of the debtor’s student loans.”); Saxman v. Educ. Credit Mgmt. Corp. (In re Sax-man), 325 F.3d 1168, 1173 (9th Cir.2003) (“bankruptcy courts may exercise their equitable authority under 11 U.S.C. § 105(a) to partially discharge student loans.”); but see Hemar Ins. Corp. v. Cox (In re Cox), 338 F.3d 1238 (11th Cir.2003), cert. denied, 541 U.S. 991, 124 S.Ct. 2016, 158 L.Ed.2d 496 (2004) (“Because the specific language of § 523(a)(8) does not allow for relief to a debtor who has failed to show ‘undue hardship,’ the statute cannot be overruled by the general principles of equity contained in § 105(a).”).
The Court agrees with those courts which have ruled that § 105(a) gives the bankruptcy court authority to fashion equitable relief in appropriate circumstances in student loan discharge cases. This is such a case. Although the Court hopes that Ms. Stevenson is able to achieve her em*599ployment goals, those goals may not be feasible due to the depressed job market and her age. Although she failed to sustain her burden of proving undue hardship at the time of trial, the Court recognizes that in the event that she loses some of the benefits to which she is now entitled, such as her rent subsidy or unemployment compensation, or if she is unable to successfully meet her goals for a new job with increased income while participating in the Ford program, based upon her testimony, she would be entitled to relief from some or all of her student loan debt because her financial circumstances would be dire and significantly worse than her current state of affairs. Thus, repayment of any sums in excess of the sums required to be paid under the Ford program’s Income Based Repayment Plan Option would be an undue hardship due to an adverse change in her financial circumstances.
Accordingly, rather than enter an order discharging a potential contingent and un-liquidated tax debt without notice to appropriate governmental authorities, the Court shall enter an order discharging any student loan debt Ms. Stevenson is unable to repay following her participation in the Ford Program. If Ms. Stevenson were to participate in the Income Based Repayment Plan Option and so inform the Court, and if Ms. Stevenson faithfully abides by the terms and provisions of either the IBRP option or an ICRP, any student loan debt which she may have at the expiration of the plan is discharged.7
V. CONCLUSION
For the foregoing reasons the Court shall enter a judgment in favor of the Defendant and against the Plaintiff with the proviso that if Ms. Stevenson informs the Court within 14 days of the date of this decision that she will participate in the Ford Program and represent that she will in good faith abide by the provisions of the Income Based Repayment Plan Option, then the Court shall enter a judgment partially discharging her student loan debt to the extent any remains at the expiration of the repayment plan.
. Prior to the trial, the parties filed a Joint Pretrial Memorandum on November 1, 2010 in which they agreed that ECMC holds four federal student loans with a total outstanding balance as of October 5, 2010 of $112,579.91 as follows:
A student loan that disbursed on December 27, 1983 under the federal Guaranteed Student Loan Program ("GSLP”). As of October 5, 2010 the loan had an outstanding balance of $7,618.81, of which $2,717.45 is for principal, $3,522.15 is for interest, and $1,379.21 is for costs. The loan has a fixed interest rate of 9% and a per diem of .67 cents.
A student loan that disbursed on December 27, 1983 under the GSLP. As of October 5, 2010 the loan had an outstanding balance of 44,967.46, of which $1,771.78 is for principal, $2,296.44 is for interest, and $899.24 is for costs. The loan has a fixed interest rate of 9% and a per diem of .44 cents. A Federal Consolidation Loan that disbursed on April 30, 1992 under the Federal Family Education Loan Program. As of October 5, 2010 the loan had an outstanding balance of $57,744.09, of which $422,021.74 is for principal, $25,328.00 is for interest, and $10,394.35 is for costs. The loan has a fixed interest rate of 9% and a per diem of $5.43.
A student loan that disbursed on June 10, 1987 under the Federal Supplemental Loans for Students ■ (SLS) program. As of October 5, 2010 the loan had an outstanding balance of $57,744.09 of which $14,128.79 is for principal, $20,628.08 is for interest, and $7,492.68 is for costs. The loan has a fixed interest rate of 12% and a per diem of $4.65.
. The Court takes judicial notice that the Charter School filed an Opposition to the Debtor's Motion for Protection against Discriminatory Treatment and requested sanctions against Ms. Stevenson. In its Opposition, the Charter School represented that Ms. Stevenson founded a company called TuckNT as a sole proprietorship in November of 2002 and that in November of 2004 that company was awarded a contract to provide services to the School, including administration of the accounts payables, accounts receivable, payroll, human resources, and grant management functions for a flat rate of $1,000 per week and was paid $43,000 during the nine month relationship which began in August of 2004. Ms. Stevenson commenced legal action against the School in the United States District Court for the District of Massachusetts and asserted a wide variety of claims against the school, which she did not initially disclose on Schedule B-Personal Property. On December 15, 2006, this Court entered sanctions against Ms. Stevenson in the sum of $500.
. Ms. Stevenson described an IDA as a saving account sponsored by community development agency whereby any money saved will be matched when the funds are used for certain purposes, such as pursuing educational opportunities, starting a business, or purchasing a car.
. The letter stated:
The fourth option is the Income Contingent Repayment Plan ("ICRP”) which has a maximum repayment term of 25 years. If at the end of the twenty-five year term there is a loan balance remaining then the ICRP requires that the remaining loan be canceled. The monthly payment amount under the ICRP Plan is calculated based upon the borrower's annual adjusted gross income ("AGI”), the total amount borrowed, and family size. The monthly amount is calculated as the lesser of: (a) the amount that would be paid if the borrower repaid the loan in 12 years, multiplied by an annual income percentage factor that varies based upon the borrower's annual income; or (b) 20% of the borrower's discretionary income, which is defined as the borrower’s adjusted gross income minus the poverty level for the borrower’s family size. If that calculation yields a monthly payment between zero and $5.00, the monthly payment is $5.00, unless the borrower's income is less than or equal to poverty level, in which case the monthly payment is zero. If the monthly payment is less than the amount of the interest that accrues on the loans, the interest is capitalized, i.e. added to the principal, once a year until the principal balance reaches 10% more than the original principal balance. At that point, interest continues to accrue but is not added to the principal balance.
If at the end of the ICR Plan there is a loan balance remaining then the loan balance is canceled under the Ford Program.
Under the ICR Plan option you would not be required to annually file renewal applications, etc. Instead you would authorize the IRS to annually notify the ICR Plan of your AGI. Your loan payment would then be set for the year based on your AGI. If you don’t file tax returns, then you would only need to complete a one page form declaring that you don't need to file a tax return as your income as [sic] under the required level, thereby confirming that your ICR Plan payment would be -0- for the year.
Defendant’s Exhibit 2, Letter to the Debtor Dated December 16, 2009 (internal citations omitted).
. The letter stated:
The fifth option is the Income Based Repayment Plan ("IBR"). The IBR became available under the Ford Program as of July 1, 2009. The IBR is available to borrowers who can make a showing of partial financial hardship; meaning that the payment amount on the Ford Standard Repayment Option exceeds 15% of your household AGI. As such, your payment under the IBR Plan would be zero (-0-) dollars per month. The IBR Plan has a maximum term of 25 years and if at the end of the IBR Plan there is a loan balance remaining then the loan balance is canceled under the Ford Program.
As your loans are in default, in order to consolidate into the IBR Plan you would first need to consolidate your student loans into the ICR Plan. After you make three monthly payments of zero (-0-) dollars under the ICR Plan you would then be eligible to consolidate your student loans into the IBR Plan.
Defendant’s Exhibit 2, Letter to the Debtor Dated December 16, 2009 (internal citations omitted).
. Bronsdon is currently on appeal to the United States Court of Appeals for the First Circuit.
. The Court notes that the ICRP requires the Debtor to authorize the IRS to disclose information to agents of the Secretary of the Department of Education. 34 C.F.R. 685.209(c)(7)(i). Accordingly, the Debtor will have to provide for her $8,000 tax liability in some fashion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494524/ | POST-TRIAL FINDINGS OF FACT AND CONCLUSIONS OF LAW
SHELLEY C. CHAPMAN, Bankruptcy Judge.
TABLE OF CONTENTS
PARTIES AND PROCEDURAL HISTORY.619
FINDINGS OF FACT.621
I. Background.622
A. The Licensor Parties and the Yu-Gi-Oh! Brand.622
B. The Yu-Gi-Oh! License Agreements.622
1. The Short Form Agreement.622
2. The 2001 Agreement.623
3. The 2008 Agreement.623
4. The Gross Income Provision .623
II.4Kids’ Activities Under the Yu-Gi-Oh! License Agreements.625
III. ADK’s Royalty Audit of 4Kids.625
IV. ADK’s Plan to Start its Own U.S. Home Video Business.627
Final Audit Findings . V. The
Finding No. 1: Funimation Service Fees. A.
1. 4Kids’ Decision to Start 4Kids Home Video .
2. The Negotiation of the Home Video Rights in the 2001 Agreement.
3. The Parties’ Understanding of Paragraph 1(b) of the 2001 Agreement.
4. The 4Kids-Funimation Agreements.
a. The Funimation Distribution Agreement.
b. The Funimation Services Agreement.
e. Execution of the Funimation Agreements.
d. Disclosure of the Funimation Services Agreement and Fees.
5. 4Kids’ Home Video Subsidiary.
6. The Revision of Paragraph l(b)(iii) in the 2008 Agreement.
Finding No. 2: Majeseo Service Fees. td
1. Background of the 4Kids-Majesco Relationship.
2. The Majeseo Services Agreement.
Finding No. 3: International Withholding Taxes . O
1. Withholding Taxes Generally.
2. Treatment of Withholding Taxes under the License Agreements.
3. Mr. Elliott’s Audit Finding.
4. Expert Testimony Regarding Japanese Tax Law .
5. There Is No Credible Evidence That ADK Ever Requested Foreign Tax Withholding Certificates from 4Kids Prior to the Audit.
6. There Is No Evidence That ADK Suffered Any Tax Related Injury.
Finding No. 4: Post-.June 2008 Home Video Revenue.
Finding No. 5: Costs of Third-Party Audits.
Finding No. 6: Errors & Omissions Insurance Allocation.
1. 4Kids’Methods.
2. Mr. Elliott’s Method.
Finding No. 7: Bank Charges . d
Finding No. 8: Miscellaneous Costs . K
Finding No. 9: Material & Courier Costs. i
*618VI. ADK’s Purported Termination of the 2008 Agreement.664
A. The 2008 Agreement’s Termination Provision.664
B. Mr. Elliott’s Preliminary Audit Findings.664
C. The Parties’ June 2010 Correspondence.665
1. ADK’s June 17, 2010 Letter.665
2. ADK’s June 25, 2010 Letter.666
3. 4Kids’ June 29, 2010 Response .666
D. The Parties’ December 2010 Correspondence.667
1. ADK’s December 20, 2010 Letters.667
2. 4Kids’ December 29,2010 Responses.668
E. The Parties’ 2011 Negotiations.669
1. Adaptation Agreement.670
2. Mr. Sugimoto’s “Inadvertent” March 9, 2011 Email .672
3. 4Kids’ $1 Million Good-Faith Payment.673
4. The March 18, 2011 Meeting.673
5. 4Kids’ Efforts to Continue Negotiations to Resolve the Audit Claims.674
F. The March 25,2011 Purported Termination.675
G. Balance Owed to 4Kids at the Time of Termination.676
EVIDENTIARY MATTERS .676
I. Admissibility of Expert Testimony.676
A. Plaintiffs’ Motion in Limine to Exclude the Expert Report and Testimony
of Takaaki Tokuhiro.677
B. 4Kids’ Motion in Limine to Exclude the Testimony of Robert Freedman
and Arthur Erk.678
II. Evidentiary Issues Regarding the Translation of Documents.679
III. Other Evidentiary Objections.681
I. Applicable Law Oí oo
II.Licensor’s Purported Termination of the 2008 Agreement was Ineffective Because Licensor Failed to Provide 4Kids with Adequate Formal Written Notice of Breach. Oí OO co
A. ADK’s June 17, 2010 Letter. Oí OO en
B. ADK’s June 25, 2010 Letter. Oí OO en
C. ADK’s December 20, 2010 Letters. Oí OO en
D. ADK’s March 4, 2011 Letter. Oí CO -3
E. Mr. Sugimoto’s “Inadvertent” March 9, 2011 Email. Oí OO oo
F. Ongoing Negotiations Continued Between the Parties Without a Final Opportunity to Cure. oo oo eo
III.The Amount Owed by 4Kids, if Any, Was Not the $4.8 Million Claimed in the Purported Notice of Breach, Which Renders the Notice Materially Defective and Renders the Termination Ineffective. Oí 00 CO
A. Finding No. 9: Material & Courier Costs — $247,771.88. Oí eo H*
B. Finding No. 8: Miscellaneous Costs — $43,554.59. Oí so to
C. Finding No. 7: Bank Charges — $4,270.58. Oí so to
D. Finding No. 6: Errors & Omissions Insurance Allocation — $67,328.45 .... Oí <£> to
E. Finding No. 5: Unauthorized Audit Fee Deduction — $105,111.20 . Oí ZD CO
F. Finding No. 4: Unreported Post-June 2008 Home Video Revenue — $26,894.27 . Oí CO ^
G. Finding No. 3: Unsubstantiated International Withholding Taxes — $2,265,767.16 . 695
*6191. 4Kids Provided Evidence of Withholding Tax Deductions Required by
the License Agreements.695
2. Licensor Has Demonstrated No Tax Injury.698
3. Even If ADK Suffered a Tax Injury, It Cannot Recover From 4Kids Due to Its Own Inaction.699
H. Findings No. 1 and No. 2: Unreported Funimation Home Video Revenue-$1,967,000.00 and Unreported Majesco Home Video Revenue-$91,666.50. 700
1. 4Kids Exercised the Home Video Rights Itself Pursuant to Paragraph l(b)(iii) of the License Agreements and Earned Service Fees from its Distributors for Separate Services Rendered ..701
a. Licensor’s Mischaracterization of 4Kids’ Duties under the License Agreements.702
b. Licensor’s Arguments that Funimation Was the Licensee Because It (i) Was Manufacturing, Distributing, and Selling Home Videos and (ii) Bore the “Inventory Risk” Do Not Withstand Scrutiny.702
c. Licensor’s “Secrecy Clause” Argument Has No Basis.704
2. Paragraph l(b)(iii) of the License Agreements and the Misunderstanding Regarding Such Provision.705
IV. Other Arguments Presented by Plaintiffs.707
CONCLUSION.708
Since 2001, defendant 4Kids Entertainment, Inc. (“4Kids” or the “Debtor”) has brought the immensely popular Yu-Gi-Oh! anime series to children of all ages in the United States and abroad. As licensee of the brand from plaintiffs NAS, TV Tokyo, and ADK (each as defined below), the Japanese consortium that controls the Yu-Gi-Oh! rights (the “Consortium”), 4Kids generated over $150 million in revenue between 2001 and 2009, which it shared with its licensor pursuant to the contractual arrangements between them. But sometime in 2009, for reasons that remain unclear, the relationship soured. The Consortium decided to conduct an audit of the royalties paid by 4Kids to the Consortium. Both 4Kids and the Consortium were troubled by the auditor’s findings that there was allegedly a $4.8 million royalty underpayment. Over the course of many months, there ensued a series of increasingly heated letters, emails, and meetings between the parties and their counsel that failed to resolve the royalty issues. Like characters in the Yu-Gi-Oh series itself, 4Kids and the Consortium were locked in a high stakes duel over the future of the series in the Western world and, by extension, the survival of 4Kids as a going concern.
On March 24, 2011, the Consortium attempted to end the duel by issuing a letter that purports to terminate its licensing agreement with 4Kids. Days later, 4Kids sought chapter 11 protection and asserted that the termination letter was ineffective. Whether or not the termination letter was effective is the core issue in this adversary proceeding. For the reasons set forth extensively below, the Court finds that the Amended and Restated Yu-Gi-Oh! Agreement dated and effective as of July 1, 2008 (the “2008 Agreement”) was not effectively terminated and, accordingly, it remains an executory contract that is the property of the 4Kids estate.
PARTIES AND PROCEDURAL HISTORY
Plaintiff and Counterclaim-Defendant TV Tokyo Corporation (“TV Tokyo”) owns and operates a television station in Japan. *620Counterclaim-Defendant ASATSU-DK Inc. (“ADK”) is a large Japanese advertising company. Plaintiff and Counterclaim-Defendant Nihon Ad Systems (“NAS”) is ADK’s wholly-owned subsidiary. Defendant and Counterclaim-Plaintiff 4Kids Entertainment Inc. is a children’s entertainment company that produces children’s television programming and licenses merchandise that relates to such programming, including, for example, home videos, toys, and trading cards.
On March 24, 2011, Plaintiffs TV Tokyo and NAS commenced an action against 4Kids in the United States District Court for the Southern District of New York (the “District Court”), alleging fraud and breaches of contract and of the covenant of good faith and fair dealing, and seeking monetary damages, an accounting, and fees and costs allegedly arising pursuant to the license agreements among the parties (the “Adversary Proceeding”). (See TV Tokyo Corporation v. 4Kids Entertainment, Inc., Case No. 11-cv-02069 (RJH), Docket No. 1). On April 6, 2011, 4Kids commenced with this Court a voluntary case pursuant to chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). On May 23, 2011, the District Court entered an order referring the Adversary Proceeding to this Court. (See TV Tokyo Corporation v. 4Kids Entertainment, Inc., Case No. 11-cv-02069 (RJH), Docket No. 6). This is a core proceeding pursuant to 28 U.S.C. section 157(b)(2).2
On June 2, 2011, this Court entered its Agreed Order Setting Trial Schedule, which bifurcated the Adversary Proceeding into two phases (the “June 2 Order”). According to the June 2 Order, the initial phase of the Adversary Proceeding is:
solely for the purposes of determining (a) whether Plaintiffs’ purported termination of 4Kids’ rights under the Yu-Gi-Oh! license was effective and (b) whether the amounts owing to Plaintiffs, if any, under the audit claims in paragraph 16 of the Complaint exceed the credits claimed by 4Kids for amounts paid or advanced to or on behalf of the Plaintiffs.
(Case No. 11-11607, Docket No. 180 at 2; Adv. Pro. No. 11-02225, Docket No. 2 at 2). On June 10, 2011, 4Kids filed its Answer and Counterclaims in the Adversary Proceeding. See Adv. Pro. No. 11-02225, Docket No. 3. On July 21, 2011, Plaintiffs filed their Answer to 4Kids’ Counterclaims. See Adv. Pro. No. 11-02225, Docket No. 14. Commencing on August 29, 2011, the Court conducted a trial with respect to the first phase of the Adversary Proceeding. The trial concluded on September 23, 2011, after over seventy hours of testimony and argument.
Prior to the commencement of the trial, the parties filed declarations in lieu of direct testimony for each of the fact witnesses who testified during the trial. On behalf of Plaintiffs, the following witnesses submitted declarations and provided live testimony3 at trial: (a) Yoshihiko Shinoda, *621Director of the Content Division of ADK, and the Managing Director of NAS;4 (b) Shu Hosaka, Department Director of the Global Licensing Department, in the Content Division of ADK;5 (c) Haruhiko Sugi-moto, Senior Vice President of ADK America, Inc., a subsidiary of ADK;6 (d) Yukio Kawasaki, General Manager of the animation division of TV Tokyo since 2011;7 and (e) Anthony Elliott, Plaintiffs’ royalty auditor. On behalf of Defendant, the following fact witnesses submitted dec: larations and provided live testimony at trial: (a) Samuel Newborn, Executive Vice President, Business Affairs and General Counsel of 4Kids;8 (b) Bruce Foster, Chief Financial Officer and Executive Vice President of 4Kids;9 (c) Rosalind Nowicki, Executive Vice President, Global Marketing and Licensing of 4Kids;10 and (d) Jacqueline Kozmata, Senior Royalty Manager at 4Kids.11 The parties also designated the deposition transcripts of Alfred Kahn, 4Kids’ former Chief Executive Officer and Chairman, and Noriko Kubota, an ADK employee in the overseas licensing group.
At trial, live expert testimony on behalf of Plaintiffs was provided by Takashi Kasai, Arthur Erk, and Robert Freedman, each of whom also submitted expert reports prior to trial. Defendant presented live expert testimony of Takaaki Tokuhiro at trial and submitted an expert report for Mr. Tokuhiro prior to trial.
On October 12, 2011, after the conclusion of the trial, each of the parties filed with the Court (a) proposed findings of fact and conclusions of law and (b) post-trial briefs. See Adv. Pro. No. 11-02225, Docket Nos. 58, 59, 61, 62.
FINDINGS OF FACT
The following constitute this Court’s findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure. Having *622considered the voluminous evidence, testimonial and documentary, including all exhibits admitted into evidence, as well as Plaintiffs’ and Defendant’s post-trial proposed findings of fact and briefs, and mindful that a court should not blindly accept findings of fact and conclusions of law proffered by the parties (see St. Clare’s Hosp. and Health Ctr. v. Ins. Co. of North Am., (In re St. Clare’s Hosp. and Health Ctr.), 934 F.2d 15 (2d Cir.1991) (citing United States v. El Paso Natural Gas Co., 376 U.S. 651, 656, 84 S.Ct. 1044, 12 L.Ed.2d 12 (1964))), and having conducted an independent analysis of the law and the facts, the Court makes the following Findings of Fact and Conclusions of Law:12
I.Background
A. The Licensor Parties and the Yu-Gi-Oh! Brand
1. The Yu-Gi-Oh! series is an animated television series based on a Japanese comic book series, also known as a “man-ga.” The manga is published by Shueisha, Inc. (“Shueisha”), while the rights to the animated series are owned by NAS and TV Tokyo. The Yu-Gi-Oh! series currently consists of Yu-Gi-Oh! Duel Monsters, Yu-Gi-Oh! GX, Yu-Gi-Oh! 5D’s, and Yu-Gi-Oh! ZeXal (collectively “Yu-Gi-Oh!”).
2. The ‘Yu-Gi-Oh! Consortium” or the “Consortium” refers to the group of Japanese businesses that have interests in the Yu-Gi-Oh! property. In the narrowest sense, the Consortium includes only TV Tokyo and NAS. However, the “Consortium” at times refers to all of the Japanese companies with an interest in Yu-Gi-Oh!, including TV Tokyo, NAS, ADK, Shueisha, and Konami. (Hosaka Decl. ¶ 2 and n.2).
3. Besides Yu-Gi-Oh!, ADK licenses more than twenty other programs outside of Japan. Although NAS and TV Tokyo own and control the rights to the Yu-Gi-Oh! series, ADK has responsibility for the day-to-day management of Yu-Gi-Oh! on behalf of NAS and TV Tokyo. (Shinoda Decl. ¶ 5).
4. Konami Corporation (“Konami”) is the worldwide licensee for Yu-Gi-Oh! trading cards.
B. The Yu-Gi-Oh! License Agreements
5. Yu-Gi-Oh! was first broadcast in Japan in or about April 2000, and, due to the success of the program in Japan, Plaintiffs decided to look into broadcasting Yu-Gi-Oh! overseas. In or around the fall of 2000, Plaintiffs began interviewing potential licensees in the United States. (Kawasaki Decl. ¶ 6). Plaintiffs ultimately chose to hire 4Kids as their licensee to promote, market, and broadcast the Yu-Gi-Oh! series.
1. The Short Form Agreement
6. The licensor-licensee relationship between (i) NAS and TV Tokyo (together, “Licensor”) and (ii) 4Kids was originally set forth in a deal memo titled Yu-Gi-Oh! Duel Monsters Deal Memo and signed on April 18, 2001 (the “Short Form Agreement”), pursuant to which NAS and TV Tokyo licensed to 4Kids certain exclusive rights to the Yu-Gi-Oh! series throughout the world outside Asia (the “4Kids Territory”). (Ex. T — 1; Kawasaki Decl. ¶ 10; Newborn Decl. ¶ 6).
*6237. The Short Form Agreement provided that the parties intended to enter into a longer agreement, but until that agreement was signed, the Short Form Agreement would “constitute the binding obligation of the parties.” (Ex. T-l). Among the rights granted to 4Kids by the Short Form Agreement were the rights to “exploit or license” the television broadcast rights and the home video rights with respect to the Yu-Gi-Oh! series. (Ex. T-l ¶¶ 4,10; Newborn Decl. ¶ 6).
2. The 2001 Agreement
8. Beginning in October 2001, the parties began negotiating a long-form agreement to replace the Short Form Agreement. In June 2003, the parties signed a long-form Yu-Gi-Oh! Agreement (the “2001 Agreement”) that superseded and replaced the Short Form Agreement. (Ex. T-6; Newborn Decl. ¶7; Hosaka Decl. ¶ 6; Shinoda Decl. ¶ 6). The 2001 Agreement, though signed in June 2008, was dated and effective “as of’ April 18, 2001, the date of the Short Form Agreement. Among other things, the 2001 Agreement required 4Kids to secure a television broadcast commitment for Yu-Gi-Oh! in the U.S. for the Yu-Gi-Oh! television series, to pay to Licensor half of 4Kids’s Gross Income (as defined in the 2001 Agreement) from the license of the certain rights in the 4Kids Territory, and to guarantee Licensor certain minimum royalties on merchandising rights. (Ex. T-6; Newborn Decl. ¶ 7).
3. The 2008 Agreement
9. In 2007, the parties began discussing an extension of the 2001 Agreement, which was scheduled to expire on August 31, 2010. These discussions culminated in the execution by 4Kids and Licensor in October 2008 of the 2008 Agreement (together with the 2001 Agreement, the “License Agreements”).
10. The rights granted to 4Kids under the License Agreements included the authority to exercise “[t]he Television Broadcast Rights, Home Video Rights, Merchandising Rights, advertising and promotion rights, publishing rights and [certain] Other Rights to the Property” (collectively, the “YGO Rights”). (License Agreements ¶¶ l(i) at Ex. T-6 & Ex. T-ll).
11. Among other things, the 2008 Agreement confirmed 4Kids’ existing television broadcast rights, home video rights and merchandise licensing rights to the Yu-Gi-Oh! property, added the Yu-Gi-Oh! 5D’s series to the agreement, clarified that 4Kids had the option to license any new Yu-Gi-Oh! “spinoff’ series, and modified various other terms of the license. In addition, the 2008 Agreement extended the term of the Yu-Gi-Oh! license to 2015 and provided for additional one-year extensions for every additional season of Yu-Gi-Oh! television episodes licensed by 4Kids from Licensor. (Ex. T-ll; Newborn Decl. ¶ 8). Paragraph 4(g) of the 2008 Agreement is identical to Paragraph 4(g) of the 2001 Agreement.
4.The Gross Income Provision
12. The License Agreements generally provide that the Gross Income — defined in relevant part as “the gross receipts received from the exploitation or license of the Rights to [Yu-Gi-Oh!] in the [4Kids] Territory” — shall be split evenly between the parties. 4Kids is generally permitted to deduct three categories of expenses from Licensor’s share of the Gross Income: (1) expenses for maintaining Yu-Gi-Oh! trademarks and copyrights in the 4Kids Territory; (2) errors and omissions insurance premiums, up to $15,000 per year; and (3) withholding taxes required by law to be deducted. (Ex. T-6 ¶¶ 4(c), 4(d); Ex. T-ll ¶¶ 4(c), 4(d)).
13. Specifically, the Gross Income Provision is set forth in Paragraphs 4(c) and *6244(d) of the License Agreements. (Ex. T-6 and Ex. T-ll at ¶¶ 4(c), 4(d)).
14. The Gross Income Provision of the 2001 Agreement defined “Gross Income” as:
the gross receipts received from the exploitation or license of the [YGO] Rights to the Property in the Territory (but not including any advertising revenues should 4Kids broadcast the Episodes in the United States on any network block controlled by 4Kids, including the Fox Network during the Saturday morning kids block (“Fox Block”)).
(Ex. T-6 at ¶ 4(c) at T-6.)
15. The definition of “Gross Income”13 was amended in the 2008 Agreement, primarily to exclude advertising revenues from 4Kids’ websites:
the gross receipts received from the exploitation or license of the [YGO] Rights to the Property in the Territory (but not including any advertising revenues should 4Kids broadcast the Episodes in the United States on any network, broadcast outlet or distribution channel controlled or programmed by 4Kids in the Territory, including, without limitation, the Fox Network during the Saturday morning kids block (“Fox Block”) and The CW Network (collectively, “4Kids Controlled Broadcast”)). Gross Income shall also not include advertising revenues from 4Kids Websites unless otherwise agreed by the parties pursuant to Paragraph l(a)(iii) above.
(Ex. T-ll ¶ 4(c)(iii) at T-ll).
16. The Gross Income Provision provides that, in return for the right to exploit the YGO Rights, 4Kids was required to pay the YGO Consortium a portion of the Gross Income received from exploitation of those rights. Specifically, Paragraph 4(c) of the License Agreements, provides, in relevant part, that:
4Kids shall pay Licensor fifty percent (50%) of the Gross Income ... received by 4Kids from the exploitation or license of the [YGO] Rights less the actual third party out-of-pocket expenses incurred by 4Kids for copyright and trademark registrations for the Property in the Territory (collectively “IP Expenses”), insurance expenses pursuant to Paragraph 13 (“Insurance Expenses”) (with Licensor’s share of the 4Kids Errors and Omissions Insurance premiums computed on pro-rata basis with other television series and movies insured under such insurance policy but in no event shall the cost to licensor exceed $15,000 per year) and withholding taxes required by law to be deducted as provided in Paragraph 4(g) (“Taxes”), which IP Expenses, Insurance Expenses and Taxes shall be deducted by 4Kids from Licensor’s share of the Gross Income.
(Ex. T-6 & Ex. T-ll at ¶¶ 4(c)).
17. Paragraph 4(d) of the License Agreements provided that all other ex*625penses, including “all expenses with respect to the adaption, dubbing, and res-coring of the Series, the advertising and marketing of the Series and the exploitation of the Television Broadcast Rights, Home Video Rights, Merchandising Rights, publishing rights and promotion rights to the Series” were to be paid “from 4Kids’ share of the Gross Income.” (Id. at ¶ ¶ 4(d)(iii).)
II. 4Kids’ Activities under the Yu-Gi-Oh! License Agreements
18. Prior to 4Kids’ licensing of Yu-Gi-Oh!, the series was virtually unknown in the 4Kids Territory. Beginning in 2001, 4Kids licensed the television broadcast rights to Yu-Gi-Oh! in the United States and Europe pursuant to the grant of rights from Licensor to 4Kids under the Short Form Agreement (later superseded by the 2001 Agreement). (Newborn Decl. ¶ 9).
19. Since launching the Yu-Gi-Oh! series in the United States in 2001 and in Europe in 2002, 4Kids has, among other things, (a) produced the English-language adaptation of over 500 Yu-Gi-Oh! episodes for broadcast in the 4Kids Territory; (b) licensed Yu-Gi-Oh! television broadcast rights to KidsWB!, which during the early years of the 2000’s was the highest rated children’s television network in the United States on Saturday mornings; (c) obtained a broadcast commitment from KidsWB! in June 2001 for the Yu-Gi-Oh! series in exchange for paying KidsWB! between 10% and 20% of 4Kids’ share of advances and royalties from the license of various Rights to Yu-Gi-Oh! in the U.S. and Europe; (d) licensed master toy rights to Yu-Gi-Oh! to Mattel in 2001; and (e) licensed promotional rights to Yu-Gi-Oh! to McDonald’s for a system-wide “Big Kids Meal” promotion in the U.S. in from December 20, 2002 through January 20, 2003. (Newborn Deel. ¶ 10).
20. As a result of the ultimately successful launch of the Yu-Gi-Oh! property in the United States, 4Kids has licensed various rights to the Yu-Gi-Oh! property to hundreds of sublicensees in the 4Kids Territory. Yu-Gi-Oh! licensees have sold several billion dollars of Yu-Gi-Oh!-relat-ed products at retail in the 4Kids Territory over the past 10 years. From 2001 to 2010, Licensor received in excess of $150 million in royalties from sales of Yu-Gi-Oh! — related merchandise, trading cards and videogames, and from the license of Yu-Gi-Oh! television broadcast and home video rights in the 4Kids Territory. (Newborn Deck ¶ 14). Of that amount, approximately $75 million came directly from 4Kids. (9/12/2011 Tr. 10:14-23 (Newborn)).
21. The Yu-Gi-Oh! license and resulting revenue are a key part of 4Eads’ business. During 2009 and 2010, the Yu-Gi-Oh! property represented a substantial share of 4Kids’ annual revenue, in the range of 40%. Many of 4Kids’ employees are primarily involved in the ongoing adaptation and distribution of the Yu-Gi-Oh! series and related licensing and marketing efforts. (Newborn Deck ¶ 15).
III. ADK’s Royalty Audit of 4Kids
22. Both the 2001 Agreement and the 2008 Agreement contain a provision allowing Licensor to audit the books and records of 4Kids:
Audit. Licensor shall have the right to audit the books and records of 4Kids insofar as they relate to the exploitation of the Rights to the Property. Any such audit shall take place during regular business hours upon not less than ten (10) days written notice. Licensor shall pay the cost of the audit; provided, however, that if any audit reveals an underpayment by 4Kids of more than five (5%) percent of the amount due Li-*626censor, and 4Kids shall reimburse Li-censor for the reasonable cost of such audit. Any underpayment reflected in the audit shall be paid to Licensor promptly.
(Ex. T-6 ¶ 4(f); Ex. T-ll ¶ 4(f)).
23. Royalty inspections are common in the licensing and entertainment industry in the United States, but are not common in Japan. (Elliott Decl. ¶¶ 5-6; Kawasaki Decl. ¶ 33, Sugimoto Decl. ¶ 10; Hosaka Decl. ¶ 53; 9/15/11 Tr. 58:24-59:4 (Now-icki); 9/6/11 Tr. 102:12-16 (Hosaka); Ex. T-210 (e-mail between 4Kids’ consultant Enna Hozumi and EVP Nowicki, noting that “Japanese companies do not routinely conduct audits” and Plaintiffs’ confirmation that Plaintiffs “rely on 4Kids,” in context of licensee/sublicensee audits)).
24. Mr. Sugimoto testified that he raised the idea of auditing 4Kids in 2003 and again around 2007-2008, and that an audit was ultimately approved by Mr. Ho-saka in July 2009. (Sugimoto Decl. ¶¶ 9-11). According to Mr. Hosaka, ADK decided to conduct the audit because of its concern at the time for 4Kids’ financial position following the global financial contraction. (Hosaka Decl. ¶ 14; Shinoda Decl. ¶ 21). This is flatly inconsistent with what Mr. Hosaka and Mr. Shinoda told 4Kids in January 2010; as reflected in both an email from Mr. Hosaka to A1 Kahn dated January 13, 2010, as well as an attached letter from Mr. Shinoda to A1 Kahn dated January 14, 2009[sic], the stated reason for the audit was the implementation of “J-SOX” in Japan. See Ex. T-43. ADK thus appears to have misled 4Kids about the purpose of the audit, and apparently has made misrepresentations to the Court on this issue.
25. In January 2010, ADK engaged Anthony Curtis Elliott to conduct a royalty audit of 4Kids. Mr. Elliott has been a CPA since 1985, and is currently licensed as a CPA in California and New York. (Elliott Decl. ¶¶ 4, 8).
26. Royalty auditors such as Mr. Elliott conduct inspections to verify that the audited party conformed to the requirements of the applicable agreement when remitting payments, and paid the licensor or other counterparty the proper amount under the terms of the agreement. (9/9/11 Tr. 8:8-ll(Erk)). Although Mr. Elliott testified that he presents himself as being “objective,” he acknowledged that the use of the word “audit” is a misnomer. Indeed, Mr. Elliott’s email signature block contains the slogan “Royalty Audits = Cash Recoveries.” See, e.g., Ex T-52, p. 3.
27. On January 12, 2010, after an initial review of 4Kids’ quarterly royalty statements, also referred to as “participation statements,” Mr. Elliott drafted a proposal in which he recommended a three-stage audit “to determine whether the [royalties paid by 4Kids] were computed in accordance with the financial provisions of the [Licensing] Agreements.” (Elliott Decl. ¶4; Ex. T-90). The first phase would cover the parties’ relationship since 2001, and examine 4Kids’ royalty payments with respect to the U.S. and Canadian merchandising rights and home video rights, and 4Kids’ contractual deductions. (Elliott Decl. ¶ 10; see also Ex. T-12; Ex. T-509.)
28. On January 13, 2010, ADK notified 4Kids that it had engaged Mr. Elliott to conduct an audit of the books and records of 4Kids. (Ex. T-43). Mr. Elliott sent 4Kids requests for documents and information relevant to the Audit dated February 10, March 19, April 2, April 30, and July 9, 2010, with additional requests in October 2010. (Elliott Decl. ¶ 12; Ex. T— 12 at TVT-NAS 0065598; Ex. T-509; Ex. T-500; Ex. T-611.)
29. On May 21, 2010, Mr. Elliott issued a set of preliminary audit findings, along *627with various inquiries regarding those findings, to Mr. Sugimoto of ADK. (Ex. T-12). The report presented seven preliminary audit findings valued by Mr. Elliott at approximately $7.3 million. The preliminary report contained the following statement in bold font:
The above audit findings are tentative. Some of these variances represent possible contract breaches.... In order to proceed with this inspection, the Accountant requests direction and final determination from ADK regarding the contractual interpretation of Paragraphs 1(b) and 4 of the [Licensing] Agreements ....
(Ex. T-12 at 2).
30. Over the next several months, Mr. Elliott continued work on the audit. During that time, he drafted three other interim reports dated October 11, October 18, and November 11, 2010. (Ex. T-13; Ex. T-93; Ex. T-94). Mr. Elliott’s final audit report was sent to Mr. Sugimoto on November 17, 2010. (Ex. T-14).
31. During the course of the audit, Li-censor retained legal counsel in the United States that was referred to Licensor by Mr. Elliott, and with whom Mr. Elliott had previously worked. Based on his preliminary audit findings, Mr. Elliott had recommended that ADK retain legal counsel. (Elliott Decl. ¶ 14; Sugimoto Decl. ¶ 16; Ex. T-12 at TVT_NAS 0065599). Mr. Elliott communicated with Licensor’s counsel roughly a dozen times concerning the audit, and drafts of his audit reports were shared with Licensor’s counsel. (8/29/2011 Tr. 229:19-231:6 (Elliott); Elliott Decl. ¶ 14).
32. Mr. Elliott received approximately $100,000 in compensation from ADK for conducting the 4Kids audit. (8/29/2011 Tr. 231:15-232:4 (Elliott)).
IV. ADK’s Plan to Start Its Own U.S. Home Video Business
33. The evidence presented at trial and summarized below shows that, while the audit was ongoing, ADK was planning to replace 4Kids as merchandise licensing agent and licensee of the Yu-Gi-Oh television and home video rights.
34. On August 5, 2010, Mr. Hosaka sent an email to various persons within ADK. The email was tagged as “High” importance and “Internal use only,” and included the notation “(Confidential!)” in the subject line. In the body of the email, under the heading “Current and future policies towards 4Kids,” Mr. Hosaka described the ongoing audit. He wrote:
At present, our company’s position is to keep step with TX and Konami and at least “Not irritate 4kids, but have them make progress on the decision for broadcasts from September in the U.S. and Europe by the middle of August so there is no disturbance to sales of cards, as well as make the release of the movie possible”.
Our company is currently in the process of establishing a new company in the U.S. to independently and directly conduct operations once the decision is not made and the movie cannot be completed (including termination of the contract due to breach of contract).
Mr. Hosaka also stated that he was “in the middle of taking concrete action” on the transfer. He stated that the information must “remain strictly confidential” and should not be shared with any other party, including Shueisha, or even other divisions within ADK. (Ex. T-422; Ex. T-422A).14
*62835. Also in evidence is a slide deck, dated August 25, 2010, titled “Current Status of 4kids and Countermeasures Hereafter.” The document, written in English, was created by ADK’s Global Licensing Department. One slide asks whether it is “possible to resume daily work without 4Kids,” noting that ADK would “be able to receive the Konami allocation,” referring to the 5% fee on Yu-Gi-Oh! trading cards and video games that Konami pays to 4Kids. (Ex. T-60; Newborn Decl. ¶ 183).
V. The Final Audit Findings
36. Mr. Elliott’s final audit report contained nine audit findings (collectively, the “Findings”), which he summarized as follows:
Finding 1 $1,967,000.00 Unreported Funimation Home Video Revenue
Finding 2 91,666.50 Unreported Majesco Home Video Revenue
Finding 3 2,265,767.16 Unsubstantiated International Withholding Taxes
Finding 4 26,894.27 Unreported Post June 2008 Home Video Revenue
Finding 5 105,111.20 Unauthorized Audit Fee Deduction
Finding 6 67,328.45 Unauthorized E & O Insurance Cost
Finding 7 4,270.58 Unauthorized Bank Charges
Finding 8 43,554.59 Other Unauthorized Deductions
Finding 9 247,771.88 $4,819,354.63 Other Recovery — Material and Courier Cost Total
(Ex. T-14 at 3; Elliott Decl. ¶ 16). Each of these Findings, and the record evidence pertinent to each, are discussed below.
A. Finding No. 1: Funimation Service Fees
37. In his first Finding, Mr. Elliott suggested that 4Kids had improperly withheld $1,967,000, representing Licensor’s share of service fees paid to 4Kids by its home video distributor, Funimation Productions, Ltd. (“Funimation”). Mr. Elliott suggested that these fees should have been included as part of “Gross Income” and split 50-50 between 4Kids and Licensor. (Ex. T-14 at 3-4; Elliott Decl. ¶¶ 17-23). Mr. Elliott’s calculation of $1,967,000 derived from the $3,934,000 in service fees received by 4Kids from Funimation, of which $1,967,000 was half. (Elliott Decl. ¶ 23).
1. 4Kids’ Decision to Start 4Kids Home Video
38. As stated above, under the Short Form Agreement signed in 2001, 4Kids was given the right to “exploit or license ... all forms of home video rights” in the Yu-Gi-Oh! series. (Ex. T-l ¶ 10). In early 2002, 4Kids began to discuss internally how it would use the home video rights to the Yu-Gi-Oh! television series to augment its other marketing initiatives. (Newborn Decl. ¶ 26).
39.At the time, the U.S. home video business was changing rapidly. The larger home video labels had begun focusing on releasing home videos of theatrical motion pictures rather than television series, which could be more easily taped off the air by means of more user-friendly VCRs and DVD players then hitting the market. 4Kids wanted to control the marketing and sale of Yu-Gi-Oh! home videos, the number of releases, the pricing of such releases, the advertising and marketing of such releases. (Newborn Decl. ¶ 37; Nowicki Decl. ¶ 14). For these reasons, 4Kids decided to exploit the Yu-Gi-Oh! home video *629rights itself in the United States. (Newborn Decl. ¶¶ 26, 28, and 29).
2. The Negotiation of the Home Video Rights in the 2001 Agreement
40. The Short Form Agreement, which was in force at the time, provided that “4Kids shall pay Licensor 50% of the Net Series Income from the exploitation of the ... Home Video Rights[.]” (Ex. T-l ¶ 12). The “Net Series Income” was defined in relevant part as the “Gross Receipts from the license of the Broadcast Rights, Home Video Rights, and Manufacturing Rights to the Series[.]” (Id.) The Short Form Agreement did not explicitly provide any formula for compensating Li-censor in the event that 4Kids exploited the home video rights itself, as opposed to licensing them to a third party. (Id., Newborn Decl. ¶ 42).
41. In a series of meetings that took place on June 10, 2002 in New York, Mr. Shinoda of ADK and Mr. Kawasaki of TV Tokyo met with representatives of 4Kids to discuss the long-form 2001 Agreement that would ultimately replace the Short Form Agreement. (Newborn Decl. ¶¶ 43-44). During one meeting, Mr. Kahn told Mr. Shinoda that 4Kids would be releasing the Yu-Gi-Oh! home videos itself for the reasons set forth above. (9/1/2011 Tr. 33:23-34:7 (Shinoda); Newborn Decl. ¶ 43; 8/8/11 Dep. Tr. 62:23-63:24 (Kahn)). During another meeting, Mr. Newborn, along with other 4Kids employees, discussed with Mr. Shinoda and Mr. Kawasaki the compensation that would be paid to Li-censor if 4Kids exploited the home video rights itself through its new home video subsidiary. (Newborn Decl. ¶ 44).
42. During one of the meetings in June 2002, Mr. Shinoda and Mr. Kawasaki advised Mr. Newborn that they wanted to make certain that the royalty paid by 4Kids Home Video on Yu-Gi-Oh! home video sales in the United States was the market-rate royalty. (Newborn Decl. ¶ 45). Mr. Newborn suggested that a royalty of 20% of the wholesale price would be a market-rate royalty, and that by splitting the royalty between 4Kids and Licensor would put Licensor in the same position whether 4Kids exercised the home video rights itself or whether it licensed those rights to a third party. (Newborn Decl. ¶ 45; 8/8/11 Dep. Tr. 64:23-65:14 (Kahn)).15 At trial, Mr. Shinoda testified that 20% was an appropriate royalty rate for a home video license in the 2002 time period. (8/30/2011 Tr. 126:2-7 (Shinoda)). Mr. Shinoda also testified that, at that time, 4Kids proposed that it would pay Plaintiffs 20% of the wholesale price as a royalty if 4Kids was going to serve as a licensee. (9/1/11 Tr. 35:22-36:8 (Shinoda)).
43. That week, Mr. Newborn drafted a new provision, Paragraph l(b)(iii), reflecting the discussions held on June 10, 2002 with respect to the home video royalty. (Newborn Decl. ¶ 47). Later that year, on three separate occasions — June 19, July 17, and December 9 — Mr. Newborn emailed redlined versions of the draft 2001 Agreement to representatives of ADK, each time showing the addition of Paragraph l(b)(iii) in bold and underlined type. (Newborn Decl. ¶¶ 48-50; Ex. T-4; Ex. T-5; Ex. T-50). Licensor never provided 4Kids with any comments on the substance of Paragraph l(b)(iii). (Newborn Decl. ¶ 50).
44. In June 2003, the parties signed the 2001 Agreement, which contained the new provision:
*630If 4Kids exercises the Home Video Rights to the Episodes and any Additional Episodes itself, 4Kids shall pay Licensor a royalty of twenty percent (20%) of the wholesale selling price charged for the Home Video Devices. Such royalty payment shall be part of Gross Income and shall be divided among the parties as provided below in Paragraph 4.
(Ex. T-6 ¶ l(b)(iii); Newborn Decl. ¶ 51, Kawasaki Decl. ¶ 24, Shinoda Decl. ¶ 13). By the time the parties signed the 2001 Agreement, 4Kids Home Video had already released eight Yu-Gi-Oh! home video volumes in the U.S., each with the 4Kids Home Video logo featured prominently on the front and back cover and on the spine of the release. (Newborn Decl. ¶ 51).
3. The Parties’ Understanding of Paragraph 1(b) of the 2001 Agreement
45.Mr. Newborn, the drafter of the 2001 Agreement and of Paragraph l(b)(iii) in particular, testified that he understood the provision to mean that the royalty specified therein — 20% of the wholesale price of the home videos — would be the only income from the home videos that would be included in Gross Income. (Newborn Decl. ¶¶ 77-79).
46. Mr. Shinoda provided inconsistent explanations for his interpretation of Paragraph 1(b) of the 2001 Agreement. In Mr. Shinoda’s Declaration, he testified that: “It was my understanding that, if 4Kids licensed the Home Video Rights itself, it would be permitted to keep any profit that it was able to make after paying the YGO Consortium the appropriate percentage of the wholesale selling price of the home videos.” (Shinoda Decl. ¶ 15). When examined at trial, Mr. Shinoda testified that “[his] understanding ... was that the entire income was going to be split fifty/fifty,” and that he understood that the 20% royalty paid into Gross Income was only a minimum guarantee. At his deposition, Mr. Shinoda had testified that, with respect to the 80% of the wholesale selling price not paid as a royalty, his understanding was that Licensor would be entitled to half of any “profit that remains after subtracting, for example, manufacturing costs.” (8/30/2011 Tr. 133:7-16, 134:4-13, 137:23-138:3 (Shinoda); 9/1/2011 Tr. 34:8-36:8, 93:23-94:15 (Shinoda)).16
4. The 4Kids — Funimation Agreements
a) The Funimation Distribution Agreement
47. Between February and May of 2002, 4Kids negotiated arrangements with Funimation with respect to the production, manufacture, distribution, and sale of home videos for Yu-Gi-Oh! and for three *631other properties represented by 4Kids: Cabbage Patch Kids, Cubix, and Tama and Friends. (Newborn Decl. IT 30). These negotiations culminated in May 2002 with the signing of two agreements between 4Kids and Funimation (Newborn Decl. 1131).
48. First, 4Kids and Funimation entered into a distribution agreement (the “Funimation Distribution Agreement”) pursuant to which Funimation would duplicate and distribute the home videos for Yu-Gi-Oh! and three other properties represented by 4Kids. (Ex. T-35). Funimation also handled the billing and collecting of the home video revenue from sub-distributors, wholesalers, jobbers, and retailers because Funimation had direct relationships with many of these companies in the home video supply chain. (Newborn Decl. ¶ 33; 9/12/2011 Tr. 73:18-24, 79:24-80:21 (Newborn)). 4Kids announced that Funimation would be its “distributor” in a press release dated May 13, 2002, and in its quarterly SEC statements beginning in the second quarter of 2002. (Newborn Decl. ¶ 72, 57; T-2).
49. The Funimation Distribution Agreement provided for a 20% royalty on the wholesale selling price to be paid to 4Kids. (Ex. T-35 ¶ 3(b)). Between 2002 and 2008, Funimation remitted a total of $4,863,576.21 in royalties to 4Kids on Yu-Gi-Oh! home videos. There is no dispute that 4Kids split these royalties 50-50 with Licensor as provided for under the 2001 Agreement. (Newborn Decl. ¶ 34; Ex. T-6 ¶ l(b)(iii), Sugimoto Decl. ¶ 20; Elliott Decl. ¶ 17).
50. Licensors contend that the distribution agreement with Funimation effectively licensed to Funimation the home video rights to Yu-Gi-Oh!. However, in the home video business, it is common for home video companies to use outside vendors to physically manufacture and distribute the VHS tapes and DVDs. (Newborn Decl. ¶ 32; Ex. T-479). Similarly, licensees in general (including many other Yu-Gi-Oh! licensees) sometimes use third parties to handle the physical manufacture and distribution of licensed products. (Newborn Decl. ¶ 33). Mr. Shinoda testified that, in his view, in order to be the licensee, 4Kids does not necessarily need to own its own factory and physically reproduce the DVDs. (8/30/2011 Tr. 141:21-142:1 (Shinoda)).
51. The evidence shows that, while Fu-nimation was responsible for the physical manufacture and distribution of Yu-Gi-Oh! home videos, 4Kids retained control over issues normally controlled by a party exercising licensed rights. For example, 4Kids controlled what episodes to release on home video; what the final mastered versions of the episodes looked like; the number of episodes to release on each video; the timing of the home video releases; what materials the home videos contained in addition to the episodes themselves; and the appearance of the home videos’ packaging, consumer advertising, and marketing materials. (Newborn Decl. ¶ 37; Nowicki Decl. ¶ 14; 9/12/2011 Tr. 174:23-175:20 (Newborn)).
52. By contrast, when 4Kids licensed the home video rights to third parties in territories outside of the United States, it retained little control over the exercise of those rights. Mr. Newborn testified that the contracts generally required that the licensee put out one video every six months and that all packaging would be approved by 4Kids, but that otherwise 4Kids had “very little control” over foreign home video licensees. (9/12/2011 Tr. 174:6-20 (Newborn)).
53. Mr. Shinoda also testified that, in his view, in order to be the licensee, 4Kids should have been the entity which bore the inventory risk. (8/30/2011 Tr. 140:7-143:4 *632(Shinoda)). But as between Konami, the worldwide licensee for Yu-Gi-Oh! trading cards, and its former distributor Upper Deck, Mr. Shinoda did not know which party held the inventory risk for unsold Yu-Gi-Oh! trading cards. In response to questioning from the Court, Mr. Shinoda testified that, as between a licensee and its distributor, it is not Licensor’s concern as to how the inventory risk is allocated, because royalties are paid when the products were initially shipped. (8/30/2011 Tr. 144:12-149:6 (Shinoda)) (“[The] royalty is applied to the amount shipped.... After that, whether that product will be sold to the distributor and how much will be sold, that is beyond our concern.”); see also 8/31/2011 Tr. 28:10-29:2 (Shinoda) (“What happens to the handling of inventory after the royalty has been paid, we’re not involved in that.”).17
b) The Funimation Services Agreement
54.In addition to the Distribution Agreement with Funimation, 4Kids and Funimation entered into a services agreement (the “Funimation Services Agreement”), under which 4Kids Home Video would provide various production, advertising, and promotion services with respect to the home videos for the four properties, apart from and in addition to 4Kids’ obligations under the Funimation Distribution Agreement. (Ex. T-36; Newborn Decl. ¶ 31; 9/12/2011 Tr. 181:10-182:24 (Newborn)). Specifically, the Funimation Services Agreement provided that, in exchange for certain service fees, 4Kids would provide various services related to the production, marketing, packaging, and advertisement of the home videos. (Ex. T-36). For example, the Funimation Services Agreement required 4Kids to:
• “create advertising, marketing and promotional materials”
• “design the packaging”
• “design the point of sale materials”
• “create, prepare and place consumer advertising”
• “produce ... advertising teasers”
• “produce supplemental content” (¿e., DVD “extras”) and
• “deliver [the] DVD content as a DLT Master.”
(Ex. T-36 ¶¶ 3-4).
55. Pursuant to the Funimation Services Agreement, 4Kids Home Video (a) “authored” the VHS and DVD versions of the Yu-Gi-Oh! episodes; (b) delivered duplication-ready DVD content to Funimation; (c) produced DVD extras (additional scenes, Yu-Gi-Oh! trading card tips, Yu-Gi-Oh! music videos and other materials included in DVD versions of the Yu-Gi-Oh! home videos); (d) produced advertising and “teasers” to be viewed prior to the start of the Yu-Gi-Oh! episodes featuring Yu-Gi-Oh! merchandise, trading cards and other previously released Yu-Gi-Oh! home videos available for sale at retail; (e) designed the packaging and point of purchase materials; (f) met numerous times with retailers and wholesalers of Yu-Gi-Oh! home videos; and (g) organized various retail promotions to support sales of Yu-Gi-Oh! home videos and related merchandise. (Newborn Decl. ¶ 35; Nowicki Dec. ¶ 18).
56. In exchange for these services, Fu-nimation paid 4Kids a per-unit fee accord*633ing to a schedule, based in part on the average monthly unit selling price of the home videos. (Ex. T-36 ¶¶ 1(a), 8(b)). The Funimation Services Agreement was amended in 2003 to provide for an additional supplemental service fee to be “paid in consideration of the additional marketing services performed and to be performed by 4Kids,” ranging from 1% to 4% of the net receipts on the Yu-Gi-Oh! home videos. (Ex. T-538 ¶ 8(d)). Between 2001 and 2009, Funimation paid a total of $3,934,458.26 in service fees to 4Kids. Mr. Elliott calculated that these fees were represented approximately 18% of the wholesale selling price of the home videos. (Ex. T-14 at 3-4; Ex. T-99; Elliott Deck ¶ 23).
57. Of the $3,934,458.26 in service fees paid by Funimation to 4Kids, $1,757,017.11 were paid in 2002 and 2003, and $951,597.42 in 2004. Thus, approximately $2,153,516.04 (of which Licensor claims to be owed $1,076,758.02) in service fees (the 2002 and 2003 totals plus five-twelfths of the 2004 total) were paid prior to June 1, 2004. (Ex. T-99).
58. Mr. Shinoda and Mr. Hosaka testified that, in their view, 4Kids was obligated under the License Agreements to provide services similar to those 4Kids agreed to provide in the Funimation Services Agreement. For example, they testified that, under Paragraph 1(e) of the License Agreements, 4Kids was granted marketing rights in the Yu-Gi-Oh! brand, which they compared to the advertising in the Funi-mation agreements. They also compared 4Kids’ obligation to develop a “style guide” to its duties under the Funimation Services Agreement to develop packaging for home videos. (Shinoda Deck ¶ 29; Hosaka Deck ¶ 28; Ex. T-6 ¶¶ 1(e), 7(d); Ex. T-ll ¶¶ 1(e), 7(d)).
59.On cross-examination, however, Mr. Shinoda admitted that developing a general “style guide” and developing packaging for specific home videos were different. (8/30/2011 Tr. 161:1-162:24 (Shinoda)). Neither Mr. Shinoda nor Mr. Hosaka18 were unable to point to any provision of the License Agreements which required 4Kids, if it were simply licensing the home video rights to a third party, to (1) design DVD packaging; (2) design point-of-sale materials; (3) create, prepare and place consumer advertising; (4) produce advertising teasers; (5) produce DVD “extras”; or (6) deliver DLT Masters. Nor could they identify any foreign home video licensee for which 4Kids provided those services. (8/30/2011 Tr. 157:25-160:2, 171:19-173:21, 177:18-179:25 (Shinoda); 8/31/2011 Tr. 12:12-13:9 (Shi-noda); 9/6/2011 Tr. 19:10-20:25 (Hosaka)). Although on re-direct Mr. Shinoda identified provisions of the License Agreements that relate to advertising, those provisions relate to 4Kids’ “right” to advertise, not its obligation to advertise — much less an obligation to advertise home videos on behalf of a home video licensee. (9/1/2011 *634Tr. 36:18-37:13 (Shinoda); Ex. T-ll ¶¶ l(a)(ii), 1(e)).
60. The parties introduced samples of license agreements between 4Kids and its foreign Yu-Gi-Oh! home video licensees. These agreements do not require 4Kids to provide the same services as it is required to provide under the Funimation Services Agreement. (Ex. T-136, Ex. T-137, Ex. T-138). This is confirmed by the testimony of Mr. Newborn and Ms. Nowicki, each of whom testified that 4Kids does not provide these services to its foreign home video licensees. (9/12/2011 Tr. 63:7-65:3 (Newborn); 9/15/2011 Tr. 112:2-115:5 (Nowicki)).
61. One of ADK’s experts, Robert Freedman, has written in a treatise relating to home video agreements in which he explains that, “unlike video cassettes, DVDs are often released with additional material,” such as “background material, biographies or interviews of some of the participants, some making of footage or other related material; all of which can be accessed by the view at the viewer’s discretion” — ie., what the parties have referred to as DVD “extras” or “supplemental DVD content.” Mr. Freedman further explains that the producer of a DVD “may negotiate to be engaged for a fee to create these ancillary materials” and that “[t]he distributor will likely will be willing to engage with the producer to perform these services if the parties can agree upon appropriate compensation.” Mr. Freedman testified that the distributor would engage the producer to create the ancillary materials because “the producer is the party that will have the greatest knowledge with respect to the content of the material.” (Ex. T-241; 9/9/2011 Tr. 167:10-170:1 (Freedman)).
e) Execution of the Funimation Agreements
62. Although the Funimation Distribution Agreement and the Funimation Services Agreement were both signed in early May 2002, they were dated as of March 1, 2002. (Ex. T-35; Ex. T-36; Newborn Deck ¶ 31). Mr. Newborn, the drafter of the Funimation agreements, testified that the reason he created two separate agreements was, in essence, to finish the Distribution Agreement (as to which there were few business issues to resolve) and to then focus on the Funimation Services Agreement while the parties were continuing to negotiate its basic business terms. Mr. Newborn testified that he was able to use an existing home video licensing agreement as a template for the Distribution Agreement, which was drafted while the businesspeople were still negotiating the details of what would become the Funimation Services Agreement, and that it was easiest to create two separate agreements rather than attempt to merge all issues in one agreement. (9/12/2011 Tr. 185:12-186:19 (Newborn)). Mr. Newborn’s explanation was credible, and there was no evidence to support Plaintiffs’ theory that the use of two separate agreements was to facilitate the inclusion of what they call the “Secrecy Clause” in the Funimation Services Agreement. See p. 147, infra.
63. Mr. Kahn, the former Chief Executive Officer of 4Kids, testified that he understood that the 20% royalty paid by Funimation on the wholesale price of the videos was for the content of the episodes, while the monies paid under the Funimation Services Agreement were for the additional services performed by 4Kids, such as advertising and promotion, that 4Kids would not provide had it licensed the home video rights to a third party. (8/8/11 Dep. Tr. 130:22-131:20, 132:20-136:19 (Kahn)).
64. The Funimation Services Agreement contains a confidentiality provision which provides, in part:
*635Each party agrees to keep the terms and conditions of this Agreement strictly confidential and shall not disclose the terms and conditions of this Agreement to any third party. Notwithstanding the foregoing, each party may disclose the terms and conditions of this Agreement or portions thereof to such persons within such party’s company on a strict “need to know basis,” and to such party’s attorneys, accountants and professional advisors who need to know such information it being understood that (i) each such person shall be informed by the disclosing party of the confidential nature of the terms and conditions of this Agreement and shall be directed by the disclosing party to treat the terms and conditions this Agreement confidentially and not to use it other than for the purposes described above ...
(Ex. T-36, ¶ 13(b)). The Distribution Agreement does not contain a confidentiality provision. (Newborn Deck ¶ 75; 9/12/11 Tr. 86:1-3; T-35 (Newborn)).
65. The confidentiality provision contained in the Funimation Services Agreement was first used by 4Kids in a January 2002 contract with Fox Broadcasting Corporation, and has since been used in an October 2008 contract with The CW Network. (Newborn Dec. ¶¶ 70-71; Ex. T-341). Mr. Newborn testified that he added the “strict ‘need to know basis’ ” language to the confidentiality provision that he inserted into the Funimation Services Agreement. (9/12/11 Tr. 82:16-24 (Newborn)).
66. The confidentiality provision allowed 4Kids to make legally-required public disclosures. (Ex. T-36 ¶ 13(b); Newborn Deel. ¶ 69). Because 4Kids’ entry into the home video market was a material business development, 4Kids disclosed the creation of 4Kids Home Video in a press release dated May 13, 2002 — less than two weeks after signing the Funimation agreements. (Newborn Deck ¶ 72). The press release also announced that Funimation would serve as 4Kids’ home video distributor. {Id.; Ex. T-2). Mr. Sugimoto testified that he was aware of 4Kids’ May 2002 press release and was aware that Funimation was acting as 4Kids Home Video’s distributor. (Sugimoto Deck ¶20). Mr. Newborn testified that the primary aim of the confidentiality provision was to prevent disclosure of the Services Agreement before the press release on May 13, 2002. (9/12/11 Tr. 84:6-13) (Newborn).
67. The Services Agreement also included a merger clause. (T-36 at ¶ 14; 9/12/11 Tr. 88:3-15 (Newborn)). That provision provides:
Entire Understanding and Modification. This Agreement and the Distribution Agreement contain the entire understanding and agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior oral and written understandings and agreements relating thereto. This Agreement may not be modified discharged or terminated orally.
(T-36, ¶ 14). The Distribution Agreement has no merger clause. (Ex. T-35). The Services Agreement refers to the Distribution Agreement in several places. (Ex. T-36 at ¶4(0), 5(a)(v), 9(c), 12(c), 12(d), 12(e) and 14). By contrast, the Distribution Agreement never mentions the Services Agreement. (See Ex. T-35).
d) Disclosure of the Funimation Services Agreement and Fees
68. Beginning in the second quarter of 2002, 4Kids disclosed in its quarterly and annual reports to the SEC (10-Qs and 10-Ks) both its distributor relationship with Funimation and the service fees payable to 4Kids. (Newborn Deck ¶ 57; Ex. T-243; Ex. T-244; Ex. T-245). For example, *6364Kids’ Form 10-Q for the second quarter of 2002 stated that 4Kids Home Video “has entered into an agreement with its home video distributor Funimation pursuant to which [4Kids Home Video] is providing ongoing advertising, marketing and promotional services with respect to home video titles of Company represented properties distributed by Funimation. Funi-mation has paid the Company an advance against [4Kids Home Video’s] share of the distribution proceeds to be realized by [4Kids Home Video] from such titles.” (Ex. T-243). And in the 10-Q disclosure for the third quarter of 2003 noted that “4Kids Home Video entered into an agreement with an unaffiliated third party home video distributor (the Video Distributor’), pursuant to which 4Kids Home Video provides ongoing advertising, marketing and promotional services with respect to certain home video titles that are owned or controlled by the Company and which are distributed by the Video Distributor.” (Ex. T-245).
69. Ms. Jacqueline Kozmata of 4Kids, who was responsible for assembling the participation statements, testified that because these fees were not split with ADK, it was not 4Kids’ usual practice to include the service fees in the participation statements. (Kozmata Deck ¶ 9).
70. However, on at least three occasions, the Funimation service fees were disclosed on quarterly participation statements sent to ADK by 4Kids. (8/29/2011 Tr. 170:17-172:6 (Elliott); Ex. T-78; Ex. T-79; Ex. T-80; see also Ex. T-98; Elliott Decl. ¶ 19). As Mr. Elliott testified, anyone reviewing those statements would be able to see that Funimation was paying service fees to 4Kids, and that Licensor was not receiving a share of those fees. (8/29/2011 Tr. 168:7-172:6 (Elliott); 8/30/2011 Tr. 64:6-65:2 (Elliott); see Ex. T-78 at ACE11848; Ex. T-79 at ACE 12199-200).
71. Mr. Shinoda testified that, from 2002 until 2006 or 2007, the person at ADK responsible for reviewing the participation statements was Noriko Kubota. (8/31/2011 Tr. 36:17-20 (Shinoda); see also 9/6/2011 Tr. 28:2-12 (Hosaka)). Mr. Sugi-moto described Ms. Kubota as being “in charge of Yu-Gi-Oh!” during this time period. (9/8/2011 Tr. 24:10-17, 28:10-23 (Sugimoto)). Ms. Kubota testified that she would “quickly” review “simple areas” [sic] of the quarterly participation statements to check “whether the money and the amount deposited matched and whether the timelines were accurate,” and whether there were “new licensees or new television stations added.” She did not know whether anyone else at ADK had the responsibility for undertaking a more fulsome review of the statements. (8/22/11 Dep. Tr. 45:9-48:20 (Kubota)).
72. Mr. Elliott testified that he learned of the service fees through examining some of 4Kids’ quarterly participation statements. (8/29/2011 Tr. 167:8-168:2 (Elliott); Ex. T-98).
73. Before the Audit, Licensor did not know that 4Kids and Funimation had signed any agreements related to the Yu-Gi-Oh! property other than the Funimation Distribution Agreement, and 4Kids’ executives did not mention it. (Sugimoto Deck ¶¶ 15, 18; Shinoda Deck ¶ 38; Kawasaki Deck ¶ 42, 37; Hosaka Deck ¶ 40).
74. Licensor’s executives testified that they first learned of the Funimation Services Agreement in 2010 as a result of Mr. Elliott’s audit. (Hosaka Deck ¶¶ 18-19, 21). On June 8, 2010, Mr. Newborn delivered a copy of the Funimation agreements to Mr. Shinoda, Mr. Hosaka, and Mr. Kawasaki, who were in Las Vegas for a trade show. (8/31/2011 Tr. 32:20-22 (Shinoda); Hosaka Deck ¶ 43).
*63775. 4Kids’ witnesses testified during trial that they did not discuss the Funimation Services Agreement, or the income stream flowing from that agreement, with anyone at the Consortium. (9/12/11 Tr. 183:11-185:11 (Newborn); 9/15/11 Tr. 42:10-17 (Nowicki); 9/19/11 Tr. 29:2-21 (Nowicki); 8/8/11 Dep. Tr. 61:17-62:22, 159:25-160:12 (Kahn)).
76. Mr. Newborn testified that the existence of the Funimation Services Agreement was not previously disclosed to Li-censor because it was not something that a licensee would typically be required to disclose. Mr. Newborn and Mr. Kahn both explained that a licensee is required to report its sales and pay its royalty, but not to disclose the details of its relationship with its distributor, nor reveal its profit margins. Thus, Mr. Kahn testified:
[I]t’s not the Consortium’s business how any licensee distributes or sells. The only thing the Consortium should be aware of is that the royalty that is being collected is valid and is based on the sales by that licensee.
No licensee would tell you what their margins are, would tell you how they sell it. They would — that’s all stul that they keep inside their own particular bailiwick, and that the only thing that the licensor is responsible for is to make sure that they get an accurate accounting of the royalty based on the wholesale sales of those — of those rights — of those particular videos.
(9/12/2011 Tr. 183:11-185:11 (Newborn); 8/8/11 Dep. Tr. 88:4-89:14 (Kahn)).
77. Consistent with 4Kids’ explanation of why it did not share with Plaintiffs the details of its relationship with Funimation, Mr. Shinoda testified that ADK was not aware of the details of its licensee Kona-mi’s relationship with its former distributor Upper Deck. For example, Mr. Shino-da did not know whether or not Upper Deck manufactured or printed trading cards on behalf of Konami. Nor did Mr. Shinoda know who, as between Konami and Upper Deck, had the inventory risk for the trading cards. (8/30/2011 Tr. 143:8-10, 143:18-22, 144:12-149:6 (Shino-da); 8/31/2011 Tr. 26:1-6 (Shinoda)).
78. There is no evidence of any representation by 4Kids to Licensor that 4Kids’ only revenue from the Yu-Gi-Oh! home videos came from 4Kids’ share of the 20% royalty on the wholesale selling price. Mr. Hosaka could not recall ever having received such a representation from anyone at 4Kids. (9/6/2011 Tr. 17:7-14 (Hosaka)).
5. 4Kids’ Home Video Subsidiary
79. In 2002, 4Kids created a wholly-owned subsidiary, 4Kids Entertainment Home Video, Inc. (“4Kids Home Video”), to conduct its home video operations. (Newborn Decl. ¶ 29; 9/12/2011 Tr. 171:21-172:9 (Newborn)).19 According to Bruce Foster, 4Kids’ Chief Financial Officer, 4Kids Home Video had between seven and nine full-time employees during its peak years of operation. In addition, a number of 4Kids employees devoted portions of their time to work on 4Kids Home Video projects, including employees from 4Kids’ graphic design, editing, and art departments. (Foster Decl. ¶ 6; 9/21/2011 Tr. 74:13-25 (Foster)).
80. Mr. Foster compiled a summary of 4Kids Home Video expenses extracted from 4Kids’ trial balance, which is created by 4Kids in the ordinary course of business and has been audited. This expense summary shows that between 2001 and *6382009, 4Kids Home Video incurred approximately $6.9 million in expenses related to, inter alia, cost of sales, personnel, office expenses, professional fees, and selling and production costs. (Ex. T-242; Foster Decl. ¶¶ 7-9; 9/21/2011 Tr. 67:5-71:15 (Foster)).
81. Approximately half of the VHS and DVD titles released by 4Kids between 2002 and 2008 related to the Yu-Gi-Oh! property. (Ex. T-473; 9/20/2011 Tr. 98:16-99:16 (Foster); 9/21/2011 Tr. 73:12-74:6 (Foster)). Thus, a reasonable approximation of the total 4Kids Home Video’s costs associated with Yu-Gi-Oh! home videos is half of the division’s approximately $6.9 million in total expenses, or roughly $3.45 million. (Foster Decl. ¶ 9; Ex. T-242).
6. The Revision of Paragraph l(b)(iii) in the 2008 Agreement
82. During the negotiations leading to the amendment and restatement of the 2001 Agreement, Licensor requested that Paragraph l(b)(iii) (which governs when 4Kids is exercising home video rights itself) be revised to provide that Licensor shall receive the entire royalty paid on Yu-Gi-Oh! home video releases made by 4Kids Home Video. (Ex. T-34). As a result of this change, the royalty paid on Yu-Gi-Oh! home video releases made by 4Kids Home Video was no longer made part of Gross Income in the 2008 Agreement and would not be split between 4Kids and the YGO Consortium. (Hosaka Decl. ¶ 24; Ex. T-11 ¶ l(b)(iii)).
83. The 2008 Agreement was signed by the parties in mid-October 2008. Paragraph l(b)(iii) was revised as requested by Licensor to read as follows:
If 4Kids exercises the Home Video Rights to the Episodes and any Additional Episodes itself, 4Kids shall pay Licensor a royalty to be negotiated in good faith of between 15% and 20% of the wholesale selling price, net of returns, for such Home Video Devices.20 Such royalty payment shall not be part of Gross Income and shall not be divided among the parties as provided below in Paragraph 4 but rather shall be paid exclusively to Licensor.
(Ex. T-ll).
84. Mr. Sugimoto testified that 4Kids had always maintained that it was exercising the home video rights itself, and that it was never ADK’s belief that 4Eids had agreed to make no money off of the home videos as a result of this amendment. (9/8/2011 Tr. 38:1-39:5 (Sugimoto); Sugi-moto Decl. ¶ 20; Ex. T-8). 4Kids had been reporting and paying Licensor as if it were exercising the Home Video Rights itself, instead of under the payment structure required if 4Kids had licensed those rights to a third party. (Sugimoto Decl. ¶ 21).
B. Finding No. 2: Majesco Service Fees
85. In his second Finding, Mr. Elliott suggested that 4Kids had improperly withheld $91,666.50, representing Licensor’s 50% share of the $183,333.00 in fees paid to 4Kids by Majesco Sales Inc. (“Majes-co”). (Ex. T-14 at 4-5; Elliott Decl. ¶¶ 27-29). Mr. Elliott determined that 4Kids had not included these service fees in its calculation of the Consortium’s share of Gross Income and that it had omitted any reference to such fees in its participation statements. (Elliott Decl. ¶ 28).
*63986. The Majesco service fees, like the Funimation service fees that are the subject of Finding 1, relate to Yu-Gi-Oh! home videos. In 2004, 4Kids Home Video entered into an agreement with Majesco (the “Majesco Services Agreement”) for distribution of Yu-Gi-Oh! television episodes stored on cartridges compatible with Nintendo’s popular handheld videogame system, the Game Boy Advance (“GBA”). (Ex. T-39).
1. Background of the 4Kids— Majesco Relationship
87. Between 2002 and 2004, 4Kids developed and applied for patents on a video compression technology enabling television episodes to be condensed, digitized, and programmed onto cartridges compatible with GBA. (Newborn Decl. ¶ 81). In order for cartridges containing television episodes compatible with GBA to be sold, Nintendo needed to approve the quality of the video and audio compression and the functionality of the menus transforming the buttons on the GBA handheld system into controls for playing television episodes on GBA (play, rewind, stop, fast-forward). (Id.). In addition, in order to sell GBA-compatible cartridges — whether for video-games or for television episodes — the cartridges needed to be ordered from and programmed by Nintendo. (Id.).
88. During 2003, 4Kids submitted to Nintendo for review and comment many versions of compressed video of Yu-Gi-Oh! episodes using the 4Kids-developed compression technology. (Newborn Decl. ¶ 82). Upon receiving comments from Nintendo, 4Kids performed additional editing of the compressed episode to improve scenes or individual animation frames that did not look crisp when viewed on GBA. (Id.).
89. During the same time period, Ma-jesco developed its own video compression technology and also submitted compressed television episodes to Nintendo for review and approval. (Newborn Deck ¶ 83). Since Majesco was principally a video game company producing video games for GBA, Majesco had a longstanding relationship with the Nintendo quality control department and was more experienced in coping with the demands of this Nintendo department. (Id.).
90. In early 2004, 4Kids and Majesco agreed to work together to release cartridges compatible with GBA containing television episodes of various series, including Yu-Gi-Oh!, with respect to which 4Kids had been granted home video rights. (Newborn Deck ¶ 84). 4Kids and Majesco agreed that the GBA cartridges of the 4Kids-produeed series would be compressed using the compression technology, which resulted in the best quality video of the specific television episode. (Id.).
91. On March 11, 2004, 4Kids issued a press release announcing that 4Kids had appointed Majesco as the distributor of GBA-compatible video cartridges of 4Kids-produced television episodes, including Yu-Gi-Oh! and that the 4Kids developed video compression technology that had been approved by Nintendo would be used in Game Boy Advance Videos. (Newborn Deck ¶ 85; Ex. T-483). The press release also stated that the GBA video cartridges of the 4Kids-produced episodes would be promoted on the 4Kids-controlled four-hour Saturday morning block on the Fox Network and on 4Kids’ websites. (Newborn Deck ¶ 85; Ex. T-483).
2. The Majesco Services Agreement
92. On April 1, 2004, 4Kids entered into two agreements, a distribution agreement and a services agreement with Ma-jesco. (Ex. T-39). Under the Majesco Services Agreement, 4Kids was obligated to provide certain marketing services to Majesco, including: (i) up to four pro*640motions per year on “FoxBox” (a four-hour block of Saturday morning television programmed by 4Kids); (ii) up to four thirty-second commercials on “FoxBox”; (iii) banner ads on the “FoxBox” website and on the 4Kids website; and (iv) coordination of cross-promotional opportunities with other licensees of Yu-Gi-Oh! merchandising rights. (Ex. T-39 ¶ 3; Newborn Decl. ¶86). In addition, 4Kids developed the video compression for the Yu-Gi-Oh! episodes sold on GBA-compatible cartridges and provided technical assistance to Ma-jesco with regard to the user interface (converting the buttons on the GBA video game system into controls for a video player — play, rewind, fast-forward, pause). (Newborn Deck ¶ 86).
93. During the first two quarters of 2004, 4Kids worked extensively with Ma-jesco and Nintendo on the compression of the 4Kids’ produced television episodes, including the Yu-Gi-Oh! episodes. (Newborn Deck ¶ 87; Ex. T-485).
94. In March 2004, 4Kids received the approval of Shueisha — the publisher of the Yu-Gi-Oh! manga and a member of the Yu-Gi-Oh! Consortium — regarding the quality of the audio and video in the episodes compressed with 4Kids’ compression technology. (Newborn Deck ¶¶ 88-89).
95. During the next few months of 2004, 4Kids finalized the compression of the Yu-Gi-Oh! episodes that were ultimately released during the summer of 2004. (Newborn Deck ¶ 90). As required by the Majesco Services Agreement, 4Kids provided Majesco with television commercials and banner ads on 4Kids-controlled websites (which at the time were the sixth most popular kids websites in the United States), and offered GBA Videos as prizes for promotions and sweepstakes broadcast on the four-hour Saturday morning block on Fox programmed by 4Kids. (Id.). Ultimately, Game Boy Advance Video was not a successful business, due to the significant pricing disadvantage of Game Boy Advance Videos relative to DVDs. (Newborn Deck ¶ 92).
96. Pursuant to the Majesco Services Agreement, 4Kids was paid $183,333.00 in services fees by Majesco. (Ex. T-14 at 4).
97. The Majesco Services Agreement contains a confidentiality provision identical to the provision contained in the Funi-mation Services Agreement. (Id. at ¶ 10(a)). The distribution agreement executed with Majesco does not contain a similar provision. (Ex. T-246).
C. Finding No. 3: International Withholding Taxes
98. In his third Finding, Mr. Elliott suggested that 4Kids had failed to provide appropriate documentation of foreign (ie., non-U.S.) withholding taxes. As described in detail below, according to Mr. Elliott, foreign withholding tax certificates were “unsubstantiated”21 if (1) 4Kids did not possess the certificate or (2) if the certificate did not reference Licensor or the Yu-Gi-Oh! property. Whether or not ADK or TV Tokyo did or could use these certificates to claim foreign withholding tax credits was irrelevant to his Finding.
1. Withholding Taxes Generally
99. As a general matter, royalty income earned in one country on behalf of a licensor in another country may be subject to a withholding tax, the amount of which will vary depending on the internal regulations of the taxing jurisdiction and on taxing treaties. (Foster Deck ¶ 10; Kasai Report at 4; Tokuhiro Report at 2). For example, if a French company pays a roy*641alty to a Japanese company, the French government can impose income taxes upon the Japanese company by requiring the French company to withhold a portion of the royalty and remit that portion to the French taxing authority. (Foster Decl. ¶ 10; Kasai Report at 4).
100. By law, the licensees and sub-agents are required to withhold and remit these taxes to their local tax authorities. (Elliott Decl. ¶ 30). Paragraph 4(c) of the License Agreements permits 4Kids to deduct such withholding taxes from Plaintiffs’ share of Gross Income. (Ex. T-6 and Ex.T-11 at ¶ 4(c)).
101. The percentage of withholding required varies by country. (Foster Decl. ¶ 10; Tokuhiro Report at 2). In some countries where there is a tax treaty in place between Japan and the particular foreign country, the percentage that must be withheld can be reduced if the foreign licensee documents with the local tax authority that the licensor is a resident of Japan. (Foster Decl. ¶ 10).22 With respect to 4Kids, these taxes ranged from 5% to 22.5% of gross royalties and licensing fees and represent amounts that 4Kids’ international licensees and subagents deducted from their quarterly royalty and licensing payments to 4Kids. (Elliott Decl. ¶ 30).
102. After the tax is paid, the local taxing authority will issue what is known as a “withholding tax certifícate.” (Foster Decl. ¶ 16). The length of time between the payment of the tax and the issuance of a certificate varies depending on the country and can range from six months to a year or two; accordingly, a corporate tax payer may not have the certificate in hand for that fiscal year when its tax return is due to be filed. (Foster Decl. ¶ 17; Koz-mata Decl. ¶ 13; 9/19/2011 Tr. 74:18-75:10 (Kozmata); 9/6/2011 Tr. 33:7-8, 33:18-34:12 (Hosaka)).
103. Licensees typically send withholding tax certificates either directly to the licensor or to its agent (in this case, to 4Kids in the United States or to 4Kids’ United Kingdom subsidiary for all territories outside of Japan and Asia). (Foster Decl. ¶ 18). 4Kids collects, files, and periodically transmits or distributes the certificates that it receives to its licensors. (Foster Decl. ¶ 18; Kozmata Decl. ¶ 17; 9/19/2011 Tr. 73:4-14, 77:10-22, 80:20-81:3, 105:6-22 (Kozmata); Ex. T-250).
2. Treatment of Withholding Taxes under the License Agreements
104. Pursuant to the License Agreements, 4Kids serves as Licensor’s agent with respect to certain licensing opportunities for the Yu-Gi-Oh! properties in countries outside of Japan and Asia. (Foster Decl. ¶ 12).23 The License Agreements provide that foreign withholding taxes paid by 4Kids’ subagents are to be deducted from Licensor’s share of royalties. (Ex. T-6 ¶¶ 4(c), (g); Ex. T-ll 1HI4(c), (g)). The License Agreements also provide that 4Kids shall provide, or cause its subagents to provide Licensor with “evidence” of taxes withheld, although the agreements do not specify the nature of such evidence:
4Kids shall provide Licensor or shall cause the applicable subagent or applica*642ble licensee to provide Licensor with evidence of payment of such withholding tax on behalf of Licensor so that Li-censor may claim an appropriate tax credit or tax deduction. 4Kids shall also assist Licensor in filing any and all forms with the taxation authorities of the various countries within the Territory24 so as to enable Licensor to claim any tax credits to which Licensor may be entitled.
(Ex. T-6 ¶ 4(g); Ex. T-ll ¶ 4(g)).
105. Mr. Newborn explained that in drafting Paragraph 4(g) of the License Agreements, he specifically chose to use a broad word — “evidence”—because he did not know what documentation was required under Japanese law to claim foreign withholding tax credits or what documentation was prepared and provided by numerous foreign countries in the 4Kids Territory. It was his assumption that Li-censor understood what documentation was necessary, and would inform 4Kids of the requirements accordingly. (9/12/2011 Tr. 103:8-24,104:16-105:2 (Newborn)).
106. 4Kids cannot compel a foreign subagent to bypass, reduce, or alter the payment of foreign withholding taxes, and 4Kids obtains no benefit from a foreign subagent’s withholding of such taxes. (Foster Decl. ¶ 11).
107. 4Kids receives the net proceeds (ie., gross royalties less withholding taxes paid to the local taxing authorities and other permitted deductions) from its Yu-Gi-Oh! subagents in foreign countries. (Foster Decl. ¶ 14). 4Kids then records the net receipts and reconciles them with the remittances provided by the sub-agent.25 (Id.). Next, the net receipts are compiled and provided in quarterly royalty reports provided to Licensor, also known as “participation statements.” (Id.). The participation statements provide detailed information regarding gross income, foreign withholding taxes, bank fees, and net cash receipts, all of which are organized by date, subagent, and country. (Id.). The remittance provided by the subagent is the basis for the information contained in participation statements provided to Licensor. (Id.).
108. It is in 4Kids’ interest to ensure that foreign subagents actually pay the foreign taxing authority and are not simply reducing the proceeds payable to 4Kids by the amount of the foreign withholding taxes due. (9/20/2011 Tr. 206:16-207:21 (Foster)).
109. There is no dispute that 4Kids advised Licensor on a quarterly basis of the amount of foreign withholding taxes deducted from Licensor’s share or royalties. The quarterly Yu-Gi-Oh! participation statements that 4Kids provided to *643Licensor listed all foreign withholding taxes paid by foreign subagents and withheld from the royalty payments to the Li-censor.26 (Foster Decl. ¶ 15; 8/31/2011 Tr. 35:18-21 (Shinoda); 8/22/11 Dep. Tr. at 48:5-20 (Kubota)).
110. Although Licensor has claimed that no foreign withholding tax certificates were provided by 4Kids to Licensor, there is little credible evidence to support this assertion. There is evidence that 4Kids did forward some tax certificates from foreign subagents to ADK. (Kozmata Decl. ¶ IT; Foster Decl. ¶ 19; 9/19/2011 Tr. 72:25-73:11, 103:8-11 (Kozmata); Ex. T-250). Mr. Hosaka testified that he personally undertook a search for such certificates after the initiation of the litigation, and looked in all of the “logical places” for the certificates — but on cross-examination he admitted that he searched for the certificates only in ADK’s tax returns and in 4Kids’ quarterly participation statements. (Hosaka Decl. ¶ 50; 9/6/2011 Tr. 38:6-12, 120:10-121:1 (Hosaka)). Although Mr. Hosaka testified in his re-direct examination that he also looked in the accounting department and in anything related to tax deductions to locate the certificates, he again admitted on re-cross examination that he looked only at the participation statements and in the tax returns for the certificates. (9/6/2011 Tr. 123:7-19, 130:15-23,131:7-132:3 (Hosaka)).
111. While Licensor has asserted that, “based on various agreements between the YGO Consortium,” ADK is the sole entity that is responsible for and entitled to claim foreign withholding tax credits, no such agreements codifying this allocation has been produced, used at trial, or introduced into evidence. (Kawasaki Decl. ¶ 48). Despite the assertions as to the allocation of tax credits and the existence of various agreements presented in his declaration, Mr. Kawasaki, the sole representative of TV Tokyo to appear in this adversary proceeding, testified that “it is a fact that tax credits have not been discussed in the Consortium.” (9/1/2011 Tr. 148:23-149:2 (Kawasaki)). Mr. Kawasaki also presented contradictory testimony as to his knowledge as to which entities within the Li-censor entity were entitled to claim the foreign withholding tax credits.27 Although Mr. Kawasaki testified at trial that, to his knowledge, ADK was the only entity entitled to claim foreign withholding tax credits, he was confronted by his contradictory deposition testimony where he stated that he did not know which of the *644Licensor entities were entitled to claim tax credits. (9/1/2011 Tr. 148:1-20 (Kawasaki)).
112. Mr. Tokuhiro, 4Kids’ tax expert, testified that, under Japanese law, the beneficiary of foreign source income is entitled to claim foreign withholding tax credits, but that based on his review of the License Agreements it did not appear to him that ADK was the only entity among the Licensors that was entitled to claim the foreign withholding tax credits related to the income generated pursuant to those agreements. (9/20/2011 Tr. 32:20-33:8 (Tokuhiro)).
113. Evidence was presented that some foreign licensees directly sent foreign withholding tax certificates to TV Tokyo. (Ex. T-28; Ex. T-28A; Kozmata Deck ¶ 15). For example, Exhibit T-28 is a collection of thirteen separate tax certificates issued in the name of TV Tokyo.28 Although six of the certificates bear an incorrect address for TV Tokyo, the remaining seven certificates bear TV Tokyo’s correct addresses in both New York and Japan. (9/1/2011 Tr. 149:7-11, 153:4-18 (Kawasaki); Ex. T-28; Ex. T-28A). Mr. Kawasaki admitted that he does not know whether TV Tokyo ever received these certificates, forwarded them to ADK, or ever contacted 4Kids to request that the names on the certificates be changed from TV Tokyo to ADK. (9/1/2011 Tr. 158:21-159:3 (Kawasaki)). Mr. Kawasaki testified that after his deposition, he checked whether TV Tokyo had received any foreign withholding tax certificates. (9/1/11 Tr. 189:12-193:7 (Kawasaki)). Based upon the information he received from TV Tokyo’s accounting department, Mr. Kawasaki concluded that no tax certificates had been received. (9/1/11 Tr. 189:12-193:6 (Kawasaki)).
114. There has been no reliable evidence presented as to whether or not TV Tokyo claimed any foreign tax credits, including credits for those withholding taxes listed in Exhibit T-28. No tax returns for TV Tokyo were produced or introduced into evidence at trial, and Mr. Kawasaki admitted that he has never reviewed or assisted in the preparation or filing of TV Tokyo’s tax returns. (9/1/2011 Tr. 157:1-5 (Kawasaki)). Although Mr. Kawasaki admitted during his deposition that he could not say whether or not the credits represented by the certificates in Exhibit T-28 were claimed by TV Tokyo, at trial Mr. Kawasaki presented hearsay testimony that he confirmed that the credits were not received by TV Tokyo. (9/1/2011 Tr. 157:6-24 (Kawasaki)). Mr. Kawasaki did not reference his communications with the accounting department in his declaration nor did he attach any documentation to his declaration evidencing how he was able to confirm this information. (9/1/2011 Tr. 153:24-155:7,157:25-158:12 (Kawasaki)).
3. Mr. Elliott’s Audit Finding
115. During his royalty audit, Mr. Elliott asked that 4Kids provide him with copies of foreign tax withholding certificates going back to 2002, ostensibly so that he could verify that the amounts deducted in 4Kids’ participation statements were accurate. (8/29/2011 Tr. 178:3-16 (Elliott)).
116. However, Mr. Elliott admitted that he did not review the foreign remittances or cash receipts to confirm whether they matched the foreign withholding tax deductions listed in the participation statements. (8/29/2011 Tr. 176:25-177:4, 177:20-178:2 (Elliott)). Instead, Mr. Elliott’s analysis was solely based on a re*645view of the certificates themselves and on the participation statements. (8/29/2011 Tr. 176:15-19,178:3-10 (Elliott)).
117. There is no evidence, in Mr. Elliott’s audit Findings or otherwise, that any foreign subagent failed to pay taxes to the applicable taxing authority for any amounts that were withheld. The only means to assess a subagent’s failure to pay taxes would be through an audit of the subagent. (9/19/2011 Tr. 71:11-22 (Koz-mata); 9/20/2011 Tr. 206:16-208:4, 210:4-9 (Foster)).
118. There is no evidence, in Mr. Elliott’s audit Findings or otherwise, that royalties were not reported properly with respect to foreign withholding tax deductions. (8/30/2011 Tr. 76:21-77:2 (Elliott)).
119. There is no evidence, in Mr. Elliott’s audit Findings or otherwise, that 4Kids claimed any withholding tax credits related to the Yu-Gi-Oh! property on its own behalf. (Foster Decl. ¶ 22; Newborn Decl. ¶ 96).
120. Exhibit 1 to Mr. Elliott’s final audit report reflects his analysis of the tax certificates. (Ex. T-14 at 5-7). Based on his review of the participation statements, Mr. Elliott determined that 4Kids had deducted $2,538,963.75 from Licensor’s share of Gross Income. (Ex. T-14; see also Elliott Decl. ¶ 30; Shinoda Decl. ¶ 41; Ho-saka Decl. ¶49). Mr. Elliott found that $1,386,913.86 worth of tax certificates were “unaccounted for,” meaning that 4Kids did not have copies of the tax withholding certificates in its possession. (Ex. T-14 at 6-7). Although Mr. Elliott did not ask ADK or TV Tokyo whether they had ever received certificates from subagents directly, Mr. Elliott deemed these $1,386,913.86 worth of certificates to be “unsubstantiated” because they were not located in 4Kids’ files. (Elliott Decl. ¶ 36).
121. Mr. Elliott noted in his analysis that tax certificates in the amount of $1,152,049.89 had been provided for his review by 4Kids. (Ex. T-14). Of this $1,152,049.89, Mr. Elliott determined that $273,196.59 were “substantiated” by virtue of the fact that they were located in 4Kids’ files and included the Licensor’s name (by referencing as the tax beneficiary either TV Tokyo, NAS, ADK, or the Yu-Gi-Oh! property). (Ex. T-14; Elliott Decl. ¶ 35; 8/29/2011 Tr. 190:11-191:6 (Elliott)). According to Mr. Elliott, his analysis of whether these certificates were substantiated did not turn on whether or not they had been provided to Licensor; their presence in 4Kids’ files and reference to Li-censor was the sole basis for his description of these certificates as substantiated. (8/29/2011 Tr. 190:11-191:6 (Elliott)).
122. Of the tax certificates that 4Kids provided to Mr. Elliott, he noted that $873,853.30 were, in his opinion, “unsubstantiated” because they did not reference the Yu-Gi-Oh! property or the Licensor on the face of the certificate. (Ex. T-14 at 6-7; Ex. T-97; Foster Decl. ¶ 35). However, at trial, Mr. Elliott admitted that he did not notice the Yu-Gi-Oh! notation present on substantially all of the certificates in this group.29 (Ex. T-97; 8/29/2011 Tr. 199:5-200:7). Despite his characterization of these certificates as “unsubstantiated,” Mr. Elliott testified that he did not know whether, as a matter of Japanese tax law, ADK could have relied on these certificates to claim foreign withholding tax credits. (Ex. T-97; 8/29/2011 Tr. 200:8-12) (Elliott).
123. Approximately $205,215.79 of these certificates which Mr. Elliott deemed to be “unsubstantiated” relate to the with-*646holdings of the Mattel subsidiaries. Mr. Elliott admitted that during his audit he was provided with an affidavit from Mattel’s Vice President of Finance/Assistant Controlled, dated March 25, 2007, which confirmed that those certificates all related to the Yu-Gi-Oh! property and reflected withholding taxes paid on behalf of NAS. (Foster Decl. ¶ 36; Ex. T-95; 8/29/2011 Tr. 200:21-201:22 (Elliott)). Mr. Elliott admitted that he does not know whether or not ADK could have used these documents to claim foreign withholding tax certificates under Japanese law. (8/29/2011 Tr. 201:23-202:3 (Elliott)).
124. Mr. Elliott admitted that the tax deductions that he deemed as “unsubstantiated” were listed and included in the quarterly participation statements provided by 4Kids to Licensor, and thus known to Licensor. (8/29/2011 Tr. 176:11-14 (Elliott)).
125. Based on the above, Mr. Elliott quantified Licensor’s tax-related audit claim against 4Kids at $2,265,767.16 — by adding together the $1,386,913.86 of unaccounted for certificates and the $873,853.30 worth of tax certificates that were, in his opinion, “unsubstantiated” because he concluded, albeit erroneously, that they did not reference the Yu-Gi-Oh! property or the Licensor on the face of the certificate. See FF ¶ 122, supra; Ex. T-14 at 3, 5-6; Elliott Decl. ¶ 36. However, Mr. Elliott admitted that he could not conclude that Licensor was injured in the amount of $2,265,767.16 because that conclusion would require an understanding and knowledge of Japanese tax law, which he does not possess. (8/29/2011 Tr. 179: 4-5, 183:18-184:2 (Elliott)). Furthermore, as demonstrated below, Mr. Elliott’s analysis did not and could not quantify any tax injury allegedly suffered by Licensor.
126. Mr. Elliott did not have access to the tax returns of ADK or TV Tokyo and thus could not and did not independently assess whether either had claimed any foreign withholding tax credits related to Yu-Gi-Oh!. (8/29/2011 Tr. 179:6-8, 180:9-11 (Elliott)). Although he admits that, if either ADK or TV Tokyo separately received the certificates, there would be no value to the claim that he put forth in his final report, Mr. Elliott never asked ADK or TV Tokyo whether they had received any foreign withholding tax certificates directly from subagents. (Id. at 183:5-9, 180:12-181:11). Mr. Elliott cannot say whether ADK or TV Tokyo had claimed any foreign withholding tax credits with respect to the approximately $2.26 million which Mr. Elliott deemed to be “unsubstantiated.” (Id. at 181:12-182:8).
127. According to Mr. Elliott, the crux of his Finding 3 was not whether or not Licensor could have claimed a tax credit. (Id. at 182:9-12). It was neither his purpose nor his intent to identify an amount that Licensor could recover from 4Kids. (Id. at 182:17-22). Instead, his audit focused on the identification of “unsubstantiated” tax deductions (ie., whether or not 4Kids had possession of the certificate, whether the certificate was issued in the Licensor’s name, or whether the certificate, in some way, identified the Yu-Gi-Oh! property). (Ex. T-14 at 5-6).
128. Exhibit 1 to Mr. Elliott’s November 2010 final audit report sets forth the reasoning behind his characterization of certificates as “unsubstantiated.” Without access to Exhibit 1 to Mr. Elliott’s November 2010 final audit report, there was no way for 4Kids to assess which tax events Mr. Elliott had deemed to be unsubstantiated. (9/21/2011 Tr. 87:1-4 (Foster); Ex. T-14; Ex. T-18). Despite a request for Mr. Elliott’s audit report in June 2010, and various requests for further information about his Findings, 4Kids was not provided with any iteration of Mr. Elliott’s audit *647report until July 2011.30 (Ex. T-17; Newborn ¶¶ 139, 149, 151; Foster Decl. ¶ 28).
129. In view of the foregoing, there is no basis to find that Mr. Elliott’s Finding 3 reflects an underpayment of royalties to Licensor or that it establishes that Li-censor was injured in the amount of $2,265,767.16. There is insufficient evidence to conclude that Mr. Elliott’s audit Finding relates to whether or not ADK could have claimed foreign withholding tax credits.
4. Expert Testimony Regarding Japanese Tax Law
130. The Court heard testimony from two experts on Japanese tax law: Takashi Kasai, Licensor’s expert, and Takaaki Tok-uhiro,31 4Kids’ expert.
131.A Japanese entity receiving licensing income from overseas, some of which has been withheld by its foreign licensee for the payment of withholding taxes, may claim either a tax credit or a tax deduction with respect to those taxes withheld. (Tokuhiro Report at 2, 5). If the Japanese entity claims a tax credit, then it reports the gross income received by the foreign licensee. (8/29/2011 Tr. at 135:2-6,135:12-16 (Kasai)). However, if the Japanese entity takes a tax deduction, then it reports the net income remitted to the licensor. (8/29/2011 Tr. 135:17-19 (Kasai)). There is a limit to the amount of foreign withholding tax credits that a Japanese corporation can claim in a single year. (8/29/2011 Tr. 136:11-15,153:20-25 (Kasai); 9/20/2011 Tr. 20:3-22 (Tokuhiro)). It is necessary to review the full tax return and apply a
*648formula to determine the credit limit for a given year. (8/29/2011 Tr. 136:16-19 (Kasai)). A corporation that has credits in excess of that limit can carry-over credits for three years. (9/20/2011 Tr. 20:14-24 (Tokuhiro)).
132. The parties’ experts are in agreement that, during the relevant time period (2001 to 2009),32 Japanese corporate taxpayers seeking a tax credit were required to attach proof of payment of taxes on behalf of the taxpayer, and that the best evidence of such payment is the tax withholding certifícate. (9/20/2011 Tr. 21:8-21 (Tokuhiro); 8/29/2011 Tr. 107:18-108:7 (Kasai)). The experts’ opinions diverge as to what alternatives are available to a taxpayer who does not have possession of the tax certificates, although both agree that the certificate is not required under the Japanese tax law and regulations so long as the taxpayer presents alternative proof which evidences payment of taxes. (8/29/2011 Tr. 107:18 — 108:7 (Kasai); 9/20/2011 Tr. 21:9-23:12, 52:1-52:13; 56:5-56:8 (Tokuhiro)).
133. Mr. Kasai admitted that documentation, other than the certificate itself, would be “acceptable]” to the Japanese National Tax Authorities, so long as the documentation evidenced payment of the withholding taxes. (8/29/2011 Tr. 108:1-108:7 (Kasai)). In Mr. Kasai’s view, proof that the taxes had been paid could not be accomplished by submission of (a) a sworn affidavit explaining that payments had been made for the benefit of ADK or (b) 4Kids’ cash receipts to the Japanese National Tax Authorities. (8/29/2011 Tr. 128:22-129:11 (Kasai)).
134. Although Mr. Kasai has no experience filing a request for foreign tax credit without possession of the certificate, he provided his “expectation” of the result of such efforts. (8/29/2011 Tr. 110:18-22, 138:5-9, 111:4 — 11 (Kasai)). Mr. Kasai was equivocal when asked, on several occasions, whether a Japanese taxpayer could seek a tax credit without having the tax certificates in hand, stating at various times that it would be “difficult.” (8/29/2011 Tr. 111:4-11, 112:13-19, 114:17-19 (Kasai)). Mr. Kasai then admitted that “if [the taxpayer] knew that the certificates would be coming in a month, then maybe” they could seek a tax credit, because the taxpayer “would be able to verify that the amount was correct in a very short period of time.” (8/29/2011 Tr. 112:20-113:23 (Kasai)). Mr. Kasai did not identify any law or regulation limiting this time period to one month.
135. Mr. Kasai stated that if one of his clients was in a position where it could not take a foreign withholding tax credit because the client did not have the relevant tax certificates, he would advise his client to ask its foreign licensee for the certificates. (8/29/2011 Tr. 113:24-114:5 (Kasai)). Mr. Kasai admitted that if one of his clients received a participation statement or royalty report from its licensing agent, the first thing he would advise his client to do would be to ask for the withholding tax certificate referenced in the participation statement. (8/29/2011 Tr. 127:6-9 (Kasai)).
136. Mr. Tokuhiro testified that it is “common” for Japanese corporate taxpayers to seek foreign withholding tax credits without possession of the certificate, because the certificates are often not available at the time of filing. (9/20/2011 Tr. 21:22-22:9 (Tokuhiro)). He explained that he often advises Japanese corporate tax*649payers about what documentation to provide to the National Tax Authority to claim foreign tax credits. (Id. at 22:10-23:4). In those instances Mr. Tokuhiro advises his clients to submit the “best documentation” of proof of payment that they have and to continue to request the certificate. (Id. at 23:5-23:12).
137. Mr. Tokuhiro translated the relevant section of the Japanese tax regulations (Section 69 of the Corporate Tax Law) for the Court and explained that the regulations require only submission of documentation supporting the payment of taxes, which includes, but is not limited to, the withholding tax certificate. (9/20/2011 Tr. 34:15-35:2, 52:1-53:2 (Tokuhiro)).
138. Both parties’ experts agree that a Japanese corporate taxpayer may, as a matter of right, amend its tax return in the year after it was filed to claim further foreign tax credits if the original return claimed some foreign tax credits. (8/29/2011 Tr. 116:6-15, 151:9-17 (Kasai); 9/20/2011 Tr. 35:8-13 (Tokuhiro)). In order to file the amended return, the company must have documents to substantiate its amendment. (8/29/11 Tr. 116:13-18 (Kasai)). To amend a tax return to receive a deduction for foreign withholding taxes, the company would need documents to show that the taxes were paid overseas. (Id. at 116:19-117:4). These documents could be either withholding tax certificates, or tax filings showing that taxes were paid to a foreign government. (Id. at 117:5-11).
139. Both parties’ experts further agree that a Japanese corporate taxpayer may petition the Japanese National Tax Authority for a period of up to five years after the initial tax return is filed for permission to amend its tax return to seek further foreign tax credits if the taxpayer elected to take credits, rather than a deduction. (8/29/2011 Tr. 116:6-12, 117:22-118:19 (Kasai); 9/20/2011 Tr. 35:18-35:24 (Tokuhiro)). Both experts agree that if there is sufficient evidence to support the amendment, the taxing authority may accept the request. (8/29/2011 Tr. 125:6-10 (Kasai); 9/20/2011 Tr. 35:25-36:3, 36:19-36:22 (Tokuhiro)). If the Japanese tax authorities reject the petition, the company has no avenue to appeal the decision. (8/29/11 Tr. 118:10-15 (Kasai)).
140. Both experts agreed that if a Japanese corporation received certificates issued in another entity’s name they would advise their client to try to obtain a certificate in the correct name. (9/20/2011 Tr. 33:18-24 (Tokuhiro); 8/29/2011 Tr. 152:20-24 (Kasai)). Although Mr. Kasai has no personal experience submitting certificates issued in another entity’s name as proof of payment of foreign withholding taxes, he testified that the Japanese National Tax Authority would likely reject such claims. (8/29/2011 Tr. 128:9-129:5 (Kasai)). In contrast, Mr. Tokuhiro testified that he would advise his clients to submit a certificate issued in another entity’s name to claim a credit with an explanation of the incorrect issuance. (9/20/2011 Tr. 33:9-34:7 (Tokuhiro)). In Mr. Tokuhiro’s experience, submission of an incorrect certificate might trigger an audit, but the audit process would afford the taxpayer an opportunity to explain the discrepancy. (9/20/2011 Tr. 37:14-24 (Tokuhiro)).
141. One of Licensor’s expert witnesses, Arthur Erk, provided an expert opinion attesting to the validity of Mr. Elliott’s audit methods and Findings and as to the standards and practices in the licensing industry for substantiating deductions. Mr. Erk testified that, with respect to the substantiation of foreign withholding taxes, he generally requires that licensees show a withholding tax certificate or a cancelled check. (9/9/2011 Tr. 62:7-12(Erk)). When asked about the situation where a tax certificate did not list the *650licensor’s name, and whether an affidavit from a sublicensee would be acceptable to substantiate the deduction, Mr. Erk testified that it would be up to his client (ie., the licensor), to determine whether such proof was acceptable. (9/9/2011 Tr. 97:20-98:6(Erk)). Mr. Erk admitted that, in this ease, his assessment of Mr. Elliott’s third audit Finding turned on the interpretation of the word “evidence” in the License Agreements. (9/9/2011 Tr. 83:5-16, 96:12-25(Erk)).
5. There Is No Credible Evidence That ADK Ever Requested Foreign Tax Withholding Certificates from 4Kids Prior to the Audit
142. According to ADK, the ADK accounting office was responsible for ensuring that foreign withholding tax credits were claimed. (8/31/2011 Tr. at 37:13-16 (Shinoda)). Ms. Noriko Kubota, an ADK employee in the overseas licensing group, was responsible for informing the accounting department of the amount of foreign withholding taxes to claim a tax credit on. (Id. at 37:21-38:2).
143. In addition to ADK’s internal accounting office, ADK retained the services of an external accounting firm, Yasumori, to assist in the preparation and filing of its tax returns. (8/31/2011 Tr. 36:24-37:9 (Shinoda); 9/6/2011 Tr. 31:7-11, 31:16-24 (Hosaka)). Mr. Kasai, Licensor’s tax expert, described the Yasumori firm as “small” and “not well known.” (8/29/2011 Tr. 154:9-16 (Kasai)). ADK ceased its relationship with Yasumori in 2010. (8/31/2011 Tr. 37:7-12 (Shinoda); 9/6/2011 Tr. 32:4-5 (Hosaka)).
144. Ms. Kubota, the ADK employee responsible for informing ADK’s accounting department about foreign withholding taxes, testified that the ADK employees who would have requested foreign withholding tax certificates from 4Kids, if any requests were made, would be Mr. Doi, Mr. Shinoda, Mr. Sato and herself. (8/31/2011 Tr. 37:21-38:2 (Shinoda); 8/22/11 Dep. Tr. 42:20-43:25 (Kubota)). Ms. Kubota testified that she did not recall requesting foreign withholding tax certificates from 4Kids. (8/22/11 Dep. Tr. 44:16-24 (Kubota)); Ms. Kubota further testified that she did not recall whether Mr. Shino-da, Mr. Doi, or Mr. Sato ever personally requested 4Kids provide foreign withholding tax certificates or whether they ever asked her to make any such request. (8/22/11 Dep. Tr. 35:22-38:13 (Kubota)).
145. Mr. Shinoda provided inconsistent testimony concerning ADK’s requests for foreign withholding tax certificates. First, Mr. Shinoda testified in his Declaration that ADK made “numerous” requests for tax withholding certificates. (Shinoda Decl. ¶ 41). Mr. Shinoda then testified that he spoke to A1 Kahn about foreign withholding tax certificates in 2003/2004. (9/1/2011 Tr. 73:22-74:22 (Shinoda)). Next, Mr. Shinoda claimed, in contradiction to his deposition testimony,33 that he requested foreign withholding tax certificates “every time” he met with Mr. Kahn. (9/1/2011 Tr. 76:21-77:17 (Shinoda)). Upon further questioning, Mr. Shinoda testified that it was not “every time.” (9/1/2011 Tr. 101:12-102:18 (Shinoda)).
146. Mr. Kahn testified that ADK “may” have “once or twice” requested tax certificates, although he could not say if those requests related to U.S. taxes paid by 4Kids itself (which are not in issue) or if they related to foreign taxes paid by *6514Kids’ subagents.34 (8/8/11 Dep. Tr. 272:5-14 (Kahn)).
147. Despite his alleged “numerous” requests for 4Kids to provide foreign withholding tax certificates, Mr. Shinoda admits that he never followed-up any request to Mr. Kahn in writing, either in an email or by letter. (9/1/11 Tr. 108:7-9 (Shino-da)).
148. ADK’s witnesses uniformly testified that no written request for foreign withholding tax certificates was between 2001 and 2009 had been located.35 (9/1/11 Tr. 103:7-9 (Shinoda); 9/6/11 Tr. 35:3-6 (Hosaka); 9/8/11 Tr. 41:10-23 (Sugimoto); Kubota Tr. 124:8-125:4). ADK’s witnesses initially asserted that Exhibit T-65 evidenced a request for foreign withholding tax certificates,36 although all admitted during the trial that this email was not a request for the withholding tax certificate, but instead related to a request from a foreign subagent, transmitted through 4Kids, for ADK to fill out a certificate of residency to avoid double taxation on income generated by the Italian subagent. (8/31/2011 Tr. 50:22-51:18, 53:17-54:2 (Shi-noda); 9/8/2011 Tr. 29:6-11 (Sugimoto); Ex. T-65; Ex. T-65A).
149.Mr. Foster testified that, while Li-censor, specifically ADK, had requested withholding certificates related to U.S. taxes, he is aware of no request for foreign tax withholding certificates prior to 2010. (Foster Deck ¶ 21). Similarly, Mr. Newborn testified that nobody at Licensor ever complained to him that certificates had not *652been provided. (Newborn Deel. ¶ 99). Likewise, Ms. Kozmata testified that, to her knowledge, no one from ADK ever requested withholding tax certificates from 4Kids. (Kozmata Deck ¶ 18; 9/19/2011 Tr. 83:24-84:8 105:3-5 (Kozmata)).
150. Ms. Nowicki provided and circulated agendas for quarterly meetings between 4Kids and Licensor, and took notes at those meetings. (Nowicki Deck ¶¶ 29-30). Based on these meeting notes and agendas, Ms. Nowicki testified that there was no instance where the Licensor ever discussed, complained, or raised questions at those meetings about foreign withholding tax certificates. (Nowicki Deck ¶ 33; Ex. T-427 to Ex. T-434). There is no credible evidence that anyone from ADK ever complained to 4Kids about the type of evidence of withholding taxes that had been provided by 4Kids and/or 4Kids’ sub-agents to ADK under the License Agreements. (9/12/2011 Tr. 171:15-20 (Newborn); Newborn Deck ¶ 99). Likewise, there is no credible evidence that anyone from TV Tokyo ever complained to 4Kids that 4Kids was not providing adequate evidence of foreign withholding taxes pursuant to the License Agreements. (9/1/2011 Tr. 159:4-8 (Kawasaki); Newborn Deck ¶ 99).
151. Despite Mr. Shinoda’s assertion that he made requests of 4Kids to provide certificates in 2003/2004, he admits that neither he, nor anyone else at ADK, requested any change to the language of Paragraph 4(g) in connection with the 2008 Agreement. (8/31/2011 Tr. 59:9-14 (Shino-da); 9/1/2011 Tr. 78:23-79:9, 83:15-17 (Shi-noda)). Indeed, ADK did not suggest that the term “certificate” be added to Paragraph 4(g) of the 2008 Agreement. (8/31/2011 Tr. 59:9-11 (Shinoda)). As a result, the parties did not alter the provision governing withholding taxes between the 2001 and 2008 Agreements. (9/1/11 Tr. 83:15-84:2 (Shinoda); Ex. T-6 ¶ 4(g); Ex. T-ll ¶ 4(g)).
152. In view of the foregoing, there is no credible evidence that anyone at Li-censor ever asked anyone at 4Kids to provide them with foreign withholding tax certificates, either orally or in writing, at any time until Mr. Elliott’s audit in 2010.
6. There Is No Evidence That ADK Suffered Any Tax Related Injury
153. Between 2001 and 2009, ADK did not take any tax credits for foreign withholding taxes paid by Yu-Gi-Oh! sub-agents of 4Kids, but did claim tax credits with respect to withholding from other foreign income. (9/20/2011 Tr. 23:19-24:6 (Tokuhiro); 9/6/2011 Tr. 32:15-22 (Hosa-ka); 8/31/2011 Tr. 38:21-39:17 (Shinoda)).
154. ADK has not offered into evidence its complete tax returns for any of the years at issue. Without its entire tax returns, 4Kids’ expert was unable to determine whether ADK claimed any tax deductions for the foreign withholding taxes paid by Yu-Gi-Oh! subagents. (9/20/2011 Tr. 24:21-25:19 (Tokuhiro)). Licensor’s own tax expert testified that he did not review the tax returns of ADK, NAS, or TV Tokyo. (8/29/2011 Tr. 131:15-21 (Kasai)).
155. As stated by Licensor’s tax expert, without a review of the full ADK tax returns, it is impossible to determine whether or not ADK had reached its maximum foreign withholding tax credit limit for the years 2001 through 2009. (8/29/2011 Tr. 136:16-19 (Kasai)).
156. The Court is unable to determine (a) whether ADK took tax deductions for foreign withholding taxes paid by Yu-Gi-Oh! subagents or (b) whether ADK would have been eligible for additional foreign withholding tax credits for the years 2001 through 2009.
*653157. Consistent with Mr. Tokuhiro’s testimony and experience, the evidence demonstrates, however, that ADK sometimes submitted documentation other than foreign withholding tax certificates in order to claim foreign withholding tax credits, as discussed below.
158. In his review of the foreign tax credits section of the portion of ADK’s tax returns admitted into evidence, Mr. Tok-uhiro determined that, between 2001 and 2009, ADK had claimed foreign tax credits for foreign source income unrelated to the Yu-Gi-Oh! license. (9/20/2011 Tr. 25:24— 26:3, 29:4-23 (Tokuhiro)). Mr. Tokuhiro observed in his review that, in at least three instances (in one tax return alone), ADK claimed foreign tax credits based on letters, rather than on the certificates, as evidence of proof of payment of taxes. (9/20/2011 Tr. 29:24-32:5 (Tokuhiro); Ex. T-260 at TVT_NAS0086960, TVT_NAS0087073, TVT_NAS0087075). One of the alternatives to the certificate submitted to the Japanese National Tax Authority to claim foreign withholding tax credits was a December 2, 2004 letter from 4Kids concerning money withheld on Yu-Gi-Oh! income earned in the U.S. (Ex. T-260 at TVT-NAS0086960).
159. Mr. Kasai similarly testified that, based on his review of the foreign tax section of one of ADK’s tax returns for the year 2004, ADK had claimed foreign withholding tax credits based on the same letters identified by Mr. Tokuhiro. (8/29/2011 Tr. 141:9-12, 141:23-143:18, 148:7-17, 148:24-151:8 (Kasai); Ex. T-260 at TVT_NAS0086960, TVT_NAS0087073, TVT_NAS0087075). Another letter, from a Spanish company, stated that “the annual certificates for any given year take a long time to process [thus] the governmental official certificate usually come within the first six months of the following year.” (Ex. T-260 at TVT_NAS0087073).
160. Ms. Kubota testified that proof of payment of withholding taxes includes, but is not limited to, the certificate.37 (8/22/11 Dep. Tr. 91:2-93:2 (Kubota)).
161. In December 2004, when the U.S. withholding tax certificates were not yet available, a member of ADK’s accounting department directed Ms. Kubota to “request” from 4Kids “something in lieu of the proof of tax withholdings’ (payment certificate or the like),” (Ex. T-152; Ex. T-152-A; 8/22/11 Dep. Tr. 89:20-90:2, 90:21-96:7, 96:24-97:11 (Kubota)). In an email dated December 2, 2004, Ms. Kubota requested that 4Kids provide a “substitute for the withholding certificate.” (8/22/11 Dep. Tr. 97:12-100:10 (Kubota); Ex. T-153; Ex. T-153-A, Ex. T-154). Ms. Kubo-ta confirmed that the “substitute for the withholding certificate” provided by 4Kids, as per ADK’s request, was the letter from 4Kids relating to U.S. withholding taxes included in ADK’s 2004 tax return. (8/22/11 Dep. Tr. 101:3-8, 102:2-103:4 (Ku-bota); Ex. T-152A; Ex. T-153A; Ex. T-154; Ex. T-260 at TVT_NAS0086959). Ms. Kubota further testified that she does not believe that 4Kids ever provided ADK with the Form 1042 U.S. certificate related to these credits. (8/22/11 Dep. Tr. 144:18-25 (Kubota)).
162. Despite the knowledge of ADK’s accounting department that documents other than the certificates themselves could be used by ADK to claim foreign withholding tax credits, there is no documentary evidence that ADK ever asked 4Kids to provide letters or other documentary alternative to the tax certificates as *654proof of payment of foreign withholding taxes by 4Kids’ subagents in order to file for the credits in a timely manner.
163. In the course of the audit, certificates reflecting $1,152,049.89 in foreign withholding tax credits were provided to Mr. Elliott. (Ex. T-14).
164. Although there is a one year right under Japanese tax law to amend a corporate tax return and a five year opportunity to petition to amend a corporate tax return, ADK elected not to amend or petition to amend any tax return or file the certificates provided to Mr. Elliott. (9/6/2011 Tr. 34:13-20 (Hosaka)).
165. Following Mr. Elliott’s audit, 4Kids, through further inquiries and review of its files, was able to locate $880,680.14 worth of additional certificates. (Foster Decl. ¶ 38; 9/12/2011 Tr. 171:5-10 (Newborn)). These certificates have been provided to ADK. (9/12/2011 Tr. 171:5-10 (Newborn)). There is no evidence that ADK attempted to amend or petition to amend any tax return or file these certificates in order to claim foreign tax credits.38
166. Both tax experts agree that if ADK had in its filed tax returns claimed tax credits unrelated to Yu-Gi-Oh!, ADK might be granted a petition to amend its tax returns to claim Yu-Gi-Oh! related tax credits within the five year statute of limitations. (8/29/2011 Tr. 125:3-10 (Kasai); 9/20/2011 Tr. 36:4-37:13 (Tokuhiro)).
167. According to Mr. Tokuhiro, had ADK elected to petition to amend its tax returns for the years 2006, 2007, 2008, or 2009, and the Japanese National Tax Authority agreed with their petition, ADK could have recovered credits of approximately $1.1 million. (9/20/2011 Tr. 36:4-25 (Tokuhiro)).
168. According to Mr. Tokuhiro, had ADK timely filed a petition to amend its tax returns prior to the fifth anniversary of the original filing date for the years 2005 through 2009, and the Japanese National Tax Authority agreed with its petition, ADK could have recovered approximately $1.6 million in foreign tax credits. (9/20/2011 Tr. 37:1-5 (Tokuhiro)).
D. Finding No. 4: Post-June 2008 Home Video Revenue
169. In his fourth audit Finding, Mr. Elliott found that 4Kids had continued to divide the 20% home video royalty between the parties during the second half of 2008. Mr. Elliott noted that, under the 2008 Agreement, effective as of July 1, 2008, Paragraph l(b)(iii) had been amended to provide that, if 4Kids exercised the home video rights itself, the entire home video royalty should be paid to Licensor. (Ex. T-14 at 7-8). Finding 4 was included in Mr. Shinoda’s December 20, 2010 letter to 4Kids. (Ex. T-18 at 1, 3).
170. Finding 4 was premised upon the application of Paragraph l(b)(iii) of the 2008 Agreement, which applies “[I]f 4Kids exercises the Home Video Rights ... itself.” (Ex. T-14 at 7-8; Ex. T-ll; 8/29/2011 Tr. 166:25-167:7 (Elliott)).
171. 4Kids never disputed Finding 4, and, in fact, agreed to pay the entire amount of the claim ($26,894.27). As Mr. Newborn explained in his testimony, this Finding resulted from an error in 4Kids’ *655accounting department following the adoption of the 2008 Agreement, which implemented the shift from the 50/50 split of home video revenue to the requirement that the entire twenty percent be remitted to Licensor. (Newborn Decl. ¶¶ 66 & n.32, 130).
172. Sometime between Mr. Shinoda’s December 20 letter and the filing of the Complaint in this action on March 25 (concurrent with the purported termination of the 2008 Agreement), Licensor dropped Finding 4. Mr. Shinoda testified that, “after further consideration, the [Yu-Gi-Oh!] Consortium has decided not to pursue this audit claim further.” (Shinoda Decl. ¶ 44). There is no mention of Finding 4 in the Complaint filed by Licensor on March 25, 2011. (See Adv. Pro. No. 11-02225, Docket No. 1).
173. Prior to the filing of the Complaint, Licensor never communicated to 4Kids that Licensor had decided not to pursue Finding 4. (8/31/2011 Tr. 34:14-21 (Shinoda)).
E. Finding No. 5: Costs of Third-Party Audits39
174. In his fifth Finding, Mr. Elliott found that 4Kids had improperly deducted 50% of the cost of various third-party audits from Licensor’s share of royalties, amounting to $105,111.20 in improper deductions. (Ex. T-14 at 8-9; 8/29/2011 Tr. 202:9-12 (Elliott)). According to Mr. Elliott, although 4Kids had informed him that it had obtained approval for these deductions — which were half the cost of third-party audits conducted on 4Kids’ sublicensees — the fact that he did not review written authorization for these deductions led him to conclude that such costs were unauthorized by Licensor. (Elliott Decl. ¶ 39; Ex. T-14 at 8-9). He therefore found that any deductions by 4Kids for third-party costs were impermissible under the License Agreements. (Elliott Decl. ¶ 40).
175. It is customary in the licensing industry to conduct audits of licensees. (Nowicki Decl. ¶ 22). It is typical to conduct these audits after a significant term of the license agreement has passed but before the agreement has concluded, to ensure collection of any audit findings. (Id.).
176. Beginning in 2005, 4Kids decided to audit some of the Yu-Gi-Oh! sublicen-sees. (Id.; Newborn Decl. ¶ 111). All audits of the Yu-Gi-Oh! licensees were conducted by external auditors. (Nowicki Decl. ¶ 23; 9/20/2011 Tr. 117:17-25 (Foster)). On January 5, 2005, Ms. Nowicki sent an email to Ms. Kubota outlining 4Kids’ procedures for conducting sublicen-see audits. (Ex. T-209; Nowicki Decl. ¶ 24). The procedures expressly provided that “4Kids will recoup 50% of the audit costs from Licensor’s share of the quarterly royalty revenues.” (Ex. T-209 at 4KIDS-0041378).
177. Ms. Kubota confirmed that she received the document outlining 4Kids’ procedures for conducting licensee audits and *656that the document sent by Ms. Nowicki specified that Licensor would share 50% of the cost of third-party audits. (Ex. T-209; 8/22/11 Dep. Tr. 125:20-126:17 (Kubota)). Ms. Kubota testified that, despite the clear language of the document, she was uncertain whether or not this document signified that costs of third-party audits would be split “as a matter of fact” or whether this document merely expressed 4Kids’ “desire to split” these costs. (8/22/11 Dep. Tr. 126:18-127:2 (Kubota)). However, Ms. Kubota has no “specific recollection” of inquiring of Ms. Nowicki or anyone else at 4Kids as to the intent behind the outlined procedure and has seen no document reflecting the same. (8/22/11 Dep. Tr. 126:18-127:9, 128:9-17 (Kubota)). Similarly, Ms. Nowicki did not recall any followup discussion with Ms. Kubota. (9/15/2011 Tr. 46:20-47:7 (Nowicki)).
178. 4Kids’ practice of treating the audit costs as off-the-top costs is consistent with licensing industry practice, where the costs of third-party audits are shared in proportion to the recoveries. (Newborn Deck ¶ 113).
179. Following 4Kids’ provision of its third-party audit procedure to ADK in January 2005, 4Kids initiated, with Li-censor’s approval, various audits of Yu-Gi-Oh! licensees. (Newborn Decl. ¶ 111). 4Kids sought Licensor’s approval of each individual audit and “never” conducted any Yu-Gi-Oh!-related audit without Li-censor’s approval. (9/15/2011 Tr. 104:15-22 (Nowicki)).
180. For example, in 2007, 4Kids requested Licensor’s approval to conduct six licensee audits. (Ex. T-31). In the email request for approval to conduct the most pressing of the six proposed audits, 4Kids explicitly stated that Licensor’s “confirmation” was required before the audit was initiated because “the Licensor is responsible for sharing in the costs of audits.” (Ex. T-31). Licensor’s response evidences that Licensor understood that costs would be shared, because in approving this audit, Mr. Doi40 of ADK wrote, “we need TV Tokyo’s confirmation because auditing involves cost.” (Ex. T-31). Mr. Sugimoto, who was copied on this email, confirmed that Mr. Doi approved this audit and that Mr. Doi understood in approving this audit that there would be associated costs. (9/8/2011 Tr. 44:10-25, 45:23^16:4 (Sugimo-to)).
181. The email also clearly expressed to Licensor that 4Kids would “move forward with [the one approved audit] but will hold for approval of the others.” (Ex. T-31). Mr. Sugimoto, who was copied on this email, confirmed that 4Kids did not initiate the other suggested audits because Licensor’s approval was required. (9/8/2011 Tr. 45:23-46:4 (Sugimoto)).
182. In a separate email in 2007, Ms. Nowicki asked for Licensor’s approval to conduct another audit. (Ex. T-101). In responding to this email, Mr. Hosaka wrote, “please proceed licensee audit you proposed [sic]. [W]e fully understand your request.” (Ex. T-101). Mr. Hosaka confirmed at trial that he was aware that 4Kids conducted third party audits and that he approved some of these audits. (9/6/2011 Tr. 42:15-20 (Hosaka)).
183. In another email in 2010 requesting Licensor’s approval of two proposed audits, 4Kids explicitly conveyed, again, that the decision to conduct audits rested *657with Licensor. (Ex. T-68). In this email, 4Kids wrote, “[ultimately, it is your decision if you do not wish to audit these licensees, but we believe we stand to make additional revenue off of these licensees and it will be worth our while.” (Ex. T-68 at TVT_NAS0036548). In response to questioning about this email, Ms. Nowicki testified that the proposed audits were not conducted because Licensor had not approved them. (9/15/2011 Tr. 104:10-22 (Nowicki)).
184. There is no dispute that Licensor understood that audits involved costs and thus Licensor had final approval over the initiation of audits. (9/6/2011 Trial Tr. at 42:15-20 (Hosaka); 9/8/2011 Trial Tr. at 48:6-9 (Sugimoto)). As Mr. Sugimoto explained:
Because when usually 4Kids ask for approval it means something associated with cost. If we say yes, then, you know, costs would be spread fifty/fifty. So that’s why we have to be very careful with when we say yes.
(9/8/2011 Tr. 48:1-5 (Sugimoto)).
185. Ms. Nowicki, 4Kids’ executive manager who was in charge of the Yu-Gi-Oh! brand on a day-to-day basis, does not recall any instance in which Licensor ever complained about, questioned, or commented on the licensee audits or the cost of those audits. (Nowicki Deck ¶ 29). Nor do her meeting notes or meeting agendas reflect any such complaints, questions or comments. (Nowicki Deck ¶¶ 29-30). Similarly, Mr. Hosaka testified that he was not aware of any instance where ADK complained about sharing the cost of third-party audits. (9/6/2011 Tr. 44:17-45:6 (Hosaka)).
186. Licensor attempted to elicit testimony from Ms. Nowicki to the effect that, because audits are not common in Japan, Licensor did not understand 4Kids’ audit procedure; Licensor relied on an email concerning approval of a third-party audit settlement, not a third-party audit proposal. (Ex. T-210). According to Ms. Now-icki, this document does not demonstrate that Licensor was confused about third-party audits, but that they were confused about a specific issue related to a specific settlement. (9/15/2011 Tr. 59:5-10; 60:5-12 (Nowicki)). Licensor further attempted to elicit testimony that a suggestion had been made that 4Kids not seek Licensor’s approval of audit settlements because Li-censor did not understand the audit procedure. Ms. Nowicki explained that this was not consistent with her recollection or review of the document, and correctly observed that, in the email, Ms. Hozumi was merely suggesting that 4Kids specifically explain in greater detail its recommendations for audit settlements. (Id. at 105:13-106:1).
187. There is no dispute that Licensor had final authority over the approval of audit settlements. 4Kids also informed Li-censor of the audit findings and the settlement offers made by the licensees. (Now-icki Deck ¶28; Ex. T-32; Ex. T-69). 4Kids never accepted a settlement without Licensor’s approval. (9/15/2011 Tr. 106:19-24 (Nowicki)). Licensor understood that they had approval over third party settlements. (9/8/2011 Tr. 48:18-24 (Sugimoto)).
188. The third party audits of 4Kids sublicensees recovered more than $750,000 in additional royalties, which were split SO-SO with Licensor. (9/6/2011 Tr. 45:7-20 (Hosaka)).
189. Mr. Elliott and Licensor have asserted that a written amendment was necessary to codify that Licensor and 4Kids would split the costs of third-party aqdits, and thus email approvals of audits were insufficient to deduct the shared cost from Licensor’s share of royalties. (Shinoda *658Decl. ¶ 47; 8/31/2011 Tr. 67:1-16 (Shino-da); Ex. T-14 at 8-9; Elliott Decl. ¶ 40). However, there is evidence that Licensor agreed, by email, to split other expenses, such as those associated with the Yu-Gi-Oh! style guide. (8/31/2011 Tr. 67:17-25 (Shinoda); 9/21/2011 Tr. 89:22-90:17, 91:5-16 (Foster)).
190. As Mr. Foster explained, it is impossible to understand all issues and costs that will arise when an agreement is entered into, and thus, it is common for additional costs not contemplated by the agreement to arise. (9/21/2011 Tr. 92:5-16 (Foster)). In those instances, depending on the nature of the cost, 4Kids will attempt to obtain verbal approval (followed-up with an email) or something in writing. (Id.).
191. The sole basis of Mr. Elliott’s Finding 5 is that the License Agreements did not speak to the deduction of third party audit costs. (Ex. T-14 at 8-9). In the course of his audit, Mr. Elliott sent an email to Mr. Sugimoto stating, “[p]er our earlier conversation, I believe you indicated your (sic) someone in your home office may have approved [the deduction of third party audit costs]. Can you confirm this?” (Ex. T-100). Mr. Elliott provided inconsistent testimony as to whether or not Mr. Sugimoto had told him if these audits had been approved. During his deposition, Mr. Elliott testified that he did not recall if Licensor had told him if these audits had been approved. (8/29/2011 Tr. 206:2-8 (Elliott)). However, at trial, Mr. Elliott testified that Mr. Sugimoto informed him that these audit costs had not been approved by Licensor. (8/29/2011 Tr. 204:4-9, 205:18-25 (Elliott); 8/30/2011 Tr. 85:2-13 (Elliott)). Mr. Sugimoto testified that it was ( Licensor’s understanding that Li-censor had final approval over third-party audits, although he did not know whether or not he told Mr. Elliott about Licensor’s approval authority. (9/8/2011 Tr. 53:19-22, 57:10-19 (Sugimoto)).
192. Mr. Elliott was shown various email communications between the parties in which Licensor agreed in writing to the initiation of third-party audits, one of which specifically referenced that the audit would involve costs to be paid by Licensor. (Ex. T-31; Ex. T-101). Mr. Elliott agreed that these emails, “appear to be some support” that audits were approved by Li-censor, but explained that Licensor had not provided copies of these emails nor did they tell him about these emails. (8/30/2011 Tr. 97:11-21 (Elliott) 8/29/2011 Tr. 208:1-3, 211:8-10). He testified that had Licensor provided him with a copy of Exhibit T-31, that email would have “impacted [his] conclusion,” and he would have discussed the issue with Mr. Sugimoto. (8/29/2011 Tr. 207:21-25 (Elliott)). He further testified that, had Licensor provided him with copies of Exhibits T-31 and T-101, he would have spoken to Mr. Sugimo-to and been “guided by his decisions as to whether or not to assert this audit claim with respect to third-party audits.” (8/30/2011 Tr. 86:24-87:10 (Elliott)). However, Mr. Elliott evaded answering whether, in light of Exhibits T-31 and T-101, Mr. Sugimoto’s statement to him that these audits were not approved was inaccurate. (8/30/2011 Tr. 101:20-103:5 (Elliott)).
193. Mr. Elliott testified that all of the deductions for third-party audit costs were detailed on the quarterly participation statements. (8/29/2011 Tr. 202:13-16 (Elliott)). Mr. Elliott admitted that, despite the inclusion of these costs on the participation statements, he was not aware of any evidence that Licensor had ever objected to these deductions, and indeed, he never asked Licensor whether they had objected to these deductions prior to 2010. (Id. at 202:21-24, 203:25-204:3).
*659194. Mr. Erk, Licensor’s royalty inspection expert, provided testimony as to Mr. Elliott’s Finding on the deduction of third-party audit costs. Mr. Erk testified that he agreed with Mr. Elliott’s Finding that the sharing of third-party audit costs had not been approved by the Licensor. (9/9/2011 Tr. 89:7-12(Erk)). But he admitted that, in the course of reaching his conclusions, like Mr. Elliott, he did not look at any emails between Licensor and 4Kids. (Id. at 89:24-90:23). Mr. Erk also admitted that all deductions for the shared costs of third-party audits were listed on the quarterly participation statements. (Id. at 90:24-91:2). And, despite blessing Mr. Elliott’s Finding, Mr. Erk admitted that he did not know whether or not before 2010 Licensor had ever objected to 4Kids charging them half of the third-party audit costs. (Id. at 91:3-7).
195. Based on the foregoing, the evidence establishes that there was a documented course of conduct between the parties whereby 4Kids would obtain Li-censor’s approval for the initiation of third-party audits, and that Licensor understood, in approving these audits, that it would share in the costs.
F. Finding No. 6: Errors & Omissions Insurance Allocation
196. In his sixth audit Finding, Mr. Elliott found that 4Kids overcharged Li-censor for its share of the errors and omissions (“E & O”) insurance purchased by 4Kids. (Ex. T-14 at 9-11; Elliott Deck ¶¶ 42-47).
197. Paragraph 13 of each of the License Agreements requires 4Kids to obtain E & O insurance on behalf of Licensor. (Ex. T-6 ¶ 13; Ex. T-ll ¶ 13). The License Agreements allow 4Kids to deduct the cost of E & O insurance from Li-censor’s share of the Gross Income, up to a maximum of $15,000 per year. If other television series and movies are insured under the same policy, the License Agreements provide that Licensor’s share of the premium shall be “computed on a pro-rata basis.” (Ex. T-6 ¶ 4(c); Ex. T-ll ¶ 4(c)).
198. Since 2001, 4Kids has purchased E & O insurance for the Yu-Gi-Oh! properties on behalf of both 4Kids and Li-censor. 4Kids has charged Licensor the maximum amount ($15,000) each year from 2001 to 2009. (Newborn Deck ¶¶ 118-19; Foster Deck ¶¶ 45-46; Elliott Deck ¶44; Shinoda Deck ¶ 48).
199. In 2010, 4Kids’ insurance policy listed 130 “additional insured” properties, seven of which were related to Yu-Gi-Oh! (Elliott Deck ¶45; Shinoda Deck ¶ 48; Hosaka Deck ¶ 55). However, this number included a number of inactive properties. (Newborn Deck ¶ 120).
200. Mr. Elliott never asked 4Kids for a breakdown of which properties listed on the policy were active and which were inactive. (8/29/2011 Tr. 212:8-214:10 (Elliott)). Nor did he attempt to (i) determine whether the inclusion of inactive properties affected 4Kids’ insurance premium or (ii) review the terms of 4Kids’ insurance policy. (8/29/2011 Tr. 214:11-15 (Elliott)).
201. Mr. Newborn and Mr. Foster both testified that maintaining E & O insurance on inactive properties account for a de minimis marginal increase in the cost of 4Kids’ insurance premiums. When 4Kids inquired with its insurance carrier about dropping inactive properties, the carrier recommended that 4Kids “keep any discontinued names on the list.” (Newborn Deck ¶ 120; Foster Deck ¶ 47; Ex. T-438).
202. The parties disagree as to how the “pro rata” share should be determined, i.e., what method should be used to calculate the percentage of the premium alloeat-*660ed to Licensor. During trial, three methods were suggested:
1. 4Kids’ Methods
203. 4Kids determined the allocation percentage by dividing its Yu-Gi-Oh!-de-rived revenue for a given year by its total company revenue. (Elliott Decl. ¶ 44). Using this formula, 4Kids allocated between 16% and 40% of its E & 0 insurance premiums to Licensor between 2001 and 2009, and for each year this amount exceeded the $15,000 maximum set out in the License Agreements. (Id.). In each case, the amount allocated to Licensor was then reduced by 4Kids to the $15,000 maximum allowed under the agreement, or approximately 11% of the total premium. (Id., Ex. T-14 at 9-11; Newborn Decl. ¶ 119; Foster Decl. ¶ 46).
204. Both Mr. Newborn and Mr. Foster testified that they believed Licensor’s share was justified because the Yu-Gi-Oh! property has always accounted for more than 11% of 4Kids’ revenue. (Newborn Decl. ¶ 119; Foster Decl. ¶ 46).
205. Similarly, Licensor’s expert, Arthur Erk, testified that he would have calculated the allocation percentage by dividing 4Kids’ Yu-Gi-Oh!-derived revenue by the revenue derived from its other insured properties. (Ex. T-200 at 6-7; 9/9/2011 Tr. 91:8-92:10(Erk)). Mr. Erk thus disagreed with Finding No. 6.
206. 4Kids submitted a spreadsheet showing a detailed analysis of the E & O insurance costs. (Ex. T-477). The analysis shows that, for every year except one, Licensor’s share of the E & O insurance exceeded $15,000 when calculated using 4Kids’ revenue basis. (Id.). Only during a single year — from April 2001 to March 2002 — does the weighted revenue method result in an allocated premium less than the $15,000 charged by 4Kids. During that year, the weighted revenue method yields an allocated premium of $5,602.99, or $9,397.01 less than the amount charged by 4Kids. (Id.).
207. Another method proposed by 4Kids is to divide the number of Yu-Gi-Oh! properties by the total number of active properties maintained by 4Kids. Mr. Newborn testified that, since Yu-Gi-Oh! always accounted for more than 11% of 4Kids’ active properties, that there would have been no refund due to Licensor using this methodology. (Newborn Decl. ¶ 119; Foster Decl. ¶ 46).
2. Mr. Elliott’s Method
208. Mr. Elliott determined the allocation percentage by dividing the number of Yu-Gi-Oh! properties listed on 4Kids’ insurance policy by the total number of insured properties. (Elliott Decl. ¶ 46). Basing his calculation on the number of insured properties listed on 4Kids’ 2010 policy, Mr. Elliott calculated that the appropriate allocation percentage was approximately 5.4%. (Id.). Applying this allocation percentage, without any knowledge of how many additional insureds were listed on 4Kids’ E & O policies in years prior to the 2010 policy year, Mr. Elliott concluded that 4Kids owed Li-censor a refund of $67,328.45 for the nine-year period in which 4Kids had deducted a total of $135,000 from Li-censor’s share of Gross Income. (Ex. T-14 at 10-11; Elliott Decl. ¶ 46).
209. In neither his audit report nor his declaration did Mr. Elliott offer an explanation as to why he determined that the pro rata share should be calculated in the manner that he suggests. (Ex. T-14 at 10-11; Elliott Decl. ¶ 46).
210. Nor, as noted above, did Mr. Elliott conduct any investigation as to the terms of 4Kids’ insurance policy or the impact, if any, of adding inactive properties to the list of additional insureds. Furthermore, Mr. Erk wrote in his expert *661report that this method “would have been more representative of the allocation of the insurance costs to the licensor companies covered under the insurance policies.” (Ex. T-200 at 6-7; 9/9/2011 Tr. 91:8-92:10). In essence, Mr. Erk disagreed with Mr. Elliott’s sixth audit Finding.
G. Finding No. 7: Bank Charges
211. In his seventh audit Finding, Mr. Elliott suggested that 4Kids had taken $4,270.58 in deductions from Licensor’s share of Gross Income for bank charges that were not authorized deductions under the License Agreements. (Ex. T-14 at 12; Shinoda Decl. ¶ 49).
212. Mr. Newborn testified that 4Kids typically deducts these bank charges to cover wire transfer fees and similar expenses, but that Finding 7 did not constitute a material dispute between the parties. (Newborn Decl. ¶ 130). 4Kids does not dispute Mr. Elliott’s Finding. (Elliott Decl. ¶ 48; 9/21/11 Tr. 23:10-19, 173:5-18 (Foster)).
H. Finding No. 8: Miscellaneous Costs
213. In his eighth audit Finding, Mr. Elliott suggested that 4Kids had deducted $43,544.59 in miscellaneous costs that were not authorized under the License Agreements. (Ex. T-14 at 12-13). This amount was for certain style guide art and dubbing expenses and fees that 4Kids had, in Mr. Elliott’s view, improperly charged to Li-censor. Id.; (Shinoda Decl. ¶ 50).
214. In his October 11, 2010 draft audit report, Mr. Elliott identified four items, totaling $132,151.69, that he concluded were not authorized by the License Agreements. (Ex. T-13 at 11-12). According to the final audit report, Ms. Kozmata “provided written support for these deductions.” Ex. T-14 at 13. Mr. Elliott then showed these documents to Mr. Sugimoto.
215. After Mr. Sugimoto’s review of the four items, Mr. Elliott concluded that Licensor was due a total refund of $43,544.59 for costs deducted improperly pursuant to the License Agreements. (Ex. T-14 at 12-13). Mr. Sugimoto had approved two of the deductions and rejected another. As for the fourth deduction, which was for Yu-Gi-Oh! style guide art costs, Mr. Sugimoto approved half of the cost. Mr. Elliott wrote that, according to Mr. Sugimoto, the style guide art costs were “ ‘top-off costs” that are divided evenly between 4Kids and Licensor. (Ex. T-14 at 12-13).
216. There was no written amendment to the License Agreements related to the division of the style guide art costs. (9/21/2011 Tr. 91:5-13 (Foster)).
217. According to Mr. Newborn, Finding 8 is not a material dispute between the parties, given that 4Kids has offered to pay substantially all of the amount ($39,-000). (Newborn Decl. ¶ 130).
I.Finding No. 9: Material & Courier Costs
218. In his ninth audit Finding, Mr. Elliott suggested that 4Kids owed Li-censor $247,771.88 in material and courier costs incurred between 2001 and 2010. (Ex. T-14 at 13; Elliott Decl. ¶ 50).
219. Under the License Agreements, Licensor is obligated to send certain materials to 4Kids with respect to each television episode, including a Digital Beta NTSC master tape of each episode, along with music effects, a script, and music cues. 4Kids, in turn, is obligated to reimburse Licensor for the “actual cost” of such materials, including courier costs. (Ex. T-6 ¶ 5(a); Ex. T-ll ¶ 5(a)). However, prior to October 15, 2010, Licensor had never sent any invoice concerning material and courier costs to 4Kids, any notice con*662cerning these costs, any request that these costs be reimbursed, or any complaint that these costs had not been paid. (Foster Decl. ¶ 41; 9/6/2011 Tr. 50:10-58:18 (Hosa-ka); 9/8/2011 Tr. 39:6-22 (Sugimoto)).
220. Mr. Foster testified that 4Kids does not usually pay material and courier costs under its license agreements, and that it does not have a practice of affirmatively requesting invoices for such costs from its licensors. Furthermore, Mr. Foster testified that it would be “impossible” for 4Kids to track whether it was being properly invoiced for the various costs it is obligated to pay under the hundreds of contracts to which it is a party. (Foster Decl. ¶¶ 41-42; 9/21/2011 Tr. 100:14-101:10, 9/20/2011 Tr. 180:17-182:1 (Foster)).
221. During the course of his audit, Mr. Elliott discovered that the material and courier costs had never been invoiced to 4Kids. (Elliott Decl. ¶ 50). At Mr. Elliott’s suggestion, Mr. Hosaka directed his associate Tammy Kusama to prepare an invoice for the material and courier costs. (Hosaka Decl. ¶¶ 57-58). Ms. Ku-sama reviewed ADK’s records and “calculated” the amount reflected on the invoice based on the average material and delivery costs. (Hosaka Decl. ¶ 58). The estimated costs were based on the period from the inception of the License Agreements to September 2010. (Elliott Decl. at ¶ 50). The costs were then converted from Japanese yen to American dollars using the exchange rate in effect at the time the invoice was prepared, which was early October 2010, rather than the exchange rates in effect when the materials were actually delivered to 4Kids. (Hosaka Decl. ¶ 58; 9/6/2011 Tr. 47:22-48:15 (Hosaka); 9/8/2011 Tr. 40:10-13 (Sugimoto)).
222. According to an analysis done by 4Kids’ Accounting Department, the prevailing exchange rate in October 2010 was the lowest yen-to-dollar rate during the 2001 to 2010 time frame. (Ex. T-270 at 4KIDS-0060156). Licensor introduced no evidence that disputes 4Kids’ analysis of the applicable exchange rates.
223. On October 15, 2010, Mr. Hosaka sent the invoice to 4Kids, consisting of a one-page chart purporting to show material and courier costs for over 800 Yu-Gi-Oh! episodes, over a nine-year period, totaling $247,771.88. The invoice only included backup documentation regarding the then-recently-delivered episodes for the Yu-Gi-Oh! 5D series. However, it did not include any backup documentation for the costs associated with the Yu-Gi-Oh! Duel Monsters and Yu-Gi-Oh! GX series, comprising approximately 400 episodes, and, notably, it also included charges for 83 episodes “scheduled to deliver from ADK” to 4Kids in the future. (Ex. T-29; Newborn Decl. ¶ 123; 9/6/2011 Tr. 46:2-18, 47:3-21 (Hosaka)).
224. Mr. Hosaka admitted that the costs reflected in the October 15 invoice did not reflect “actual” costs, but were based on the average costs of such materials. (9/6/2011 Tr. 46:19-47:2 (Hosaka); Hosaka Decl. ¶ 58).
225. Mr. Elliott took ADK’s representation that it was owed $247,771.88 and included that figure in his final audit report. Mr. Elliott testified that he took ADK’s calculation at “face value” and did not ask for any supporting documentation. He further testified that he understood at the time he included Finding 9 in his audit report that the numbers were based on estimated costs and not actual costs. (8/29/2011 Tr. 217:1-219:6 (Elliott); 8/30/2011 Tr. 96:22-97:4 (Elliott); Ex. T-14).
226. On several occasions, 4Kids requested that ADK or its counsel provide 4Kids with additional information regard*663ing the material costs. (Newborn Decl. ¶ 124; Ex. T-22; Ex. T-269; Ex. T-270; 9/6/2011 Tr. 48:16-52:15 (Hosaka)). For example, in a letter dated December 29, 2010, Mr. Kahn wrote: “[T]here are no invoices or other back up information to support about ¥14 million of material costs and courier costs.... Please advise whether these invoices and other records exist. If ADK has such invoices and other information, please send it to us at your earliest convenience.” (Ex. T-22).
227. In an email dated January 14, 2011, Mr. Newborn offered that 4Kids would pay such material costs and courier costs on the more than 500 Yu-Gi-Oh! episodes delivered by ADK to 4Kids over the ten-year relationship without regard to the statute of limitations and without requiring ADK to provide documentation of the actual material costs and courier costs if such documentation could not be located. He asked Licensor to (1) explain the 10% “management fee” included in the invoice sent regarding material costs for Yu-Gi-Oh! 5D; (2) explain why the courier costs had been charged for 123.2 episodes;41 and (3) justify the exchange rate used in the invoice. Mr. Newborn included a chart prepared by 4Kids’ accounting department showing that the ¥80 per dollar exchange rate apparently used by Licensor was, as of January 14, 2011, the lowest (i.e., least favorable to 4Kids) in recent history, and he suggested that it would be more appropriate to use the exchange rates in effect when the episodes were delivered. (Ex. T-270).
228. Mr. Newborn sent a follow-up email on February 28, 2011, again offering to resolve the material costs if Licensor would provide answers to the questions posed in Mr. Newborn’s January 14 email. (Ex. T-269).
229. In a letter dated March 4, 2011, Licensor’s counsel stated with respect to the material costs that, “[a]s with all the other claims, without a larger commitment by 4Kids to resolve all outstanding issues, it is not worth the time to track down the individual invoices relating to this single claim.” (Ex. T-25 at 2).
230. At trial, Mr. Hosaka testified that Licensor never provided any backup documentation to 4Kids concerning the Yu-Gi-Oh! Duel Monsters and Yu-Gi-Oh! GX series. He also testified that ADK currently has such documentation in its possession. (9/6/2011 Tr. 52:2-53:18 (Hosa-ka)).
231. Mr. Foster testified that if 4Kids had received proper backup documentation to substantiate the material and courier costs invoice, 4Kids would have paid the invoice in the normal course of business. Mr. Foster also testified that as the CFO of a public company, and given the internal accounting controls in place, he would not have been able to pay the material costs without having the proper supporting documentation. (9/20/2011 Tr. 177:15-178:5, 179:15-182:1 (Foster)).
232. Licensor’s expert, Mr. Erk, submitted a report in which he stated that “Mr. Elliott’s inspection revealed that 4Kids had improperly shifted [the material and courier] costs to [Licensor].” (Erk Report, Ex. T-200 at 7). But at trial, Mr. Erk testified that, upon further reflection, 4Kids had done nothing improper with respect to the material costs. He testified that he would have handled the issue differently than Mr. Elliott, and would not *664have included the material costs as an audit claim. Mr. Erk also testified that there was nothing improper about 4Kids’ request for additional documentation regarding the material costs, and that asking for such documentation would be the logical and reasonable thing to do. (9/9/2011 Tr. 92:19-95:1 (Erk)).
VI. ADK’s Purported Termination of the 2008 Agreement
A. The 2008 Agreement’s Termination Provision
233. Paragraph 12(a) of the 2008 Agreement provides, in relevant part:
If either party breaches any warranty or other material provision of this Yu-Gi-Oh! Agreement and does not cure such breach within ten (10) business days of the breaching party’s receipt of a written notice of such breach from the non-breaching party, then at any time during the continuance of such default, the non-breaching party may, in addition to any other rights the non-breaching party may have at law or in equity, terminate this Agreement effective as of the date of the breaching party’s receipt of a written notice from the non-breaching party notifying the breaching party of such termination.
(Ex. T-ll).
234. Paragraph 15(c) of the 2008 Agreement provides, in relevant part:
All notices, requests, consents and other communications hereunder shall be in writing and shall be sent by express mail, or telefax with a follow up copy by express airmail to the parties at their addresses first above written.... Notice shall be deemed received upon actual receipt or when such receipt has been refused.
(Ex. T-ll).
B. Mr. Elliott’s Preliminary Audit Findings
235. Shortly after being retained in January 2010, Mr. Elliott wrote an email to Mr. Hosaka and Mr. Sugimoto in which he posed questions regarding ADK’s interpretation of the License Agreements.42 Mr. Elliott noted that, under the 2001 Agreement, the home video royalty had been divided evenly between the parties, and that the provision had been amended in the 2008 Agreement to provide that the entire home video royalty be paid to Li-censor when 4Kids was exercising the home video rights itself. Mr. Elliott, noting that there was no effective date provision in the 2008 Agreement, questioned whether this change was retroactive to 2001, in which case Licensor would be entitled to an additional $4.3 million in home video royalties. (Ex. T-89).
236. Mr. Sugimoto responded to Mr. Elliott’s email, stating that “both ADK and 4Kids were assuming that the effective date was at the time of the signing of the [2008 Agreement]. Legally we may be able to claim the money, but ethically [it] may be difficult.” (Ex. T-89).
237. Mr. Elliott provided ADK with a preliminary audit report on May 21, 2010, in which he identified seven potential claims against 4Kids valued at approximately $7.3 million. The largest preliminary audit claim was for the $4.3 million in home video royalties that Mr. Elliott had identified in his January 2010 email to Mr. Sugimoto, based on the purported retroactive applicability of the 2008 Agreement. (Ex. T-12 at 2-6).
*665238. In his May 2010 audit report, Mr. Elliott also raised three issues regarding international withholding taxes. First, Mr. Elliott suggested that the withholding taxes should be taken equally from 4Kids’ share.43 Second, Mr. Elliott suggested that 4Kids had not substantiated foreign withholding tax deductions with withholding tax certificates. Third, Mr. Elliott posed questions to ADK as to whether (1) anyone at ADK had ever made an inquiry with 4Kids regarding the tax credits; (2) whether ADK actually took the tax credits on its Japanese income tax returns; and (3) whether anyone at ADK ever submitted a request to 4Kids to provide evidence that the withholding taxes were actually paid. (Ex. T-12 at 9-11).
239. In or about early June 2010, Mr. Elliott learned from his review of 4Kids’ participation statements and subsequent conversations with 4Kids’ employees that 4Kids was receiving service fees from Fu-nimation in connection with Yu-Gi-Oh! home videos. (Elliott Deck ¶ 19-20).
240. Mr. Newborn of 4Kids provided copies of the Funimation Services Agreements to ADK executives at a trade show in Las Vegas on June 8, 2010. (Hosaka Deck ¶ 43). Copies were emailed to Mr. Elliott the following week. (Ex. T-17 at 3).44
C. The Parties’ June 2010 Correspondence
1. ADK’s June 17, 2010 Letter
241. On June 17, 2010, Mr. Hosaka sent a letter to Mr. Kahn at 4Kids in which he raised two substantive audit issues. First, Mr. Hosaka stated that 4Kids had “misclassified certain income” by not paying Licensor the entire 20% home video royalty under the 2001 Agreement, and that Licensor was “entitled to 20% of the wholesale price,” premised on the retroactive application of the 2008 amendment to Paragraph l(b)(iii), which provided that the entire 15-20% home video royalty would go to ADK if 4Kids exercised the home video rights itself. Second, Mr. Ho-saka claimed that 4Kids was obligated to include the Funimation service fees in Gross Income. (Ex. T-15).
242. Mr. Hosaka attached a proposed “tolling agreement,” which he asked 4Kids to sign in order to “give Mr. Elliott time to complete his audit and allow [4Kids and ADK] time to informally discuss and explore issues raised by the audit.” (Ex. T-15; Newborn Deck ¶ 137).
243. The June 17 letter did not (1) mention tax withholding, third-party audit costs, E & O insurance allocation, or material and courier costs; (2) contain any form of the words “notice,” “breach,” “cure,” or “terminate”; (3) make a demand for the payment of a specified sum; or (4) reference the termination provision of the 2008 Agreement. (Ex. T-15).
244. The June 17 letter was sent by email and facsimile. (Ex. T-15). There is no evidence that it was sent by express mail or express airmail as provided in Paragraph 15(c) of the 2008 Agreement.
*6662. ADK’s June 25, 2010 Letter
245. On June 25, 2010, ADK’s outside counsel sent a letter to Mr. Newborn briefly discussing Mr. Elliott’s preliminary audit Findings. The letter contained several requests or demands for payment. The letter “demand[ed]” and “insist[ed]” that 4Kids repay and reimburse Plaintiffs for underpaid royalties and other expenses. Specifically, the letter outlined ADK’s position that it was owed: (1) $2,431,788.10 in home video royalties which ADK asserted were wrongly split between the parties under the 2001 Agreement, or, alternatively, half of the gross amount of the service fees paid to 4Kids by Funimation (incorrectly estimated by Mr. Elliott to be $2,215,198.50); (2) third-party audit costs in the amount of $127,925.29; (3) $74,063.64 in improper deductions for bank charges and “miscellaneous undisclosed deductions”; and (4) $366,000.00 in previously uninvoiced material costs. In addition, the letter requested documentation to support $2,424,397.76 in international withholding taxes paid by 4Kids’ subagents and copies of 4Kids’ E & O insurance policies and certificates. (Ex. T-16). All of the numbers listed in the June 25 letter are inconsistent with the numbers later asserted in the December 20, 2010 letter sent by ADK to 4Kids. (Ex. T-16; Ex. T-18; Newborn Decl. ¶ 18).
246. The June 25 letter closed by stating, “In the interest of resolving this matter amicably, I also ask that you agree to the attached tolling agreement in order to give the parties time to discuss the issues. I look forward to your prompt response and to working with you to resolve this matter.” (Ex. T-16).
247. The June 25 letter did not (1) include any form of the words “notice,” “breach,” “cure,” or “terminate”; or (2) reference the termination provision of the 2008 Agreement. (Ex. T-16).
248. On its face, the letter purports to have been sent by facsimile, hand delivery, and email. (Ex. T-16). Licensor introduced no evidence that the letter was, in fact, hand delivered, and there is no evidence that it was sent by express mail or express airmail as provided in Paragraph 15(c) of the 2008 Agreement.
3. 4Kids’ June 29, 2010 Response
249. On June 29, 2010, Mr. Newborn sent a letter to counsel for ADK. Mr. Newborn requested a copy of Mr. Elliott’s audit report and supporting schedules in order to assist 4Kids in understanding and resolving the audit issues:
We believe that it would be more productive to review the audit report which Mr. Elliott is presumably compiling and which should have schedules attached to it supporting the various claims being asserted. As you’re probably aware, it is customary in the licensing business for a party conducting an audit to supply the audit party with the audit report. The parties can then discuss whatever issues are raised by the audit report with the details surrounding such issues available to the parties.
(Ex. T-17 at 2).
250. In his June 29 letter, Mr. Newborn also responded to the substantive points raised by ADK’s June letters, explaining 4Kids’ position that (1) the 2001 Agreement clearly states that the 20% home video royalty is to be split between the parties; (2) ADK is not entitled to any portion of the Funimation service fees, which were for “hundreds of thousands of dollars” of “services rendered” by 4Kids; (3) ADK had approved third-party audits, and was obligated to pay its share of the associated costs; and (4) ADK had been charged an appropriate amount for its share of the E & O costs. As to withholding taxes, Mr. Newborn suggested that *667Mr. Elliott conduct “audit tests” in order to “verify the withholding tax information on [4Kids’] participation statements.” In addition, Mr. Newborn asked for additional information regarding the material costs. Finally, Mr. Newborn informed ADK that the proposed tolling agreement was being reviewed by 4Kids’ outside counsel. (Ex. T-17).
251. The parties ultimately signed the tolling agreement on June 30, 2010. (Newborn Decl. ¶ 139). The agreement was effective as of June 1, 2010.45
252. Following the parties’ June 2010 correspondence, Mr. Elliott’s audit continued for several months, culminating in the issuance of his November 17, 2010 report to ADK. (Elliott Decl. ¶¶ 14-15). During this time, there is no record evidence of any written correspondence between the parties concerning the substance of the audit.
D. The Parties’ December 2010 Correspondence
1. ADK’s December 20, 2010 Letters
253. On December 20, 2010, Mr. Shino-da sent a letter to 4Kids containing a brief description of Mr. Elliott’s nine audit Findings. At the conclusion of each Finding, Mr. Shinoda variously wrote that ADK “expect[ed],” was “entitled to,” or was “owed,” or that 4Kids “should pay” certain amounts. (Ex. T-18).
254. The December 20 letter did not provide 4Kids with enough information to fully evaluate Licensor’s audit claims. For example, the letter provided no information regarding which withholding tax deductions were considered “substantiated” and which were not. Mr. Foster testified that he could not determine, from looking at Mr. Shinoda’s December 20 letter, which tax withholding deductions Licensor counted as “unsubstantiated.” (9/21/2011 Tr. 83:18-21, 87:1-4 (Foster)).
255. Nor could 4Kids determine from Mr. Shinoda’s letter what amounts claimed were beyond the statute of limitations period. Similarly, Mr. Shinoda’s letter provided no information regarding the basis for Licensor’s calculation of the material and courier costs. (Ex. T-18).
256. Mr. Shinoda’s letter also claimed that ADK had not received a scheduled payment for 4Kids’ purchase of the Yu-Gi-Oh! 5D series, which had been due November 30, 2010. (Ex. T-18). In fact, 4Kids had made such a payment. (Newborn Decl. ¶ 141; 8/31/2011 Tr. 72:15-21 (Shinoda)). Regarding the allegedly delinquent payment, Mr. Shinoda wrote that 4Kids “must now [make the payment] or be in breach of the parties’ agreements.” (Ex. T-18 at 1) (emphasis added).
257. Regarding the audit claims, Mr. Shinoda wrote that he was writing to “request payment for the underpayment Mr. Elliott found” and that he “insisted] that within 10 business days 4Kids pay ADK $4,819.354.63 to cover the full underpayment.” Although the letter was dated December 20, 2010, the letter called for payment of these amounts allegedly due by December 14, 201046 — six days before the date of the letter. (Ex. T-18 at 5).
258. Mr. Shinoda did not use the words “notice,” “cure” or “terminate” in his letter, nor did he reference the termination *668provision of the 2008 Agreement. The only occurrence of the word “breach” was with respect to the allegedly delinquent November 30 payment, which had been paid on November 30, 2010, as required. (Ex. T-18).
259. Referring to the December 20 letters, Mr. Shinoda testified that “[i]t was [his] intent by including this ten business day cure period to alert 4Kids to the urgency of their need to respond to [ADK’s] demand for payment.” He also testified that he gave 4Kids ten business days to cure “because [he] was required to do so under the 2008 Agreement,” and that he “included a reference to paragraph 4(f) because that paragraph states that ‘[a]ny underpayment reflected in the audit shall be paid to [the YGO Consortium] promptly.’ ” (Shinoda Decl. ¶¶ 58-59).
260. But on cross-examination, Mr. Shinoda admitted that he did not write the December 20 letters and, in fact, does not know who wrote those letters. (8/31/2011 Tr. 78:20-79:5 (Shinoda)). When asked at his deposition why he included a ten-day period in the December 20 letter, Mr. Shi-noda testified that he believed ten days was an “appropriate” duration, but did not make any reference to any requirements of the 2008 Agreement. (8/31/2011 Tr. 79:11-83:9 (Shinoda)).
261. Mr. Shinoda claims to have sent a second version of his letter later on the same day, December 20, 2010, correcting the mistake regarding the November 30 payment. (Shinoda Decl. ¶ 57). The second version of the letter does not explain that it replaces the first, and it omits references to the November 30 payment (and all references to a “breach” of the 2008 Agreement). (Ex. T-19). 4Kids first learned of this version of the letter during the pre-trial discovery phase of this proceeding in May 2011, and it has not been able to find this second version in its records. (Newborn Decl. ¶ 141 & n.51). Mr. Kahn testified that it is possible that it was received by 4Kids but inadvertently discarded as a duplicate. (8/8/11 Dep. Tr. 240:22-241:14 (Kahn)).
262. The second version of Mr. Shino-da’s December 20 letter contains fax lines in English at the bottom, suggesting that it was “received” by a fax machine on December 20, 2010. (Ex. T-19). However, the fax confirmation line does not indicate that the letter was sent to, or received by, 4Kids. Moreover, the letter has a document control number in the lower left that appears similar to the document control numbers on other letters sent by ADK’s outside counsel (see, e.g., Ex. T-16; Ex. T-25), suggesting that the letter was prepared by the Olshan firm. Mr. Hosaka also testified that the Olshan firm may have drafted the December 20 letters. (9/6/2011 Tr. 74:20-75:17 (Hosaka)).
263. Both December 20 letters on their face state only that they were sent by facsimile. (Ex. T-18; Ex. T-19). Mr. Shi-noda testified that he did not know whether the letters were sent by any method other than fax. (8/31/2011 Tr. 71:14-20 (Shinoda)). When asked at trial whether he sent the letters by courier or by mail, such as FedEx, Mr. Hosaka responded, “I think so.” (9/6/2011 Tr. 114:6-115:7 (Ho-saka)). However, Licensor has not introduced into evidence any shipping record or receipt showing that either letter was sent by express mail or express airmail, and neither letter refers to such a method of delivery on its face. (Ex. T-18; Ex. T-19). Thus, there is no credible evidence that either letter was sent by express mail or express airmail as required by the notice provision in Paragraph 15(c) of the 2008 Agreement.
2. 4Kids’ December 29, 2010 Responses
264. On December 29, 2010, 4Kids sent three letters to Licensor addressing the *669Findings discussed in Licensor’s December 20 letter and setting out 4Kids’ position as to why the claims were largely invalid. (Ex. T-20; Ex. T-21; Ex. T-22). Although sent under the name of Mr. Kahn, the letters were drafted by Mr. Newborn. (9/12/11 Tr. 187:8-187:15 (Newborn)).
265. The first December 29 letter addressed international withholding taxes. The letter explained that, in 4Kids’ experience with other Japanese licensors, the information included on 4Kids’ participation statements was sufficient for ADK to have claimed tax credits or deductions on its income tax returns. (Ex. T-20). It also explained 4Kids’ position that Mr. Elliott could have “substantiated” the withholding taxes by examining 4Kids’ cash receipts to verify that the monies received from foreign licensees reflected the payment of withholding taxes. Id. The first December 29 letter noted that it is ADK’s responsibility, not 4Kids’ responsibility, to ensure that ADK made appropriate tax elections on its Japanese tax returns. Finally, 4Kids proposed that it would contact the Japanese office of an international accounting firm to assist ADK in filing amendments to its Japanese tax returns. Id. Mr. Shinoda, to whom the proposal was addressed, could not recall ever responding to 4Kids regarding that proposal. (8/31/2011 Tr. 84:3-17 (Shinoda)).
266. In its second December 29 letter, 4Kids addressed the home video revenue audit claims (Findings 1, 2 and 4). (Ex. T-21). 4Kids explained that ADK was not entitled to moneys received by 4Kids Home Video, which had acted as the U.S. home video licensee and had performed various services for its distributor Funimation, including authoring DVDs, producing DVD extras, and advertising and promotions. Id. Recognizing that the parties had been “unable to convince” each other about the validity of their respective arguments regarding service fees, 4Kids suggested that the parties submit these claims to arbitration to determine whether ADK is entitled to any share of the service fees. Id.
267. 4Kids’ third December 29 letter addressed third-party audit costs, E & O insurance allocation, and material costs. (Ex. T-22). With respect to the material costs, 4Kids requested invoices or other “back up information” to support the amount claimed. In addition, 4Kids noted that it disagreed with the exchange rate used for ADK’s calculation of material costs for the nine-year period at issue. Id.
E. The Parties’ 2011 Negotiations
268. Over the course of the next two months, and as described below, 4Kids and Licensor engaged in what Mr. Shinoda previously referred to as a “nearly continuous dialog” regarding the settlement of the audit claims “that continued through and beyond” Licensor’s purported termination of the 2008 Agreement. (Declaration of Yoshihiko Shinoda, dated May 25, 2011, ¶ 31, Case No. 11-11607, Docket No. 112).47
269. Ms. Nowicki was scheduled to travel to ADK’s offices in Japan in early January 2011 to meet with Mr. Sugimoto and Mr. Hosaka regarding marketing and *670licensing issues. Before her trip to Japan, Ms. Nowicki sent an email to Mr. Sugimo-to in order to arrange meetings. (9/15/11 Tr. 80:23-82:9 (Nowicki)). Ms. Nowicki asked Mr. Sugimoto, “Will there be any opportunity for me to review audit concerns?” (9/15/11 Tr. 80:23-82:9 (Nowicki)). Mr. Sugimoto responded by telling Ms. Nowicki that all communications regarding the audit claims should be addressed to Plaintiffs’ counsel. (9/15/11 Tr. 80:23-82:9 (Nowicki)). While in Japan, Ms. Nowicki sought to meet with Mr. Shinoda to discuss the audit claims. Mr. Shinoda declined to meet with Ms. Nowicki. (Now-icki Decl. ¶ 36-37; Newborn Decl. ¶¶ 146, 148). Nonetheless, as set forth below, negotiations concerning the audit claims continued between 4Kids and ADK for the next several months.
270.On February 2, 2011, Licensor’s counsel met with Mr. Newborn, Mr. Foster, and 4Kids’ outside director Wade Mas-sad. (Newborn Decl. ¶ 150). Licensor’s counsel advised 4Kids that the issues between the parties did not pertain only to the audit claims; rather, Licensor wanted information on the financial condition of 4Kids and wanted to renegotiate certain terms of the 2008 Agreement. (Id.). Mr. Newborn testified that he provided Li-censor’s counsel with information regarding 4Kids’ financial condition and that Mr. Massad discussed the possible sale of 4Kids to a larger company. (Newborn Decl. ¶ 151). Mr. Newborn again requested information regarding the foreign withholding tax issue and the material costs. (Id.). Licensor’s counsel communicated to 4Kids that Licensor wished to resolve the audit claims only on a global basis, and to reach such a resolution, 4Kids would need to pay Licensor between $2 million and $3 million. (Ex. T-25).
271. Mr. Kahn resigned as Chief Executive Officer and Chairman of 4Kids in early 2011.48 (Hosaka Decl. ¶ 63). After Mr. Kahn left the company, Michael Gold-stein became 4Kids’ new interim chairman. (Hosaka Decl. ¶ 64). Before this, Plaintiffs had no prior relationship with Mr. Gold-stein. (Hosaka Decl. ¶ 64).
1. Adaptation Agreement
272. Under the 2008 Agreement, 4Kids has the exclusive and very valuable option to license the rights to any new Yu-Gi-Oh! series. 4Kids’ option for any new series must be exercised by the April 15th immediately preceding the broadcast season during which the new series will commence. (Ex. T-ll ¶ 1(c)). Plaintiffs were planning to launch a new Yu-Gi-Oh! series, called Yu-Gi-Oh! ZeXal (“Zeal”). (9/1/11 Tr. Shinoda 7:20-23). During early 2011, 4Kids had not yet exercised its option to license the rights to the forthcom*671ing Zeal series. (Newborn Decl. ¶¶ 154, 181). 4Kids had been the licensee for the other Yu-Gi-Oh! series up until that point. (9/1/11 Tr. 7:28-24 (Shinoda)).
273. On February 23, 2011, Mr. Hosa-ka delivered to Mr. Newborn a proposed “Adaptation Agreement,” pursuant to which 4Kids would give up all the television broadcast, home video, and merchandising rights in any new Yu-Gi-Oh! series — including the Zeal series. (Hosaka Decl. ¶ 65). The Adaptation Agreement would have put 4Kids in the position of a “work for hire” production studio, responsible only for producing English language adaptations for the Zeal series. Such an arrangement would have cut 4Kids out of the overwhelming majority of future Yu-Gi-Oh! revenues. (Ex. T — 111; Newborn Decl. ¶¶ 153,155).
274. Mr. Newborn testified that Mr. Hosaka presented the Adaptation Agreement simply as a way to start production on promotional materials for the Zeal series in time for an industry convention in April 2011. Mr. Hosaka assured Mr. Newborn that once “things got back to normal,” that 4Kids would be granted full participation in the Zeal series. (Newborn Decl. ¶ 157). Mr. Newborn informed Mr. Hosaka that 4Kids would not sign the proposed Adaptation Agreement. (Newborn Decl. ¶ 156; Hosaka Decl. ¶ 65).
275. On the evening of February 24, 2011, Licensor’s counsel followed up Mr. Hosaka’s hand delivery of the Adaptation Agreement with a letter demanding that 4Kids sign the “Adaptation Agreement” by no later than March 4, 2011. According to the letter, “ADK view[ed] the Adaptation Agreement as an appropriate way to move forward with the Yu-Gi-Oh [Zeal] series adaptation process, while we continue to work to achieve a global resolution of all the outstanding issues between 4Kids and ADK.” (Ex. T-23; Newborn Decl. ¶ 158).
276. Mr. Newborn replied on March 3, 2011, in a letter to Licensor’s counsel, in which he advised the Consortium that 4Kids would not sign the Adaptation Agreement. (Ex. T-24; 9/1/11 Tr. 8:11-8:22 (Shinoda)). Mr. Newborn wrote that “ADK appears to be attempting to deprive 4Kids of its contractual rights to the new Yu-Gi-Oh! series.” Mr. Newborn suggested that there was “plenty of time to resolve the various audit issues” and that 4Kids “strongly believe[s] that all outstanding issues can be resolved in several days of negotiation.” (Ex. T-24; Newborn Decl. ¶ 159).
277. ADK’s counsel replied by letter dated March 4, 2011, in which ADK declined to negotiate with 4Kids with respect to any individual audit claims. (Ex. T-25). In particular, the letter stated that “4Kids appears intent on approaching ADK’s substantial audit claims in a piecemeal, one-claim-at-a-time manner.” Id. The letter further stated that “the only way to resolve the audit claims is at a global level” and that absent a large commitment by 4Kids, “even discussing the individual audit claims is a fruitless effort.” Id. In a brief response to Mr. Newborn’s earlier request that Licensor submit invoices to support its material costs claim, Licensor’s counsel stated that without a global payment in the range of $2 million to $3 million, “it is not worth the time to track down the individual invoices relating to this claim.” Id. The letter demanded that 4Kids “either (1) sign the Adaptation Agreement; or (2) commit to negotiate within a range of $2 million to $3 million to settle all of [Licensor’s] audit related claims.” The letter concluded by stating that if 4Kids did not agree to either of these two conditions, then Licensor would “proceed with the expectation that 4Kids is not genuinely interested in resolving our *672differences.” Id. No mention was made of termination of the 2008 Agreement.
278. As Mr. Newborn testified, Li-censor’s March 4 letter was sent to 4Kids on a Friday afternoon at around 6:41 p.m. (Newborn Decl. ¶ 160). The letter demanded a response by the following business day (Monday, March 7) at noon. (Ex. T-25).
279. Between March 7 and 9, there was a series of three phone calls between the parties’ counsel — including bankruptcy counsel — regarding 4Kids’ response to Li-censor’s demand. Mr. Newborn testified that, during these phone calls, 4Kids’ counsel advised Licensor’s counsel that if Li-censor sent a notice of breach, that 4Kids would have no choice but to file for bankruptcy within the ten-business-day cure period set forth in Paragraph 12(a) of the 2008 Agreement, resulting in an automatic stay of the attempted termination. (Newborn Decl. ¶¶ 161-64). Mr. Newborn also testified that Licensor’s counsel never suggested to 4Kids that any of their prior correspondence constituted a notice of breach. (Newborn Decl. ¶ 165).
2. Mr. Sugimoto’s “Inadvertent” March 9, 2011 Email
280. On March 9, Mr. Sugimoto allegedly “inadvertently” copied Mr. Newborn and Ms. Nowicki on two emails he sent to Licensor’s counsel. In one of those emails, Mr. Sugimoto wrote that 4Kids “seems ... willing to pay [an] ‘entrance fee,’ ” and that if 4Kids “fail[s] to commit any money (other than 7 figure[s]) by tomorrow’s deadline, please send the termination letter.” (Sugimoto Decl. ¶ 29; Ex. T-311; Ex. T-492; Ex. T-493).
281. The email contains indicia that it may not have been sent inadvertently. First, the email’s formatting and contents are unusual: the body contains a salutation, then text, then an Olshan law firm signature block, then a horizontal line, then more text, then a signature, then another salutation, then more text, and then another signature — all within the same email body. Second, the email was apparently a reply to an email from Mr. Newborn; but instead of Mr. Newborn’s name appearing in the “To” field on the reply, it appears in the “Cc” field. (Ex. T-311; 9/8/2011 Tr. 69:19-86:6 (Sugimoto)).
282. On cross-examination, Mr. Sugi-moto testified that he hit “reply to all,” but offered no explanation as to why Mr. Newborn’s name appeared in the “Cc” rather than that “To” field. (9/8/2011 Tr. 69:19-70:9, 74:1-3, 83:21-84:23 (Sugimoto)). Mr. Newborn’s name could only have been manually inserted as a “Cc” to this email. Nor could Mr. Sugimoto explain the formatting of the email, saying only that he may have “cop[ied] and paste[d]” text from another document. (9/8/2011 Tr. 81:19-83:2, 84:24-86:6 (Sugimoto)). Mr. Sugimo-to himself referred to the formatting of the email chain as “strange.” (9/8/2011 Tr. 85:19-86:6 (Sugimoto)).
283. As Ms. Nowicki testified, 4Kids received Mr. Sugimoto’s email around the same time that its Board of Directors was meeting to decide whether to make a $1 million good-faith payment to Licensor. Ms. Nowicki testified that she believed Mr. Sugimoto’s email might have been an attempt to “nudge” 4Kids’ Board into making the good-faith payment. (9/19/2011 Tr. 13:10-22 (Nowicki)).
284. Approximately forty minutes after Mr. Sugimoto’s emails were sent, Li-censor’s counsel replied to Mr. Newborn and Ms. Nowicki, asking them to “[p]lease delete” the emails because they were “inadvertently copied” by Mr. Sugimoto. (Ex. T-311).
285. Ms. Nowicki testified that, following the March 9 email from Mr. Sugimoto, she discussed with both Mr. Foster and *673with Mr. Newborn the possibility that Plaintiffs would terminate the 2008 Agreement. (9/15/11 Tr. 94:20-97:13 (Nowicki)).
286. Ms. Nowicki also responded to Mr. Sugimoto via email, asking him, “is this how it has to be?” (Sugimoto Decl. ¶ 30; Ex. T-126). Mr. Sugimoto replied that Plaintiffs “are still waiting for your answer.” (Id.).
287. Also on that same day, Mr. Newborn wrote to ADK’s counsel in Japan, Tomohiro Tohyama, discussing “potential termination by ADK of the 4Kids-ADK Agreement” and asking Mr. Tohyama to intercede on behalf of 4Kids. (Ex. T-129 at 4KIDS 0061787).
3. 4Kids’ $1 Million Good-Faith Payment49
288. On March 10, 2011, 4Kids’ counsel advised Licensor’s counsel that 4Kids was prepared to pay $1 million as a good faith gesture so that the parties could meet and seek to resolve the various issues. (Newborn Decl. ¶ 168).
289. Discussions between 4Kids and Licensor were then suspended due to the catastrophic earthquake in Japan on March 11, 2011. On March 16, 2011, counsel for Licensor indicated that his client would view a payment of $1 million toward ultimate resolution of the audit claims as a gesture of good faith and means of rebuilding trust between the parties. (Newborn Decl. ¶ 169; Ex. T-403; Ex. T-404).
290. On March 17, 2011, 4Kids paid Licensor $1 million,50 while reserving its position that it did not owe Licensor anything other than non-material amounts under the 2008 Agreement. (Newborn Decl. ¶ 169).
4. The March 18, 2011 Meeting
291. On March 18, 2011, the parties’ representatives met in New York. Present at the meeting on behalf of Licensor were Messrs. Shinoda, Hosaka, and Sugimoto, as well as Licensor’s counsel. Present on behalf of 4Kids were Michael Goldstein, 4Kids’ interim Chief Executive Officer, and 4Kids’ counsel. Both 4Kids’ and Li-censor’s witnesses testified that the pur*674pose of the March 18 meeting was to resolve and settle the audit claims. At the meeting, Mr. Goldstein made a presentation regarding a potential sale of 4Kids to a company called Classic Media LLC. Mr. Goldstein also made clear that 4Kids would have to declare bankruptcy if the audit claims were not resolved. (Newborn Decl. ¶ 170; Shinoda Decl. ¶¶ 68-74; Hosaka Decl. ¶¶ 66-69; Sugimoto Decl. ¶¶ 38-41; 9/6/2011 Tr. 82:2-5 (Hosaka)).
292. Near the end of the meeting, which lasted for the entire day, 4Kids asked Licensor for a settlement figure for the audit claims. Licensor responded by offering to settle for $3 million. (Shinoda Decl. ¶¶ 73-74; Sugimoto Decl. ¶ 40; Ho-saka Decl. ¶ 68; 9/12/2011 Tr. 162:16-21 (Newborn)).
293. Licensor’s witnesses gave conflicting testimony regarding what occurred at the end of the meeting. Mr. Shinoda testified that Mr. Goldstein responded to the settlement proposal by stating that the proposal was unacceptable and that 4Kids would have to file for bankruptcy, after which he left the room. (8/31/2011 Tr. 94:2-95:2, 96:22-97:1 (Shinoda)). Mr. Sug-imoto testified that Mr. Goldstein left the meeting “without allowing any further discussion.” (Sugimoto Decl. ¶ 40).
294. Mr. Shinoda and Mr. Hosaka both testified that, during the March 18 meeting, nobody said or suggested that ADK would terminate the License Agreements. Mr. Shinoda testified that the issue of termination was not raised because the parties were still trying to resolve the audit claims. (8/31/2011 Tr. 97:2-12 (Shi-noda); 9/6/2011 Tr. 79:23-80:2 (Hosaka)). There is no evidence that anyone suggested at the March 18 meeting that a notice of breach had already been given.
295. As of the March 18 meeting, ADK still had not provided 4Kids with a copy of Mr. Elliott’s audit report. Mr. Newborn testified that he did not believe that, at the time, 4Kids possessed sufficient information to evaluate the validity of all of ADK’s audit claims. (9/12/2011 Tr. 191:23-193:2 (Newborn)). For example, Mr. Newborn testified that he never received answers to questions concerning the calculation of the courier and material costs. (9/12/2011 Tr. 187:8-188:25 (Newborn)). Plaintiffs do not dispute this testimony. Furthermore, Mr. Foster testified that, throughout the negotiations over the audit claims, Licensor never provided 4Kids with sufficient information to determine which tax withholding deductions were considered “unsubstantiated” in Mr. Elliott’s parlance. (9/21/2011 Tr. 87:5-21 (Foster)).
5. 4Kids’ Efforts to Continue Negotiations to Resolve the Audit Claims
296. Mr. Newborn testified that, during the week of March 21, the parties’ respective counsel continued to have conversations regarding a potential settlement of the audit claims. (Newborn Decl. ¶ 171).
297. During this time, 4Kids’ negotiations with Nicktoons regarding a potential license of television broadcast rights to Yu-Gi-Oh! continued. On March 24, 2011, a day before the purported termination, Brian Lacey, the head of 4Kids’ television distribution, forwarded to Mr. Hosaka a summary of deal points that Mr. Lacey had discussed with Nicktoons. (Ex. T-486; Newborn Decl. ¶ 172).
298. On March 24, 2011, Mr. Goldstein also sent an email to Mr. Shinoda, Mr. Hosaka, and Mr. Sugimoto of ADK summarizing the positive results of the negotiation with Nicktoons on the license of Yu-Gi-Oh! television broadcast rights. Mr. Goldstein’s email concluded with the following:
*675Finally, despite the current difficulties, 4Kids continues to work for the benefit of the Yu-Gi-Oh Consortium and the Yu-Gi-Oh brand, whether with regard to producing the Yu-Gi-Oh Zeal sizzle tape for MIP, trying to make the Nick-toons deal or providing help to ADK on production matters and production materials during this very difficult time in Japan.
In his e-mail of March 9 to Brian Lacey and Sam Newborn, Hosaka-san indicated that if the Nicktoons deal were to move ahead, there “must be new hope for our relationship.” 4Kids has always believed that all companies involved with Yu-Gi-Oh have so much more to gain from the continuation and strengthening of the 4Kids — ADK partnership than from the very costly and destructive alternative.
(Ex. T-295; Newborn Decl. ¶ 172).
F. The March 25, 2011 Purported Termination
299. At 8:05 p.m. (EST) on March 24, 2011, Mr. Hosaka, on behalf of Mr. Shino-da, emailed to Michael Goldstein at 4Kids a letter (dated March 25, 2011)51 purporting to “exercise [Licensor’s] option, under paragraph 12(a), to terminate the [2008 Agreement].” Mr. Shinoda stated that the purported termination would be effective upon receipt of the letter. (Ex. T-26).
300. The March 25 letter referenced ADK’s earlier letters of June 17, 2010, June 25, 2010 and December 20, 2010, but did not specify which, if any, of these letters constituted the written notice of breach required under Paragraph 12(a). However, the March 25 letter appears to premise the purported termination on the failure to pay the approximately $4.8 million set forth in Mr. Shinoda’s December 20 letter. (Ex. T-26).
301. The Court finds that, based on the foregoing, 4Kids never received proper and effective notice that Licensor had triggered the 10-day termination window by sending a notice of breach under Paragraphs 12(a) and 15(c), or that a cure period was running.
302. The complaint in this action was served the following day, on March 25, 2011. (Newborn Decl. ¶ 173). 4Kids filed its bankruptcy petition on April 6, 2011, within ten business days of ADK’s March 25, 2011 letter purportedly terminating the 2008 Agreement. (Newborn Decl. ¶ 177).
303. Mr. Shinoda, Mr. Hosaka, and Mr. Sugimoto each testified that, prior to March 25, 2011, they never told anyone at 4Kids that ADK was going to terminate the 2008 Agreement. (8/31/2011 Tr. 98:22-99:3 (Shinoda); 9/6/2011 Tr. 85:3-8 (Hosa-ka); 9/8/2011 Tr. 88:10-13 (Sugimoto)). Mr. Shinoda testified that he never told 4Kids that ADK would terminate the 2008 Agreement because the parties were still engaged in discussions about the audit claims. (8/31/2011 Tr. 99:4-6 (Shinoda)).
304. Mr. Newborn testified that, throughout the series of negotiations that took place between 4Kids and Licensor, Licensor was unwilling to unbundle the audit claims, and would only resolve them on a global basis. (9/12/2011 Tr. 195:3-23 (Newborn)). As noted above, correspondence from ADK’s counsel confirmed this position. (Ex. T-25). Mr. Newborn also testified that, as of the date of the purported termination, 4Kids still did not have enough information to evaluate the validity of all of Licensor’s audit claims. (9/12/2011 Tr. 195:24-196:3 (Newborn)).
*676G. Balance Owed to 4Kids at the Time of Termination
305. Under the License Agreements, 4Kids made certain advance payments to Licensor. (Foster Decl. ¶ 49). The 2008 Agreement provides that 4Kids is entitled to recoup Licensor’s share of the Gross Income against any advance payments made:
Notwithstanding anything herein to the contrary, 4Kids shall be entitled to all amounts earned with respect to the exploitation of the Rights to the Property until the cumulative share of Gross Income credited to Licensor calculated as provided above in Paragraph 4(c) exceeds the amount of advances paid by 4Kids to Licensor under Paragraphs 4(a) and 4(b) above.
(Ex. T-ll ¶ 4(d)(ii); see also Foster Decl. ¶ 49).
306. Mr. Foster testified that, as of March 24, 2011, the balance of 4Kids’ unre-couped advances to Licensor was $841,418.77. (Foster Decl. ¶52; Ex. T-475). Upon examination at trial, Mr. Foster agreed that this number should be reduced by $45.24, which reflected certain bank charges not properly charged to Li-censor under the 2008 Agreement. (9/21/2011 Tr. 23:10-18, 128:7-17, 174:2-17 (Foster)).
307. Mr. Foster testified that the unre-couped balance of the advance payments would first be used to offset any portion of Gross Income owed to Licensor. Mr. Foster also testified that Gross Income from current royalties would be treated the same as, for example, Gross Income received as a late payment from a sublicen-see from five years ago. (9/21/2011 Tr. 128:18-129:24 (Foster)).
308. In addition, as explained above, 4Kids had made a $1 million good-faith payment toward the audit claims on March 17, 2011. (See ¶ 290, supra).
309.Therefore, as of the date of the purported termination, 4Kids had a balance of $1,841,373.53 in its favor against any claim by Licensor for an underpayment of Gross Income. The amounts owing to Plaintiffs under the audit claims in Paragraph 16 of the Complaint do not exceed this amount.
EVIDENTIARY MATTERS
The Court now turns to a number of evidentiary issues raised by the parties prior to and during the trial.
I. Admissibility of Expert Testimony
The admissibility of expert testimony is analyzed pursuant to Rule 702 of the Federal Rules of Evidence, which, as amended in 2000, provides:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.
Fed.R.Evid. 702.
The proponent of the expert testimony bears the burden of establishing its admissibility at trial by a preponderance of the evidence. In re Young Broad., Inc., 430 B.R. 99,121 (Bankr.S.D.N.Y.2010) (citing Daubert v. Merrell Dow Pharms., Inc. (“Daubert ”), 509 U.S. 579, 592 n. 10, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993)). In Daubert, the Supreme Court charged trial courts with the responsibility of serving as gatekeepers to exclude unreliable expert *677testimony. Trial judges are to make the “preliminary assessment of whether the reasoning or methodology underlying the testimony is scientifically valid and of whether that reasoning or methodology properly can be applied to the facts in issue.” Daubert, 509 U.S. 579, 592-593, 113 S.Ct. 2786,125 L.Ed.2d 469 (1993). In Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 141, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999), the Court clarified that this “gatekeeping” applies to all expert testimony, including “testimony based on technical and other specialized knowledge.”
Rule 702 requires a court to make three determinations when assessing the admissibility of expert testimony: (1) whether the witness is qualified as an expert to testify as to a particular matter; (2) whether that opinion is based upon reliable data and methodology; and (3) whether the expert’s testimony is relevant. Young Broad., 430 B.R. at 121. As a threshold matter, a witness proffered to testify regarding specialized knowledge must first be qualified as an expert. Id. at 122 (citing Zaremba v. Gen. Motors Corp., 360 F.3d 355, 360 (2d Cir.2004)).
A wide variety of knowledge and experience can qualify a witness as an expert. “The Second Circuit has taken a liberal view of the qualification requirements of Rule 702, at least to the extent that a lack of formal training does not necessarily disqualify an expert from testifying if he or she has equivalent relevant practical experience.” Arista Records v. Lime Group LLC, 2011 WL 1674796, at *2 (S.D.N.Y. May 2, 2011). No particular experience or academic training is required; a court may consider the totality of a witness’s qualifications in its analysis. Young Broad., 430 B.R. at 122. As Chief Judge Gonzalez explained in Young Broadcasting, “an expert’s qualification can be based on a broad range of knowledge, skill, experience, training, or education.” Id. Given this liberal standard, the Second Circuit has cautioned that quibbles with an expert’s training go to the testimony’s weight, not its admissibility, and are an appropriate subject for cross-examination. United States v. Joseph, 542 F.3d 13, 21-22 (2d Cir.2008).
A. Plaintiffs’ Motion in Limine to Exclude the Expert Report and Testimony of Takaaki Tokuhiro
Prior to the commencement of the trial, on August-23, 2011, Plaintiffs filed a motion in limine seeking to exclude the expert report and testimony of Takaaki Tokuhiro (“Mr. Tokuhiro”), a Japanese certified public accountant (“CPA”), regarding Japanese corporate tax law and regulations on foreign tax credits (the “Tokuhiro Motion”).52 On August 26, 2011, 4Kids filed an opposition to the Tok-uhiro Motion.53
Mr. Tokuhiro was asked by 4Kids to provide an opinion concerning the Japanese corporate tax law and regulations on foreign tax credits and the applicability of those regulations to certain issues herein. Specifically, Mr. Tokuhiro was asked to provide an opinion concerning the requirements for claiming foreign tax credits under Japanese corporate tax law and regulations. He was also asked to opine on the ability of a company to amend tax returns in Japan with respect to foreign tax credits, and any limitations there may be with respect to the amount of time a company *678has to make such amendments. In addition, Mr. Tokuhiro was asked to provide an opinion as to whether any foreign tax credits were claimed during the duration of the agreements between 4Kids and Licensor.54
In the Tokuhiro Motion, Plaintiffs argue that Mr. Tokuhiro’s expert report and testimony should be excluded because he is not qualified to provide an expert opinion concerning the requirements for filing for foreign withholding tax credits under Japanese tax laws and regulations. Plaintiffs contend that Mr. Tokuhiro has no firsthand experience with respect to the requirements or practices of the Japanese tax authority. The crux of Plaintiffs’ challenge is Mr. Tokuhiro’s lack of a Certified Public Tax Accountant (“CPTA”) license. They also note that Mr. Tokuhiro admitted in his deposition that he would not be permitted to render advice on these topics in Japan without violating the Certified Public Tax Accountants Law, a violation that is punishable in Japan by a fine and/or imprisonment.
In its opposition to the Tokuhiro Motion, 4Kids argues that Mr. Tokuhiro, as a CPA with thirty years of experience, is fully familiar with the applicable Japanese tax law and regulations. He has personally and directly advised corporate clients on how to realize the value of insufficiently documented foreign tax credits. Further, Mr. Tokuhiro explained that as a CPA, he could qualify to become a CPTA by paying a registration fee, opening an office in Japan, and participating in ongoing education classes.55 4Kids asserts that although Mr. Tokuhiro has not personally prepared tax returns to be filed with the Japanese National Tax Authority, he is capable and qualified to provide advice regarding the requirements of the Japanese tax law and regulations and has advised Japanese multinational corporations on how and when to claim foreign withholding tax credits for some thirty years.
Consistent with the Court’s ruling previously placed on the trial record, Plaintiffs’ motion is denied, for the following reasons. The fact that Mr. Tokuhiro does not hold a CPTA license is of no moment; it was abundantly cledr that based on his thirty years of experience as a Japanese CPA, Mr. Tokuhiro is fully familiar with the provisions and practices of Japanese tax law at issue herein.56 Similarly, the “admission” in his deposition that he would not be permitted to render advice on these topics “in Japan” is irrelevant.57 The key inquiry is whether Mr. Tokuhiro has the education and experience necessary to satisfy the qualification requirements of Rule 702. The answer is clearly yes. The Court finds that Mr. Tokuhiro is qualified as an expert in Japanese tax law, including the ability and means to claim foreign withholding tax credits and deductions; his expert report is thus admitted and his testimony will be fully considered by the Court.
B. 4Kids’ Motion in Limine to Exclude the Testimony of Robert Freedman and Arthur Erk
The Court now turns to the admissibility of the expert report and testimony of Plaintiffs’ experts, Robert Freedman (“Mr. Freedman”) and Arthur Erk (“Mr. Erk”). On August 23, 2011, 4Kids filed a motion in limine seeking to exclude the expert report and testimony of Messrs. Freedman and Erk (the “Freedman/Erk *679Motion”). Plaintiffs filed a memorandum of law in opposition to the Freedman/Erk Motion on August 26, 2011.58
Plaintiffs offered the expert report and testimony of Mr. Freedman on the issue, inter alia, of whether the Funimation and Majesco Agreements “comport with custom and usage in the television and home video industries.”59 Plaintiffs additionally offered the expert report and testimony of Mr. Erk on the issues, inter alia, of whether the services performed by Mr. Elliott comport with industry standards and practices and whether the audit Findings had reasonable merit. There is no dispute as to the expert qualifications of Messrs. Freedman and Erk as each of them has decades of experience in their respective fields.
In the Freedman/Erk Motion, 4Kids objected to the admission of the testimony of Messrs. Freedman and Erk on the grounds that it consists “largely of legal opinions, opinions as to the ultimate issues of this litigation and conclusory assertions with no factual basis or expert analysis.”60 While Plaintiffs acknowledge that an expert is not permitted to offer legal conclusions, they argue that it is permissible for an expert witness to testify about issues that would help the finder of fact understand concepts it needs to know to render a decision “despite the fact that [such] opinions may encroach on matters of law.”61
As the Court indicated during trial, with respect to the Freedman/Erk Motion, there is merit to 4Kids’ position with respect to the proffered testimony of Mr. Freedman and Mr. Erk. Accordingly, as more fully reflected in the hearing transcript from August 29, 2011,62 the Court limited its consideration of Mr. Freedman’s testimony to matters pertaining to the customs and practices of licensors and licensees, and limited its consideration of Mr. Erk’s testimony to whether the services performed by Mr. Elliott comport with industry standards. To the extent that each of these experts offered legal opinions or opinions as to ultimate issues, such opinions were not admitted or considered by the Court; conclusory assertions without a factual basis were afforded little or no weight by the Court.63
II. Evidentiary Issues Regarding the Translation of Documents
During the course of the trial, on September 6, 2011, Plaintiffs filed a motion in limine seeking, inter alia, to exclude from evidence certain un-translated non-English language documents (the *680“Translation Motion”).64 4Kids filed an Opposition to the Translation Motion.65 Specifically, the documents at issue in the Translation Motion include: (1) the 2004 corporate tax return of ADK filed with the Japanese taxing authority, which was introduced by 4Kids for the limited purpose of rebutting Plaintiffs’ contentions as to what constitutes necessary and proper supporting documentation when claiming foreign withholding tax credits under Japanese law; (2) certain tax certificates which bear, in English, the name and purported address of TV Tokyo; and (3) a set of German foreign withholding tax certificates, which was introduced by 4Kids for two limited purposes: (a) to determine whether Mr. Elliott could understand the documents, or had re-calculated his audit Finding to take the documents into account,66 and (b) to determine whether TV Tokyo had searched its files for any such documents that might have been sent to it directly by foreign licensees.
While the law is clear that proceedings in this Court are to be conducted in English,67 the limited use of non-English documents here qualifies for exception to the general rule. There is no serious dispute with respect to the nature of the documents at issue; no inference or conclusions are being urged based on any untranslated (ie., non-English) words in the documents. Moreover, any assertion of prejudice to Plaintiffs arising from 4Kids’ reliance on Japanese language documents produced by Plaintiffs themselves is baseless, especially in light of the fact that several of Plaintiffs’ key witnesses testified at trial in Japanese with the assistance of the parties’ mutually agreed translator.
In addition, Plaintiffs objected to the admission into evidence of the English translation of an email dated August 5, 2010, from Mr. Hosaka to a group of recipients at ADK.68 Unlike the hundreds of pages of other Japanese language documents translated into English by the parties’ agreed translation service, this particular document, say Plaintiffs, has been translated incorrectly.69 Rejecting the Court’s suggestion that the document be given to an additional neutral translator, Plaintiffs instead took the position that only the author of the document, Mr. Ho-saka, is in a position to convey the document’s meaning.70 Specifically, Plaintiffs argue that, only with respect to this document, often translations between Japanese and English do not adequately convey a document’s meaning because “in Japanese there is no past perfect tense and its future tense is usually the same form as the present tense.”71 The email in question is of substantial significance to 4Kids’ view of Plaintiffs’ motivations in pursuing the termination of the 2008 Agreement; the email, asserts 4Kids, is a highly confiden*681tial inner circle revelation of Plaintiffs’ plan to replace 4Kids as its home video licensee. While telling, the email has little bearing on the issue of the effectiveness of the termination letter, except to the extent that it may evidence Plaintiffs’ lack of good faith in pursuing termination. In any event, the Court finds no basis on which to exclude it from evidence in favor of what would undoubtedly be a self-serving translation of the document by Mr. Hosaka.
III. Other Evidentiary Objections
Plaintiffs have also objected to the admission into evidence of various portions of the Newborn Declaration and the Foster Declaration on the ground that they reflect legal conclusions or legal interpretations and hearsay. As was the case with respect to the proffered testimony of Messrs. Freedman and Erk, the Court did not consider testimony that reflects legal conclusions nor did it afford any weight to the conclusions of any witnesses on the ultimate issues before the Court.
DISCUSSION
Against the foregoing extensive factual backdrop, the Court now turns to the basic questions of contract law which are presented by this dispute. As in any contract dispute, certain first principles apply.
I. Applicable Law
Under New York law, contract termination disputes are raised as breach of contract claims. Joseph Victori Wines, Inc. v. Viña Santa Carolina, S.A, 933 F.Supp. 347, 352-53 (S.D.N.Y.1996).72 To prevail on a breach of contract claim under New York law, a party must demonstrate, by a preponderance of the evidence, (1) the existence of a contract, (2) performance by the party seeking recovery, (3) non-performance by the other party, and (4) damages attributable to the breach. Pisani v. Westchester County Health Care Corp., 424 F.Supp.2d 710, 719 (S.D.N.Y.2006) (citing Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir.1996)).
A contract must be “enforced according to its terms.” W.W.W. Associates, Inc. v. Giancontieri, 77 N.Y.2d 157, 162, 565 N.Y.S.2d 440, 566 N.E.2d 639 (1990); West, Weir & Bartel, Inc. v. Mary Carter Paint Co., 25 N.Y.2d 535, 542, 307 N.Y.S.2d 449, 255 N.E.2d 709 (1969). Accord, South Rd. Assocs., LLC v. Int’l Bus. Mach. Corp., 4 N.Y.3d 272, 277, 793 N.Y.S.2d 835, 826 N.E.2d 806 (2005) (“In cases of contract interpretation, it is well settled that “when parties set down their agreement in a clear, complete document, their writing should ... be enforced according to its terms.’ ”) (quoting Vermont Teddy Bear Co., Inc. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475, 775 N.Y.S.2d 765, 807 N.E.2d 876 (2004)). “This principle is based on the sound policy that favors predictability in the interpretation of commercial writings. If parties are properly to structure and plan their commercial activities, they must be able to rely upon the plain language of the agreements they sign.” Int’l Multifoods Corp. v. Comm. Union Ins. Co., 98 F.Supp.2d 498, 503 (S.D.N.Y.2000).
Courts resolve the question of law as to whether or not a writing is ambiguous. W.W.W. Associates, 77 N.Y.2d at 162, 565 N.Y.S.2d 440, 566 N.E.2d 639. “[A] contract is not rendered ambiguous just because one of the parties attaches a different, subjective meaning to one of its terms.” Moore v. Kopel, 237 A.D.2d 124, 125, 653 N.Y.S.2d 927 (1st *682Dep’t 1997). Accord, Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 906 F.2d 884, 889 (2d Cir.1990) (“Language whose meaning is otherwise plain is not ambiguous merely because the parties urge different interpretations in the litigation.”); Atlantic Mut. Ins. Co. v. Terk Tech. Corp., 309 A.D.2d 22, 28, 763 N.Y.S.2d 56 (1st Dep’t 2003). “But, if ambiguity exists, then extrinsic evidence of the parties’ intent may be looked to as an aid to construing the contractual language.” Sayers v. Rochester Tel. Corp. Supplemental Mgmt. Pension Plan, 7 F.3d 1091, 1095 (2d Cir.1993).
Of particular importance here is the fundamental principle that contractually-required notices of breach must provide sufficient information for the noticed party to determine what steps were necessary to cure the alleged breaches. See, e.g., R Squared Global, Inc. v. Serendipity 3, Inc., 2011 WL 5244691, at *9, 2011 U.S. Dist. LEXIS 127291 (S.D.N.Y. November 3, 2011), at *27 (granting motion for a preliminary injunction after noting that the evidence raised a sufficiently serious question as to whether the defendant had ever given the contractually-required prior written notice and opportunity to cure any of the breaches it cited as grounds for termination); Chinatown Apartments, Inc. v. Chu Cho Lam, 51 N.Y.2d 786, 788, 433 N.Y.S.2d 86, 412 N.Eüd 1312 (1980) (purported notice of breach suffered from “fatal defect” because it did not state the lease provisions allegedly violated, and thus did not provide the allegedly breaching party with sufficient notice to cure the alleged defect); City of Amsterdam Indus. Development Agency v. Safari Enterprises, Inc., 279 A.D.2d 865, 866-67, 719 N.Y.S.2d 368 (3rd Dep’t 2001) (a material issue of fact was raised because purported notices of breach failed to specify delinquent amount of rent due, to advise of 30-day period to cure, or of intention to terminate should the arrears remain); Ulla-Maija, Inc. v. Kivimaki, 2005 WL 2429490, at *4-5 (S.D.N.Y. Sept. 30, 2005) (purported notice of breach was “stated in terms so general as to be meaningless insofar as providing an opportunity to cure any alleged breaches” and failed to identify a cure period, and thus was “invalid as a notice”); SVS, Inc. v. Rabbit Ears Productions, Inc., 1992 WL 91183 (S.D.N.Y. Dec. 12, 1991), at *10-11 (failure to include “decisive issue” in purported notice of breach rendered notice “invalid”).
In order for a notice of breach to be effective, it must “objectively” put the allegedly breaching party on “notice that a cure period [is] being triggered” and that “drastic legal repercussions” will result from a failure to cure. Gil Enterprises, Inc. v. Delvy, 79 F.3d 241, 246 (2d Cir.1996); accord, Wechsler v. Hunt Health Sys., Ltd., 2004 WL 2210261, *5 (S.D.N.Y. Sept. 30, 2004). In Gil Enterprises, the court interpreted the requirements of a contract provision which provided that, if a publisher failed to furnish a statement of account within sixty days of a written demand from the owner, the other owner had the right to terminate the agreement. Gil Enterprises, Inc. v. Delvy, 79 F.3d at 244. The Second Circuit held that the defendant’s letter was not “sufficiently imperative” to give the allegedly breaching party “notice that a cure period was being triggered.” Id. at 246. Similarly, the District Court has noted that “[t]he purpose of a demand requirement is to provide the target party with notice that further action in contravention to the demand will result in substantial legal consequence.” Wechsler, 2004 WL 2210261, at *5. Whether termed a “demand” for performance or a “notice” of breach, the purpose is to alert the recipient that a cure period is running and that *683the failure to cure could result in termination of the contract.
Finally, under New York law, a purported notice of breach will not be effective where it does not comply with a contractual requirement that it be sent in a specified manner. See Luxottica Group S.p.A. v. Bausch & Lomb Inc., 160 F.Supp.2d 545, 551 (S.D.N.Y.2001) (termination provision was not triggered by two purported notices of breach that were sent by facsimile and not by overnight mail as required under the parties’ licensing agreement). “ ‘Where the Agreement specifies conditions precedent to the right of cancellation, the conditions must be complied with.’ ” Bausch & Lomb Inc. v. Bressler, et. al, 977 F.2d 720, 727 (2d Cir.1992) (quoting Consumers Power Co. v. Nuclear Fuel Servs., Inc., 509 F.Supp. 201, 211 (W.D.N.Y.1981)). The general rule is that “written notice requirements are fully enforceable.” USI Ins. Sewices LLC v. Miner, 2011 WL 2848139 (S.D.N.Y. July 7, 2011), at *2 (quoting Art of War Music Publ’g, Inc. v. Andrews, 2000 WL 245908 (S.D.N.Y. Mar. 3, 2000), at *2). “Notice provisions, such as the one here, ‘serve the valuable function of allowing the purportedly breaching party to distinguish between minor complaints or posturing by its contractual partner and an actual threat of termination.’ ” Id. Thus, “[u]nder New York law, where no notice was given as set forth under the [contract], there can be no breach of the [contract] because defendant was not afforded the opportunity to cure the defect.” Id. In fact, terminating a contract without complying with the notice and cure provisions therein is itself a material breach. Bausch & Lomb, 977 F.2d at 727.
As explained more fully below, application of these first principles of New York contract law to the facts and circumstances of this ease compels the conclusion that the 2008 Agreement has not been effectively terminated.
II. Licensor’s Purported Termination of the 2008 Agreement was Ineffective Because Licensor Failed to Provide 4Kids with Adequate Formal Written Notice of Breach
The 2008 Agreement contains a termination provision which provides that, in order to terminate the agreement, the terminating party must (i) provide written notice of a breach of a warranty or other material provision of the agreement and (ii) give the breaching party ten days to cure such breach before providing written notice of termination. Specifically, Paragraph 12(a), the termination provision of the 2008 Agreement, provides as follows:
Termination, (a) If either party breaches any warranty or other material provision of this Agreement and does not cure such breach within ten (10) business days of the breaching party’s receipt of a written notice of such breach from the non-breaching party, then at any time during the continuance of such default, the non-breaching party may ... terminate this Agreement effective as of the date of the breaching party’s receipt of a written notice from the non-breaching party notifying the breaching party of such termination.
(Ex. T-ll at ¶ 12(a)).
Paragraph 15(c) of the 2008 Agreement provides, in relevant part:
All notices, requests, consents and other communications hereunder shall be in writing and shall be sent by express mail, or telefax with a follow up copy by express airmail to the parties at their addresses first above written.... Notice shall be deemed received upon actual receipt or when such receipt has been refused.
*684(Ex. T-ll). There is nothing ambiguous about Paragraph 12(a) or Paragraph 15(c) of the 2008 Agreement.
The Court finds that Licensor’s purported termination of the 2008 Agreement is ineffective for several reasons. First, Li-censor failed to provide to 4Kids adequate formal written notice of breach pursuant to the terms of the 2008 Agreement. Second, Licensor’s refusal to unbundle its audit claims deprived 4Kids of an effective opportunity to determine the validity of certain of the audit claims and to cure them.73 Third, even if the cure period had already run, the fact that the parties engaged in extensive negotiations precluded Licensor from terminating without providing 4Kids with a final opportunity to cure. In addition (or, in the alternative), as will be addressed in Section III below, even if Licensor had provided adequate formal notice pursuant to Paragraphs 12(a) and 15(c), the notice was defective and thus the termination was ineffective because the true underpayment reflected in the audit, if any, was less than the asserted amount of $4.8 million.
Plaintiffs attempt to rely on the “totality of the parties’ communications” in order to argue that 4Kids was on actual notice of breach.74 In making this argument, they cite to decisions rejecting “overly formalistic” interpretations of pre-ter-mination notice provisions which have held that a “good faith attempt to comply with the contract’s ... provisions” is sufficient. See e.g., Schwartz v. Fortune Magazine, 89 F.Supp.2d 429, 434 (S.D.N.Y.1999). But it is clear under New York law that where, as here, a party seeks what amounts to a forfeiture, a notice of breach will be scrutinized and any inadequacy — be it trivial or material — will defeat such party’s claim. See Luxottica Group S.p.A. v. Bausch & Lomb Inc., 160 F.Supp.2d 545, 550-551 (S.D.N.Y.2001) (citations omitted). None of the communications identified by Plaintiffs (taken together or separately) is sufficient to constitute adequate written notice of breach and an opportunity to cure as required by the 2008 Agreement.75 This conclusion is far from overly formalistic; moreover, based on the entirety of the record, the Court finds it impossible to conclude that the totality of Plaintiffs’ communications with 4Kids between June 2010 and March 2011 reflects a good faith attempt to comply with the provisions of the 2008 Agreement.
Plaintiffs have identified the following as communications with- 4Kids in which they purport to have given 4Kids written notice of breach: (a) the June 17, 2010 letter from Mr. Hosaka; (b) the June 25, 2010 letter from Mr. Bisceglie; (c) the December 20, 2010 letters from Mr. Shinoda; (d) the March 4, 2011 letter from Mr. Bisceg-lie; and (e) the March 9, 2011 email from Mr. Sugimoto. The Court’s analysis with *685respect to each of these communications follows.
A.ADK’s June 17, 2010 Letter
The June 17 letter from Mr. Ho-saka to 4Kids76 did not (1) mention all of the audit issues that comprised the total $4.8 million later sought by Plaintiffs; (2) contain any form of the words “notice,” “breach,” “cure,” or “terminate”; (3) make a demand for the payment of a specified sum; or (4) reference the termination provision of the 2008 Agreement. In addition, the June 17 letter was sent by email and facsimile and not by express mail or express airmail as provided in Paragraph 15(c) of the 2008 Agreement. Rather than serve as clear a notice of breach, this letter instead requested that 4Kids sign a tolling agreement to allow time for Mr. Elliott to complete the audit and for the parties to “informally” discuss the issues. The presence of both imperative and precatory language in the June 17 letter is significant. The Court finds that this letter is insufficient to objectively put 4Kids on notice that a cure period was being triggered. See e.g., Gil Enterprises, Inc. v. Delvy, 79 F.3d 241, 246 (2d Cir.1996) (holding that, in order for a notice of breach to be effective, it must “objectively” put the allegedly breaching party on “notice that a cure period [is] being triggered” and that “drastic legal repercussions” will result from a failure to cure). In addition, because the June 17 letter did not delineate each of the audit claims, it did not contain enough information for 4Kids to cure the alleged breach.
B. ADK’s June 25, 2010 Letter77
The Court finds that the letter sent by ADK’s outside counsel to Mr. Newborn on June 25, 201078 was also insufficiently clear and imperative to satisfy the requirements of Paragraph 12(a) of the 2008 Agreement. Far from providing notice of breach, the June 25 letter suggested that the parties could resolve the matter amicably, and it requested that 4Kids sign a tolling agreement in order to allow time for discussion. Once again, as in Gil, supra, the presence of precatory language is significant. Like the June 17 letter, the June 25 letter did not (1) include any form of the words “notice,” “breach,” “cure,” or “terminate” or (2) reference the termination provision of the 2008 Agreement. Finally, there is no evidence that it was sent by express mail or express airmail as provided in Paragraph 15(c) of the 2008 Agreement.
C. ADK’s December 20, 2010 Letters
Plaintiffs assert that either (or both) of the two versions of the letter they sent to 4Kids on December 20, 2010,79 satisfies the objective standard set forth in Gil Enterprises and otherwise triggers a right to terminate. However, the uncertainty regarding the transmission and receipt of these letters and the errors and other shortcomings in the content of the letters preclude their use (taken together or separately) as a basis on which Plaintiffs can establish that they effectively terminated.
As was the case with the prior letters, the December 20 letter did not provide 4Kids with enough information to fully *686evaluate Licensor’s audit claims, particularly with respect to (i) which tax withholding deductions Licensor counted as “unsubstantiated” and (ii) how Licensor calculated the material and courier costs asserted. As Mr. Foster testified, without this information, particularly with respect to material and courier costs, 4Kids, as a public company, could not pay Licensor’s “estimated” amount contained in Finding 9. Essentially, the December 20 letter left 4Kids without an effective opportunity to evaluate the validity of the amount and to cure, rendering it a defective notice of breach. See, e.g., Chinatown Apartments, Inc. v. Chu Cho Lam, 51 N.Y.2d 786, 788, 433 N.Y.S.2d 86, 412 N.E.2d 1312 (1980) (purported notice of breach suffered from “fatal defect” because it did not state the lease provisions allegedly violated, and thus did not provide the allegedly breaching party with sufficient notice to cure the alleged defect). The evidence also demonstrates that 4Kids’ additional requests for backup information on several of the audit claims were ignored by Licensor.
The first version of the December 20, 2010 letter claimed that ADK had not received a scheduled payment for 4Kids’ purchase of the Yu-Gi-Oh! 5D series, which had been due on November 30, 2010. Regarding the allegedly delinquent payment, Mr. Shinoda wrote that 4Kids “must now [make the payment] or be in breach of the parties’ agreements.” (Ex. T-18 at 1). Mr. Shinoda did not use the words “notice,” “cure,” or “terminate” in his letter, nor did he reference the termination provision of the 2008 Agreement, and the absence of any such terminology failed to give 4Kids objective notice of the alleged audit-related breach and of the drastic legal repercussion of termination, as is required by courts. Significantly, the only occurrence of the word “breach” in the letter was with respect to the November 30 payment, which ADK subsequently discovered had been paid by 4Kids on November 30, 2010, as required.
ADK claims that once it discovered that this payment in fact had been made by 4Kids in a timely manner, it sent a second letter, also on December 20, correcting the mistake,80 but there is no clear evidence that this second letter was ever received by 4Kids. The second version of the letter does not explain that it replaces the first, and it omits references to the November 30 payment (and all references to a “breach” of the 2008 Agreement which had been contained in the first version of the letter). Mr. Kahn and Mr. Newborn testified that it is possible that it was received by 4Kids but inadvertently discarded as a duplicate. Neither the first version of the letter nor the second version of the letter was sent by express mail. While the second version of the December 20 letter fails to provide adequate notice of breach for the same reasons that the first version is deficient, the Court notes that the questionable transmission and/or receipt of the second letter illustrates .the purpose of provisions such as Paragraph 15(c) of the 2008 Agreement: requiring that notices be sent by express mail to ensure definitively that notices are received by the intended recipients.
In the December 20 letter, Mr. Shinoda wrote that he was writing to “request payment for the underpayment Mr. Elliott found” and that he “insistfed] that within 10 business days 4Kids pay ADK $4,819,354.63 to cover the full underpayment.” Although the letter was dated December 20, 2010, the letter called for payment by December 14, 2010 of these amounts allegedly due — six days before the date of the letter. Even if the letter *687were to be considered a notice of breach, the cure period asserted was less than clear.
Both versions of the December 20, 2010 letter seek payment from 4Kids within ten business days.81 When asked about his selection of this time period, Mr. Shinoda gave several differing responses, which undermines the credibility of his testimony in this regard. In his declaration, Mr. Shino-da testified that “[i]t was [his] intent by including this ten business day cure period to alert 4Kids to the urgency of their need to respond to [ADK’s] demand for payment.” He also testified that he gave 4Kids ten business days to cure “because [he] was required to do so under the 2008 Agreement,” and that he “included a reference to paragraph 4(f) because that paragraph states that ‘[a]ny underpayment reflected in the audit shall be paid to [the YGO Consortium] promptly.’ ” (Shinoda Decl. ¶¶ 58-59).
On cross-examination, Mr. Shinoda admitted that he did not even write the December 20 letters and, in fact, does not know who wrote those letters. (8/31/2011 Tr. 78:20-79:5 (Shinoda)).82 When asked at his deposition why he included a ten-day period in the December 20 letter, Mr. Shi-noda testified that he believed ten days was an “appropriate” duration, but did not make any reference to any requirements of the 2008 Agreement. (8/31/2011 Tr. 79:11-83:9 (Shinoda)).
Further, there is no evidence that either of the December 20 letters was sent pursuant to the notice requirement of Paragraph 15(c) of the 2008 Agreement, and Li-censor’s testimony on this point was also inconsistent. On their face, both letters only state that they were sent by facsimile and not by express mail or express airmail, as required. Mr. Shinoda testified that he did not know whether the letters were sent by any method other than fax. When asked at trial whether he sent the letters by courier or by mail, such as FedEx, Mr. Hosaka responded, “I think so.” Licensor did not introduce into evidence any shipping record or receipt showing that either letter was sent by express mail or express airmail.
For all of these reasons, the December 20 letters fail to serve as adequate and objective notice of breach pursuant to the terms of the 2008 Agreement.
D. ADK’s March 4, 2011 Letter
The March 4, 2011 letter from ADK’s outside counsel to 4Kids83 also does not provide objective notice of the beginning of the ten business day cure period, nor does it provide details on the substance of the audit claims which would provide 4Kids an opportunity to cure. Instead, it merely states that if 4Kids does *688not sign the Adaptation Agreement or commit to a $2 to $3 million payment, ADK will “proceed with the expectation that 4Kids is not genuinely interested in resolving our differences.” As with the prior letters, the terms “notice,” “cure” or “terminate” are not used in the March 4 letter, and the letter was not sent in the manner required for notices under Paragraph 15(c) of the 2008 Agreement.
E. Mr. Sugimoto’s “Inadvertent” March 9, 2011 Email
Licensor has also claimed that an email from Mr. Sugimoto, dated March 9, 2011,84 which, according to Mr. Sugimoto, was sent in error to 4Kids, constitutes notice of breach. The email, which was from sent from Mr. Sugimoto to Plaintiffs’ counsel, requests that counsel “send the termination letter” if 4Kids fails to commit a seven-figure amount by the following day. Licensor’s counsel almost immediately asked 4Kids to delete this email because 4Kids was “inadvertently copied.” The Court finds that this “inadvertent” email does not constitute adequate notice of breach, not only for the basic reason that the email fails to comply with Paragraph 15(c)’s express mail requirement, but also because it does not satisfy Li-censor’s termination obligations under Paragraph 12(a) of the 2008 Agreement by providing notice that a cure period is being triggered and giving 4Kids an effective opportunity to cure. Simply put, it would be absurd to conclude that an allegedly “inadvertent” email, which Licensor’s counsel then requested be “deleted,” could satisfy the formal contractual notice requirements of the 2008 Agreement.
F. Ongoing Negotiations Continued Between the Parties Without a Final Opportunity to Cure
[29] Beginning in December 2010 and particularly between March 10, 2011 and March 24, 2011, the parties continued to have meetings and conversations regarding a potential settlement of the audit claims. Mr. Shinoda testified that no one used the word “breach” during such negotiations, nor was the issue of termination raised at the parties’ final in-person meeting on March 18, 2011. Mr. Hosaka confirmed this fact as well in his testimony. FF ¶ 294; (8/31/2011 Tr. 97:2-12 (Shinoda); 9/6/2011 Tr. 79:23-80:2 (Hosaka)). There is no evidence that anyone suggested at the March 18 meeting that a notice of breach had already been given, despite Licensor’s subsequent assertion that the cure period had been running or had already expired during that time.
Under New York law, when two contracting parties have engaged in extensive negotiations after a cure period has expired, an additional notice and opportunity to cure must be given prior to termination. See Zuckerman v. 88072 Oumers Corp., 97 A.D.2d 736, 468 N.Y.S.2d 639, 642 (1st Dep’t 1983); TSS-Seedman’s, Inc. v. Elota Realty Co., 134 A.D.2d 492, 521 N.Y.S.2d 277, 278 (2d Dep’t 1987), aff'd, 72 N.Y.2d 1024, 534 N.Y.S.2d 925, 531 N.E.2d 646 (1988).85 Courts have also recognized *689that it is inequitable for one party to induce reliance by the other party through its course of conduct, only to abruptly terminate the contract without a final chance to cure. For example, in LaGuardia Assocs. v. Holiday Hospitality Franchising, Inc., 92 F.Supp.2d 119 (E.D.N.Y.2000), the court held that a franchisor could not abruptly withdraw a 60-day grace period customarily extended to the franchisee for certain payments. As a matter of equity and “sensible business practice,” the franchisor could not discontinue the practice without reasonable notice. See id. at 130.
The Court finds credible the testimony of 4Kids’ witnesses that 4Kids believed that Licensor would comply with the formal termination requirements of the 2008 Agreement (by sending written notice of breach sent by express mail) before it could terminate the agreement. The testimony reveals that, if Licensor had sent a formal notice of breach to 4Kids, 4Kids intended to file for bankruptcy protection during the subsequent ten business day cure period in order to invoke the automatic stay and prevent termination. See Ex. T-129.86 Moreover, by continuing to engage in negotiations with 4Kids, Plaintiffs induced reliance by 4Kids; there is no other credible explanation for 4Kids’ having refrained from filing for chapter 11 protection during this time period.
Contrary to the assertions of Licensor, the Court concludes that none of the written communications between the parties prior to March 24, 2011 was sufficient to constitute adequate notice of breach, nor are they sufficient taken as a whole. None of them was sent to 4Kids by express mail as required by Paragraph 15(c) of the 2008 Agreement.87 Moreover, even if notice had been proper and the cure period had begun to run or had run, it would have been inequitable and improper for Li-censor to continue negotiating with 4Kids throughout the cure period and abruptly terminate without providing a final opportunity to cure. Accordingly, the termination was ineffective.
III. The Amount Owed by 4Kids, If Any, Was Not the $4.8 Million Claimed in the Purported Notice of Breach, Which Renders the Notice Materially Defective and Renders the Termination Ineffective
The Court finds that even if Plaintiffs had given 4Kids proper formal notice of breach pursuant to the terms of the 2008 Agreement, Plaintiffs’ termination was ineffective nonetheless because the amount owed to Plaintiffs, if any, was not *690the $4,819 million amount contained in the termination letter and the purported notices of breach. The parties’ positions on this issue are in stark conflict:
• 4Kids argues that if the Court determines that any of the audit Findings is incorrect, then Licensor’s alleged notice and basis for the purported termination were defective and, therefore, ineffective. See 4Kids’ Post-Trial Brief at p. 20.88
• In contrast, Plaintiffs assert that as long as the amount asserted was not “arbitrary” and was “within the realm of the incoming revenues being generated by Yu-Gi-Oh!,” then 4Kids “simply [has] to pay” such amount. Plaintiffs argue that Paragraph 4(f) of the License Agreements requires 4Kids to “promptly” pay any underpayment reflected in the audit, and it does not give 4Kids the right to contest the audit procedures or to dispute the audit claim amounts. See Plaintiffs’ Post-Trial Memorandum at pp. 101-102. In other words, Plaintiffs believe that, even if the Court determines that any of the audit findings is incorrect, then the termination notice premised on the demand for the $4,819 million amount is nonetheless still effective.89 This is notwithstanding the fact that the underpayment “reflected in the audit” is not necessarily the amount due and owing. In other words, close enough is good enough.
The Court agrees with 4Kids: because the $4,819 million amount asserted by Plaintiffs was incorrect and inaccurate, it could not and did not form a valid basis for termination.90 Close enough is decidedly not good enough under the facts and circumstances present here. See, e.g., Luxottica Group S.p.A v. Bausch & Lomb Inc., 160 F.Supp.2d 545, 550-551 (S.D.N.Y.2001) (holding that when remedy of forfeiture is invoked, notice of default is scrutinized and any defect or inadequacy will defeat the claim) (citations omitted).
The evidence at trial revealed that, despite requests from 4Kids, Plaintiffs continuously refused to “unbundle” the total audit amount and resolve each of Mr. Elliott’s nine Findings on an individual basis. However, at least seven of those Findings (Findings 1, 2, 3, 4, 5, 6, and 9), have either been withdrawn by Licensor or are merit-less. This material error in the amount originally asserted by Licensor as its basis for breach renders termination ineffective, as Licensor based its purported termination on an incorrect, aggregate audit amount.
Despite the Court’s conclusion that if it finds any of the nine substantive audit claims meritless then it need not proceed further because Licensor’s alleged notice and basis for the purported termination were defective, the Court will address be*691low each of the nine audit Findings, starting with perhaps the most egregiously incorrect so-called Finding. To do so will highlight how baseless is Licensor’s demand for over $4.8 million.
A. Finding No. 9: Material & Courier Costs — $247,771.88
Audit Finding 9 reflects Licensor’s contention that 4Kids owes Licensor $247,771.88 in so-called material and courier costs incurred between 2001 and September 2010. This amount was based on a one-page invoice sent to 4Kids for the first time in October 2010 which reflected nine years of costs never previously mentioned, let alone invoiced, to 4Kids. The costs contained in Finding 9 were converted from Japanese yen to American dollars using the October 2010 exchange rate — the lowest exchange rate during the nine-year period — rather than the exchange rates in effect when the materials were actually delivered to 4Kids.
Mr. Elliott based Finding 9 on a provision of the License Agreements which obligates Licensor to send certain materials to 4Kids with respect to each television episode, including a Digital Beta NTSC master tape of each episode, along with music effects, a script, and music cues and which obligates 4Kids, in turn, to reimburse Li-censor for the “actual cost” of such materials, including courier costs. (Ex. T-6 ¶ 5(a); Ex. T-ll ¶ 5(a)).
The testimony at trial revealed, however, that a large portion of the material and courier costs asserted in Finding 9 were based upon estimates instead of “actual costs,” and another piece of the asserted costs reflected a charge for materials not yet delivered to 4Kids. (See 9/6/11 Tr. 46:19-49:21 (Hosaka); Hosaka Decl. ¶ 58). Mr. Elliott testified that he took ADK’s calculation at “face value” and did not ask for any supporting documentation; he only asked that ADK prepare a summary invoice for 4Kids because he discovered that there had been no invoice sent previously. Mr. Elliott further testified that he understood at the time he included Finding 9 in his audit report that some of the numbers were based on estimated costs and not actual costs, but he did not mention this in his Finding. (8/29/11 Tr. 217:1-219:6 (Elliott); 8/30/11 Tr. 96:22-97:4 (Elliott)). Thus, the demand for payment of these charges was not a demand for unpaid royalties revealed by the audit; simply put, it was a number concocted by Plaintiffs and tacked onto their demand.
At trial, Licensor admitted that it is in possession of documentation to support the actual costs incurred, but that it never provided this backup information to 4Kids, despite multiple requests. (9/6/2011 Tr. 52:2-53:18 (Hosaka)).91 The evidence reveals that 4Kids had offered in several emails to ADK to pay the material and courier costs (without regard to the statute of limitations) if Licensor would provide answers to several questions that *692had been posed by Mr. Newborn about the costs. Mr. Newborn’s emails went unanswered. In short, Licensor consistently refused 4Kids’ offers to address Finding 9, and this refusal of reasonable offers to cure an alleged breach also precludes Li-censor from asserting a valid claim of breach with respect to material and courier costs. Hole v. G.M. Corp., 83 A.D.2d 715, 442 N.Y.S.2d 638, 640 (3rd Dep’t 1981) (“It is uncontroverted that G M made several offers to repair and since plaintiff rejected those offers and never presented G M the opportunity to comply with the express warranty, he cannot now be heard to claim its breach.”).92 Licensor cannot rely on Finding 9 as an underpayment reflected in the audit within the meaning of Paragraph 4(f) of the 2008 Agreement or as a breach which, if not cured, would justify termination of the 2008 Agreement.
B. Finding No. 8: Miscellaneous Costs — $43,554.59
Finding 8 relates to certain miscellaneous costs that, in Mr. Elliott’s view, were not authorized under- the License Agreements and were improperly charged by 4Kids to Licensor. Based on Mr. Newborn’s testimony, it is the Court’s understanding that Finding 8 is not a material dispute between the parties, given that 4Kids has offered to pay substantially all of the amount ($39,000). Accordingly, the Court will not address the merits of this claim.
C. Finding No. 7: Bank Charges— $4,270.58
Finding 7 is comprised of $4,270.58 in deductions taken from Licensor’s share of Gross Income for bank charges that were not authorized deductions under the License Agreements. Mr. Foster testified that 4Kids does not dispute Mr. Elliott’s Finding. Accordingly, the Court will not address the merits of this claim.
D.Finding No. 6: Errors & Omissions Insurance Allocation — $67,-328.45
In Finding 6, Mr. Elliott concluded that 4Kids overcharged Licensor for its “pro rata” share of E & O insurance by approximately $67,000 over the period of the License Agreements. Paragraph 13 of each of the License Agreements requires 4Kids to obtain E & O insurance on behalf of Licensor, and the agreements allow 4Kids to deduct the cost of the insurance from Licensor’s share of Gross Income, up to a maximum of $15,000 per year. If other television series and movies are insured under the same policy, the License Agreements provide that Licensor’s share of the premium shall be “computed on a pro-rata basis.” The parties disagree as to the proper method for computing the pro rata allocation of the insurance premium.
Despite the fact that 4Kids’ E & O policy listed a number of inactive properties, Mr. Elliott calculated Licensor’s share of the premium by dividing the number of Yu-Gi-Oh! titles listed on the policy by the total number of properties on the policy. Using this method, he determined that 4Kids overcharged Licensor for its pro rata share of E & O insurance by approximately $67,000.
In contrast, 4Kids has demonstrated that if the allocation of Licensor’s share of the premium were determined either (a) *693on a weighted revenue basis — a methodology which was supported by Licensor’s own expert as more appropriate than Mr. Elliott’s method — or (b) as a proportion of active properties insured by 4Kids (in contrast to all properties), then the cost allocated to Licensor was appropriate. The Court has seen no evidence demonstrating why Mr. Elliott’s method was the most reasonable or correct way of calculating Licensor’s share — to the contrary, even Li-censor’s own expert disagreed with Mr. Elliott’s choice. As Plaintiffs are unable to meet their burden to demonstrate that Finding 6 evidences a breach of the License Agreements, the Court is unable to conclude that Finding 6 reflects an underpayment; accordingly, it cannot support termination of the 2008 Agreement.
E. Finding No. 5: Unauthorized Audit Fee Deduction — $105,111.20
Audit Finding 5 stems from Licensor’s claim that, despite the lack of an express provision in the License Agreements authorizing such deductions, 4Kids improperly deducted 50% of the costs of third-party audits conducted by 4Kids on its sublicen-sees from Licensor’s share of Gross Income. Mr. Elliott testified that, while he was conducting his audit, Licensor did not show him or discuss with him any correspondence between the parties relating to Licensor’s approval of 4Kids’ third-party audits. Mr. Elliott therefore concluded that Licensor had not authorized a modification of the License Agreements or otherwise consented to payment of 50% of the costs of such audits and that, consequently, such deductions by 4Kids were impermissible. The evidence, however, demonstrates that Licensor acted otherwise.
In January 2005, Ms. Nowicki of 4Kids informed Ms. Kubota of ADK of 4Kids’ third-party audit procedure, and after that time, 4Kids initiated various audits of Yu-Gi-Oh! sublicensees. While the parties agree that the License Agreements do not explicitly permit deductions from Li-censor’s share of Gross Income for these audits, the emails submitted into evidence clearly indicate Licensor’s consent and approval of certain audits, and Licensor’s course of conduct over the period of the License Agreements also demonstrates that Licensor never raised any objection to the deductions from Gross Income (which were prominently listed on the quarterly participation statements provided to Li-censor) until the audit in 2010. Between 2005 and 2009, 4Kids recovered over $750,000 through third-party audits, all of which was split 50-50 with Licensor, without objection. Notably, while Licensor objects to having to pay half the cost of these audits and uses this claim as a basis for termination, it has not offered to return any portion of the $375,000 paid to Li-censor as a result of these audits.
Viewing each third-party audit request and approval separately, 4Kids has demonstrated that each represented a written modification of the License Agreements. Email communication evidencing an agreement to modify the terms of an agreement constitutes a “signed writing” as per the statute of frauds, where (1) the terms of the proposed modification are set forth in the email; (2) a reply email evidences acceptance of the proposed modification; and (3) the emails include signature blocks, which signify an intent to authenticate. Stevens v. Publicis SA, 50 A.D.3d 253, 854 N.Y.S.2d 690, 691-92 (1st Dep’t 2008), appeal dismissed, 10 N.Y.3d 930, 862 N.Y.S.2d 333, 892 N.E.2d 399 (2008). Each of these conditions is present in the emails submitted into evidence. Specifically, in its requests for approval by Licensor, 4Kids made clear that the audits involved costs, and, at trial, both Mr. Hosaka and Mr. Sugimoto testi-*694fled that they understood that approving the proposed audits involved a sharing of costs. 4Kids presented emails and testimony illustrating that it sought Licensor’s written approval of each individual audit (which approval was given via e-mail), and 4Kids did not conduct any Yu-Gi-Oh!-related audit without Licensor’s approval. In fact, the evidence reveals that 4Kids declined to move forward with some proposed third-party audits because Licensor had not given its approval.
Moreover, even if the Court had found that the License Agreements had not been modified by the email approvals, Licensor is unable to defeat the equitable arguments of estoppel and waiver, given that (i) 4Kids relied on Licensor’s written approval to conduct the audits and would not have conducted them without consent and (ii) in accepting the royalty payments recouped through the third-party audits, Licensor waived its right to object to the deductions for costs.
An estoppel “rests upon the word or deed of one party upon which another rightfully relies and so relying changes his position to his injury.” It is imposed by law in the interest of fairness to prevent the enforcement of rights which would work fraud or injustice upon the person against whom enforcement is sought and who, in justifiable reliance upon the opposing party’s words or conduct, has been misled into acting upon the belief that such enforcement would not be sought.
Nassau Trust Company v. Montrose Concrete Products Corp., 56 N.Y.2d 175, 184, 451 N.Y.S.2d 663, 436 N.E.2d 1265 (1982) (citations omitted). “While estoppel requires detriment to the party claiming to have been misled, waiver requires no more than the voluntary and intentional abandonment of a known right which, but for the waiver, would have been enforceable.” Id.
For all of these reasons, the Court finds that Finding 5 does not reflect an underpayment nor does it constitute a breach of the License Agreements that can serve as a basis for Licensor’s termination of the 2008 Agreement.
F. Finding No. 4: Unreported Post-June 2008 Home Video Revenue— $26,894.27
Finding 4 has been withdrawn by Li-censor. While it was included in Mr. Shi-noda’s December 20, 2010 letter, it was not included in the complaint filed by Plaintiffs in the Adversary Proceeding. The Court notes, however, that Finding 4 was premised upon the application of Paragraph l(b)(iii) of the 2008 Agreement, which applies if 4Kids “exercises the Home Video Rights ... itself.”93 In dropping its pursuit of this audit Finding, however, Li-censor appears to have realized that it was misreading the 2008 Agreement and that it would be inconsistent to continue to pursue both Finding 4 and Finding 1, as Finding 1 relies on Licensor’s allegation that 4Kids was not exercising home video rights itself under the License Agreements. As Finding 1 asserts a claim for nearly $2 million, Licensor clearly chose to pursue the more lucrative claim. Moreover, the withdrawal of Finding 4 amounts to an admission by Plaintiffs that the amount demanded in the December 20 letter was erroneous. While the amount of *695Finding 4 may be relatively trivial, the point is not: if a demand is going to serve as the basis for a termination of such enormous consequence, it needs to be correct. Once again, close enough is not good enough.
G. Finding No. 3: Unsubstantiated International Withholding Taxes — $2,265,767.16
Based on Mr. Elliott’s audit Finding of $2,265,767.16 in “unsubstantiated” foreign withholding tax certificates, Licensor asserts that it was unable to claim foreign withholding tax credits or take foreign withholding tax deductions related to the Yu-Gi-Oh! property. Instead of quantifying its claim by the value to Licensor of the amount of the deduction or credit which could have been taken by Licensor on Japanese tax returns, Licensor has incorrectly asserted a dollar for dollar assessment in the form of an “audit claim” based on the face amount of the tax certificates that Mr. Elliott found to be “unsubstantiated.” Licensor has failed to prove that it suffered any injury as a result of 4Kids’ alleged breach, which it alleges was 4Kids’ failure to provide it with such certificates as required by the License Agreements. Licensor’s position is wrong, on several levels.
Mr. Elliott’s subjective and slipshod classification of certain tax certificates as “unsubstantiated” was purportedly based upon (i) whether 4Kids possessed such certificates in its files (without regard to whether they had been provided to Li-censor) 94 and (ii) whether the certificates referenced Licensor or the Yu-Gi-Oh! property.95 Mr. Elliott did not consider whether or not Licensor did or could have used such certificates to take a deduction or credit, nor whether Licensor suffered any tax injury in connection with his Finding. Moreover, the evidence demonstrates that 4Kids did not breach its obligations under the License Agreements to provide “evidence of payment of such withholding tax[.]” Ex. T-6 ¶ 4(g); Ex. T-ll T4(g). Accordingly, Licensor has failed to prove that Finding 3 reflects an underpayment or otherwise establishes a breach of the License Agreements sufficient to justify termination.
1. 4Kids Provided Evidence of Withholding Tax Deductions Required by the License Agreements
Section 4(g) of the License Agreements states that “4Kids shall provide Licensor or shall cause the applicable *696subagent or applicable licensee to provide Licensor with evidence of payment of such withholding tax on behalf of the Licensor so that Licensor may claim an appropriate tax credit or tax deduction.” Ex. T-6 ¶ 4(g); Ex T-ll ¶ 4(g). As explained by the drafter of the agreement, Mr. Newborn, he elected to use a purposefully broad term, “evidence,” because he did not know (i) what was required to prove payment of foreign taxes under Japanese tax laws and regulations or (ii) the proof of payment executed in the various foreign countries in the 4Kids Territory, but he assumed that Licensor would inform 4Kids of what documentation was necessary. (9/12/2011 Tr. 103:8-24, 104:16-105:2 (Newborn)).
Although Licensor has claimed that no foreign withholding tax certificates were provided to Licensor in the course of the parties’ relationship, there was credible evidence to the contrary. Both Ms. Kozmata and Mr. Foster of 4Kids testified that 4Kids collected and forwarded some tax certificates from foreign subagents to ADK; evidence was also presented that some foreign subagents sent foreign withholding tax certificates directly to TV Tokyo. Moreover, the Court finds that Plaintiffs’ testimony at trial was not credible regarding searches undertaken by Plaintiffs for such certificates. Mr. Hosa-ka testified (i) in his declaration that he personally undertook a search for such certificates after the initiation of the litigation, and he looked in all of the “logical places” for the certificates and (ii) in his re-direct examination that he also looked in the accounting department and in anything related to tax deductions to locate the certificates — but, on cross-examination, Mr. Hosaka admitted that he searched for the certificates only in ADK’s tax returns and in 4Kids’ quarterly participation statements.
While Licensor was not obliged under the License Agreements to ask 4Kids for copies of missing certificates, even Plaintiffs’ tax expert admitted that, if one of his clients could not take a foreign withholding tax credit because it was missing the relevant tax certificates, he would advise his client to ask its licensee for the certificates. There is no credible evidence that between 2001 and 2009 ADK ever requested foreign tax withholding certificates in writing from 4Kids, and the evidence presented by Plaintiffs regarding verbal requests for such certificates is inconsistent at best. Ms. Kubota, the ADK employee responsible for informing ADK’s accounting department about foreign withholding taxes, testified that if any requests were made for certificates from 4Kids, they would have been made by Mr. Doi, Mr. Shinoda, Mr. Sato, or her. She did not recall requesting withholding tax certificates from 4Kids, nor did she recall being asked by one of the other ADK employees to make such a request. Mr. Shinoda’s testimony on the topic was contradictory: he testified that he requested foreign withholding tax certificates “every time” he met with Mr. Kahn of 4Kids, a statement directly inconsistent with both his declaration and his deposition testimony in which he stated that it was not “every time.” He also admitted that he never followed up on any of his requests by letter or even by email; this is not surprising as it is difficult to believe that an important high-ranking executive such as Mr. Shinoda would discuss the topic of tax certificates with the Chief Executive Officer of 4Kids.
Plaintiffs’ witnesses also uniformly testified that no written request for foreign withholding taxes between 2001 and 2009 had been located. During his cross-examination, Mr. Sugimoto attempted to claim, for the first time, that the failure to locate any emails on the subject could be blamed on a change to ADK’s email system. No *697other witnesses mentioned this change; it was not raised by Mr. Sugimoto at his deposition, nor was it brought to the Court’s attention by Licensor’s counsel. Not only does it defy common sense that something so significant to Licensor’s position would not have been included in prior testimony, but it also cuts against Li-censor’s assertion that it had received no tax certificates, as such certificates could have been included in emails that may have been “lost” during the alleged email system change. Simply put, in the absence of any evidence that such a change in ADK’s email system in fact occurred or that no email archives were created at the time of the alleged change, the Court cannot conclude that this testimony is credible.
The parties also agree that foreign withholding taxes were listed on the quarterly participation statements that were provided to Licensor. Mr. Kasai, Plaintiffs’ tax expert, admitted that if one of his clients received a participation statement referencing foreign withholding taxes, the first thing he would advise his client to do would be to ask for the certificates. Instead, Licensor, a large Japanese public company with an internal accounting department and an external accounting firm, failed to ask for tax certificates and, prior to Mr. Elliott’s audit in 2010, Licensor never complained to 4Kids about the type of evidence that had been provided under the License Agreements.
Moreover, it is difficult to credit Licensor’s current allegations that, for numerous years, it has maintained that 4Kids failed to provide proper “evidence of payment” in accordance with Paragraph 4(g) of the agreements given that, during the 2008 re-negotiation of the 2001 Agreement, Licensor failed to request any change to the language of Paragraph 4(g). Indeed, Licensor did not suggest that the term “evidence” be replaced with the term “certificate,” or even that the term “certificate” be added to Paragraph 4(g). A party’s acceptance of performance in conflict with his proposed interpretation of the contract, without comment or protest, presents a strong showing that the contrary interpretation was the intent of the parties. Record Club of Am., Inc. v. United Artists Records, Inc., 1991 WL 73888, at *12 (S.D.N.Y. Apr. 29, 1991) (“UAR’s course of performance in accepting without protest payments based on Record Club’s interpretation of the excess-free provision warrants a finding that this reflected the intent of the parties and was a practical construction of the contract.”). This is particularly true where, as here, the party is represented by counsel and advisors. Jobim v. Songs of Universal, Inc., 732 F.Supp.2d 407, 416 (S.D.N.Y.2010) (“Plaintiffs, represented by sophisticated counsel and accounting advisors, failed to object to this calculation. After receiving ‘net receipts’ royalty payments for over thirty years, and failing to object, Plaintiffs cannot now argue for an ‘at source’ royalty arrangement.”). Licensor’s failure to object or otherwise comment about 4Kids’ provision of evidence pursuant to the agreements over a ten-year period negates Licensor’s new-found position that 4Kids did not comply with Paragraph 4(g) of the License Agreements. See Evans v. Famous Music Corp., 1 N.Y.3d 452, 459, 775 N.Y.S.2d 757, 807 N.E.2d 869 (2004) (finding repeated performance over contracts ranging from 23 to 59 years in duration without objection or comment constituted extrinsic evidence as to which interpretation should prevail). Whether the issue of the 4Kids’ tax certificates simply “fell between the cracks” of one or more of Plaintiffs’ accounting departments, or whether Plaintiffs made a deliberate decision to not seek tax credits or deductions, remains a mystery; 4Kids, however, cannot be fault*698ed for relying on the course of conduct that had developed since the inception of the 2001 Agreement and on contractual language that was adopted verbatim in the 2008 Agreement.
2. Licensor Has Demonstrated No Tax Injury
Licensor has conflated two distinct issues related to foreign withholding taxes: (i) whether 4Kids “substantiated” its deductions of foreign withholding taxes as determined by Mr. Elliott’s audit96 and (ii) whether Licensor suffered any actual injury, in the form of a higher tax bill, as a result of 4Kids’ alleged breach of the License Agreements. Despite Licensor’s assertion of a tax injury in connection with Finding 3, Mr. Elliott admitted that he does not know whether, as a matter of Japanese tax law, ADK could have relied (or did rely) on any of the tax certificates that he found to be “unsubstantiated” in order to claim foreign withholding tax credits. He also testified that he could not conclude that Licensor was injured in the amount of Finding 3 because that conclusion would require an understanding of Japanese tax law, which he does not possess. Instead, Mr. Elliott summarized his audit Finding as whether he could identify “unsubstantiated” tax deductions, not as whether Licensor could have taken a tax credit or recovered a certain amount from 4Kids. Significantly, Mr. Elliott admitted that while he valued Licensor’s tax related claim against 4Kids at $2,265,767.16, he could not conclude that Licensor was “injured” in this amount. In making his Finding, Mr. Elliott relied on an inconsistent and subjective standard which did not employ any accepted accounting principles. The Court finds that, for all of these reasons, Finding 3 was not properly included as an audit claim, and it cannot serve as a basis for termination of the 2008 Agreement.
There is no basis on which the Court can conclude that Mr. Elliott’s tax-related Finding establishes that Licensor was injured in the amount of $2,265,767.16. A finding of an actual injury here depends on whether Licensor was unable to claim foreign withholding tax credits, not whether or not tax certificates were located in 4Kids’ files or included a reference to Li-censor or the Yu-Gi-Oh! property. However, Licensor has not presented any evidence to support any actual tax injury.
In fact, based on the evidence presented, the Court is unable to determine (i) whether tax credits were claimed by any of the Licensor entities based on the tax certificates included in Finding 3 and (ii) whether, as Plaintiffs claim, ADK was the only member of the Consortium entitled to claim such credits on its Japanese tax returns. Mr. Elliott’s conclusion that certain tax certificates were “unsubstantiated” was drawn without any investigation on his part as to whether such certificates were provided to Licensor either by 4Kids or by sublicensees, and it is possible that Li-censor was in fact in possession of some or all of the allegedly “unsubstantiated” certificates and may have used them to claim tax credits on Japanese tax returns.
Similarly, with regard to those tax certificates that Mr. Elliott deemed “unsubstantiated” because they did not reference Licensor or Yu-Gi-Oh! property on their *699face, Mr. Elliott admitted that he does not know whether or not Licensor could have claimed foreign withholding tax credits based on any of such certificates. Mr. Elliott could not say whether or not Li-censor had claimed credits with respect to any or all of the $2.26 million which he deemed to be “unsubstantiated,” although he admitted that there would be no value to the alleged injury claim he put forth in his report if Licensor received certificates directly from subagents. Moreover, even based on his own “methodology,” Mr. Elliott’s Finding was erroneous because substantially all of the tax certificates deemed “unsubstantiated” by Mr. Elliott for this reason did indeed contain a Yu-Gi-Oh! notation on their face, other than those relating to the withholdings of the Mattel subsidiaries. See footnotes 29, 94, supra.
Licensor claims that ADK is the only entity in the Consortium entitled to claim foreign withholding tax credits, but it has introduced no agreement into evidence which supports this assertion.97 Furthermore, the License Agreements themselves establish that TV Tokyo is a Licensor that is entitled to claim tax credits under Section 4(g) of the agreements, and evidence was presented at trial that TV Tokyo received certificates directly from sublicen-sees.98 In addition, the Court finds credible the testimony of Mr. Tokuhiro, 4Kids’ tax expert, that, based on his review of the License Agreements, it did not appear that ADK was the only Licensor entity entitled to claim foreign withholding tax credits related to the income generated pursuant to the License Agreements.
Mr. Kawasaki, the sole representative of TV Tokyo to appear in this Adversary Proceeding, presented contradictory testimony as to which entities within the Consortium were entitled to take foreign withholding tax credits. At trial, he testified that only ADK could take such credits, although at his deposition he stated he did not know which entities were entitled to take the credits. Given this inconsistency and the other inconsistencies in Mr. Kawasaki’s testimony (see footnote 27, supra), the Court cannot rely on Mr. Kawasaki’s statement that ADK was the only entity that could take such credits.
3. Even If ADK Suffered a Tax Injury, It Cannot Recover From 4Kids Due to Its Own Inaction
It would be inequitable to allow ADK to recover from 4Kids for its alleged tax injury in light of the evidence demonstrating that it took no actions to minimize such injury. Here, Licensor had several opportunities to mitigate, none of which it exercised. First, as discussed above, assuming Licensor did not receive the withholding tax certificates, there is no credible evidence that Licensor ever requested them from 4Kids. Had this request been made, Mr. Foster testified that 4Kids would have timely provided the certificates.
Second, Licensor could have submitted to the Japanese National Tax Authority an alternative to a withholding tax certificate, such as a letter which evidenced proof of the payment of taxes, in order to claim foreign withholding tax credits, had the *700certificate not been available. In fact, both Mr. Tokuhiro and Mr. Kasai testified that, after reviewing the foreign tax credits section of a portion of ADK’s 2004 tax return admitted into evidence, ADK had claimed foreign tax credit based on letters, rather than on the certificates, as evidence of proof of payment of taxes. This undermines Plaintiffs’ position at trial that, without the actual withholding tax certificates, they could take no tax credits. In addition, despite ADK’s clear knowledge that documents other than certificates could be used to claim foreign withholding tax credits, there is no evidence that ADK ever asked 4Kids to provide alternative documentation as proof of payment of foreign withholding taxes by 4Kids’ sublicensees in order for ADK to file for tax credits in a timely manner.99 Had Licensor submitted letters or other evidence of foreign with-holdings taxes and claimed tax credits in a timely manner, Licensor would have been able to amend a tax return to claim additional foreign withholding tax credits.
Third, foreign withholding tax certificates amounting to $1,152,049.89 in credits were provided to Mr. Elliott in the course of his audit, and further certificates amounting to $880,680.14 in credits were provided to Licensor following Mr. Elliott’s audit. ADK (or another Licensor entity, as appropriate) could have, as a matter of right, amended its tax return to claim foreign withholding tax credits with respect to the past one year, and petitioned the Japanese National Tax Authority to amend its tax return to claim credits related to payment between 2005 and 2009. There is no evidence of any effort to do so. According to Mr. Tokuhiro, had the Japanese National Tax Authority agreed with a petition filed by ADK to amend ADK’s returns for the years 2006 through 2009, ADK could have recovered credits of approximately $1.1 million. Had such petition been filed by ADK prior to the fifth anniversary of the original filing date for the years 2005 through 2009, and the Japanese National Tax Authority agreed with such petition, Mr. Tokuhiro testified that ADK could have recovered approximately $1.6 million in tax credits. The Court finds this testimony credible, and Plaintiffs submitted no contradictory evidence which would cause the Court to question Mr. Tokuhiro’s testimony in this regard.
Licensor’s clear failure to attempt to minimize any of its alleged damages, either by (i) requesting missing tax certificates from 4Kids, (ii) requesting additional information or documentation needed to claim tax credits, or (iii) petitioning the Japanese National Tax Authority for permission to amend tax returns to account for the new certificates provided to Mr. Elliott strongly militates against the conclusion that 4Kids should be held liable for any tax injury allegedly suffered by Licensor.
H. Findings No. 1 and No. 2: Unreported Funimation Home Video Revenue — $1,967,000.00 and Unreported Majesco Home Video Revenue — $91,666.50100
Audit Findings 1 and 2 reflect Plaintiffs’ contention that 4Kids “surreptitiously excluded” from Plaintiffs’ portion of *701Gross Income at least (a) $1,967,000 of income that it received in the form of service fees from Funimation and (b) $91,666.50 that it received in the form of service fees from Majesco. See Plaintiffs’ Post-Trial Memorandum at p. 43. Plaintiffs allege that 4Kids’ failure to include these service fees in Plaintiffs’ portion of Gross Income constitutes a breach of the Gross Income provision of the License Agreements. Licensor’s claim to half of these service fees rests on, among other things, an incorrect proposition — that the service fees paid to 4Kids by Funimation and Majesco should have been included as part of Gross Income because 4Kids was obligated under the License Agreements to provide such services to its home video licensees — and reflects a misunderstanding of Paragraph l(b)(iii) and its relationship with the Gross Income provision in Paragraph 4.
Based on the evidence presented and the Court’s interpretation of the relevant paragraphs of the License Agreements, the Court finds that 4Kids, through its entity 4Kids Home Video, exercised the home video rights itself and the services fees paid to 4Kids by Funimation and Ma-jesco were not royalties paid for the “exploitation” or “license” of the home video rights; rather, such fees were paid as compensation for actual services rendered by 4Kids to Funimation and Majesco as its distributors. Funimation and Majesco were not 4Kids’ sublicensees. Accordingly, 4Kids was only obligated (i) under the 2001 Agreement, to pay to Licensor half of the 20% royalty of the wholesale selling price charged for the Home Video Devices (because such royalty was treated as Gross Income and divided 50-50) and (ii) under the 2008 Agreement, to pay to Licensor 100% of the 20% royalty payment (because such royalty was no longer treated as Gross Income).101 The service fees received by 4Kids were not royalty payments that should have been included in such amounts.
1. 4Kids Exercised the Home Video Rights Itself Pursuant to Paragraph l(b)(iii) of the License Agreements and Earned Service Fees from its Distributors for Separate Services Rendered
The evidence shows that 4Kids created its own home video subsidiary, 4Kids Home Video, for the purpose of exercising the home video rights to Yu-Gi-Oh! and certain other properties represented by 4Kids. In continuing to exercise its rights to the “exploitation or license of the [YGO] Rights to the Property in the Territory” pursuant to the License Agreements, 4Kids Home Video retained control over the content of each Yu-Gi-Oh! home video release in the U.S. and over the advertising and marketing of such Yu-Gi-Oh! home videos.102 In addition, the evidence *702shows that 4Kids Home Video incurred $6.9 million in expenses, at least half of which are attributable to the Yu-Gi-Oh! titles released by 4Kids. Licensor did not dispute any of these facts.
a) Licensor’s Mischaracterization of 4-Kids’ Duties under the License Agreements
Licensor spent a great deal of time at trial attempting — in vain — to draw parallels between 4Kids’ practices and obligations with respect to its foreign home video licensees and its relationship with Funimation in order to argue that 4Kids was providing services that it was already obligated under the License Agreements to provide to its Yu-Gi-Oh! foreign home video licensees (and thus, the service fees paid to 4Kids were actually royalty payments that should have been treated as Gross Income). Simply put, the evidence adduced at trial demonstrates the opposite.
The Funimation Services Agreement provides that, in exchange for certain service fees, 4Kids will provide various services related to the production, marketing, packaging, and advertisement of the home videos. 4Kids had no obligation to provide such services pursuant to the License Agreements. At trial, Licensor attempted to (i) recharacterize the grant by Licensor to 4Kids under the License Agreements of the right to advertise Yu-Gi-Oh! as an obligation by 4Kids to advertise Yu-Gi-Oh!, in order to argue that 4Kids Home Video’s advertising duties in the Funimation Services Agreement were requirements of the License Agreements and (ii) transform 4Kids’ obligation pursuant to
the License Agreements to provide a general Yu-Gi-Oh! “style guide” to all of its licensees into an obligation to design home video packaging and point-of-sale materials, as 4Kids Home Video did under the Funimation Services Agreement.
Neither of such attempts was successful. On cross-examination, Mr. Shinoda admitted that the duties of 4Kids Home Video under the Funimation Services Agreement materially differed from the duties of 4Kids under the License Agreements, and neither Mr. Shinoda nor Mr. Hosaka could point to any provision of the License Agreements which required 4Kids to (1) design DVD packaging; (2) design point-of-sale materials; (3) create, prepare and place consumer advertising; (4) produce advertising teasers; (5) produce DVD “extras”; or (6) deliver DLT Masters, if 4Kids was licensing the home video rights to a third party. Nor could they identify any foreign home video licensee for which 4Kids provided those services. FF ¶ 59. At trial, Mr. Newborn and Ms. Nowieki both confirmed that 4Kids does not provide these services to its foreign home video licensees, which lends further support to 4Kids’ assertion that it was proper for 4Kids to be paid service fees for providing such services because it was not otherwise required to do so. b) Licensor’s Arguments that Funimation Was the Licensee Because It (i) Was Manufacturing, Distributing, and Selling the Home Videos and (ii) Bore the “Inventory Risk” Do Not Withstand Scrutiny
Licensor has also attempted to argue that Funimation did not serve as a mere *703distributor; rather, it contends that 4Kids licensed the home video rights to Funimation pursuant to the Funimation Distribution Agreement by granting it the rights to “manufacture,” “distribute,” and “sell” the home videos.103 Licensor has further asserted, as evidenced in the testimony of Mr. Shinoda at trial, that 4Kids was not the true licensee of the Yu-Gi-Oh! home video rights because 4Kids did not carry the “inventory risk.”104
The evidence demonstrates that home video licensees often use vendors to handle manufacturing, distribution, and other jobs, and 4Kids need not exercise every aspect of the home video rights itself in order to be considered the licensee. Mr. Shinoda admitted that a licensee need not be a manufacturer in order to be the licensee,105 nor must a licensee distribute the product itself. The Court also finds credible Mr. Newborn’s testimony that, in contrast to the activities of 4Kids Home Video, when 4Kids licenses home video rights to a third party, 4Kids retains little involvement with the home video releases and “very little control” apart from exercising rights of approval with regard to (i) the home video packaging produced by the home video licensee (as distinguished from designing the home video packaging which 4Kids Home Video did for the U.S. Yu-Gi-Oh! home video releases distributed by Funimation) and (ii) any advertising produced by the home video licensee. (9/12/2011 Tr. 174:6-20 (Newborn)); FF ¶ 52.106
Finally, as argued by 4Kids, Licensor’s reading of the License Agreements is incorrect. The word “manufacture” as used in the License Agreements encompasses both the physical duplication of the DVDs (which was outsourced to Funimation) and the authoring and production of the home videos, ie., the steps necessary to take the bare television episodes and make them into final DLT masters ready to be duplicated (which was performed by 4Kids Home Video). In addition, the word “sell” encompasses the actual transaction to the wholesaler (which was outsourced to Funi-mation), but also consumer advertising and point-of-sale advertising (which was performed by 4Kids Home Video). FF ¶¶ 42, 50-51. The sharing of these tasks demonstrates that, while 4Kids was “exercising” the home video rights, it did so by retain*704ing rights, responsibilities, and control for itself and merely outsourcing certain tasks to its distributor Funimation.
Mr. Shinoda’s argument that the party who bears the “inventory risk” should be considered the licensee also falls short. When presented with the example of Ko-nami (the licensee for Yu-Gi-Oh! trading cards) and its former distributor, Upper Deck, on cross-examination, Mr. Shinoda admitted that he did not know whether Konami or Upper Deck had the inventory risk on the sale of Yu-Gi-Oh! trading cards. Mr. Shinoda was also asked whether he would still consider Konami the licensee of Yu-Gi-Oh! trading cards if Upper Deck had the inventory risk. After giving various inconsistent answers, Mr. Shinoda, in response to questioning from the Court, admitted that his concern was only in allocating the inventory risk between Licensor and its licensee, not between the licensee and its distributor, because Mr. Shinoda’s focus was that the royalty on Yu-Gi-Oh! trading cards was paid at the time the goods are manufactured.107 FF ¶ 53.
c) Licensor’s “Secrecy Clause” Argument Has No Basis
The License Agreements do not speak to the relationship between the home video licensee and its distributors or vendors, and Mr. Shinoda’s reasoning in response to questioning on the Upper Deck/Konami relationship directly supports the Court’s conclusion in that regard. Licensor has no legitimate concern with the service fees or any other arrangement between 4Kids and its distributor, as long as Licensor receives the appropriate amount of the 20% royalty as specified in Paragraph l(b)(iii). As long as the 20% royalty is properly being paid (and divided 50-50 between Licensor and 4Kids as per the 2001 Agreement or paid 100% to Licensor as per the 2008 Agreement), the requirements of the License Agreements are satisfied.
There is no provision in the License Agreements that requires 4Kids to disclose the business details of its distributor relationships with Licensor. Nevertheless, Plaintiffs express outrage and despair over the fact that they were allegedly never told about the Services Agreement by 4Kids. They have referred to such agreement as a “side agreement” and to its confidentiality provision as a “Secrecy Clause,” implying that 4Kids intentionally hid this agreement from them. Plaintiffs have questioned the need for separate distribution and services agreements with Funimation and have accused 4Kids of using the two separate agreements to conceal the existence and details of the Services Agreement from Licensor. Notwithstanding Plaintiffs’ overwrought arguments surrounding the Secrecy Clause,108 the Court finds nothing untoward, let alone sinister, in the fact that this clause was included in the Services Agreement.
The Court cannot locate any affirmative misrepresentation in the record regarding the Funimation Services Agreement. Moreover, the Court finds credible Mr. Newborn’s explanation regarding the reason for the creation of two separate agreements as well as his explanation regarding *705the purpose of the confidentiality provision in the Funimation Services Agreement; and no evidence was submitted by Plaintiffs to rebut this testimony.109 Mr. Sugi-moto also testified that he was aware of 4Kids’ May 2002 press release and was aware that Funimation was acting as 4Kids Home Video’s distributor. (Sugimo-to Decl. ¶ 20). Despite this admitted awareness, there is no evidence that Li-censor ever asked 4Kids for a copy of the Funimation agreements, or inquired at all into the details of 4Kids’ relationship with Funimation. In addition, the Court notes that because the service fees received by 4Kids were listed on participation statements provided to ADK and the Services Agreement was disclosed in numerous SEC filings, Licensor also could have, through the exercise of reasonable diligence, discovered the service fees being paid to 4Kids with minimal effort and inquired further into the relationship had it decided to do so.
2. Paragraph l(b)(iii) of the License Agreements and the Misunderstanding Regarding Such Provision
Generally, under Paragraph 4(c) of the 2001 Agreement, Gross Income — defined as the “gross receipts received from the exploitation or license of the Rights” — is split evenly between the parties. But Paragraph l(b)(iii) of the 2001 Agreement provides that if 4Kids exercises the home video rights itself, “4Kids shall pay Li-censor a royalty of twenty percent (20%) of the wholesale selling price charged for the Home Video Devices,” and that the royalty shall be paid into Gross Income and split between the parties. Applying standard rules of contract interpretation, Paragraph l(b)(iii) controls, and Licensor’s share of the home video revenues under the 2001 Agreement was limited to its share of the royalty, or 10% of the wholesale price.
It is well settled that “if there [is] an inconsistency between a specific provision and a general provision of a contract, ... the specific provision controls.” Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42, 46, 150 N.Y.S.2d 171, 133 N.E.2d 688 (1956); accord Oldcastle Precast, Inc. v. U.S. Fidelity & Guar. Co., 458 F.Supp.2d 131, 142-43 (S.D.N.Y.2006); Restatement (SECOND) CONTRACTS § 203(c) (1981) (“In the interpretation of a promise or agreement ... specific terms and exact terms are given greater weight than general language[.]”). Thus, the specific provision regarding Licensor’s share of the home video revenue in Paragraph l(b)(iii) controls *706over the general provision for allocating Gross Income in Paragraph 4(c).
Plaintiffs argue that Paragraph l(b)(iii) does not state that the 20% royalty shall be the only gross income to which Li-censor is entitled, or that the 20% royalty shall override the Gross Income provision in Paragraph 4 — meaning that, under Plaintiffs’ reading of the License Agreements, all revenue related in any way to the release by 4Kids Home Video of Yu-Gi-Oh! home videos in the U.S. (whether in the form of royalties or in the form of service fees) should be considered to be Gross Income.110 This interpretation, however, renders Paragraph l(b)(iii) superfluous and is unsupported by the plain text of the provision. Paragraph l(b)(iii) says nothing about a minimum guarantee, nor does it say that the royalty will be “at least” twenty percent. Furthermore, even if the provision were ambiguous, the extrinsic evidence in the record supports 4Kids’ interpretation, not Licensor’s. As Mr. Newborn testified, the purpose of the provision was to put Licensor in the same position regardless of whether 4Kids exercised the rights itself or licensed them to a third party, and, in either case, Licensor would receive half of the appropriate royalty.
In addition, there is substantial evidence that, even if Licensor did not fully understand the intersection of Paragraph l(b)(iii) with the Gross Income provision in Paragraph 4, Licensor knew that 4Kids Home Video was receiving additional revenue from its exercise of Yu-Gi-Oh! home video rights in the U.S. and did not question this practice for almost ten years. Mr. Shinoda testified in his declaration and at trial that he knew that 4Kids was receiving additional revenue as the home video licensee. Shinoda Deck ¶ 15 (“It was my understanding that, if 4Kids licensed the Home Video Rights itself, it would be permitted to keep any profit that it was able to make after paying the YGO Consortium the appropriate percentage of the wholesale selling price of the home videos.”). While he later contradicted this testimony with alternative explanations for Paragraph l(b)(iii) (see FF ¶ 46), a common thread throughout Mr. Shinoda’s explanations was that 4Kids Home Video was receiving additional revenue as the home video licensee.
The change to Paragraph l(b)(iii) in the 2008 Agreement also provides little reason to doubt Licensor’s awareness that 4Kids was receiving additional revenue as the home video licensee over and above the royalty payment. At the request of Li-censor’s outside counsel, Paragraph l(b)(iii) of the 2001 Agreement was renegotiated in the 2008 Agreement to provide that Licensor was to receive 100% (instead of 50%) of the royalty payable by 4Kids Home Video from the exercise of Yu-Gi-Oh! home video rights in the U.S. See Ex. T-34. The ostensible reason for such renegotiation was that Licensor understood that 4Kids Home Video was receiving additional revenue as the home video licensee over and above the royalty and that, therefore, 4Kids Home Video should pay 100% of the royalty to Licensor. Mr. Sugimoto also testified at trial that it was never ADK’s belief that 4Kids had agreed to make no money off of the home videos as a result of this amendment. FF ¶ 84. Thus, Licensor’s argument that 4Kids engaged in conduct intended to mislead Li-*707censor is simply not credible: Licensor, by its own admission, knew that 4Kids Home Video was receiving additional revenue as the Yu-Gi-Oh! home video licensee.111
The Court concludes that, by receiving service fees from Funimation and Majesco pursuant to the respective Services Agreements, 4Kids did not breach the Gross Income provision or any other provision of the License Agreements. 4Kids was not obligated to treat such service fees as royalty payments (and thus, as Gross Income) because such service fees were not monies paid for the “exploitation” or “license” of the home video rights. The evidence shows that such service fees were compensation for valuable services rendered by 4Kids to its home video distributors which 4Kids was under no obligation to provide pursuant to the terms of the License Agreements or otherwise. Moreover, despite the fact that 4Kids may have outsourced certain manufacturing, distribution, and other jobs to its distributors Funimation and Majesco, 4Kids continued to “exercise” the home video rights itself, as the licensee, and it retained control over issues normally controlled by a party exercising licensed rights. Licensor has also not demonstrated a breach of the License Agreements on account of 4Kids’ failure to share the terms of the Funimation and Majesco relationships with Li-censor; 4Kids was under no duty to disclose to Licensor the business details of such relationships to Licensor.
IV. Other Arguments Presented by Plaintiffs
Plaintiffs have raised numerous other miscellaneous arguments to justify their course of conduct prior to and during this proceeding. Such arguments include allegations that (i) 4Kids breached the implied covenant of good faith and fair dealing, (ii) 4Kids committed a fraud by (a) not disclosing the Funimation and Majesco Services Agreements to Licensor and (b) collecting withholding tax certificates while representing to Licensor that 4Kids was not doing so, and (iii) 4Kids’ breaches were “incurable.”
None of these arguments justifies termination of the 2008 Agreement. Plaintiffs’ claim for breach of the covenant of good faith and fair dealing is duplicative of their breach .of contract claim, which has already been fully addressed by the Court in this decision. The claims asserted by Plaintiffs for fraud are without support in the trial record, as the Court has found no misrepresentations made by 4Kids with respect to the Funimation and Majesco Services Agreements and no violation by 4Kids of its “evidence” obligation with respect to foreign withholding taxes under the License Agreements.
Moreover, just as the recollection and testimony of many of Plaintiffs’ witnesses seems to have evolved over time, Plaintiffs’ legal theories and positions also seem to have evolved to fit the facts as they developed during this proceeding. For Plaintiffs to assert now that, as of March 18, 2011, there existed an incurable breach, while still continuing to seek the $4.8 million demanded (having already accepted 4Kids’ $1 million good faith payment) is troubling. Plaintiffs’ credibility at every *708turn in these proceedings was sorely lacking, and the Court has serious concerns about Plaintiffs’ good faith in this matter. Indeed, in Plaintiffs’ opening statement at trial, counsel emphasized that Plaintiffs had been the victims of a breach of trust; if anyone is the victim of a breach of trust in this matter it is 4Kids.
CONCLUSION
Licensor did not effectively terminate the 2008 Agreement. The formal requirements of Paragraphs 12(a) and 15(c) of the 2008 Agreement were not satisfied, as 4Kids never received proper and effective notice that a cure period was running and that Licensor had triggered the 10-day termination window by sending a notice of breach. Moreover, even if notice had been proper and the cure period had begun to run or had run, it would have been inequitable and improper for Licensor to continue negotiating with 4Kids throughout the cure period and abruptly terminate without providing a final opportunity to cure.
Even if it were the case that Licensor had properly complied with the formal notice of breach and termination requirements in the 2008 Agreement, the termination was nonetheless ineffective because the notice sent by Licensor was substantively defective. Plaintiffs’ purported basis for termination — 4Kids’ failure to promptly pay the royalty underpayment reflected in the audit — was improper because the amount owed to Plaintiffs, if any, was nowhere near the $4,819 million amount asserted in the termination letter and the purported notices of breach. The $4,819 million amount asserted by Plaintiffs was materially incorrect and inaccurate; therefore, it could not and did not form a valid basis for termination. Stated differently, there simply was not a $4,819 million royalty underpayment reflected in the audit. Seven of Mr. Elliott’s Findings (Findings 1, 2, 3, 4, 5, 6, and 9) have either been withdrawn by Licensor or are merit-less and do not reflect an underpayment or otherwise evidence a breach of the License Agreements. It bears emphasis that in the Court’s view, the invalidity of any single one of these Findings is sufficient to support the ultimate conclusion that termination was ineffective. The material difference in the amount originally asserted by Licensor as its basis for breach renders termination ineffective, as Licensor based its purported termination on an incorrect aggregate audit claim amount.112 For all of these reasons, the Court concludes that the 2008 Agreement is still in effect and remains property of the Debtor’s estate.113
IT IS SO ORDERED.
. 4Kids’ Answer and Counterclaims alleges that this is a core matter pursuant to 28 U.S.C. § 157(b)(2). Plaintiffs’ Answer to 4Kids' Counterclaims neither admits nor denies this allegation. In the Court's view, there is no question as to the core nature of this proceeding. Moreover, by virtue of the June 2 Order, Plaintiffs consented to this Court’s adjudication of this Adversary Proceeding. Accordingly, it is the Court’s view that it has authority to enter a final judgment in this Adversary Proceeding and any limitations on its authority arguably imposed by Stern v. Marshall, - U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), are inapplicable.
. Messrs. Shinoda, Kawasaki, and Kasai testified in Japanese; live English translation of their testimony was ably provided by Ms. Eli-ca Funatsu. Messrs. Sugimoto and Hosaka, while they testified in English, were assisted *621at times by Ms. Funatsu. The parties worked cooperatively in the discovery phase of these proceedings with respect to the translation of documents produced by Plaintiffs in Japanese. English translations of such documents were provided by a translation service agreed upon by the parties.
. Mr. Shinoda is responsible for, among other things, negotiating ADK's business contracts and overseeing their legal administration, including the agreements between the YGO Consortium and 4Kids. (Shinoda Deck ¶ 2). He is also involved in and familiar with ADK’s business operations and finances. (Shinoda Decl. ¶ 2).
. Mr. Hosaka is responsible for the administration, management, and sale of rights related to the various animation products that ADK handles, including Yu-Gi-Ohk (Hosaka Deck ¶ 2).
. Mr. Sugimoto was 4Kids' primary contact in the Consortium. (9/19/11 Tr. 8:9-11 (Now-icki)).
. From 2000 to 2009, Mr. Kawasaki worked in TV Tokyo’s licensing department as Manager. (Kawasaki Deck ¶ 3). In 2009, he joined the Animation Division as Senior Manager. (Kawasaki Deck ¶ 3).
. Mr. Newborn is responsible for, among other things, negotiating 4Kids’ business contracts and overseeing their legal administration, including the agreements with Plaintiffs. (Newborn Deck ¶ 2).
. Mr. Foster oversees, among other things, all of the financial aspects of 4Kids, including all financial reporting and review of all financial statements, all investing by 4Kids, and all SEC filings. (Foster Deck ¶ 3).
. Ms. Nowicki is responsible for overseeing the day-to-day operations of the marketing and licensing of the Yu-Gi-Oh! brand. (Now-icki Deck at ¶ 3).
. Ms. Kozmata is responsible for, among other things, the preparation of "participation statements” that are sent out quarterly to the licensors of various entertainment properties that are represented by 4Kids, including ADK. (Kozmata Deck ¶¶ 3, 5).
. The findings of fact and conclusions of law herein shall constitute the Court’s findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052, made applicable to this proceeding pursuant to Bankruptcy Rule 9014. To the extent any finding of fact later shall be determined to be a conclusion of law, it shall be so deemed, and to the extent any conclusion of law later shall be determined to be a finding of fact, it shall be so deemed.
. In the 2001 Agreement, Paragraph l(b)(iii) provides that "[i]f 4Kids exercises the Home Video Rights to the Episodes and any Additional Episodes itself, 4Kids shall pay Li-censor a royalty of twenty percent (20%) of the wholesale selling price charged for the Home Video Devices. Such royalty payment shall be part of Gross Income and shall be divided among the parties as provided below in Paragraph 4." Ex. T-6.
In the 2008 Agreement, Paragraph l(b)(iii) was revised to provide that "[i]f 4Kids exercises the Home Video Rights to the Episodes and any Additional Episodes itself, 4Kids shall pay Licensor a royalty to be negotiated in good faith of between 15% and 20% of the wholesale selling price, net of returns, for such Home Video Devices. Such royalty payment shall not be part of Gross Income and shall not be divided among the parties as provided below in Paragraph 4 but rather shall be paid exclusively to Licensor." Ex. T-11.
. Plaintiffs objected to the introduction of T-422A, a certified translation of T-422, on the basis that Mr. Hosaka, during his deposition, disagreed with portions of the translation. As *628discussed herein at p. 107, the Court overruled that objection and admitted T-422A into evidence. (9/23/2011 Tr. 18:25-24:17).
. This testimony is corroborated by Mr. Shi-noda’s testimony that Mr. Kahn told him in 2002 that 4Kids would be releasing the home videos itself. (9/1/2011 Tr. 32:19-25 (Shino-da)).
. There were several other inconsistencies in Mr. Shinoda's testimony. For example, he testified at trial that in his opinion, a company such as 4Kids, in order to be considered the home video "licensee,” must physically manufacture and duplicate the home videos itself; but he later admitted that a licensee "[does not] necessarily have to have their own factory and hire employees” or "manage their own factory per se.” 8/30/2011 Tr. 140:7-11, 141:12-143:4 (Shinoda). He also testified that he asked Mr. Kahn for foreign tax withholding certificates "every time” that he and Mr. Kahn met, only to concede later in his testimony that "[fit might not have been every single time[.]” (9/1/2011 Tr. 76:21-77:6, 101:9-102:19 (Shinoda)). And, although Mr. Shinoda testified in his Declaration that “[fit was [his] intent by including [a] ten business day cure period [in the December 20 letter] to alert 4Kids to the urgency of their need to respond to [Licensor's] demand for payment,” he admitted on cross-examination that he did not write the December 20 letter and did not even know who the author was. (Shinoda Decl. ¶ 58; 8/31/2011 Tr. 78:15-79:10 (Shino-da)).
. In fact, 4Kids and Funimation negotiated a provision in the amended Funimation Services Agreement that balanced 4Kids’ right to approve marketing and pricing decisions against Funimation's risk of having unsold inventory. The provision provided that if Fu-nimation sought to reduce the price of a home video title by more than one-third, then 4Kids could either approve the reduction or buy 75% of the unsold inventory. (Ex. T-538 ¶ 6(b)).
. There were many inconsistencies in Mr. Hosaka’s testimony that give the Court pause with respect to his credibility as a witness. For example, in his trial declaration, Mr. Ho-saka offered opinions on the meaning of Paragraph l(b)(iii) and the reasons why it was modified in 2008, despite having testified at his deposition that he had no understanding regarding these issues. (9/6/2011 Tr. 15:20-17:1, 17:15-19:3 (Hosaka)). Mr. Hosaka also testified at his deposition that, during the March 18, 2011 meeting between the parties, ADK offered to invest $3 million in 4Kids; but at trial he testified that ADK made a $3 million settlement demand. (9/6/2011 Tr. 80:3-81:21 (Hosaka)). And although Mr. Hosaka testified in his declaration that he personally searched for tax certificates in "all of the logical places,” he admitted during his deposition, and again on cross-examination at trial, that he only looked in ADK's tax returns and in 4Kids’ quarterly participation statements. (Hosaka Deck ¶ 50; 9/6/2011 Tr. 35:18-38:12, 130:15-132:23 (Hosaka)).
. 4Kids does not generally enter into formal licensing agreements between the parent 4Kids Entertainment, Inc. and its wholly-owned subsidiaries. (9/12/2011 Tr. 172:10-19 (Newborn)).
. "Home Video Devices” is defined in Paragraph l(b)(ii) of the 2008 Agreement as video cassettes, dvd, cd-rom and/or such other home video formats as may hereafter be created for purposes of a consumer viewing television programs at home.
. The term "unsubstantiated” appears nowhere in the License Agreements and, accordingly, has no legal significance or dispositive effect on the issues before the Court.
. Prior to 2004, there also was a withholding tax in the United States with respect to royalties payable to Japanese licensors, but that withholding tax has since been eliminated. (Foster Decl. ¶ 10 n.2; Newborn Decl. ¶ 95). This withholding tax was eliminated on July 1, 2004.
. In the License Agreements and in the testimony presented at trial, these foreign companies were variously referred to as “foreign licensees,” "sublicensees” of 4Kids, and "sub-agents” of 4Kids. For simplicity, these companies are referred to herein as "subagents” or "sublicensees.”
. Licensor has asserted that 4Kids was obligated to assist ADK in filing for tax credits in Japan. (9/23/2011 Tr. 69:7-12 (Plaintiffs’ Closing Argument); Ex. T-18). In contrast, both License Agreements are clear on their face that '’4Kids shall also assist Licensor in filing any and all forms with the taxation authorities of the various countries within the Territory so as to enable Licensor to claim any tax credits to which Licensor may be entitled.” (Ex. T-6 ¶ 4(g); Ex. T-ll ¶4(g)) (emphasis added). Both agreements define the Territory as “the world except the Asian countries [including Japan] listed on Exhibit B.” (Ex. T-6 ¶ 3; Ex. T-ll ¶ 3). Accordingly, 4Kids was obligated to assist Licensor with the filing of forms in the Territory to enable Licensor to claim tax credits, but was not obligated to assist Licensor in filing for tax credits in Japan.
. It is undisputed that Mr. Elliott did not request copies of foreign remittances or cash receipts from 4Kids, which documents would have enabled Mr. Elliott to confirm that 4Kids accurately reported the amount of net proceeds and the associated royalties. See ¶ 116, infra.
. While both Licensor’s and 4Kids' tax experts agree that generally the participation statements would not be sufficient proof of the payment of foreign taxes, both testified that they would advise a client to "first” request the relevant certificates after receipt of participation statements. (8/29/2011 Tr. 127:6-9 (Kasai); Tokuhiro Report at 6).
. There were a number of inconsistencies in Mr. Kawasaki’s testimony. For example, Mr. Kawasaki claimed that he received an oral recitation of Mr. Elliott’s Findings in October 2010, but that he did not recall when he learned about the Funimation service fees. (9/1/2011 Tr. 144:9-146:6 (Kawasaki)). He then testified, on redirect, that he recalled learning of the service fees after June 2010. (9/1/2011 Tr. 186:5-14, 188:24-189:8 (Kawasaki)). Mr. Kawasaki testified that he had a general understanding of how foreign withholding taxes work, but admitted that he testified in August that he did not possess an understanding of foreign withholding taxes. (9/1/2011 Tr. 146:12-147:16 (Kawasaki)). Mr. Kawasaki testified at his deposition that he did not often speak to ADK about 4Kids in the prior eighteen months; however, at trial, Mr. Kawasaki claimed that starting in January 2011, he and the other members of the Consortium had weekly meetings, in addition to numerous phone calls each week, concerning 4Kids between January and March 2011. (9/1/2011 Tr. 122:11-24, 176:14-179:20 (Kawasaki)). He then claimed that as time progressed, he was speaking to ADK on a daily basis concerning 4Kids. {Id..).
. As Mr. Foster testified in his declaration, Exhibit T-28 is a collection of certificates issued in the name of TV Tokyo that were obtained by 4Kids subsequent to Mr. Elliott's audit. (Foster Deck V 38 n.6; 9/20/2011 Tr. 223:14-22 (Foster)).
. Substantially all of the certificates in this group reference Yu-Gi-Oh! except those from the various Mattel subsidiaries. (Foster Decl. 1! 35).
. Licensor has asserted that it is custom and practice in the licensing field for the auditing party to not provide the audit report to the audited entity. However, Mr. Erk, Licensor’s expert on the "customs and practices [of] royalty compliance work,” testified that in his practice the audited party "often” receives a copy of the audit report. (9/9/2011 Tr. 21:20-22, 77:1-11 (Erk)). Using a proposal sent by an external auditor (and forwarded to ADK) for an audit of foreign Yu-Gi-Oh! licensees, Licensor has attempted to demonstrate that 4Kids’ own practice was to generate two reports, one internal and one external. (Ex. T-607). However, there is no evidence, other than this proposal which was not approved, that 4Kids ever utilized internal and external versions of audit reports; nor is there any evidence whether the proposed external report provided less or more information regarding the audit claims than the proposed internal report. (9/15/2011 Tr. 50:21-23, 51:17-20, 52:6-10, 56:15-16 (Nowicki); 9/12/2011 Tr. 42:14-24; 51:23-25 (Newborn); 9/20/2011 Tr. 148:16-23 (Foster); Ex. T-607; Ex. T-68). The possible reasons the final audit report was not produced to 4Kids until pre-trial discovery are obvious to the Court: it reveals Mr. Elliott's focus on whether any requests had ever been made for the withholding tax certificates, and it also reveals the auditor’s unabashed motivation to "discover” aggressive claims for inclusion in the audit, notwithstanding the longstanding course of dealing between the parties.
. Licensor has challenged Mr. Tokuhiro’s qualifications to provide an expert opinion concerning the requirements to file for foreign withholding tax credits under Japanese tax laws and regulations. The crux of the Licensor’s challenge is that Mr. Tokuhiro’s lack of a CPTA license precludes the necessary expertise required in this litigation. Mr. Tokuhiro explained that, as a CPA, he would qualify to become a CPTA solely by paying a registration fee, operating an office in Japan, and participating in ongoing education classes. (9/20/2011 Tr. 45:17-46:10 (Tokuhi-ro)). Although Mr. Tokuhiro has not personally prepared tax returns to be filed with the Japanese National Tax Authority, he is capable and qualified to provide advice regarding the requirements of the Japanese tax law and regulations and has advised Japanese multinational corporations on how and when to claim foreign withholding tax credits for more than 20 years. (9/20/2011 Tr. 9:10-19, 12:6-16 (Tokuhiro)). This Court finds that Mr. Tokuhiro is qualified as an expert in Japanese tax law, including the ability and means to claim foreign withholding tax credits and deductions. See pp. 103-104, infra.
. Mr. Kasai testified that the Japanese tax law has recently been amended to provide that Japanese corporations seeking foreign withholding tax credits or deductions do not have to physically attach proof of payment to the tax return; such proof must now be held by the taxpayer for a period of seven years. (8/29/2011 Tr. 109:14-110:14 (Kasai)).
. Mr. Shinoda testified in his deposition that he discussed foreign withholding tax certificates with Mr. Kahn on several occasions, but that these discussions did not occur every time that he met with Mr. Kahn. (9/1/2011 Tr. 101:12-21 (Shinoda)).
. Ms. Nowicki confirmed Mr. Kahn's testimony and explained that she did not recall the topic of foreign withholding certificates being raised at any meeting with ADK. (9/15/2011 Tr. 107:15-20 (Nowicki)).
. Mr. Sugimoto testified that ADK had conducted a search for requests for foreign withholding tax certificates between July 2010 and December 15, 2010 (five days before Licensor had sent its purported notice of breach to 4Kids), but that no such requests or communications were located during this investigation. (9/8/2011 Tr. 28:10-29:20, 41:10-23 (Sugimoto); 9/1/2011 Tr. 79:14-80:4 (Shino-da); Ex. T-63; Ex. T-64; Ex. T-65; Ex. T-65A). Messrs' Shinoda and Hosaka had also asked Ms. Kubota to search for any requests from ADK to 4Kids for foreign withholding tax certificates. (9/8/11 Tr. 23:2-24:15; 28:10 -28:20; 29:12-29:20 (Sugimoto); T-65 & T-65A). During his cross-examination, Mr. Sugimoto claimed, for the first time, that there had been a change in ADK’s email system and thus, it was possible that this was the reason that ADK's requests had not been located during ADK’s investigation. (9/8/2011 Tr. 24:10-15 (Sugimoto)). The alleged change in the email system was not mentioned by Mr. Sugimoto during his deposition, by any other ADK witness at trial or in deposition, or by counsel for Licensor in the course of discovery. (9/8/2011 Tr. 41:10-23 (Sugimoto)). As there was no other evidence of any kind presented regarding this alleged change in the email system, the Court does not find Mr. Sugimoto’s testimony on this point to be credible.
.In closing arguments, counsel for Licensor asserted that there were additional documentary requests by ADK for 4Kids to provide foreign withholding tax certificates in exhibits T-146, T-148, and T-253. Ms. Kubota was the only witness to provide any testimony concerning T-146. Ms. Kubota testified that this email exchange evidenced 4Kids’ request of ADK to fill out forms to avoid double taxation of foreign income and does not "reflect any request by ADK for 4Kids to supply or provide foreign [i.e., non-U.SJ withholding tax certificates.” (8/22/11 Dep. Tr. 78:18-80:16 (Kubota)). Likewise, T-148 does not reflect a request for foreign withholding tax certificates. The email specifically states, “please arrange to send us the receipts you get from tax office (regarding withholding Tax) as soon as possible. We do not need to file to our tax office soon, but unless we don't have (sic) any proof of U.S. tax office receiving tax there, we'll be in big trouble.” (Ex. T-148). Similarly, Ms. Kozmata explained that T-253 was a request for U.S. withholding tax certificates (specifically the form 10-42), not foreign withholding tax certificates. (Ex. T-253; 9/19/2011 Tr. 84:9-25, 85:10-21 (Kozmata)).
. Although Ms. Kubota has no formal tax training, she explained that she "trained on the job” concerning taxes because she had "a lot of interaction” with the accounting office on a "day to day” basis. (8/22/11 Dep. Tr. 15:16-16:2 (Kubota)).
. Similarly, as discussed below in Section VI.D.2, infra, after receiving the December 20, 2010 letter, Mr. Newborn, in a letter dated December 29, 2010, proposed a "constructive solution" to work with Deloitte and Touche to determine what information would be required for ADK to file amended tax returns and claim foreign withholding tax credits. (Ex. T-18, Ex. T-20, 9/12/2011 Tr. 170:23-171:4 (Newborn)). ADK did not respond to 4Kids’ offer of assistance on this issue. (Id.; 8/31/2011 Tr. 83:22-84:17 (Shinoda)).
. In support of its position, Licensor incorrectly cites Paragraph 4(f) of the License Agreements. (Newborn Decl. ¶ 115; Ex. T-18 at 4KIDS-0041383). Paragraph 4(f) does not relate to third-party audit costs. Rather, this subparagraph deals exclusively with an audit conducted by Licensor of 4Kids. This provision states that if Licensor uncovers an underpayment of more than 5% due, 4Kids is obliged to reimburse Licensor for the cost of the audit of 4Kids. (Newborn Decl. V 115; Ex. T-6 ¶ 4(f); Ex. T-ll K4(f)). That Li-censor understands the meaning of Paragraph 4(f) is evident from the penultimate paragraph of the December 20, 2010 letter, where Licensor relies upon this paragraph to seek reimbursement for the cost of Mr. Elliott’s services in conducting the audit of 4Kids. (Newborn Decl. ¶ 116; Ex. T — 18).
. Licensor attempted to put forth an argument that Mr. Doi did not have the authority to authorize third-party audits. However, Mr. Sugimoto testified that Mr. Doi was in charge of ADK's licensing group and Yu-Gi-Oh! in 2007. (9/8/2010 Tr. 118:23-119:4 (Sugimoto)). Ms. Nowicki confirmed Mr. Doi’s authority with her testimony that Mr. Doi was “in charge” of approvals. (9/19/2011 Tr. 8:9-9:l (Nowicki)).
. The invoice sent to 4Kids contains a line item charge for “courier costs” for 123.2 episodes. The Court does not understand how it would be possible for ADK to send (and to charge 4Kids for) .2 of an episode. The evidence demonstrates that this question was never answered for the Court or for Mr. Newborn.
. There were many similar examples in the record of communications between Mr. Elliott and ADK management personnel that reflected Mr. Elliott’s zealous pursuit and advocacy of interpretations of the License Agreements that would support aggressive audit claims.
. This claim was never raised with 4Kids or otherwise pursued. Contrary to Mr. Elliott’s preliminary analysis, the License Agreements provide that withholding taxes “shall be deducted ... from Licensor’s share of the Gross Income.” (Ex. T-6 ¶ 4(c); Ex. T-ll ¶ 4(c)).
. Mr. Hosaka testified that Mr. Newborn’s “bizarre” behavior at the June 8, 2010 Las Vegas meeting, along with the fact that 4Kids had been delisted from the New York Stock Exchange, contributed to Licensor’s decision to hire U.S. litigation counsel. (Hosaka Deck ¶ 59). But Mr. Sugimoto testified that Li-censor had retained litigation counsel on May 28, 2010 — prior to the purported "bizarre” behavior. (Sugimoto Deck ¶ 16).
. The tolling agreement was extended twice after this date — once in October 2010 and again in January 2011. (See Ex. T-536; Ex. T-610 at 15; 9/12/11 Tr. 121:20-25, 139:10-12 (Newborn); Shinoda Decl. ¶ 55).
. This error suggests that the letter was originally intended to be sent immediately after the November 30, 2010 payment was due and the date was not corrected once the decision was made to send the letter on December 20, 2010 instead. See footnote 81, infra.
. Mr. Shinoda submitted this declaration in support of Licensor’s objection to 4Kids’ Motion for Order Enforcing the Automatic Stay with Respect to 4Kids’ Rights under the Yu-Gi-Oh! License, Case No. 11-11607, Docket No. 61 (the "Stay Motion”). The Stay Motion sought an order from this Court (i) enforcing the automatic stay to protect 4Kids' rights under the 2008 Agreement and (ii) prohibiting Licensor from exercising control over such rights until the Court had determined whether Licensor’s purported termination of the 2008 was valid and enforceable.
. A1 Kahn, although not present during the trial, at times loomed large over the proceedings. There is no dispute that he played a significant role in the business of 4Kids and in the relationship with the Consortium. Similarly, it is undisputed that despite this role, there is no "key man" provision in the 2008 Agreement. Accordingly, his departure from 4Kids at the end of 2010 — be it abrupt, unexplained, and a "shock" to the Consortium— has no bearing on the termination issue before the Court. Nor does his alleged volatility. See, e.g., Plaintiffs’ Post-Trial Memorandum, Adv. Pro. No. 11-02225, Docket No. 61 (“Plaintiffs' Post-Trial Memorandum”), at pp. 14, 32. Plaintiffs’ attempts to portray the man they maintain was indispensable to the 4Kids relationship as someone whom they feared are unconvincing. Equally unconvincing is the notion that Mr. Shinoda and Mr. Kahn discussed foreign tax withholding certificates "every time” they met and that the Consortium did not address the tax certificate issue in the 2008 Agreement because they were counting on 4Kids and in particular, A1 Kahn, to get the certificates. See, e.g., 9/1/11 Tr. 78:5-84:1 (Shinoda). The evidence proffered in support of these contentions is not credible.
. From the first moments of their opening statement at trial, through the pages of their post-trial submission, Plaintiffs urged that this case is about a breach of trust. And although prior to sending the termination letter, Plaintiffs never once informed 4Kids of their position that there had been an "incurable” breach of trust, Plaintiffs now take the position that no amount of money can cure such breach. Incredibly, however, Plaintiffs demanded and accepted $1 million from 4Kids a mere two weeks before sending the termination letter and continued to demand an additional $3 to 4 million — never once informing 4Kids that money would not be enough to cure the alleged breach. How can this be? Surely it would be a breach of trust by Plaintiffs to demand $4.8 million in cure payments while secretly intending to assert an incurable breach. As Plaintiffs themselves point out in their Post-Trial Memorandum (at p. 2), one cannot tell half-truths. As explained more fully below, if there was a breach of trust in this case, it was committed by the Consortium in demanding the payment of grossly overstated amounts resting on specious audit Findings.
. Plaintiffs assert (for the first time) in their Post-Trial Memorandum that this $1 million payment cannot "count” as a cure payment because it is subject to clawback in the Debt- or’s chapter 11 case. See Plaintiffs' Post-Trial Memorandum at p. 108. This is a remarkable assertion, for a number of reasons. First, the Court is unaware of any offer to return the payment to the Debtor. Second, the day after receiving the payment, Plaintiffs purport to have decided that the asserted breaches were not curable by money — a position they did not share with 4Kids until the trial. Third, under Plaintiffs' theory, the additional $3 million they demanded on March 18 would also have been susceptible to claw-back in a subsequent 4Kids chapter 11 case so presumably its payment could not have "counted” as a cure.
. Japan is in a time zone that is 13 hours ahead of New York. Accordingly, Licensor’s letter is dated March 25, 2011, but was received in New York on March 24, 2011.
. Plaintiffs’ Motion In Limine To Exclude The Expert Report And Testimony Of Takaaki Tokuhiro, Adv. Pro. No. 11-02225, Docket No. 20.
. Opposition of 4Kids Entertainment to Motion In Limine To Exclude Expert Report And Testimony Of Takaaki Tokuhiro, Adv. Pro. No. 11-02225, Docket No. 37.
. Expert Report of Takaaki Tokuhiro, Ex. T-221, at 1-2.
. 9/20/11 Tr. 45:17-46:10 (Tokuhiro).
. 8/29/11 Tr. 12:24-13:7.
. Id.
. On September 15, 2011, Plaintiffs filed a letter on the docket of this case addressing certain additional objections raised by 4Kids at trial regarding the testimony of Messrs. Freedman and Erk. See Adv. Pro. No. 11-02225, Docket No. 46. See footnote 63, infra.
. Report of Robert Freedman Pursuant to Federal Rule of Civil Procedure 26(a)(2)(B)/Federal Rule of Bankruptcy Procedure 7026(a)(2)(B), Ex. T-240 at 4.
. 4Kids' Motion in Limine Under Daubert and Fed.R.Evid. 702 to Exclude the Testimony of Robert I. Freedman, Esq. and Arthur L. Erk, Adv. Pro. No. 11-02225, Docket No. 19 at 1.
. Plaintiffs' Memorandum of Law in Opposition to Debtors' Motion in Limine, Under Daubert and Fed.R.Evid. 702, to Exclude the Testimony of Robert I. Freedman, Esq. and Arthur L. Erk, Adv. Pro. No. 11-02225, Docket No. 39 at 4.
. 8/29/11 Tr. 13:13-15:8.
. The objections raised by 4Kids at trial to the Freedman and Erk testimony on the ground that details of the testimony were not explicitly set forth in the expert reports (See Adv. Pro. No. 11-02225, Docket No. 46) were and are hereby overruled. See footnote 58, supra.
. Plaintiffs’ Motion in Limine to Exclude the Improper Testimony of Debtors' Witnesses and to Preclude the Use of Uncertified Translations, Adv. Pro. No. 11-02225, Docket No. 42.
. Opposition of 4Kids Entertainment to Motion in Limine to Exclude Testimony of the Debtors’ Witnesses and to Preclude the Use of Uncertified Translations, Adv. Pro. No. 11-02225, Docket No. 43.
. 8/29/11 Tr. 193:7-194:22.
. United States v. Rivera-Rosario, 300 F.3d 1, 5-6 n. 4 (1st Cir.2002) (noting the "well-settled rule that parties are required to translate foreign language documents into English”).
. Ex. T-422A.
. 9/23/11 Tr. 19:5-9.
. Id. at 19:1-24:20.
. Id. at 22:13-25; see abo Plaintiffs' Post-Trial Memorandum at p. 40.
. The License Agreements provide that "[t]he law of the venue of the lawsuit shall be applicable.” Ex. T-6 11 15(g); Ex. T-ll ¶ 15(g). The parties do not dispute that, here, the License Agreements are governed by New York law.
. Licensor elected to pursue its claims with respect to the nine audit Findings in the form of one aggregate demand. It could have elected to assert nine separate demands, but it did not do so.
. See Plaintiffs’ Post-Trial Memorandum at p. 9.
. It would render Paragraph 12(a) of the 2008 Agreement meaningless if a termination could be effected without complying with the notice and cure requirements provided for therein. Under New York law, an interpretation that renders a provision meaningless should be avoided. See Verzani v. Costco Wholesale Corp., 641 F.Supp.2d 291, 299 (S.D.N.Y.2009) (''[T]he [CJourt may not read the agreement to make any of its terms meaningless, or construe its language to render particular provisions mere surplusage.” (internal quotation marks omitted)), aff'd, 387 F.App'x. 50 (2d Cir.2010); Serdarevic v. Centex Homes, LLC, 760 F.Supp.2d 322, 332-33 (S.D.N.Y.2010).
. Ex. T-15.
. While the June 25 letter contained several requests or demands for payment, all of the audit amounts listed in the June 25 letter are inconsistent with the numbers later asserted in the December 20, 2010 letter sent by ADK to 4Kids.
. Ex. T-16.
. Ex. T-18 and Ex. T-19.
. Ex.T-19.
.Notably, neither letter accurately includes a correct calendar date for ten business days after December 20, 2010. The first letter requests payment by December 14, 2010, and the second letter requests payment by December 30, 2010. Ten business days after December 20, 2010, by this Court’s calculation, appears to be January 3, 2011. Although there was no evidence presented as to the reason it was decided that the demand letter be sent on December 20, 2010, the Court cannot help but observe that sending such a letter during the holiday season — i.e., at a time when there probably would be few senior personnel available — smacks of gamesmanship and a lack of good faith.
. While Mr. Shinoda could not recall who drafted the December 20 letters, the evidence indicates that they were drafted by Licensor’s outside counsel. Mr. Hosaka also testified that the Olshan firm may have drafted the December 20 letters. Given the significance of the December 20 letter(s), the lack of recollection and clarity on these details is striking.
. Ex.T-25.
. Ex.T-311.
. In Zuckerman and TSS-Seedman’s, New York courts considered whether a lease contract had been validly terminated as a predicate to determining whether the court had the power to issue a so-called Yellowstone injunction. Zuckemian held that a purported termination was invalid because, “having participated from the outset in extensive settlement negotiations ..., the parties have set a new period in which the defect may be cured.” 468 N.Y.S.2d at 642. And in TSS-Seedman's, the court reached the same result, reasoning that because “the parties engaged in extensive settlement negotiations,” and because “such conduct [was] indicative of a recognition on the part of both parties that the plaintiff had a *689right to cure any default,” the purported termination was ineffective. 521 N.Y.S.2d at 278.
. Exhibit T-129 is a March 9, 2011 email from Mr. Newborn to Licensor’s outside counsel, Tomohiro Tohyama, in which Mr. Newborn states that "[g]iven the threatening position of ADK’s U.S. lawyer, 4Kids has had no choice but to consult outside litigation and bankruptcy counsel.... 4Kids would be obligated to try to stop the termination of the [2008 Agreement].... [and] would have to prepare for a bankruptcy filing in New York because of the serious harm to 4Kids’ business .... Notwithstanding the clause in the 2008 [Agreement], permitting termination on bankruptcy of either party, as we discussed last night, under U.S. bankruptcy law such clause would not be enforced.... The end result of the strategy of ADK’s lawyer will be a very substantial loss of business for ADK, for 4Kids, for the rest of the Yu-Gi-Oh Consortium and for Konami.”
. In Luxottica, numerous notices had been sent by fax but the failure to send a notice of default by overnight carrier, as required by the applicable agreement, was particularly noted by the court in its analysis. See Luxottica Group S.p.A. v. Bausch & Lomb Inc., 160 F.Supp.2d 545, 551 (S.D.N.Y.2001).
. Adv. Pro. No. 11-02225, Docket No. 59.
. Plaintiffs reliance on Caivel Corporation v. Diversified Management Group, Inc., for this proposition (see Plaintiffs' Post-Trial Memorandum at p. 8) is misplaced inasmuch as Carvel involved payments on promissory notes, i.e., amounts that were, without dispute, due and owing and were accurately cited in the notice. See Carvel Corporation v. Diversified Management Group, Inc., 930 F.2d 228 (2d Cir.1991).
. In fact, the day it sent the purported termination letter, Licensor also filed the Adversary Proceeding against 4Kids in which it alleged a $4,792 million underpayment (instead of the previously asserted $4,819 million underpayment). Within less than one day of delivery of the termination letter, Licensor had already dropped $26K from its claim, the amount contained in Finding 4. The Court finds that even without considering the merits of each of the other audit Findings, this "substitution” of the number being utilized as the basis for breach renders the notice ineffective. Notwithstanding, the Court will consider the merits of each of the audit Findings in turn.
. Licensor’s expert, Mr. Erk, testified that he would have handled the material and courier costs differently than Mr. Elliott, by sending a letter to 4Kids instead of including them as an audit claim. Mr. Erk also testified that there was nothing improper about 4Kids’ request for additional documentation regarding the material costs, and that asking for such documentation would be the logical and reasonable thing to do. (9/9/2011 Tr. 92:19-95:l(Erk)). Mr. Foster testified that if 4Kids had received proper backup documentation to substantiate the material and courier costs invoice, 4Kids would have paid the invoice in the normal course of business. Mr. Foster also testified that as a public company, and given the internal accounting controls in place, 4Kids would not have been able to pay the material costs without the proper supporting documentation. (9/20/2011 Tr. 177:15-178:5, 179:15-182:1 (Foster)).
. Because the Court finds that Plaintiffs have no valid claim for breach based upon (i) the merits of Finding 9 and (ii) Plaintiffs’ refusal to permit 4Kids to address the claim, the Court need not reach 4Kids' argument that the statute of limitations bars a portion of the claim. The same holds true with respect to the statute of limitations aspects of certain other of the audit claims.
. Finding 4 resulted from 4Kids’ error in continuing to divide the 20% home video royalty between the parties during the second half of 2008 notwithstanding the change to the provision in the 2008 Agreement which provides that, if 4Kids exercises the home video rights itself, the entire home video royalty should be paid to Licensor. 4Kids acknowledged its accounting error and offered to pay the full amount of Finding 4.
. Mr. Elliott testified that, in deeming $1,386,913.06 in tax certificates to be "unsubstantiated,” he did not even ask ADK or TV Tokyo whether they had ever received certificates from subagents directly, and his determination did not turn on whether or not the certificates had been provided to Licensor. Rather, the presence or absence of the certificates in 4Kids’ files was the sole basis for his description of these certificates as unsubstantiated.
. Of the tax certificates that 4Kids provided to Mr. Elliott, he noted that $873,853.30 were, in his opinion, "unsubstantiated” because they did not reference the Yu-Gi-Oh! property or the Licensor on the face of the certificate. Significantly, however, Mr. Elliott admitted at trial that he did not notice the Yu-Gi-Oh! notation present on substantially all of the certificates in this group. Also, $205,215.79 of the approximately $874,000 of these certificates relate to the withholdings of the Mattel subsidiaries. Mr. Elliott was provided during his audit with an affidavit from Mattel's Vice President of Finance/Assistant Controlled which confirmed that those certificates all related to the Yu-Gi-Oh! property and reflected withholding taxes paid on behalf of NAS. Mr. Elliott admitted that he does not know whether or not ADK could have used these documents to claim foreign withholding tax certificates under Japanese law, but he nevertheless categorized such certificates as "unsubstantiated.”
. Staled differently, since Mr. Elliott’s audit mandate was to determine whether 4Kids had underpaid royalties to Licensor, he should have confirmed that when 4Kids reported a net royalty proceeds amount to Licensor (i.e., gross proceeds less foreign withholding taxes), 4Kids' sublicensee had actually remitted the withholding taxes to the foreign taxing authority and had not remitted such amount to 4Kids. Mr. Elliott did not pursue this area of inquiry. See ¶¶ 115-119, supra.
. Because Licensor has not produced ADK’s complete tax returns for the years 2001 to 2009 or provided any other evidence of ADK’s alleged tax injury, there is no way to determine whether or not ADK claimed the net income from foreign licensees and thus deducted the value of these credits and received, at least some, tax benefit. There is also no way to determine whether or not ADK was even eligible to claim additional foreign withholding tax credits, or whether it was at or near the limit for such credits.
. Without access to TV Tokyo's tax returns, there is no way for the Court to confirm that TV Tokyo did not claim any foreign withholding tax credits related to Yu-Gi-Oh!.
. The evidence demonstrates that, on at least one occasion, Licensor requested such a letter from 4Kids to evidence the payment of U.S. withholding taxes, but no such request was made concerning the payment of foreign withholding taxes.
. The Court will address Findings 1 and 2 together, as they were handled together at trial and raise the same issues of law and of interpretation of the License Agreements. For the sake of convenience, references in this Section may be to Funimation only, but the conclusions in this Section H are applicable to both Findings 1 and 2.
. In the 2001 Agreement, Paragraph l(b)(iii) provides that "[i]f 4Kids exercises the Home Video Rights to the Episodes and any Additional Episodes itself, 4Kids shall pay Li-censor a royalty of twenty percent (20%) of the wholesale selling price charged for the Home Video Devices. Such royalty payment shall be part of Gross Income and shall be divided among the parties as provided below in Paragraph 4.” Ex. T-6.
In the 2008 Agreement, Paragraph l(b)(iii) was revised to provide that "[i]f 4Kids exercises the Home Video Rights to the Episodes and any Additional Episodes itself, 4Kids shall pay Licensor a royalty to be negotiated in good faith of between 15% and 20% of the wholesale selling price, net of returns, for such Home Video Devices. Such royalty payment shall not be part of Gross Income and shall not be divided among the parties as provided below in Paragraph 4 but rather shall be paid exclusively to Licensor.” Ex. T-11.
. Specifically, as noted in the Findings of Fact above, in exercising the home video rights under the License Agreements, 4Kids *702Home Video controlled (a) the number of Yu-Gi-Oh! home video releases; (b) the number of Yu-Gi-Oh! television episodes to be included in each home video; (c) consumer advertising and promotion for the Yu-Gi-Oh! home video releases; (d) the contents of each Yu-Gi-Oh home! video release, including DVD "extras” such as music videos, Yu-Gi-Oh! character and trading card information and the teaser advertising on the home video release preceding the Yu-Gi-Oh! television episode; (e) pricing and "remaindering” of Yu-Gi-Oh! home video releases; and (f) packaging and point-of-sale materials. See FF ¶ 51.
. In Plaintiffs’ Post-Trial Memorandum, they state that they do not dispute that they were aware from the very beginning that 4Kids claimed that it was exploiting the home video rights itself through its subsidiary 4Kids Home Video and that Funimation was acting as the distributor. Their argument, however, is that, while 4Kids had represented to them that Funimation was a mere distributor, Funi-mation was in fact 4Kids’ licensee. See Plaintiffs’ Post-Trial Memorandum at p. 52.
. Mr. Shinoda testified that, in his view, the "inventory risk” should be with the licensee. FF ¶ 53.
. As set forth more fully in footnote 16 supra, Mr. Shinoda’s testimony on this point was one of several inconsistencies in his testimony at trial. He initially testified that, in his opinion, a company such as 4Kids, in order to be considered the home video "licensee,” must physically manufacture and duplicate the home videos itself; but he later admitted that a licensee "[does not] necessarily have to have their own factory and hire employees” or "manage their own factory per se.” (8/30/2011 Tr. 140:7-11, 141:12-143:4 (Shi-noda)).
.Mr. Kahn, the former Chief Executive Officer of 4Kids, also testified that he understood that the 20% royalty paid by Funimation on the wholesale price of the videos was for the content of the episodes, while the monies paid under the Funimation Services Agreement were for the additional services performed by 4Kids, such as advertising and promotion, that 4Kids would not provide had it licensed the home video rights to a third party. (8/8/11 Dep. Tr. 130:22-131:20, 132:20-136:19 (Kahn)).
. The facts show that 4Kids and Funimation actually shared the inventory risk. The amended version of the Funimation Services Agreement contains a provision that balanced 4Kids’ right to approve marketing and pricing decisions against Funimation’s risk of having unsold inventory.
. Plaintiffs’ concern with secrecy is ironic, to say the least, in light of their undisclosed determination that 4Kids’ alleged breaches were incurable (see Plaintiffs’ Post-Trial Memorandum at p. 38) and their highly confidential plan to replace 4Kids as their home video licensee. (See FF ¶¶ 34-35, supra).
. Mr. Newborn, the drafter of the Funimation agreements, testified that the reason he created two separate agreements was, in essence, to finish the Funimation Distribution Agreement (as to which there were few business issues to resolve) and to then focus on the Funimation Services Agreement while the parties were continuing to negotiate the basic business terms. Mr. Newborn testified that he was able to use an existing home video licensing agreement as a template for the Funimation Distribution Agreement, which was drafted while the businesspeople were still negotiating the details of what would become the Funimation Services Agreement, and that it was easiest to create two separate agreements rather than attempt to merge all issues in one agreement. (9/12/2011 Tr. 185:12-186:19 (Newborn)); FF ¶ 62. In addition, because 4Kids’ entry into the home video market was a material business development, 4Kids disclosed the creation of 4Kids Home Video in a press release dated May 13, 2002 — less than two weeks after signing the Funimation agreements. (Newborn Decl. ¶ 72). Mr. Newborn testified that the primary aim of the confidentiality provision was to prevent disclosure of the Funimation Services Agreement before the press release on May 13, 2002. (9/12/11 Tr. 84:6-13) (Newborn). The evidence shows that this confidentiality provision was used by 4Kids in other agreements prior to and subsequent to the Funimation agreements.
. As the Court concluded above, the service fees were not monies paid for the "exploitation” or "license” of the home video rights, and thus were properly excluded from Gross Income under Paragraph 4(c). Under no reading of the License Agreements can such fees be considered an additional royalty on top of the existing 20% because they were not a royalty; rather they were compensation for valuable services actually rendered by 4Kids.
. As to Finding 1, 4Kids also argued that approximately $1,076,758.02 of the $1.967 million in service fees claimed by Licensor were paid more than six years prior to the effective date of the tolling agreement, i.e., prior to June 1, 2004, and, as a result, Li-censor is barred the statute of limitations from seeking payment of this amount. Because the Court finds that Plaintiffs have no valid claim for breach based upon the merits of Finding 1, the Court need not reach 4Kids’ argument that the statute of limitations bars a portion of the claim.
. Findings 7 and 8 are not in dispute. Together, they total $47,825.17, far less than $1,841,373.53, which is the sum of the $1 million good faith payment sent by 4Kids to Licensor plus the balance of $841,373.53 in unrecouped advances paid by 4Kids to Li-censor as of March 24, 2011 (see FF ¶¶ 306-307, supra). When measured against the amount of royalties paid by 4Kids to Plaintiffs over the time period encompassed by the audit, $47,825.17 is a trivial amount. “It is in not society’s interest to permit a party ... [to use] an insignificant breach as a pretext for avoiding his contractual obligations." SVS, Inc. v. Rabbit Ears Productions, Inc., 1992 WL 91183 (S.D.N.Y. Dec. 12, 1991), at *9 (citing Farnsworth on Contracts at 607).
. Plaintiffs characterize this result as the imposition of a specific performance remedy and charge that 4Kids is not entitled to such relief. Plaintiffs are incorrect. The Second Circuit has repeatedly held that a court can enjoin the attempted termination of, and order specific performance of, an agreement to supply a unique product, including an agree*709ment to license intellectual property especially where, as here, the availability of a product is essential to the life of the business. See, e.g., Tom Doherty Assocs., Inc. v. Saban Entm’t, Inc., 60 F.3d 27 (2d Cir.1995) (affirming preliminary injunction requiring defendant to license children's book to book publisher); Reuters Ltd. v. United Press Int’l, Inc., 903 F.2d 904 (2d Cir.1990) (reversing denial of preliminary injunction where news wire service would be irreparably harmed by termination of news photograph service); Rex Med. L.P. v. Angiotech Pharms. (US), Inc., 754 F.Supp.2d 616 (S.D.N.Y.2010) (enjoining termination of licensing and distribution agreement for medical device product). 4Kids has asserted that it is entitled to seek both specific performance and monetary damages for injuries caused by Licensor's breach. The extent to which 4Kids is entitled to damages, including attorneys’ fees, as a result of Plaintiffs' conduct, remains to be determined another day. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494525/ | MEMORANDUM OPINION
RICHARD E. FEHLING, Bankruptcy Judge.
I. INTRODUCTION
This contested matter would be easily resolved if Debtors sought to avoid the liens of two judgments against Debtor wife alone as an encumbrance on property held by Debtors as tenants by the entirety. Likewise, it would be easily resolved if Debtors sought to avoid the liens of two judgments against Debtor husband alone as an encumbrance on property held by Debtors as tenants by the entirety. In both instances, I could grant any such avoidance motion without much explanation or discussion. I have before me, however, two motions by Debtors that, taken together, seek to avoid the liens of two judgments against Debtor wife and two identical judgments against Debtor husband. The complicating circumstances are the origin and nature of the judgments: The four judgments were entered pursuant to four separate, stand-alone, and independent guaranties of two primary debts that a principal obligor owes to the creditor. Two of the four judgments (one against wife and one against husband) are for identical amounts; the other two judgments (one against wife and one against husband) are for different, but also identical, amounts; and the four judgments arise from four individual, textually identical, but separate, guaranties of the same underlying principal loans.
The creditor made two loans to Debtors’ company. Debtors each executed two separate but identical guaranties: Same principal borrower; same amounts; same terms; same underlying loans — but separate, individual, stand-alone, independent guaranties. Creditor confessed two separate judgments under Pennsylvania law against Debtor wife, and two separate judgments against Debtor husband, thereby producing four entirely individual and independent judgments and judgment liens.
II. FACTUAL AND PROCEDURAL BACKGROUND
A. FACTUAL UNDERPINNINGS OF THE LOAN TRANSACTIONS
The parties have stipulated to what are limited, fairly simple facts in these two contested matters.1 The following constitute my findings of fact:
1. NOVA Bank made two loans to B & P Carpet Installers, Inc., one in the amount of $45,000 on October 30, 2007 (Loan 53800511) (the “$45,000 B & P Loan”), and the second in the amount of *736$40,000, made on December 7, 2007 (Loan No. 53800550) (the “$40,000 B & P Loan”). Stipulation, 111.
2. On October 30, 2007, Debtor husband Paul Holler executed a commercial guaranty at the time 2 Loan- No. 53800511 was made to B & P (the “Mr. Holler $45,000 Guaranty”). Stipulation ¶ 2 and Exh. “B.”
3. On October 30, 2007, Debtor wife Philomena Holler executed a commercial guaranty at the time Loan No. 53800511 was made to B & P (the “Mrs. Holler $45,000 Guaranty”). Stipulation ¶ 3 and Exh. “C.”
4. Also on October 30, 2007, NOVA extended a loan to Debtors in the amount of $99,000 (the “$99,000 Loan”), secured by a mortgage on Debtors’ home (the “Mortgage”).3 Stipulation ¶ 4 and Exh. “D.”
5. On December 7, 2007, Debtor husband Paul Holler executed a commercial guaranty at the time Loan No. 53800550 was made to B & P (the “Mr. Holler $40,000 Guaranty”). Stipulation ¶ 5 and Exh. “E.”
• 6. On December 7, 2007, Debtor wife Philomena Holler executed a commercial guaranty at the time Loan No. 53800550 was made to B & P (the “Mrs. Holler $40,000 Guaranty”). Stipulation ¶ 6 and Exh. “F.”
7. B & P and Debtors defaulted under the loan documents for both Loan Nos. 53800511 and 53800550. Stipulation ¶ 7.
8. The following four judgments were entered by confession in the Lehigh County Court of Common Pleas on August 3, 2010:
a. NOVA v. Philomena Holler, No. 2010-N-783, in the amount of $40,098.44 (the “Mrs. Holler $40,098.44 Judgment”); Stipulation ¶ 8 and Exh. “H.” *737b. NOVA v. Paul T. Holler, No. 2010-N-785, in the amount of $40,098.44 (the “Mr. Holler $40,098.44 Judgment”); Stipulation ¶ 8 and Exh. “G.”
c. NOVA v. Paul T. Holler, No. 2010-N-788, in the amount of $41,076.31 (the “Mr. Holler $41,076.31 Judgment”); Stipulation ¶ 8 and Exh. “I.” and
d. NOVA v. Philomena Holler, No. 2010-N-789, in the amount of $41,076.81 (the “Mrs. Holler $41,076.31 Judgment”). Stipulation ¶ 8 and Exh. “J.”
9. The Mr. Holler $40,098.44 Judgment (No. 2010-N-783)4 and the Mrs. Holler $40,098.44 Judgment (No. 2010-N-785) (together, the “$40,098.44 Judgments”) relate to the balance owed on the NOVA loan to B & P in Loan No. 53800511 at the time the $40,098.44 Judgments were entered. Stipulation ¶ 9.
10. The Mr. Holler $41,076.31 Judgment (No. 2010-N-788) and the Mrs. Holler $41,076.31 Judgment (No. 2010-N-789) (together, the “$41,076.31 Judgments”) relate to the balance owed on the NOVA loan to B & P in Loan No. 53800550 at the time the $41,076.31 Judgments were entered. Stipulation ¶ 10.
11. At all times relevant to this dispute, the real estate owned by the Debtors (their home) at 1618 Alex Court, Salisbury Township (Allentown Post Office), PA, 18103,5 is and has been held by Debtors together as husband and wife as tenants by the entirety. Stipulation ¶ 11.
12. The Mr. Holler $45,000 Guaranty and the Mr. Holler $40,000 Guaranty are together referred to herein as the “Mr. Holler Guaranties.”
13. The Mrs. Holler $45,000 Guaranty and the Mrs. Holler $40,000 Guaranty are together referred to herein as the “Mrs. Holler Guaranties.”
14. The Mr. Holler Guaranties and the Mrs. Holler Guaranties are together referred to herein as the “Guaranties.”
15. The Mr. Holler $40,098.44 Judgment and the Mr. Holler $41,076.31 Judgment are together referred to herein as the “Mr. Holler Judgments.”
16. The Mrs. Holler $40,098.44 Judgment and the Mrs. Holler $41,076.31 Judgment are together referred to herein as the “Mrs. Holler Judgments.”
*73817. The Mr. Holler Judgments and the Mrs. Holler Judgments are together referred to herein as the “Judgments.”
18. Nothing in the Stipulation or anywhere else in the record explains why NOVA utilized two separate guaranty agreements in each B & P loan (one for Mr. Holler and one for Mrs. Holler) rather than one joint guaranty agreement in each B & P loan transaction for both Mr. and Mrs. Holler together.
B. PROCEDURAL HISTORY
NOVA entered the Judgments by confession against Debtors on August 3, 2010. Debtors filed their joint Chapter 7 petition a year later, on August 4, 2011. On August 9, 2011, Debtors filed two Motions To Avoid Judicial Liens Pursuant to 11 U.S.C § 522(f) and N.B.R. Rules 4003(d) and 9014, through which they seek to avoid the liens of the Judgments on their home. The first Motion To Avoid was directed specifically at the Mr. Holler Judgments and the second Motion To Avoid was directed specifically at the Mrs. Holler Judgments.
On August 24, 2011, Debtors timely filed Certifications of No Response or Objection for both Motions To Avoid and I signed Orders granting both Motions To Avoid on August 29, 2011. Between the time that I signed the Orders granting the Motions and the time they were docketed by the Clerk’s Office, however, NOVA’s counsel had entered his appearance and filed late responses to the Motions. On September 6, 2011, NOVA filed its Motion for Reconsideration of Orders Entered August 29, 2011 Granting Debtors’ Motions To Avoid Judicial Liens. At the September 27, 2011 hearing on NOVA’s Motion for Reconsideration, Debtors’ counsel exhibited noteworthy professionalism and courtesy, and agreed that I should reconsider, on the substantive merits, my August 29, 2011 Orders granting the Motions To Avoid. The matter before me at this time, therefore, is NOVA’s request for reconsideration, on the merits, of my Orders granting the Motions To Avoid. The parties filed their Stipulation of the facts on October 6, 2011, and filed their briefs supporting and opposing the Motions To Avoid on October 21, 2011.
On October 19, 2011, NOVA filed its objections to Debtors’ claim of exemptions under Section 522(b)(3)(B) of their home at 1618 Adam Court, Allentown, PA. NOVA’s opposition to Debtors’ exemptions is based upon NOVA’s argument (also at the heart of the within dispute) that the Guaranties created joint liability of Debtors that therefore constitute a claim against the home as entireties property. Debtors filed their reply to NOVA’s exemption motion on November 7, 2011. Debtors and NOVA have agreed, through stipulations filed on November 14, 2011, and presented in open Court on November 8, 2011, to continue the exemption dispute until the Motions To Avoid are resolved because many of the legal issues in both matters are identical. Much of the law discussed and relied upon, and determined in this Memorandum Opinion controls the result in the objection to exemptions.
The matter of the avoidance of the hens of the Judgments is now ripe for my determination. Upon my review of this contested matter, I have determined the foregoing findings of fact and the following conclusions of law and legal discussion. Based on this Memorandum Opinion, I will deny NOVA’s motion for reconsideration and ratify, restate, and re-enter my previous order dated August 29, 2011, granting Debtors’ Motions To Avoid.
III. LEGAL BACKGROUND
A. STATUTORY BACKGROUND-MOTIONS TO AVOID JUDICIAL LIENS
The two Motions To Avoid are *739based on Sections 522(b)(3)(B)6 and 522(f)(1) of the United States Bankruptcy Code.7 A judicial lien can be avoided if it impairs some exemption allowed under the Bankruptcy Code. As discussed at more length below, exemption of property held as tenants by the entirety can only be exercised if the property is exempt from process under applicable non-bankruptcy (Pennsylvania) law. A handful of cases have examined exemption/avoidance in similar matters, but none has addressed the issue of two identical, separate judgment liens directly. I analyze the case law and Sections 522(b)(3)(B) and 522(f)(1) below.
B. LIENS AGAINST PROPERTY OWNED BY HUSBAND AND WIFE AS TENANTS BY THE ENTIRETY
1. Third Circuit Court — Exemption of Property Owned by Husband and Wife as Tenants by the Entirety
I start my analysis of the unique issue I face8 with the Third Circuit Court’s decision in Napotnik v. Equibank & Parkvale Savings Association, 679 F.2d 316 (3d Cir.1982). Napotnik examined a debtor’s attempt to avoid a lien against property held together with his wife under Pennsylvania law as tenants by the entirety under Section 522(b)(3)(B). The Third Circuit found that the new Bankruptcy Code clearly intended that property of a bankrupt estate held by husband and wife as tenants by the entirety be exempt in bankruptcy to the extent that such property was exempt from process under Pennsylvania law. Id. at 318. The phrase “exempt from process” included more than the specific exemptions allowed to debtors by Pennsylvania law. Id. at 319. Exempt from process also means immune from process, which allowed debtors to exempt their interest in entireties property that could not be reached by creditors against one or the other spouse. Id. The court then evaluated what sort of debt could lead to a judgment that would subject entireties property to legal process.
Examining Pennsylvania law, the Napot-nik court recognized that a judgment in favor of a creditor against an individual *740spouse is not an enforceable lien on entire-ties property, but is merely a presently unenforceable lien on that spouse’s expectancy of survivorship. It constitutes a lien against the property only if and when the other spouse dies. Id. See also In re Houck, 184 B.R. 21, 23 (Bankr.E.D.Pa.1995)(until the death of one spouse, entireties property is exempt from process by a creditor of only one spouse, but is not exempt from process by a creditor who is owed a debt by both spouses jointly). Under The Bankruptcy Act of 1898, title to entireties property passed to the trustee when both husband and wife had been adjudicated bankrupt and their estates were consolidated for administration by a single trustee. Napotnik, 679 F.2d at 320 citing In re Pennell, 15 F.Supp. 743 (W.D.Pa.1936). Under Pennsylvania law, tenants by the entirety property that was in the hands of a bankruptcy trustee could be subject to judgment hens if the judgments were joint against the debtor husband and wife.
NOYA’s argument therefore is basically that when the first of the four Judgments (the Mrs. Holler $40,098.44 Judgment) was confessed, Debtors must have held their breath to see what would happen next. Without a doubt according to Napotnik, the entry of the Mrs. Holler $40,098.44 Judgment, as a judgment against only Mrs. Holler, did nothing to lien or encumber their home. But then, upon the confession of the Mr. Holler $40,098.44 Judgment, a lien on their home suddenly sprang into existence. This weak legal construct is at the heart of this dispute.
In In re Carpenter, 5 F.Supp. 101, 101— 02 (M.D.Pa.1933), the court ruled that property of a husband and wife held as tenants by the entirety was property of a bankruptcy estate subject to administration. This was so despite their having filed their bankruptcy petitions individually and severally, rather than jointly. Two joint judgments by two separate creditors had been entered against both husband and wife together.9 Either of the two judgments could have led to execution, levy, and sale of the entireties property under judicial process in Pennsylvania. The court in Napotnik acknowledged the Carpenter ruling (and numerous other state and federal decisions) as permitting execution and levy to enforce a joint debt against entireties property of a husband and wife. Napotnik, at p. 320. Therefore, property held as tenants by the entirety is not exempt from all process in Pennsylvania, but only from some. Id.
Not surprisingly, the conclusion in Napotnik was that property held as tenants by the entirety in the hands of a bankruptcy trustee is not exempt from a joint judgment on a joint debt. Id. at 321. An individual debtor’s interest in real property owned as tenants by the entirety cannot be exempt from process in Pennsylvania if he and his wife are joint obligors. He may not, therefore, exempt his portion of the equity from the effect of a creditor’s judicial lien filed against both debtor and his spouse. Id. at 321-22.
More recently, the Third Circuit Court looked to Napotnik for guidance when it addressed Pennsylvania law regarding not judgments, but unsecured claims against a husband and wife in In re O’Lexa, 476 F.3d 177 (3d Cir.2007). The court referred to Napotnik for the proposition that spouses in a joint bankruptcy are not entitled to avoid liens on their entireties property when liens are against them jointly. *741Id. at 179. The trastee in O’Lexa argued that an obligation of the wife became an obligation of the husband pursuant to the Pennsylvania “doctrine of necessaries.” The court examined the codification of the “necessaries” doctrine and found that it did not create a joint obligation, but provided only individual, several liability. Id. at 179-80, citing 23 Pa.C.S.A. § 4102. The court concluded that the statute did not impose joint liability that would allow a creditor of both spouses to reach entireties property. Id. at 180. Without joint liability on the “necessaries” claims, the court ■rejected the trustee’s grounds for attacking the debtor’s claim of exemption in en-tireties property.
The Third Circuit Court decided O’Lexa and a companion case, In re Brannon and In re Lewis, 476 F.3d 170 (3d Cir.2007)(consolidated on appeal), on the same date. In Brannon/Lewis, the court summarized O’Lexa as follows:
O’Lexa makes clear that the presence of joint liability is necessary for a creditor to access property in a bankruptcy estate held as tenants by the entireties.
Id. at p. 175. As discussed below, however, something more than liability for the same debt is needed to allow judgment liens to encumber entireties property.
The Third Circuit Court in O’Lexa also relied on the long-standing decision in A. Hupfel’s Sons v. Getty, 299 F. 939 (3d Cir.1924). In Hupfel’s, the court faced one judgment that had been entered against the husband and a second, separate judgment entered against the wife, both arising out of the same underlying business matter. The husband owed Hupfel’s for amounts due (a) for a lease of certain premises and (b) for the purchase of inventory (beer). The husband defaulted in his payments to Hupfel’s. Shortly after the husband’s default in the payment of his debt, his wife became involved in the business and agreed to assume payment of her husband’s debt if Hupfel’s loaned her funds for the purchase of a liquor license for the business. The default continued and Hupfel’s entered two separate judgments against husband and wife on the same day in the same business transaction but on two separate obligations — the lease and the guaranty. Id. at 940-41.
While the judgments against them were liens of record, the husband and wife sold certain property that they owned as tenants by the entirety to Mrs. Getty. Hup-fel’s proceeded to execute on its judgments against Mrs. Getty’s newly acquired property. Id. at 939. The Third Circuit Court expressed doubt that the common origin of separate debts based on different considerations is the test of a joint debt that constitutes a lien on entireties property. To the contrary, the court decided that the creditor must show some joint act through which the husband and wife consented to change the attributes of the entireties estate in themselves. Merely showing the wife’s consent to the husband’s antecedent transactions was not enough. Id. at 941. The two obligations were entirely separate and were for separate and distinct consideration. The husband’s obligation was original and the wife’s was secondary. The court concluded:
If judgment had been recovered on one and not on the other the estate by en-tireties could not, in their lifetime, be reached by execution; and similarly, their estate by entireties cannot be reached by execution on both judgments unless they arise from their joint act. The tenants were without doubt mutually interested in the transactions which resulted in the two judgments. But mutuality of interest in separate transactions out of which had grown separate obligations based upon different consid*742erations does not amount to joint action ....
Id.
Through Napotnik, O’Lexa, and Hup-fel’s, the Third Circuit Court provides the framework to examine the liability of a husband and a wife when attempting to expose property held as tenants by the entirety to separate judgment liens against the husband and the wife.
2. Pennsylvania Court — Liens on Property Owned by Husband and Wife as Tenants by the Entireties
In 1992, the Pennsylvania Superior Court noted in its interpretation of New Jersey law10 that only one Pennsylvania court had addressed whether separate judgments against a husband and a wife could constitute a lien against property they held as tenants by the entirety. That lone Pennsylvania decision is Blusiewicz v. Rosenfield, 33 Pa. D. & C.2d 470 (Mont.Co.Comm.Pleas 1964).11 As the only Pennsylvania decision determining this issue, Blusiewicz carries weight as representative of Pennsylvania law in the absence of appellate decisions.12 Enhancing my regard for Blusiewicz as providing guidance for Pennsylvania law in this matter is the fact that one member of the three-judge panel of Montgomery County judges was Judge J. William Ditter, Jr., who presently serves with distinction on the bench of the United States District Court for the Eastern District of Pennsylvania.
In Blusiewicz, the court noted that the single judgment obtained in Illinois and transferred to Pennsylvania was entered against both defendants, not as husband and wife, but individually. Id. at 472. No mention was made in the Illinois judgment about the defendants being husband and wife; the judgment was entered against each of them individually; and their liability was not referred to in any way as joint. The defendants owned property in Penn--sylvania as tenants by the entirety and plaintiff transferred the judgment and attempted to enforce the lien against that property. The court rejected plaintiffs arguments. Relying in part on the Hupfel’s decision, the court also referred to North Carolina law as being instructive. Noting that North Carolina law was similar to Pennsylvania in recognizing ownership of property by a husband and wife as tenants by the entirety, the court cited Southern Distributing Co. v. Carraway, 189 N.C. 420, 127 S.E. 427 (1925). In that case, the North Carolina Supreme Court rejected a levy against entireties property by a judgment against husband and wife individually. The Blusiewicz court relied upon and adopted the “syllabus” of the North Carolina court decision in toto:
*743“Where consent judgment was rendered and entered against defendants husband and wife, ‘individually,’ land held by husband and wife as tenants by the entirety was not subject to levy under execution on such judgment; ‘individually’ meaning separately and personally, as distinguished from jointly or officially, and as opposed to collective or associate action or common interest.”
Blusiewicz, 33 Pa. D. & C.2d at 473.13 The consent judgment in Southern Distributing was entered against the husband and wife, trading as a business name and against them “individually.” The North Carolina defendants consented to the judgment against them individually and separately, not jointly or as a joint obligation. The North Carolina court found:
It was no doubt the purpose of the defendants to exclude the property, held by them as tenants by the entirety, from execution under this judgment, for they consented that same might be entered against them individually and not otherwise.
Southern Distributing, 127 S.E. at 428. The language of the Southern Distributing case, although not precedential or binding in the matter before me, is instructive as having also guided the only Pennsylvania court to address the issue now before me. I accept the Blusiewicz court’s reliance on Southern Distributing and believe that it is helpful in my analysis.
The Blusiewicz court concluded:
[Tjhere cannot be an execution against property held as tenants by the entire-ties unless it is upon a judgment wherein defendants have acted jointly as tenants by the entireties and by their action have waived the substantive law of tenants by the entireties.
Blusiewicz 33 Pa. D. & C.2d at 473.
3. Pennsylvania Bankruptcy Court-Liens on Property Owned by Husband and Wife as Tenants by the Entirety
The United States Bankruptcy Court for the Western District of Pennsylvania decided a similar dispute about exemption in Westmoreland Mall, Inc. v. Bialon (In re Bialon), 67 B.R. 451 (Bankr.W.D.Pa.1986). The issue, as formulated by the court, was whether the judgment creditor held a joint claim against the debtor and her husband, which would subject the entireties property of debtor and her husband to process under Pennsylvania law. If the claim was joint, debtor’s entireties property could not be claimed as exempt, pursuant to Section 522(b)(2)(B). Id. at 452. Debtor owed money pursuant to a lease for her retail sales space in a mall. Her husband entered into an “Individual Guaranty” document, agreeing to be liable for her debt if she defaulted. Id. at 452-53. If the debt created by the lease (wife’s obligation) and the guaranty (husband’s obligation) were joint debt, the entireties property could not be exempted and relief from the stay would be granted to permit the judgment creditor to foreclose on the entireties property pursuant to its judgment. Id. at 453. But if the lease and guaranty obligations were separate and distinct, arising as they did from entirely separate and distinct documents, no joint debt could be found and the exemption would be upheld. Id.
The court reviewed Pennsylvania law as it pertained to guaranties and sure*744ties and determined that the guaranty in question, although titled Individual Guaranty, was actually a suretyship agreement under Pennsylvania law. Id. Generally under common law, a guaranty is a collateral and independent obligation that creates only secondary liability; a suretyship agreement, on the other hand creates primary liability on both its obligor and the principal. Id.
After its analysis of the common-law distinctions between guaranties and sureties, the Bialon court turned to Pennsylvania’s codification of the difference through Public Law 971, 8 P.S. § 1, which resolves the issue as follows:
§ 1. What constitutes contract of suretyship
Every written agreement hereafter made by one person to answer for the default of another shall subject such person to the liabilities of suretyship, and shall confer upon him the rights incident thereto, unless such agreement shall contain in substance the words: “This is not intended to be a contract of surety-ship,” or unless each portion of such agreement intended to modify the rights and liabilities of suretyship shall contain in substance the words: “This portion of the agreement is not intended to impose the liability of suretyship.”
1913, July 24, P.L. 971, 8 P.S. § 1. Bialon, 67 B.R. at 454. Under Pennsylvania law, therefore, debtor’s husband was primarily liable with debtor, as a surety, for the lease obligation. Id. See also Leedom v. Spano, 436 Pa.Super. 18, 28, 647 A.2d 221, 226 (1994)(“It is a fundamental principle of surety law that upon default by the principal, both principal and surety thereupon become liable on the original undertaking.”). Accord In re F.B.F. Industries, Inc., 165 B.R. 544, 548 (Bankr.E.D.Pa.1994). Since the passage of Public Law 971, the liability of one person to answer for the default of another is that of surety-ship unless their agreement expressly indicates a contrary intent. First Nat. Bank v. Houck, 18 Berks 174, 176 (Pa.Ct.Comm.Pl.1926).
By virtue of both the lease and the guaranty, the court declared without referring to Pennsylvania law,14 that debtor and her husband were jointly liable for the debt upon debtor’s default under the lease. Bialon, 67 B.R. at 454. The court also found that the lease and guaranty created identical obligations relating to duration, contingencies, and amount owed, thereby producing a single debt owed for the lease payment. Id.
The Bialon judge distinguished Hupfel’s from applying to his case: Although Hup-fel’s involved a husband and wife, with one spouse’s agreement to guaranty the indebtedness of the other, the Third Circuit Court had found no joint act because they were separate transactions with separate consideration for each obligation. Id. In Bialon, the court found that the consideration that the debtor and her husband gave and received was identical. Each spouse agreed to pay rental fees, debt- or/wife as principal and husband as guarantor, so debtor/wife could operate her retail store business from the leased premises. Id. The loan documents before the court in Bialon, although physically separate, created a joint obligation, making debtor and her husband jointly and sever*745ally liable to the judgment creditor.15 The entireties property of debtor and her husband was therefore not exempt from process by the couple’s creditors under Pennsylvania law and therefore could not be exempted under Section 522(b)(2)(B). The couple’s property was available for the judgment creditor’s efforts to satisfy the joint debt and the Bankruptcy Court granted relief from the stay to allow the creditor to enforce its judgment.
IY. DISCUSSION
A. APPLICATION OF THE CASE LAW
1. Avoiding the Issue by Drafting the Guaranties Differently
NOVA could have had Debtors execute a single guaranty together as husband and wife.16 NOVA could have had each Debtor agree, in separate guaranties, that his/her liability was joint with his/her spouse, who had executed an identical but separate guaranty. NOVA could have had Debtors sign a document in addition to the Guaranties, which document would constitute Debtors’ knowing waiver of the attributes and protection of their owning their home as tenants by the entirety, thereby expressly authorizing NOVA to execute, levy, and sell their home upon a default. NOVA could have had Debtors execute a mortgage to secure their Guaranties. NOVA did none of these simple changes to the loan documents, any one of which would have made quite clear that Debtors intended their liability to be joint, not separate and individual, and as husband and wife. To the contrary, the Guaranties are unquestionably individual and separate in nature and substance.
NOVA could have required Debtors to memorialize their joint liability, easily and expressly, thereby subjecting their entire-ties property to execution, levy, and sale. None of the language in the Guaranties (or in any of the other loan documents) shows any intention of NOVA or Debtors that Debtors’ obligations to NOVA were joint and subject to collection against their en-tireties property. Based upon the actual language of the Guaranties, I will analyze the facts in this dispute pursuant to the cases that establish how Debtors’ property is or is not subject to the liens of the Judgments.
2. Joint Liability Under Hupfel’s
In Hupfel’s, the Third Circuit identified four elements to determine joint liability between a husband and wife. First, joint liability is unlikely if the couple did not evidence a joint act consenting to change the attributes of the tenants by the entire-ties ownership. Nothing in the Guaranties suggests anything about Debtors’ consent to change the protective attributes of owning their home as tenants by the entirety. Second, joint liability is unlikely if both husband and wife are not subject to primary liability. Upon the event of default of the loans in this case, Mr. Holler became primarily liable with B & P through the Mr. Holler Guaranties for the amounts set forth in the Mr. Holler Judgments. Upon the event of default, Mrs. Holler *746became primarily liable with B & P through the Mrs. Holler Guaranties for the amounts set forth in the Mrs. Holler Judgments. But Mr. Holler signed nothing making him directly, primarily, or jointly liable for the Mrs. Holler Guaranties and Mrs. Holler signed nothing making her directly, primarily, or jointly liable for the Mr. Holler Guaranties.17
Third, joint liability is likely if the mutual interest displayed by the couple in the res of the loan and liability for it is without doubt. Nothing in the Guaranties or in any other loan documents reflects any mutual interest of Debtors in any of the loans that constitute the res in this case. Mrs. Holler was president of B & P and Mr. Holler was vice president and secretary of B & P when they signed the Guaranties. Stipulation, Exh. “A,” at p. 3. But Mrs. Holler owns 100% of the stock in B & P and Mr. Holler owns none.18 Their ownership interests in B & P are entirely disparate and therefore cannot serve as a mutual interest. Furthermore, nothing in the Stipulation (nor anywhere else in the record) provides facts that describe their compensation (if any) from B & P19 or the benefits to them (if any) for serving as its officers.
Fourth, joint liability is unlikely if the husband and wife receive separate consideration for their obligations. I have no idea of the consideration Mr. Holler received or enjoyed for executing the Mr. Holler Guaranties; I have no idea of the consideration Mrs. Holler received or enjoyed for executing the Mrs. Holler Guaranties. Consideration for Debtors might have been identical, but has not been shown to me in any way. The only reference to any consideration received by Debtors is the bald, ubiquitous phrase: “For good and valuable consideration ...” Guaranties, Exhs. “B,” “C,” “D,” & “F,” at p. 1. This statement, although providing the legal basis for binding Debtors to their Guaranties, does not elucidate the nature or amount of any consideration whatsoever.20 NOVA does not comment anywhere on the issue of consideration. NOVA might have, on the face of the Guaranties, claimed or shown that the consideration for each of the Debtors is identical. Not so. The consideration for Mr. Holler and Mrs. Holler is unknown. No one can tell from the record therefore that the consideration for each of the Guaranties was in any way identical.
Furthermore, both Guaranties expressly note that NOVA did not ask for or require the Guaranties from Debtors:
GUARANTOR’S REPRESENTATIONS AND WARRANTIES:
Guarantor represents and warrants to Lender that:
* * *
*747(B) this Guaranty is executed at Borrower’s request and not at the request of Lender....
Guaranties, Exhs. “B,” “C,” “D,” & “F,” at p. 2.
Under the four tests established by the Third Circuit Court in Hupfel’s, I conclude that the Judgments of Debtors are clearly not joint obligations through which Debtors consented to surrender the protections of their ownership of their home as tenants by the entirety. Under each of the Hup-fel’s four tests, Debtors’ entireties property would not be subject to execution, lien, and sale by NOVA. Debtors’ exemptions would be valid, permitting the avoidance of the Judgments.
3. Joint Liability Under Blusiewicz and Southern Distributing
Blusiewicz and Southern Distributing, the North Carolina decision on which it relies for guidance, provide more recent guidance than Hupfel’s to determine if separate actions of a husband and wife expose their entireties property to their creditors. The elements of such exposure follow. First, joint liability is unlikely if judgment is expressly entered against a husband and wife separately, personally, or individually by consent. Alternatively and second, joint liability is likely if judgment is expressly entered jointly, formally against them together as husband and wife, or collectively. Third, but similarly, joint liability is unlikely upon the exclusion of language suggesting joint liability or liability as husband and wife. Fourth, joint liability is likely if a judgment was entered in which defendants acted or were described jointly as tenants by the entirety who waive the protection of holding property by the entireties.
I quoted Blusiewicz previously, but its conclusion is directly on point in this case and bears repeating:
[TJhere cannot be an execution against property held as tenants by the entire-ties unless it is upon a judgment wherein defendants have acted jointly as tenants by the entireties and by their action have waived the substantive law of tenants by the entireties.
Blusiewicz 33 Pa. D. & C.2d at p. 473 (emphasis added).
The language of the Guaranties and the Judgments is irrevocably individual in nature. Nothing in the Mr. Holler Guaranties or the Mr. Holler Judgments refers in any way to Mrs. Holler, their marital relationship, or ownership of their home as tenants by the entirety. Nothing in the Mrs. Holler Guaranties or the Mrs. Holler Judgments refers in any way to Mr. Holler, their marital relationship, or ownership of their home as tenants by the entirety. I adopt the tests established by Blusiewicz, as the only Pennsylvania court to address this issue head on, and Southern Distributing, the North Carolina Supreme Court decision relied upon in Blu-siewicz.21 Both Blusiewicz and Southern Distributing are consistent with the Third Circuit Court in Hupfel’s.
I conclude therefore, based upon Blusiewicz and Southern Distributing (and Hupfel’s) that the liens on the Judgment against Debtors, which arose from the Guaranties, did not subject Debtors’ entireties property to execution, levy, and sale by NOVA. Debtors’ exemptions are *748therefore valid and support avoidance of the Judgments.
4. Joint Liability Under Bialon
Neither the Guaranties as a whole nor any separate provision in them includes a statement that the Guaranties are not suretyship agreements as required by Public Law 971 to prevent the Guaranties from being deemed to be suretyship agreements. Guaranties, Exhs. “B,” “C,” “D,” & “F.” Statutorily, therefore, the Guaranties are suretyship agreements. Public Law 971, 8 P.S. § 1. The issue before the Bialon court differed substantially from that presently before me. In Bialon, the sole issue was whether the spouse/guarantor/surety was jointly liable with the spouse/principal obligor. In the case before me, on the other hand: (a) Mr. Holler is surety for and jointly liable with B & P and (b) Mrs. Holler is surety for and jointly liable with B & P.
I conclude from Bialon (perhaps redundantly with other decisions discussed herein), that each Debtor individually is jointly liable with Debtors’ company, B & P. Two important issues, however, were not addressed in Bialon. First, is one surety of a principal’s indebtedness jointly liable with a co-surety of the same indebtedness? Mr. Holler is surety for and jointly liable with B & P. Mrs. Holler is surety for and jointly liable with B & P. Does that mean that Mr. Holler is jointly liable with Mrs. Holler?22
The second unaddressed question is more significant. In Bialon, the court distinguished Hupfel’s and ignored Blusiew-icz (in which the courts found no joint liability). In both cases, the courts required more than simple liability for the same debt. Hupfel’s also required a “joint act consenting to a change in the attributes of the estate in themselves and not their consent to antecedent transactions.” 299 F. at 941. In examining the facts to find such a “joint act” when the creditor had entered two separate judgments against the married couple, the Third Circuit found that both the husband and wife had a mutual interest in seeing their enterprise succeed. But the court went on to recognize that their mutual interest was insufficient, in and of itself, to conclude that the two separate judgments, taken together, constituted a lien against entire-ties property. Id. Hupfel’s also rejected the creditor’s argument that mutual action supported collection of the judgments against entireties property. To the contrary, the couple had entered into two separate transactions out of which had grown separate obligations.23 Id. The court in Bialon distinguished Hupfel’s because of the separate transactions and different consideration. The instruments in Bialon, although physically separate, created a joint obligation. Upon its determination that the obligation was joint, the court found that the entireties property was subject to execution, levy, and sale under Pennsylvania law. Bialon, 67 B.R. at 454. The court did not consider Blusiewicz and *749ignored the other aspects of the liability of the couple, as considered in Hupfel’s. For these reasons, I do not rely on Bialon as providing guidance about Pennsylvania law in this dispute.
B. NOVA’S ALTERNATIVE ARGUMENTS
1. Even If No Judgments Had Been Entered, Debtors’ Joint Debt Precludes Them from Exempting Their Entireties Property
NOVA presents two arguments as alternatives to its basic defense that the four Judgments themselves permit execution, levy, and sale of Debtors’ entireties property. First, NOVA claims that Debtors’ joint liability for the B & P debt exists without regard to whether the Judgments were entered against them. NOVA argues that, even if it had not confessed the Judgments, the nature of Debtors’ liability to NOVA under the separate Guaranties is joint, thereby preventing Debtors from exempting their entireties property from disposition by the Chapter 7 Trustee.24 The cases on this issue arise from widely disparate factual and legal circumstances and reflect very different approaches to the joint liability. A first pair of decisions (discussed below) finds no joint debt, whereas another pair of decisions (also discussed below) finds joint indebtedness. My analysis of Pennsylvania law in this bankruptcy context leads me to (a) follow the first pair of decisions, reject joint debt, and uphold debtors’ exemptions under circumstances not precisely before me and (b) distinguish the second pair of decisions (neither of which was cited or briefed by the parties before me), which describe co-sureties’ co-liability also under circumstances not before me. Based upon the first pair of decisions (coupled with Hup-fel’s and Blusiewicz), I predict that Pennsylvania courts would find no joint debt frustrating the exemption of Debtors’ home as entireties property in this case.
a. Joint liability under the Bran-non/Lewis and O’Lexa cases
As I discussed briefly above, the Third Circuit Court decided three cases together on the same day in 2007. The first decision was in two consolidated cases, In re Brannon and In re Lewis, supra, 476 F.3d 170 (3d Cir.2007), and the second decision was in the third case, In re O’Lexa, supra, 476 F.3d 177 (3d Cir.2007). The debtor in O’Lexa had substantial credit card debt in her name alone. She owned her home with her husband as tenants by the entirety, so she elected the state exemptions The Chapter 7 Trustee challenged debtor’s claim of exemption of her home as entire-ties property. The court reiterated the longstanding rule that when one spouse files bankruptcy, individual claims against that debtor do not vitiate the immunity of entireties property. O’Lexa, 476 F.3d at 179.25
The Trustee used a novel approach in his objection to Debtors’ claim of exemption — he argued that the debtor’s credit card purchases for household goods *750and bills constituted legal “necessaries” for her and her husband. Under Pennsylvania law, when debts are contracted by one spouse for “necessaries” for the support and maintenance of the family, the creditor may proceed against both spouses directly for the debt. 23 Pa.C.S. § 4102. The claim against the non-purchasing spouse, however, may be satisfied solely out of that spouse’s separate property. Id. Because Section 4102 establishes that indebtedness for “necessaries” constitutes a “separate claim” against the non-purchasing spouse, the liability is not joint and cannot reach the entireties property. As the court summarized O’Lexa in the Bran-non/Lewis decision, the statute did not create joint liability, but rather made the spouse who bought'the “necessaries” primarily liable and the other spouse only secondarily liable. Brannon/Lewis, 476 F.3d at 175.
The Third Circuit Court’s reference to the non-purchasing spouse as being “secondarily liable” is instructive. The “necessaries” statute does not refer to the debt owed by the non-purchasing spouse as anything other than direct and immediate. 23 Pa.C.S. § 4102. The statutory limitation is only that collection of the “necessaries” obligation from the non-purchasing spouse may come solely from that spouse’s separate property. Id. Yet the court considered that limitation as creating secondary liability. This analysis of secondary liability can extend to the liability of a husband and a wife who sign separate written instruments making them liable for the same debt, which is the case before me.
The court in both O’Lexa and Brannon/Lewis reviewed allegedly joint claims, none of which were the subject of judgments. The court determined the exemption of entireties property based upon claims that were general unsecured claims — not judgments. Judgments are not necessary for a creditor, a trustee, or any other party in interest to contest the exemption of entireties property in the face of obligations for which both spouses are liable. Accord, Houck, supra, 184 B.R. at 24. Thus, NOVA correctly claims that Debtors’ obligations under the Guaranties, even if the debt had not been reduced to the Judgments, could have been considered. This argument, although unassailable, fails to add substance supporting NOVA’s position. The same analysis of the nature of the obligations, whether secured by judgments or as unsecured claims, must be undertaken.
Although not discussed in O’Lexa, the provider of the “necessaries” could have sued and obtained a single judgment against both the purchasing spouse and the non-purchasing spouse. One judgment would exist: The claims against both parties would be identical in underlying transaction, amount, origin, and, in particular, consideration — but, by statute, the non-purchasing spouse would be only secondarily liable. Or the creditor could obtain two separate judgments against the spouses. Two judgments would exist: Identical in underlying transaction, amount, origin, and, once again in particular, consideration. As stated in O’Lexa, whether holding a single judgment against both husband and wife individually or two separate judgments against them, the creditor could not assert joint liability that would allow it to reach entireties property and therefore no joint claim existed in opposition to the debtors’ claim of exemption. O’Lexa, supra, 476 F.3d at p. 180 (citing the Hupfel’s decision).
b. Joint liability under the Ba-hara/Brizer & Keystone Bank cases
In the consolidated cases of In re Bahara and In re Brizer, 219 B.R. 77, 80 *751(M.D.Pa.1998)(eonsolidated on appeal), District Court Judge Thomas I. Vanaskie (now Third Circuit Court Judge) stated that the issue before him was the determination of the relationship between co-sureties of a principal obligor’s debt. Enunciation of this issue appears to address head-on the relationship between the Debtors as co-sureties in the dispute before me. But the circumstances that Judge Vanaskie faced differ substantially from those before me.
In Bahara/Brizer, numerous members of three families guaranteed the debt owed to the creditor by the principal borrower, a family-owned brewery. Sharply differing from the matter at hand, the guarantors had all signed a single guaranty agreement and were expressly jointly and severally liable for the principal’s obligation. Id. at 80. The creditor reached an agreement with one of the guarantying families for payment of an amount less than its proportional share of the total indebtedness and released those family members of further obligations to the creditor. Id. at 78-79. Judge Vanaskie relied heavily on the Pennsylvania Supreme Court decision in Keystone Bank v. Flooring Specialists, Inc., 513 Pa. 103, 518 A.2d 1179 (1986), to determine if the liability of the non-released sureties had been reduced or otherwise affected by the release of the other sureties. The issue he addressed, therefore, differed substantially from the matter now before me and his analysis of the law of co-sureties does not apply to this case.
Judge Vanaskie referred to and quoted Keystone Bank:
“Where ... there are several sureties for the principal’s unpaid debt, each surety owes to his co-sureties a duty to pay his proportional share of their common debt.” Id. at 115, 518 A.2d 1179. Upon default by the principal in a sure-tyship, each surety becomes a principal for his or her pro rata share and remains a surety for the balance of the debt. Id. at 116, 518 A.2d 1179 (“[W]here there are several co-sureties each of them is in legal effect, as against the others, a principal for his proportion of the debt and a surety for the rest of it.”) Accordingly, in this case, the [sureties] were each liable as principals to pay their proportionate share of the indebtedness to the Bank ..., and each remained liable as sureties for their co-guarantors’ proportionate shares.
219 B.R. at 80-81. Again, I observe that this explanation of the interplay and liability between these co-sureties is based on a single guaranty agreement in which all of the guarantors/sureties expressly agreed to joint and several liability with their fellow sureties.
In Bahara/Brizer and Keystone Bank, the courts considered the “debts” owed between and among the principal and all sureties when the creditor released one of the obligors (whether the principal obligor or a guarantor). The courts’ analysis was built upon a significant fact and a significant “what if.” Their determinations were based on (1) the sureties’ express agreement to be jointly liable and (2) “what if’ the loan and surety documents do not provide an explanation of how, when, what, and who could be released by the creditor without reducing or discharging the liability of the remaining co-obligors and co-sureties. That is, some of the legal analysis would not pertain if the loan and surety documents spelled out what would happen if the creditor released one or more obli-gors, one or more sureties, or some collateral. 219 B.R. at 81, 513 Pa. at 115-16, 518 A.2d at 1185-86.
The Bahara/Brizer and Keystone Bank courts reviewed the legal construct of co-sureties’ expressly joint obligations with one another to address the common-law *752problem that arises upon the release of other obligors/sureties. In Baham/Brizer, Judge Vanaskie reviewed Title 13 Pa. C.S.A. § 3606, which provides that, without an express reservation of rights, a creditor who releases a party to a loan or collateral securing the loan discharges at least some of the obligations of other parties to the instrument. And, on the other hand, Section 3606 provides that a party who expressly reserves the right to release co-obligors may release an obligor, a surety, or collateral without affecting the liability of another co-surety. 219 B.R. at 82 and n. 10. As I will detail below, the terms of the Guaranties expressly reserve NOVA’s right to release co-obligors and sureties without affecting the liability of any other obligor or surety.
The importance of these distinctions is manifest in the differing nature of the liability between and among the principal and the sureties. The above quote from Keystone Bank in Judge Vana-skie’s opinion makes clear that the sureties are liable as principals with the primary obligor and must pay their proportionate share of the primary obligor’s debt. Id. at p. 81. This basic legal conclusion reflects literally centuries of jurisprudence.26 But Judge Vanaskie goes on to describe the further legal obligation of co-sureties to the primary obligor according to Keystone Bank. Id. Sureties owe their proportionate share of the principal’s debt as principals themselves. Id.27 But their responsibilities to their co-sureties for the debt beyond their proportionate share is secondary liability, due to the creditor only upon a default of a co-surety in paying its proportionate share.
Debtors individually, of course, are primarily liable to NOVA with B & P pursuant to the Guaranties. But as between themselves, Debtors did not expressly agree to joint liability. Bahara/Brizer and Keystone Bank do not say that all sureties of a principal obligor are jointly liable.28 The sureties in those cases were jointly liable because they had expressly agreed to be. Sureties are not primarily or jointly indebted to each other absent something manifesting that liability. Debtors’ debt to NOVA is not joint. Debtors’ obligations are similar to the secondary liability recognized by the Third Circuit Court in both Hupfel’s and O’Lexa in the context of the debts they faced.
As I note in detail below, the terms of the Guaranties are replete with language expressly reserving NOVA’s right to re*753lease any obligor, any guarantor, or any collateral without reducing or discharging the liability of any other guarantor. Judge Vanaskie remanded the cases of Bran-non/Lewis to the Bankruptcy Court to review, inter alia, the loan documents to determine if any such reservation of rights existed. Id. at 83. The terms of the Guaranties are therefore helpful to determine if this case is similar to and controlled by the Brannon/Lewis and Keystone Bank decisions.
c. Terms of Guaranties — Release, settlement, discharge of co-sureties
The issue faced by the courts in Ba-hara/Brizer and Keystone Bank is not the issue in this case. Judge Vanaskie and the Pennsylvania Supreme Court determined the liability of jointly liable sureties when the lender reached a settlement with one of their number whom they then released. This issue is not before me because (1) Debtors’ Guaranties do not expressly make their obligations joint liabilities and (2) the language in the Guaranties expressly reserves NOVA’s power to settle with and release either B & P or one of the sureties without releasing or discharging the other surety. The following excerpts from the Guaranties show the express reservation by NOVA of its rights to release a party or collateral without reducing the liability of the signatories to the Guaranties in any way:
This is a guaranty of payment and performance and not of collection, so Lender can enforce this Guaranty against Guarantor even when Lender has not exhausted Lender’s remedies against anyone else obligated to pay the Indebtedness or against any collateral securing the Indebtedness, this Guaranty or any other guaranty of the Indebtedness. * * * Under this Guaranty. Guarantor’s liability is unlimited and Guarantor’s obligations are continuing.
Guaranties, Exhs. “B,” “C,” “D,” & “F,” p. 1, Section titled: “Continuing Guarantee of Payment and Performance.”
[Lender has the right:] ... (D) to release, substitute, agree not to sue, or deal with any one or more of Borrower’s sureties, endorsers, or other guarantors on any times or in any manner Lender may choose
Guaranties, Exhs. “B,” “C,” “D,” & “F,” p. 1, Section titled: “Guarantor’s Authorization to Lender.”29
Guarantor waives any right to require Lender: ... (C) to resort for payment or to proceed directly or at once against any person, including Borrower or any other guarantor....
Guaranties, Exhs. “B,” “C,” “D,” & “F,” p. 2, Section titled: “Guarantor’s Waivers I.”
Guarantor also waives any and all rights or defenses based on suretyship ... including, but not limited to, any rights or defenses arising by reason of ... (C) any disability or other defenses of Borrower, of any other guarantor, or of any other person, or by reason of the cessation of Borrower’s liability from any cause whatsoever....
Guaranties, Exhs. “B,” “C,” “D,” & “F,” p. 2, Section titled: “Guarantor’s Waivers II.”
Under these provisions of the Guaranties, NOVA would suffer no diminution of its ability to collect the full amount of its debt from either Debtor even if NOVA released the other Debtor or B & P completely. The two significant underlying predicates on which the Bahara/Brizer and Keystone Bank decisions were based are missing. Despite these changed cir*754cumstances, the analysis of these two eases supports finding that Debtors are not jointly liable to NOVA under the Guaranties or Judgments.
I have reviewed and I accept the guidance of O’Lexa, Hupfel’s, and Blusiewicz, describing what is needed to find joint liability, and Bahara/Brizer and Keystone Bank, relating to co-sureties’ liability for debt. I believe that the Pennsylvania Supreme Court, faced with a similar situation, would recognize that its Keystone Bank decision addresses only the issue of releases of co-sureties who have expressly agreed that they are jointly liable with each other. Keystone Bank does not apply to NOVA’s attack on the attribute of Debtors’ property held as tenants by the entirety. The separate, independent Judgments, based on the separate, standalone written Guaranties make no mention of joint liability or of destroying the attribute of tenancy by the entirety. Keystone Bank (and therefore Bahara/Brizer) refers to the primary, joint liability of co-sureties with the principal compared to the possibly secondary liability of co-sureties. I predict that Pennsylvania courts would reject the notion that separate, independent judgments entered individually against a husband and wife would encumber their property held as tenants by the entirety.
The obligations created by certain sure-tyship agreements are and may be construed to be joint obligations of a married couple in certain situations. But not all obligations incurred by a husband and wife at or near the same time constitute joint obligations that void the protection against individual judgment creditors afforded by holding property as tenants by the entirety. Expressly supporting this analysis are the decisions in O’Lexa, Blusiewicz, and Southern Distributing. Those decisions required some overt action that showed the parties’ surrender of the attributes of their holding property as tenants by the entirety. No such overt action exists here. The nature of the obligations under the Guaranties, even if the Judgments had not been confessed, does not destroy Debtors’ exemption of their entireties property under Section 522(b)(3)(B) of the Bankruptcy Code. I reject NOVA’s first alternative argument, largely because the obligations owed to NOVA under the Guaranties simply do not constitute joint claims whether unsecured or secured through the liens of the Judgments.
2. NOVA Is Obliged To File Separate Actions Against Debtors To Be Able To Enforce Its Judgments
NOVA’s second alternative argument bears only limited consideration. NOVA explains that it cannot enforce the Judgments under Pennsylvania law without initiating additional, independent actions against Debtors to execute and levy on the liens of the Judgments. NOVA points out that each of the Guaranties provides for this. Doing little more than what is required under Pennsylvania law, the Guaranties provide the following notice after the warrants of attorney that authorized the entry of the Judgments by confession:
The lien arising from any judgment confessed or entered pursuant to the foregoing authority shall not extend to any of Guarantor’s residential real property as that term is defined in the Pennsylvania Act of January 30, 1974 (Pa. Laws 13, No. 6), referred to as the Loan Interest and Protection Law, as amended, and the holder of any judgment confessed or entered pursuant to the forgoing [sic] authority shall not, in enforcement of any such judgment, execute, levy or otherwise proceed against any such residential real property; provided, however, that the lien of such judgment shall extend to such residential real property *755and that the holder thereof shall be permitted to execute; levy or proceed against such residential real property from and after the entry of a judgment as contemplated by Section 407 of such Loan Interest and Protection Law and Rules 2981 and 2986 of the Pennsylvania Rules of Civil Procedure, or successor or similar statutes and rules.
Guaranties, Exhs. “B,” “C,” “D,” & “F,” at p. 4, Section: “Confession of Judgment.”
Pursuant to Rules 2981-2986 of the Pennsylvania Rules of Civil Procedure, a creditor may enforce the lien of judgment obtained by confessing judgment against residential real estate by filing a complaint to confirm the confessed judgment to the judgment in a later action. Pa. R. Civ. Proc., Rules 2981-2986. Specifically, Rule 2986(a) provides:
(a) Judgment shall be entered in the action [to conform the judgment] for the amount, if any, due the plaintiff from the defendant or the amount, if any, due the defendant from the plaintiff. That judgment shall merge with the confessed judgment. The court shall enter an appropriate order conforming the confessed judgment to the judgment in the action.
Pa. R. Civ. Proc., Rule 2986(a). Only after a conforming judgment is entered can a creditor execute and levy against residential property.
In its action to conform the judgment, NOVA would be obliged to plead and prove that the separate, independent Judgments should be conformed by the new action under Rule 2986. Furthermore, NOVA would be obliged to argue that the independent, individual Guaranties and Judgments should be bound together and deemed to be joint obligations under Pennsylvania law to permit it to proceed against Debtors’ home, their en-tireties property. Through its pleadings and during the hearing on that matter, Debtors could and would oppose NOVA with the same arguments raised herein. I predicted above that Pennsylvania’s courts would decline to hold that the Judgments are presently enforceable liens against Debtors’ home. I believe, for the same reasons, that the action to conform judgments would fail and NOVA would not be permitted to execute, levy, or sell Debtors’ home. I reject NOVA’s second alternative argument, because it also is controlled by the same legal conclusions discussed above.
V. CONCLUSION
I conclude that the Judgments, entered independently and separately, based upon the entirely separate and distinct Guaranties, do not constitute presently enforceable liens on Debtors’ home, which is owned as tenants by the entirety. I further conclude that nothing in the Judgments, the Guaranties, or any other loan documents in this matter provides any indication whatsoever that Debtors intended to surrender to NOVA the protection that owning their home a tenants by the entirety affords them.
Upon the findings of fact, conclusions of law, and discussion in this Memorandum Opinion, therefore, I enter the accompanying Order (1) denying NOVA’s motion for reconsideration on the substance and merits and (2) ratifying, restating, and reentering my Orders dated August 29, 2011, granting Debtors’ Motions To Avoid.
ORDER DENYING NOVA’S MOTION FOR RECONSIDERATION
AND NOW, this 13 day of December, 2011, upon my consideration of Debtors’ two Motions To Avoid Judicial Liens Pursuant to 11 U.S.C. § 522(f) and N.B.R. 4003(d) and 9014, both filed on August 9, 2011, and upon my previously granting the *756motions to avoid by my Order dated August 29, 2011, and upon NOVA filing, on September 6, 2011, its Motion for Reconsideration of Orders Entered August 29, 2011 Granting Debtors’ Motions To Avoid Judicial Liens, and upon the hearing on NOVA’s Motion for Reconsideration held on September 27, 2011, and upon my consideration of the stipulation of facts and the exhibits that the parties filed on October 6, 2011, and upon my consideration of the briefs that the parties filed on October 21, 2011, and upon the findings of fact, conclusions of law, and discussions stated in the accompanying Memorandum Opinion,
IT IS HEREBY ORDERED that NOVA’s Motion for Reconsideration is HEREBY DENIED.
IT IS FURTHER ORDERED that my two Orders dated August 29, 2011, granting both of Debtors’ Motions To Avoid are HEREBY RATIFIED, RESTATED, AND RE-ENTERED.
IT IS FURTHER ORDERED that the Judgments (as defined in the Memorandum Opinion) are HEREBY AVOIDED IN FULL.
. The parties filed their Stipulation Submitted in Connection with Debtors’ Motions To Avoid Judicial Liens (the "Stipulation”) on October 6, 2011.
. The parties used the phrase "at the time” in Paragraphs 2, 3, 5, and 6 of the Stipulation. I have no way of knowing whether Mr. Holler actually executed his guaranties simultaneously (or practically simultaneously) with the B & P loan documents. The same uncertainty pertains to Mrs. Holler's guaranties. Alternatively, the B & P loan documents might have been signed on one date at one location and Mr. and Mrs. Holler’s guaranties might have been signed on another date at another location. For the purpose of this Statement, however, I regard both Mr. and Mrs. Holler as having executed their guaranties as part of the same transactions and at the same effective dates and times as they executed the primary loan documents as officers and representatives of B & P. Mrs. Holler signed the B & P loan documents as President of B & P; Mr. Holler signed the loan documents as Vice President/Secretary of B & P. See Exh. "A” to the Stipulation.
I raise the possibility of different dates and places because of the discrepancy between certain dates in another of the loan documents. See note 3, below.
. Although Paragraph 4 of the Stipulation does not identify what property is subject to the mortgage securing the $99,000 Loan, the Mortgage at Exh. "D” shows clearly that the mortgaged property is Debtor’s home, 1618 Alex Court, Allentown (Salisbury Township), PA 18103.
I do not typically examine underlying documents about issues not specifically addressed by the parties, but this dispute has caused me to study the exhibits attached to the Stipulation. I note that the mortgage (and a number of ancillary loan documents that appear to have been contemporaneously executed) are dated October 30, 2007. The notary’s acknowledgment of the mortgage, however, is dated October 31, 2007. Some appropriate reasons for these mismatched dates may very will exist, but I note the requirement that a notary be present when the mortgage is executed, affixing his/her certification only when documents are executed before him/her. Fisher v. Advanta Finance Corp., (In re Fisher), 320 B.R. 52, 63-65 (E.D.Pa.2005). Once again, because the parties do not expressly address the mis-matched dates in the Stipulation or their briefs, I will not regard it as material.
. Paragraphs 9 & 10 of the Stipulation erroneously refer to the judgments’ docket numbers as beginning with ''2000” rather than ''2010,” which is the correct date. See Exhs. "G,” "H,” “I,” and “J.”
. Although I have slightly revised the language of Paragraph 11 of the Stipulation, Exhibit "D” in the Stipulation as well as Debtors' Schedules filed in this case show that my description of Debtors’ address and ownership of their home are correct.
I may take judicial notice, under Fed. R.Evid. 201 (incorporated into bankruptcy cases by Fed. R. Bankr.P. 9017), of the docket entries and the bankruptcy petition, schedules, and statement of financial affairs filed in this case. See Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1200 n. 3 (3d Cir.1991); Levine v. Egidi, No. 93C188, 1993 WL 69146, at *2 (N.D.Ill. March 8, 1993); In re Paolino, No. 85-00759F, 1991 WL 284107, at *12 n. 19 (Bankr.E.D.Pa. Jan. 11, 1991); see generally Nantucket Investors II v. California Federal Bank, (In re Indian Palms Assoc., Ltd.), 61 F.3d 197 (3d Cir.1995). Although I may not take judicial notice sua sponte of the facts contained in the debtors’ files that are in dispute, In re Aughenbaugh, 125 F.2d 887 (3d Cir.1942), I may take judicial notice of adjudicative facts "not subject to reasonable dispute ... [and] so long as it is not unfair to a party to do so and does not undermine the trial court's fact finding authority.” Indian Palms, 61 F.3d at 205 (3d Cir.1995) (citing Fed.R.Evid. 201(f) advisory committee note (1972 proposed rules)). Nothing in this case leads me to believe that Mrs. Holler’s 100% ownership of B & P is in dispute.
. This sub-section of Section 522 provides the "state exemptions” for debtors who elect this avenue for exempting assets.
. (b)(1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection....
(3) Property listed in this paragraph fe—
(B) any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbank-ruptcy law; and
(f)(1) Notwithstanding any waiver of exemptions but subject to paragraph (3) [not at issue here], the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is—
(A) a judicial lien, other than a judicial lien that secures a debt of a kind that is specified in section 523(a)(5) [not at issue here]....
11 U.S.C. §§ 522(b)(3)(B) and 522(f)(1).
.I note the paucity of Pennsylvania decisions addressing the issue of the effect of two separate judgments against entireties property of a husband and wife. It is so simple to avoid this problem in both loan transactions and litigation that it should not arise often. Creditors can simply demand joint guaranties in loan transactions or can sue a couple jointly as husband and wife in general litigation matters if they intend to encumber and collect from entireties property.
. Unlike the Judgments in this case, each of the two judgments considered in Carpenter were judgments against both husband and wife together and jointly, rather than the four separate, individual, independent Judgments now before me.
. The Howard Savings Bank v. Cohen, 414 Pa.Super. 555, 560, 607 A.2d 1077, 1079 (1992). Although the Howard Savings case results in the same conclusion that I do, it dealt with New Jersey law and therefore cannot support my decision in this case.
. Neither the parties’ research nor my own has led me to any other Pennsylvania state court decision squarely on this issue. But see the Pennsylvania Bankruptcy Court case, Westmoreland Mall, Inc. v. Bialon {In re Bialon) 67 B.R. 451 (Bankr.W.D.Pa.1986), discussed at more length below.
.If Pennsylvania courts had definitively interpreted the legal issue before me, I would apply that law. On the other hand (and in this case), state law relating to this matter is sparse at best. To supplement the lone decision in Blusiewicz. I will therefore look to other, analogous issues in Pennsylvania law to determine how Pennsylvania courts would rule if faced with the same issue. Kollar v. Miller, 176 F.3d 175, 178-79 (3d Cir.1999).
. The Blusiewicz court refers to this excerpt as the "syllabus” of the Southern Distributing decision. My review of the Southern Distributing opinion in both the Southeast Reporter and the North Carolina Reporter did not reveal a demarcated syllabus or a passage including the language of the syllabus. I accept the "quoted” syllabus, however, at the very least, as the Blusiewicz synopsis of the Southern Distributing decision.
. The court in Bialon needed no reference to support this ruling because the nature of the liability of a principal and its surety has long been regarded as joint. See Haddens v. Chambers, 2 U.S. (Dall.) 236, 1 Yeates 529, 1 L.Ed. 363 (1795). See also, 48-50 Enterprises, Ltd. v. Rimmer, {In re Bradstreet), Nos. 01-18357, 01-30953, and 01-0775, 2002 WL 31987287 at *8 (Bankr.E.D.Pa. Dec. 31, 2002).
. The Bialon court ignored the effect that Public Law 971, discussed above, should have had in Hupfel’s, Under Public Law 971, 8 P.S. § 1, at least the guaranty portion of the wife’s obligations to Hupfel's constituted a surety-ship, thereby imposing the same joint liability on the couple in Hupfel’s as was found in Bialon.
. Numerous references, definitions, and interpretative sections of the Guaranties make it clear that the form for the document used by NOVA may be signed by multiple parties together: See Guaranties, Exhs. “B,” "C,” “D,” & "F,” at p. 3.
. At page 32, fn. 22 below, I question whether something similar to transitive liability between co-sureties exists, such as the following:
A is a surety for and jointly liable with B. C is a surety for and jointly liable with B. Is A therefore jointly liable with C? As the discussion shows, the answer is No.
. This is not a stipulated fact, but is contained in ¶ 13 of Debtors’ Schedule B filed in this case. It is the only evidence of ownership of B & P that exists.
. Debtors’ Schedule I filed in this case describes Mr. Holler’s employment as a driver for Eastern Warehouse Distributors and Mrs. Holler’s employment as a cashier at Wal-Mart.
. In two separate miscellaneous or definition sections of the Guaranties, the nature and meaning of Debtors’ "consideration” is not defined, explained, described, or enhanced. Guaranties, Exhs. "B,” "C,” “D,” & "F,” atpp. 2 & 3.
. Section 522(b)(3)(B) differentiates between jointly held property and property owned as tenants by the entirety when it provides the exemptions for property held either way. Congress must have intended that the two means of ownership differ or it would not have included both. Some joint act, something more than mere liability for the same debt therefore, is necessary to constitute a lien on entireties property.
. For want of a more appropriate label, I refer to this question as whether some transitive principle applies to co-sureties' obligations. Arithmetically: If A = C and if B = C, then A = C. I do not believe that this principle applies to sureties. That is, merely because A is surety and jointly liable for C’s debt and B is surety and jointly liable for C’s debt, does not mean that A is jointly liable for B’s debt.
Although in a different context, the nature of co-sureties’ liability with each other has long been addressed under Pennsylvania law and is discussed below, in the context of NOVA's first alternative argument in opposition to the Motions To Avoid.
. The court in Hupfel’s also regarded the separate and independent consideration of the two obligations as a factor in its decision.
. Memorandum of Law Filed on Behalf of NOVA Bank in Opposition to the Motions of Debtors, etc., atp. 8.
NOVA’s alternative argument is far from theoretical or hypothetical. NOVA has filed its opposition to Debtors’ declaration of Pennsylvania exemptions and this Memorandum Opinion will necessarily apply to that pending motion.
. As noted above, the court in Brannon/Lew-is succinctly summarized its companion decision as follows: “O’Lexa makes clear that the presence of joint liability is necessary for a creditor to access property in a bankruptcy estate held as tenants by the entireties.” 476 F.3d at 175.
. See note 14, above.
. Again, Judge Vanaskie analyzed the obligations to each other of co-sureties who were expressly jointly liable with each other, by quoting from Keystone Bank:
[I]n the case of co-sureties, the equitable principles of suretyship are observed, and accordingly, each must be treated as between himself and his co-sureties as a principal for the fraction of the debt which he ought to pay, and as a surety for the remainder. If the creditor by any dealings with one co-surety impairs the suretyship rights of other co sureties, they will be discharged from such a proportion of the debt as they would equitably have been entitled, on payment of it to throw upon the co-surety with whom the inequitable dealings have been had.
219 B.R. at 81-82 (quoting 513 Pa. at 116, 518 A.2d at 1186) (quoting 10 S. Williston, A Treatise on the Law of Contracts § 1263, at 840 (3d ed. 1967)) (emphasis in Bahara/Brizer).
.The holdings of Bahara/Brizer and Keystone Bank do not apply to the case now before me. I include them in my analysis of the meager case law, however, because the language of each (if the background facts are not inspected) appears to declare that co-sureties of an obligation are jointly liable. Upon consideration of the facts before the courts, no such holding exists.
. The guaranty at issue in Bahara/Brizer had no such right of release. 219 B.R. at 83. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494526/ | MEMORANDUM OPINION
BERNARD MARKOVITZ, Bankruptcy Judge.
Before the court is Sherry Justice Sales, LLC. (“Justice Sales”) seeking a declaration by the court of the nondischargeability of $96,000 owed to it by Debtor pursuant *771to 11 U.S.C. § 523(a)(2)(A). Sherry Justice, owner of Sherry Justice Sales, LLC, testified on behalf of Sherry Justice Sales that she loaned money to the Debtor on the basis of his false representations, fraud, and false pretenses. As such, Plaintiff asserts that 11 U.S.C. § 523(a)(2)(A) bars dischargeability of her claims against Debtor.1
We hold that there were no such false representations, fraud, or false pretenses. However, even if there were, we do not believe that Mrs. Justice could have justifiably relied on those statements given her knowledge of the business and her sophistication developed through her twenty years in the industry.
- FACTS -
Debtor served as the president and was an owner of one-third of Hawkins Precast Concrete Products, LLC. (“Business”). Cindy Barbero served as controller of Business.
In August of 2007, Debtor hired Sherry Justice as an independent sales agent. Plaintiff and Debtor had a personal relationship that had existed for many years prior to his hiring Mrs. Justice. She was compensated $1000 per month plus 100% health insurance coverage. In this role, Mrs. Justice’s duties included finding and bidding on jobs, booking orders, giving quotes, etc. The bidding process required her to complete paperwork detailing the costs of creating a product. She also had a working understanding of such costs as she had twenty years of experience in the construction industry. During her time with the Business, Mrs. Justice did not have access to its books. However, she did have access to the emails of the officers of the Business, as well as to information regarding the balance of its bank account. Also, the controller constantly shared information concerning business operations with her. After a period of time, Plaintiff was considered a temporary employee.
In May of 2008, Debtor approached Mrs. Justice about borrowing money to use for payment of Business expenses. She agreed and loaned Debtor $10,000. He eventually gave her a check, which she was never able to cash because every time it was presented, there were insufficient funds. He personally guaranteed that he would pay her back even if the business was unable to do so. Plaintiff claims that assertions such as these led her to continue loaning money to the Debtor. Debtor admits that he did continually represent that the business was profitable and that it would be able to pay back its loans, despite its having a $900,000 judgment of confession against it. She continued to loan him money until the two parted ways in May of 2010.
During the period of May 2008 through May 2010, Mrs. Justice continued to loan Debtor money for business expenses and projects. In many cases, Mrs. Justice borrowed the money on credit cards and Debtor would make payments on the credit card. Debtor continued to make payments on the credit cards through December of 2009, at which point the payments ceased. After December 2009, Plaintiff also collected receivables of the Business in repayment. During this time, Debtor personally guaranteed to repay Plaintiff, even if the business would be unable to do so. Debtor also borrowed money from Cindy Barbero (controller), who was also a creditor in this case. On March 31, 2010, *772the Sherry Justice drafted a promissory note, which the Debtor amended and signed stipulating that he owed her $102,309 based on the money she had loaned him up to that point and that he also owed her $49,799.98 for use of her water account. Mrs. Justice loaned Debt- or money after the signing of the promissory note, but never amended the note to reflect the additional loans. Currently, Debtor owes Plaintiff $96,000. The promissory note included a variety of collateral including the contents of the farmhouse owned in joint tenancy by Debtor and his wife. However, the promissory note referred to the house as “property of Mark T. Hawkins”, but did not include his wife. Mrs. Justice had been in this house and had seen that it was full of antiques collected by Debtor. These antiques were the “contents” referred to in the promissory note. On occasion, Debtor told Mrs. Justice that he was proud of his antiques and that he had collected the antiques and decorated the farm house himself.
In the meantime, the Business, through Debtor and Cindy Barbero (controller of the Business) encouraged Mrs. Justice to pursue minority status for purposes of government contracts and by October of 2008, Justice Sales, LLC was in business and remained a sales agent for the Business 2. Mrs. Justice would bid on jobs as an agent for Justice Sales, as well as for Business. If Justice Sales received the job, it would then contract with the Business for the manufacturing of the goods.
In April of 2010, Business filed a Chapter 11 petition after a creditor of the Business confessed judgment and froze its bank accounts. Subsequently, the case was converted to a Chapter 7 and the Business was forced to close. The conversion was required because of the objection by two creditors to the feasibility of the plan, including Justice Sales. On April 12, 2011, Justice Sales filed her claim against Debtor. Doc.No.l. Plaintiff asserts that in her continuing to loan the Debtor money, she relied on Debtor’s representations of the financial circumstances of the business, as well as the assets pledged as collateral in the promissory note dated March 31, 2010. Plaintiff also claims that the Debtor never intended to repay the Plaintiff and that such representations were also false representations. Plaintiff claims that based on these statements, 11 U.S.C. § 523(a)(2)(A) has been satisfied and that the debt owed to Plaintiff is nondischargeable.
- Discussion -
The Bankruptcy Code is built around the principle of providing a debtor a fresh start free from debts; however, such a fresh start is available only to an “honest, but unfortunate debtor.” Insurance Company of North America v. Cohn (In re Cohn), 54 F.3d 1108, 1113 (3d Cir.1995).
In keeping with the requirement that a debtor be honest, 11 U.S.C. § 523(a)(2)(A) denies dischargeability for debts that are for money obtained by false pretenses, false representations, or actual fraud, other than a statement regarding financial conditions of the debtor.
In order to prevail in a case based on a claim under 11 U.S.C. § 523(a)(2)(A), Justice Sales, as Plaintiff, must prove by a preponderance of the evidence the existence of the following five factors: (1) Debtor made a representation; (2) at the time of the representation, Debt- or knew it to be false;(3) Debtor made the representation with the intent and purpose *773of deceiving Plaintiff;(4) Plaintiff relied upon the false representation; and(5) Plaintiff suffered a loss as a proximate result of the representation. In re Barnette, 281 B.R. 869, 874 (Bankr.W.D.Pa.2002).
In order to prevail on a claim under § 523(2)(A)(2), Debtor must have made a representation. However, the code expressly excludes representations regarding the financial condition of the Debtor. There is question in this case as to whether or not the Debtor made false representations that would satisfy even this first requirement.
The first false representation the Plaintiff asserts is that the Debtor indicated to her that the Business was profitable and would be able to repay her because of its profitability. Such an assertion is based on the financial conditions of the Debtor and as such, is not a false representation for purposes of § 523(a)(2)(A). Even if an argument could be made that this false representation is more than the financial condition, Plaintiff would have to prove the remaining requisite elements.
There is no evidence, and certainly not a preponderance of the evidence as required by the Code, that at the time the Debtor represented that the business was profitable, he knew such representation was false. Debtor admits to continually representing that the business was profitable. However, there is no evidence that he did not believe such statement to be true; if anything, there is evidence that he did believe the condition to be trae. He had paid down a confession of a judgment and could have seen this as a indicator of profitability. Also, the Business was continuing to bid on, get, and complete jobs.
The Plaintiff also has to prove that when making such statement, the Debtor intended to deceive the Plaintiff. Intent to deceive may be established based on the facts and circumstances of an individual case and may be inferred when the facts and circumstances present a picture of deceptive conduct on the part of the Debtor. In re Bruce, 262 B.R. 632, 636(Bankr.W.D.Pa.2001). The facts and circumstances of this case do not show that the Debtor intended to deceive by indicating that the company was profitable. At the time of making the statement, he believed that his company could gain profitability and he also could have seen the company as being profitable, given its ability to pay down the confession of judgment and to continue completing jobs.
The fourth element is also problematic to the plaintiffs case. In order to prevail on this claim, the Plaintiff has to prove that she justifiably relied on false representation of the debtor. Justifiability is different from reasonableness in the sense that it is based on qualities and characteristics of the particular individual who relies on a particular representation. In re Scott, 294 B.R. 620, 629 (Bankr.W.D.Pa.2003). Citing: Field v. Mans, 516 U.S. 59, 68, 116 S.Ct. 437, 442-43, 133 L.Ed.2d 351 (1995). In the case at bench, the Mrs. Justice was not justified in relying on such a representation. She had access to the business’s bank accounts and the officer’s email accounts. She also gained a great deal of information from the controller. Also, Mrs. Justice had twenty plus years of experience in the industry and knew what is required of a company to be profitable. Her requiring the Debtor to sign a promissory note less than a month prior to the Business’ filing bankruptcy also serves as evidence of her knowledge of the Business’ deteriorating state.
The Plaintiff’s other allegations of false representations made by the Debtor also fail to meet the five requirements neces*774sary to prevail on a claim under § 523(a)(2)(A) of the Code.
The Plaintiff claims that the Debtor never intended to repay her and as such, the personal guarantees made by the Debtor, as well as the other representations of intent to repay were false representations for purposes of § 523(a)(2)(A) of the Code.
It is well established that without more, a broken promise to repay will not sustain a cause of action under § 523(a)(2)(A) of the Code. In re Singh, 433 B.R. 139, 163 (Bankr.E.D.Pa.2010). Such inquiry centers on a subjective standard of intent given the totality of the circumstances. Id. In the case at bench, the Plaintiff has failed to sustain its burden of preponderance of the evidence in establishing that the Debtor did not intend to repay her. Plaintiff points to the financial state of the Business and asks the court to infer that Debtor had knowledge of the state of the Business and as such, could not have possibly expected to repay the Plaintiff. However, if anything, the evidence contradicts such alleged intent to deceive. The Debtor signed a promissory note and partially repaid Mrs. Justice. In fact, he repaid the Plaintiff a significant amount of his debt. This included making payments on the credit cards used by Mrs. Justice to borrow money for the Debtor. As such, the Plaintiff failed to meet its burden for showing that this was a false representation fulfilling § 523(a)(2)(A) of the Code. Based on Debtor’s repayment of some of the debt, we find this assertion groundless.
The final false representation asserted by the Plaintiff is focused on the collateral put forth in the promissory note signed by Mrs. Justice and Debtor on March 31, 2010. The Plaintiff asserts that she relied on the Debtor’s representation that the antiques in the farmhouse were owned only by the Debtor, when in fact, the antiques were owned by both the Debtor and his wife.
There are several issues with this allegation. The Plaintiff has not put forth any evidence that the Debtor intended to deceive the Plaintiff by making such assertions or that Mrs. Justice justifiably relied on the assertions to lend. As previously discussed, intent is based on the facts and circumstances of each case. In re Bruce, 262 B.R. at 636. Here, the Debtor is not a lawyer and is not so sophisticated that he would know the consequences of suggesting that the antiques were solely his versus shared between himself and his wife. Also, the context in which the statements were made suggest that he was not intending his statements to be relied upon. The topic of his antiques came up in the context of the Debtor expressing his pride regarding his antiques.
Mrs. Justice did not justifiably rely on such representation. Although it is included in the promissory note, most of the money she had loaned the Debtor occurred before the signing of the promissory note. Also, even if Plaintiff is suggesting that she relied on the mere statements and the existence of the antiques, Mrs. Justice is not justified in relying on such. As was the case with Debtor, it is unlikely that the Mrs. Justice recognized a distinction between personal property owned solely by the Debtor and personal property owned by both the Debtor and his wife.
Because the Plaintiff has failed to prove by a preponderance of the evidence that any of the three alleged false representations made by the Debtor satisfied the requirements of § 523(a)(2)(A) of the Code, we deny the declaration sought by the Plaintiff, Justice Sales, LLC.
An appropriate order will be entered.
*775
ORDER OF THE COURT
AND NOW, this 30th day of January, 2012, for the reasons expressed in the foregoing Memorandum Opinion, we hereby DENY the Plaintiffs request for a declaration of the nondischargeability of the Debtor’s obligations to the Plaintiff.
. Sherry Justice personally loaned the money to Debtor, but the claim was filed by Sherry Justice Sales, LLC.
. Although the parties agreed that after a period of time, Plaintiff was considered a temporary employee, Justice Sales also serviced two other unrelated companies. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488391/ | USCA11 Case: 22-10911 Date Filed: 11/21/2022 Page: 1 of 2
[DO NOT PUBLISH]
In the
United States Court of Appeals
For the Eleventh Circuit
____________________
No. 22-10911
Non-Argument Calendar
____________________
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
versus
ANNETTA GAYNELL OWENS,
a.k.a. Gaynell,
Defendant-Appellant.
____________________
Appeal from the United States District Court
for the Southern District of Alabama
D.C. Docket No. 1:20-cr-00122-TFM-27
USCA11 Case: 22-10911 Date Filed: 11/21/2022 Page: 2 of 2
22-10911 Opinion of the Court 2
____________________
Before ROSENBAUM, JILL PRYOR, and BRASHER, Circuit Judges.
PER CURIAM:
Domingo Soto, appointed counsel for Annetta Gaynell
Owens in this direct criminal appeal, has moved to withdraw from
further representation of the appellant and filed a brief pursuant to
Anders v. California, 386 U.S. 738 (1967). Our independent review
of the entire record reveals that counsel’s assessment of the relative
merit of the appeal is correct. Because independent examination
of the entire record reveals no arguable issues of merit, counsel’s
motion to withdraw is GRANTED, and Owens’s conviction and
sentence are AFFIRMED. | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488396/ | 11/21/2022
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 22-0531
Supreme Court Cause No. DA 22-0531
VICTORY INSURANCE CO.
Plaintiff/Appellant
v. ORDER GRANTING APPELLANT'S
UNOPPOSED RULE 26 (1) MT. R.
OFFICE OF THE MONTANA STATE APP. P. MOTION FOR EXTENSION
AUDITOR, OF TIME TO FILE
OPENING BRIEF
Defendant/Appellee
The Appellant in this matter has moved this Court for an extension of tirne in
which to file its Opening Brief. Finding good cause therefore,
IT IS HEREBY ORDERED that Appellant's Opening Brief in this matter is
now due on or before Friday, December 30, 2022.
Dated this 21st day of Novernber, 2022
C erk of the Supreme Court
1 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488398/ | 11/21/2022
Case Number: DA 21-0086
IN THE SUPREME COURT OF THE STATE OF MONTANA
STATE OF MONTANA, No. DA-21-0086
Plaintiff and Appellee, ORDER GRANTING
SECOND UNOPPOSED
v. MOTION FOR
EXTENTSION OF TIME
LUKE STROMMEN, TO FILE REPLY BRIEF
Defendant and Appellant.
Upon consideration of Appellant’s Unopposed Motion for Extension of
Time to File Reply Brief and good cause appearing, IT IS HEREBY ORDERED
that Appellant’s Reply Brief shall be filed on or before December 30, 2022.
Electronically signed by:
1 Mike McGrath
Chief Justice, Montana Supreme Court
November 21 2022 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488399/ | 11/21/2022
IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
August 2, 2022 Session
FAMILY TRUST SERVICES LLC ET AL. v. GREEN WISE
HOMES LLC ET AL.
Appeal from the Chancery Court for Davidson County
No. 15-0780-BC Anne C. Martin, Chancellor
___________________________________
No. M2021-01350-COA-R3-CV
___________________________________
This appeal involves claims by four plaintiffs against an attorney, his business partner,
and the attorney’s and partner’s limited liability company. The plaintiffs claim that the
defendants fraudulently redeemed properties sold via tax sales, utilizing forged or
fraudulent documents. Following a bifurcated jury trial, the plaintiffs’ claims were
dismissed except for the claim of one plaintiff against the attorney defendant, which
resulted in a verdict for damages in the amount of $53,450. The trial court subsequently
denied a motion for new trial filed by the plaintiffs. The plaintiffs have appealed. Upon
thorough review, we conclude that the trial court’s denial of the plaintiffs’ motion for
new trial should be reversed. However, we affirm the trial court’s pre-trial determination
that judgment on the pleadings was appropriate concerning the plaintiffs’ claims of unjust
enrichment and “theft” of the right of redemption. We further affirm (1) the trial court’s
grant of summary judgment in favor of the defendants concerning the plaintiffs’ claim
based on Tennessee Code Annotated § 66-22-113 and (2) the court’s denial of the
defendant company’s motion to dissolve the lien lis pendens on its property. The
remaining issue raised by the defendants is pretermitted as moot. We remand this matter
to the trial court for a new trial.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
Affirmed in Part, Reversed in Part; Case Remanded
THOMAS R. FRIERSON, II, J., delivered the opinion of the court, in which FRANK G.
CLEMENT, JR., P.J., M.S., and ANDY D. BENNETT, J., joined.
Eugene N. Bulso, Jr., and Paul J. Krog, Brentwood, Tennessee, for the appellants, Glenna
Ponce Davis, Carl Chambers, Debra Irvin, and Dorothy Booher.
Henry E. Hildebrand, IV, and Denis G. Waldron, Nashville, Tennessee, for the appellees,
Green Wise Homes LLC, Charles E. Walker, and Jon Paul Johnson.
OPINION
I. Factual and Procedural Background
On June 30, 2015, Family Trust Services, LLC, and Billy Gregory filed a class
action complaint in the Davidson County Chancery Court (“trial court”), naming REO
Holdings, LLC; Charles E. Walker; Jon Paul Johnson; Julie Coone; and Merdan Ibrahim
as defendants. The plaintiffs alleged that the defendants were liable for damages and
other relief based on claims of fraud, conspiracy, racketeering, and violations of various
statutes for allegedly operating a criminal enterprise in connection with real property tax
sales over a period of at least five years. The plaintiffs described this alleged fraudulent
activity as follows:
The Defendants’ general modus operandi consists first of
identifying, from among properties that have been sold in satisfaction of
unpaid real property taxes, properties with absentee owners or owners
otherwise unlikely to investigate or assert their interests. Then, if
necessary, the Defendants create false instruments, such as affidavits of
heirship, that identify certain persons as having interests in the real property
in question; the Defendants append forged signatures and notary
acknowledgements to these documents. The Defendants then create false
deeds, again appending forged signatures and notary acknowledgements.
On the basis of these instruments and the pretended title they convey, the
Defendants commence redemption processes on the respective properties.
In many instances, the Defendants obtain decrees of redemption purporting
to vest title to the redeemed properties in them as a result of this course of
conduct.
In the course of this process, the Defendants electronically or
photostatically copy the signatures and stamps of various notaries public—
from Tennessee and other States throughout the Union—from previously
recorded instruments and then append these images to the false documents
they create to support their redemption claims.
(Paragraph numbering omitted.)
The plaintiffs specifically identified at least eight separate tracts of real property in
various Tennessee counties that they alleged had been fraudulently redeemed by the
defendants following the properties’ respective tax sales. According to the plaintiffs,
they sought to bring their action on behalf of themselves and any person who owned an
-2-
interest in real property that had been fraudulently redeemed from a tax sale by the
defendants and all persons who had purchased property at a tax sale that was
subsequently fraudulently redeemed by the defendants. The plaintiffs claimed that the
requirements of Tennessee Rule of Civil Procedure 23 were met, including that the
plaintiffs were adequate representatives of the class. In support of their claims, the
plaintiffs attached copies of the purportedly fraudulent documents. The plaintiffs also
sought a temporary injunction preventing the defendants from, inter alia, recording any
property transfer documents in Tennessee. The trial court issued a temporary injunction
to this effect on July 27, 2015.
On August 21, 2015, the defendants, REO Holdings, LLC (“REO”); Charles E.
Walker; Jon Paul Johnson; Julie Coone; and Merdan Ibrahim, along with Nationwide
Investments, LLC (“Nationwide”), filed a motion to dismiss pursuant to Tennessee Rules
of Civil Procedure 9.02 and 12.02(6). These defendants asserted that the plaintiffs lacked
standing and that their complaint failed to state a claim upon which relief could be
granted.
On October 19, 2015, the plaintiffs, Family Trust Services, LLC; Steven Reigle;
Regal Homes Co.; Billy Gregory; and John Sherrod, filed a second amended class action
complaint against the defendants, wherein they identified eleven separate tracts of real
property that they alleged had been fraudulently redeemed by the defendants. The
plaintiffs initiated claims of fraud, slander of title, trespass, ejectment, and civil
conspiracy, as well as violations of various statutes, including the Racketeer Influenced
and Corrupt Organizations Act (“RICO”), Tennessee Consumer Protection Act
(“TCPA”), Tennessee Code Annotated § 66-22-113 (concerning liability of a clerk or
officer of the court), and Tennessee Code Annotated § 30-2-712 (concerning affidavits of
heirship). The plaintiffs attached several documents in support of their claims.
The defendants filed a supplement to their motion to dismiss, arguing that all
claims, except the slander of title and RICO claims by Steven Reigle and the claims of
John Sherrod, should be dismissed for lack of standing or for failure to state a claim upon
which relief could be granted. Following a grant of permission by the trial court, the
plaintiffs filed a third amended class action complaint on November 6, 2015, adding
claims of unfair competition, unjust enrichment, intentional interference with business
relations, malicious prosecution, and theft of the right of redemption. The plaintiffs also
filed a motion seeking to attach certain properties owned by Mr. Walker pending trial.
On January 25, 2016, the defendants filed an additional motion seeking to dismiss
certain claims asserted by the plaintiffs in their third amended complaint. The plaintiffs
filed a response opposing the defendants’ motion. On February 29, 2016, the trial court
entered a memorandum and order granting the plaintiffs’ motion for prejudgment
attachment of Mr. Walker’s properties. In doing so, the court found that the plaintiffs had
demonstrated the essential elements for acquiring such relief found in Tennessee Code
-3-
Annotated § 29-6-101. Mr. Walker and REO subsequently filed federal bankruptcy
actions pursuant to Chapter 11 of the United States Bankruptcy Code. The defendants
also filed an amended motion to dismiss.
On March 14, 2016, the trial court entered an order staying the claims against Mr.
Walker and REO due to the pending bankruptcy proceedings. The other defendants were
ordered to file answers to the third amended complaint by April 8, 2016. On April 7,
2016, the trial court entered an order directing the plaintiffs’ counsel to prosecute the
charge of criminal contempt against Mr. Walker. Thereafter, the non-bankruptcy
defendants filed answers to the plaintiffs’ claims, and REO filed notice that the action
was being removed to the federal bankruptcy court. Because of the removal, on May 17,
2016, the trial court stayed all proceedings in this action.
On January 11, 2018, the plaintiffs filed a motion seeking to dissolve the stay.
The plaintiffs reported that while the action was pending in bankruptcy court, they had
settled their claims against Mr. Walker, Mr. Johnson, and REO. The plaintiffs stated that
their remaining claims had been severed and remanded to the trial court, and they
attached an order from the federal bankruptcy court evincing such. Therefore, on
February 7, 2018, the trial court entered an order dissolving the stay and reopening the
matter for proceedings concerning the remaining claims and defendants, who were
determined to be Julie Coone, Nationwide, and Merdan Ibrahim.
On March 29, 2018, the plaintiffs filed a fourth amended class action complaint.
Nationwide subsequently filed a motion to dismiss while Ms. Coone and Mr. Ibrahim
filed a joint motion to dismiss. The trial court entered an order denying the respective
motions to dismiss on July 6, 2018.
On August 31, 2018, the plaintiffs filed a motion seeking to add Carl Chambers as
a party plaintiff and to add Charles E. Walker and Jon Paul Johnson as defendants. The
plaintiffs alleged that Mr. Chambers was the grandson and lawful heir of a real property
owner whose land was fraudulently obtained by Mr. Walker and REO. The plaintiffs
attached a revised fourth amended class action complaint, naming Family Trust Services,
LLC; Steven Reigle; Regal Homes Co.; Billy Gregory; John Sherrod; and Carl Chambers
as plaintiffs and Charles E. Walker, Jon Paul Johnson, Julie Coone, Nationwide
Investments LLC, and Merdan Ibrahim as defendants. Mr. Walker subsequently removed
the action to the federal bankruptcy court; however, the federal court remanded the action
to the trial court on April 1, 2019.
On April 17, 2019, the plaintiffs filed a motion seeking the trial court’s permission
to file a fourth amended and restated complaint and asking the court to attach Mr.
Walker’s real property and to lift the stay imposed concerning enforcement of Mr.
Walker’s criminal contempt sentence. The plaintiffs alleged that in September 2018, Mr.
Walker and Mr. Johnson had formed a new limited liability company in Delaware named
-4-
Green Wise Homes, LLC (“Green Wise”) and that Mr. Walker had transferred fourteen
parcels of real property in Davidson County, Tennessee, to Green Wise. Mr. Johnson had
likewise transferred two Davidson County parcels of real property to Green Wise.
Plaintiffs thus sought to add Green Wise as a party defendant.
On May 1, 2019, at 9:30 a.m., the trial court entered an order reopening the matter,
stating that a hearing was scheduled for that afternoon concerning the plaintiffs’ motion.
However, approximately thirty minutes later, Mr. Walker filed another notice of removal
to the federal bankruptcy court. On July 2, 2019, the federal court again remanded the
action to the trial court. The plaintiffs subsequently filed a motion in the trial court to
reopen the matter, which Mr. Walker opposed. Mr. Walker averred that the bankruptcy
court had entered a discharge order with respect to his debts on February 20, 2019,
including any debt owed to Mr. Chambers. Mr. Walker further argued that the plaintiffs
had agreed to dismiss their claims against Mr. Walker with prejudice in the bankruptcy
action. On July 31, 2019, the trial court entered an order reopening the case and granting
the plaintiffs permission to file their revised fourth amended complaint. The court also
granted permission for Green Wise and Mr. Chambers to be added as parties to the
action.
On August 1, 2019, the plaintiffs filed a “Fourth Amended and Restated Class
Action Complaint” (“Fourth Amended Complaint”) against Green Wise, Mr. Walker, Mr.
Johnson, Ms. Coone, Nationwide, and Mr. Ibrahim, again averring claims of fraud,
defamation of title, liability pursuant to Tennessee Code Annotated § 66-22-113, unfair
competition, unjust enrichment, intentional interference with business relations,
malicious prosecution, theft of the right of redemption, theft and trespass on real
property, civil conspiracy, and fraudulent transfer of assets. The plaintiffs attached
voluminous documents purportedly demonstrating the forgeries and fraud committed by
the defendants. Following the filing of answers by some of the defendants, the plaintiffs
filed a motion seeking certification of the class, defined as:
(a) all persons who owned an interest in real property defendants
fraudulently redeemed from a tax sale, (b) all persons who purchased at tax
sale real property defendants subsequently fraudulently redeemed, or
attempted to be redeemed, and (c) all persons who have participated in the
market for tax-sale properties in competition with the defendants during the
course of the fraudulent enterprise described herein.
On September 30, 2019, Debra A. Irvin sought to intervene as a named plaintiff in
the action. Ms. Irvin alleged that she had been defrauded by the defendants and, as a
result, had lost over $70,000 in excess proceeds at the tax sale of her real property. Ms.
Irvin filed an intervening complaint, wherein she specifically claimed that Ms. Coone,
Mr. Walker, and Mr. Johnson had executed forged or fraudulent documents in their
scheme to defraud her. On November 7, 2019, the trial court entered an order permitting
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Ms. Irvin to intervene. On November 12, 2019, Chancellor Ellen Hobbs Lyle recused
herself from presiding in this matter and requested the Chief Justice of the Tennessee
Supreme Court to reassign the case to another judge. Chief Justice Bivens subsequently
assigned the case to Chancellor Anne C. Martin.
Following the filing of answers to the intervening complaint by certain defendants,
the trial court entered an order on January 17, 2020, by which the court scheduled the
motion for class certification for further hearing and denied the plaintiffs’ motion for
prejudgment attachment of properties. Mr. Walker, Mr. Johnson, and Green Wise
subsequently filed a motion for judgment on the pleadings, propounding that the
plaintiffs could not demonstrate causation.
On April 22, 2020, the trial court entered an order concerning the various pending
motions. With regard to the motions to dismiss filed by certain defendants, the trial court
dismissed the plaintiffs’ claims of unjust enrichment and theft. The trial court also noted
that James Brett had been added as a party defendant in the intervening complaint, and
the court found that it maintained jurisdiction over Mr. Brett such that the claims against
him could proceed.
With reference to class certification, the trial court determined that the plaintiffs
had failed to meet the numerosity requirement of Tennessee Rule of Civil Procedure 23.
The court further found that Ms. Irvin’s claims were not similar to the claims of other
putative class members. The court therefore denied class certification, concluding that
joinder was an “appropriate and feasible mechanism.”
On May 29, 2020, the plaintiffs filed a motion, pursuant to Tennessee Rule of
Civil Procedure 19, to join Dorothy Booher and Glenna Davis Ponce as party plaintiffs.
The trial court granted joinder of these parties on June 17, 2020. Pursuant to the court’s
direction, the plaintiffs filed an amended and consolidated complaint on July 10, 2020,
adding the claims of Ms. Irvin, Ms. Booher, and Ms. Ponce and omitting the claims that
had been previously dismissed.
On October 9, 2020, Mr. Walker, Mr. Johnson, and Green Wise (collectively,
“Defendants”)1 requested that the trial court allow voluntary rescission of the transfers of
certain real properties from Mr. Walker and Mr. Johnson to Green Wise. They also
sought dissolution of liens lis pendens filed by certain plaintiffs on those properties. On
October 29, 2020, the trial court entered an order denying these motions.
Defendants subsequently filed motions for summary judgment concerning the
claims of Ms. Booher, Ms. Ponce, Ms. Irvin, and Mr. Chambers. Nationwide also filed a
motion for summary judgment. The plaintiffs filed responses in opposition to these
1
The remaining defendants are not parties to this appeal.
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motions. Numerous documents were filed by the parties concerning the summary
judgment motions.
On August 2, 2021, the trial court entered an order granting a motion filed by
Defendants to bifurcate the trial as to claims asserted against them by Mr. Chambers, Ms.
Irvin, Ms. Booher, and Ms. Davis (collectively, “Plaintiffs”).2 On August 6, 2021, the
court entered an order concerning the pending summary judgment motions. The court
granted summary judgment in favor of Defendants with respect to Mr. Chambers’s claim
of trespass. The court also granted summary judgment in favor of Defendants with
respect to Plaintiffs’ claims respecting violation of Tennessee Code Annotated § 66-22-
113, the statute that establishes liability for a notary public. Otherwise, the court denied
the summary judgment motions.
On August 10, 2021, Defendants filed a motion pursuant to Tennessee Rules of
Civil Procedure 54.02 and 59.04, requesting that the trial court revise its ruling denying
summary judgment concerning the claims of defamation of title asserted by Mr.
Chambers, Ms. Booher, and Ms. Ponce. Defendants asserted that a plaintiff did not have
standing to assert a claim of defamation of title when the plaintiff possessed no interest in
the property. The court subsequently entered an order denying the motion, determining
that these plaintiffs possessed intangible redemption interests.
Following a jury trial conducted on September 13-20, 2021, the trial court entered
an order on September 21, 2021, in accordance with the jury verdict forms, finding Mr.
Walker liable to Ms. Irvin for damages in the amount of $53,450. All other claims
against Defendants were dismissed with prejudice.
On September 27, 2021, Plaintiffs filed a motion for new trial, pursuant to
Tennessee Rule of Civil Procedure 59, respecting their claims of fraud, defamation of
title, and civil conspiracy. Ms. Irvin also sought a new trial as to her claims for punitive
damages. Plaintiffs argued that the evidence presented at trial preponderated against the
jury’s verdict. The trial court entered an order on October 21, 2021, determining that
Plaintiffs had not presented a sufficient basis for the trial court to vacate the jury verdict.
The court stated: “No error has been identified and, the Court finds, a reasonable jury
could have and did reach a result of no liability on the claims at issue.” The court
accordingly denied the motion for new trial.
Plaintiffs thereafter sought certification from the trial court pursuant to Tennessee
Rule of Civil Procedure 54.02. The trial court entered an agreed order on November 10,
2021, certifying the court’s September 21, 2021 order as final. Plaintiffs timely appealed.
2
Although this order does not appear in the appellate record, the trial court’s subsequent August 19, 2021
order setting the dates for trial and pre-trial conference refers to the order granting bifurcation.
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II. Issues Presented
Plaintiffs present the following issues for this Court’s review, which we have
restated slightly:
1. Whether the trial court erred by failing to properly perform its duties
as thirteenth juror, thereby requiring a new trial.
2. Whether the trial court erred by dismissing Plaintiffs’ claims of
unjust enrichment.
3. Whether the trial court erred by failing to recognize a common law
claim for intentional interference with the right of redemption.
4. Whether the trial court erred by granting summary judgment in favor
of Defendants concerning claims against Mr. Johnson, pursuant to
Tennessee Code Annotated § 66-22-113, when Mr. Johnson
allegedly notarized certifications used to falsely attest that forged
instruments were genuine.
Defendants have raised the following additional issues, which we have also restated
slightly:
5. Whether the jury’s verdict in favor of Ms. Irvin lacked material
evidence to support it.
6. Whether the trial court erred by denying Green Wise’s motion to
dissolve the lien lis pendens recorded against its real property by Mr.
Chambers.
III. Standard of Review
As our Supreme Court has elucidated with regard to review of a jury’s verdict:
Where a party invokes the right to a jury trial, our constitution
requires “that the jury be allowed to determine all disputed issues of fact.”
Spence v. Allstate Ins. Co., 883 S.W.2d 586, 594 (Tenn. 1994). The
questions of disputed fact to be resolved by the jury include the type and
amount of any damages awarded to the plaintiff.
However, “a verdict of a jury is subject to the supervision of the trial
court.” Foster v. Amcon Int’l, Inc., 621 S.W.2d 142, 144 (Tenn. 1981).
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“No verdict is valid until it is approved by the trial court judge.” Davidson
v. Lindsey, 104 S.W.3d 483, 488 (Tenn. 2003) (citing Cumberland Tel. &
Tel. Co. v. Smithwick, 112 Tenn. 463, 79 S.W. 803, 805 (1904)). In
determining whether to approve the jury’s verdict, the trial judge acts as a
“thirteenth juror”:
“The reasons given for the rule are, in substance, that the
circuit judge hears the testimony, just as the jury does, sees
the witnesses, and observes their demeanor upon the witness
stand; that, by his training and experience in the weighing of
testimony, and the application of legal rules thereto, he is
especially qualified for the correction of any errors into which
the jury by inexperience may have fallen, whereby they have
failed, in their verdict, to reach the justice and right of the
case, under the testimony and the charge of the court; that, in
our system, this is one of the functions the circuit judge
possesses and should exercise—as it were, that of a thirteenth
juror. So it is said that he must be satisfied, as well as the
jury; that it is his duty to weigh the evidence; and, if he is
dissatisfied with the verdict of the jury, he should set it
aside.”
Davidson, 104 S.W.3d at 488 (quoting Smithwick, 79 S.W. at 804). “The
purpose of the thirteenth juror rule is to be a ‘safeguard . . . against a
miscarriage of justice by the jury.’” State v. Moats, 906 S.W.2d 431, 434
(Tenn. 1995) (quoting State v. Johnson, 692 S.W.2d 412, 415 (Tenn. 1985)
(Drowota, J., dissenting)).
The trial judge must be independently satisfied with the verdict; if
the trial judge is dissatisfied with the verdict, the verdict must be set aside.
Holden v. Rannick, 682 S.W.2d 903, 905 (Tenn. 1984). In addressing a
motion for a new trial, the trial court has such broad discretion that it is not
bound to give reasons for its action in granting or denying a new trial based
on the preponderance of the evidence. James E. Strates Shows, Inc. v.
Jakobik, 554 S.W.2d 613, 615 (Tenn. 1977). Indeed, when a trial judge
approves the verdict without comment, the appellate court will presume
that the trial judge has adequately performed his function as the thirteenth
juror. Holden, 682 S.W.2d at 905 (citing Cent. Truckaway Sys. v. Waltner,
36 Tenn. App. 202, 253 S.W.2d 985, 991 (1952)).
Borne v. Celadon Trucking Servs., Inc., 532 S.W.3d 274, 308 (Tenn. 2017) (other internal
citations omitted). However, if the trial court judge states the reasoning for her decision,
“this court looks to [the stated reasons] only for the purpose of determining whether [the
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judge] passed upon the issues, and was satisfied or dissatisfied with the verdict thereon.”
Holden v. Rannick, 682 S.W.2d 903, 905 (Tenn. 1984) (quoting Cumberland Tel. & Tel.
Co. v. Smithwick, 79 S.W. 803, 805 (Tenn. 1904)). “If a trial judge, in discharging his
duty as a thirteenth juror, makes comments which indicate that he has misconceived his
duty as a thirteenth juror, an appellate court must reverse the trial judge and remand for a
new trial.” See Holden, 682 S.W.2d at 905.
With reference to a trial court’s grant of judgment on the pleadings, this Court has
previously explained:
A motion for judgment on the pleadings is provided for by Rule 12.03 of
the Tennessee Rules of Civil Procedure. In pertinent part, that Rule
provides that “[a]fter the pleadings are closed but within such time as not to
delay the trial, any party may move for judgment on the pleadings.” Tenn.
R. Civ. P. 12.03. . . . In reviewing the trial court’s ruling on a motion for
judgment on the pleadings, “we must accept as true ‘all well-pleaded facts
and all reasonable inferences drawn therefrom’ alleged by the party
opposing the motion.” Cherokee Country Club, Inc. v. City of Knoxville,
152 S.W.3d 466, 470 (Tenn. 2004) (quoting McClenahan v. Cooley, 806
S.W.2d 767, 769 (Tenn. 1991)). Importantly, conclusions of law are not
admitted. Id. (citation omitted). A motion for judgment on the pleadings
should not be granted “unless the moving party is clearly entitled to
judgment.” McClenahan v. Cooley, 806 S.W.2d 767, 769 (Tenn. 1991)
(citation omitted). Because the trial court’s determination on a Rule 12.03
motion is a question of law, we review the trial court’s actions de novo,
with no presumption of correctness. See Bowden v. Ward, 27 S.W.3d 913,
916 (Tenn. 2000).
Ave. Bank v. Guarantee Ins. Co., No. M2014-02061-COA-R3-CV, 2015 WL 5838309, at
*4 (Tenn. Ct. App. Oct. 6, 2015).
IV. Chancellor as Thirteenth Juror
Plaintiffs assert that the chancellor erred by failing to properly perform her duties
as thirteenth juror. As our Supreme Court elucidated nearly forty years ago:
The duty of a trial judge to act as a thirteenth juror in a civil trial in
Tennessee is well established. The rule was described in Cumberland
Telephone & Telegraph Co. v. Smithwick as follows:
“[T]his is one of the functions the circuit judge possesses and
should exercise—as it were, that of a thirteenth juror. So it is
said that he must be satisfied, as well as the jury; that it is his
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duty to weigh the evidence; and, if he is dissatisfied with the
verdict of the jury, he should set it aside.”
112 Tenn. 463, 469, 79 S.W. 803, 804 (1904).
Where a trial judge has simply approved the verdict without
comment, an appellate court will presume that he has adequately performed
his function as a thirteenth juror. Central Truckaway System v. Waltner, 36
Tenn. App. 202, 217, 253 S.W.2d 985, 991 (1952). If reasons are given,
“this court looks to them only for the purpose of determining whether he
passed upon the issues, and was satisfied or dissatisfied with the verdict
thereon.” Smithwick, supra, 112 Tenn. at 470, 79 S.W. at 805. If a trial
judge, in discharging his duty as a thirteenth juror, makes comments which
indicate that he has misconceived his duty as a thirteenth juror, an appellate
court must reverse the trial judge and remand for a new trial. See Nashville,
C. & St. L.R. Co. v. Neely, 102 Tenn. 700, 52 S.W. 167 (1899).
Holden, 682 S.W.2d at 904-05.
In Holden, our Supreme Court concluded that this Court had correctly reversed the
trial court’s denial of the plaintiff’s motion for new trial and remanded the matter for a
new trial. Id. In doing so, the High Court reviewed the trial court’s comments, made
during the hearing on the motion, to the effect that the trial court “doesn’t substitute its
judgment for that of the jury” and “would just as readily have agreed with the verdict the
other way.” Id. at 905. By reason of these comments, the Supreme Court stated:
The comments of the trial judge, considered as a whole, indicate that
he misconceived his duty as a thirteenth juror. Although the trial judge said
that he agreed with the verdict for the defendant, he indicated that he would
also have agreed with a verdict for the plaintiff. That position is
inconsistent with his duty to weigh the evidence and pass on the issues. If a
trial judge properly weighs the evidence and passes on the issues, he will
not find that the evidence does not preponderate in favor of the plaintiff
because the verdict is for the defendant, but would preponderate in favor of
the plaintiff if the verdict had been for the plaintiff.
The trial judge stated that he expressly approved the verdict. It
appears from the context of that statement, however, that he approved the
verdict because he felt that the case was fairly presented and he was not
shocked by the verdict, rather than because he reached the same verdict as
the jury after independently weighing the evidence and passing upon the
issues. Twice the trial judge stated that the court does not substitute its
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judgment for that of the jury. Those statements reveal a mistaken belief on
his part that he was under no duty to pass upon the issues.
Because the trial judge stopped short of making an independent
decision on the issues presented by the case, and deferred to the judgment
of the jury, he failed to perform his duty as a thirteenth juror. The Court of
Appeals correctly reversed his decision and remanded the case for a new
trial.
Holden, 682 S.W.2d at 905-06.
Tennessee appellate courts often have been tasked with analyzing a trial court’s
comments surrounding the denial of a motion for new trial to discern whether the judge
has “misconceived” her duty as thirteenth juror. For example, in Sherlin v. Roberson,
551 S.W.2d 700, 700-01 (Tenn. Ct. App. 1976), this Court reviewed the trial court
judge’s comments announced during the hearing concerning the plaintiff’s motion for
new trial, including:
I can’t say the jury reached the wrong verdict. I can’t say that they reached
the right verdict. Before I would as a thirteenth juror, before I would set
the verdict aside, it would have had to have been a verdict that I couldn’t
have lived with, and that was not the case in this case. I thought it was a
case that could have gone either way, very much so. Most cases are not as
close as the questions as in this case that appeared at the time of the trial,
and I can’t say that I can’t agree with what the jury did.
This Court determined that the above-quoted remarks “make it appear [the judge]
disassociated himself from the deliberative process which is the peculiar and exclusive
province of the jury of which the presiding judge is as much a member as jurors sitting in
the jury box.” Id. at 701. The Sherlin Court continued,
To say, as the trial judge did in this case, that before the trial judge,
acting as the thirteenth juror, should set aside a verdict it would have to be a
verdict that he could not live with would be to adopt a standard relieving
the judge of the duty to take an unbiased and dispassionate view of the
evidence, weigh it and determine whether the evidence preponderates in
favor of the plaintiff or defendant or is equally balanced.
If the trial judge abdicates this important duty justice could often
miscarry. On appeal the evidence cannot be weighed as in the trial court.
As has been said so often, a verdict in a civil case approved by the trial
judge cannot be overturned if there is any credible material evidence to
support it. In view of the finality of his determination of the weight of the
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evidence as the thirteenth juror, it will not do to weaken the rule by
implying approval by the trial judge from countervailing and irreconcilable
remarks. To do so would be to strike at the very foundation of our judicial
system as it pertains to jury trials.
Id.
The above-quoted language from Sherlin was later cited with approval by our
Supreme Court in James E. Strates Shows, Inc. v. Jakobik, 554 S.W.2d 613, 615-16
(Tenn. 1977), wherein the High Court was asked to review a trial court’s remarks
concerning its decisions to initially grant and subsequently reconsider its earlier ruling
and deny the plaintiff’s motion for new trial. The trial court originally granted the
plaintiff a new trial, expressing its disagreement, as thirteenth juror, with the jury’s
verdict. Id. at 614. Following the defendants’ filing of a motion to reconsider, the trial
court heard oral arguments, subsequently granted the motion to reconsider, reversed its
earlier ruling on the motion for new trial, and reinstated the jury’s verdict. Id. In its
written order, the trial court stated:
[T]he Court is of the opinion that its dissatisfaction with the jury’s verdict
in favor of the defendants was actually a dissatisfaction with the proof as
presented by the plaintiff. The Court is of the opinion that there was
evidence to support the verdict of the jury in its finding for the defendants
and the Court cannot say that the verdict was unreasonable in light of the
evidence presented by both sides in this case.
Id. at 615.
This Court reversed the trial court’s decision in Jakobik, and the Supreme Court
agreed with that reversal. Id. at 616. The High Court observed that “the trial judge
affirmatively predicated his ruling upon a finding that there was some evidence to
support the verdict” and that “the verdict was not unreasonable.” Id. As the Court noted,
“[t]he clear implication from his remarks is that he did not weigh the evidence and
determine whether it preponderated in favor of the plaintiff or defendants or was equally
balanced, but merely determined that there was some evidence to support the verdict.”
As a result, the High Court remanded the matter for a new trial. Id.
Similarly, in the case of Miller v. Doe, 873 S.W.2d 346, 349 (Tenn. Ct. App.
1993), the trial court judge denied the defendant’s motion for new trial, stating during the
motion hearing that he was “not inclined to interfere with the verdict of the jury.” The
judge further posed the rhetorical question, “what makes the judge any smarter than the
jury in this case?” The Miller Court compared these comments to previous cases wherein
an appellate court had reversed a trial court’s denial of a motion for new trial because the
judge had commented that he or she “rarely invade[d] the province of the jury” or did not
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“feel that he ha[d] a right to interfere with the verdict of the jury.” Id. at 349 (citing
Nashville, C. & St. L.R. Co. v. Neely, 52 S.W. 167, 168 (Tenn. 1899); McLaughlin v.
Broyles, 255 S.W.2d 1020, 1022 (Tenn. Ct. App. 1952)). This Court reasoned that the
comments articulated by the trial court in Miller demonstrated similar deference to the
jury rather than indicating that the trial court had “independently weighed the evidence,
had passed on the issues presented to the jury, and reached the same verdict as the jury
did.” Id. at 349. The Miller Court in turn reversed the trial court’s decision and
remanded the matter for a new trial. Id.3
Finally, in Michelsen v. Stanley, 893 S.W.2d 941, 945 (Tenn. Ct. App. 1993), the
trial court commented during the hearing on the plaintiff’s motion for new trial that the
“Court is not the judge of the credibility of the witnesses” and that “there was sufficient
evidence in the cause to justify the verdict of the jury.” The trial court further stated that
the “credibility of a witness is peculiarly within the province of the jury” and that the jury
“determine[s] the weight, credit, and value to be given to the testimony.” Id. at 944. The
Michelsen Court disagreed, elucidating:
As thirteenth juror, the trial judge’s duty is to approve or disapprove of the
jury’s verdict based on his or her independent evaluation of the evidence.
This evaluation includes weighing the evidence. The credibility of a
witness’s testimony affects the weight attributable to that testimony. The
trial judge cannot make an independent evaluation of the evidence without
assessing the credibility of witnesses. Therefore, when the trial judge is
acting as thirteenth juror, assessing the credibility of witnesses is one of his
functions.
While the role of a trial judge in a jury trial is obviously important to
the successful conclusion of the trial, his role is more strategically
significant in disposing of a motion for a new trial following an
unsatisfactory jury verdict. He has certain responsibilities that he must
carry out. The proper disposition of a motion for a new trial by the court is
essential in order to afford the litigants appellate review.
Id. at 945. The Michelsen Court accordingly reversed the trial court’s judgment and
remanded the case for a new trial. Id.
3
The Miller Court also provided the following guidance, which warrants reiterating here:
[W]e strongly suggest that when a trial judge overrules a motion for new trial, that he
simply state that he has reviewed the evidence relevant to the issues and approves the
verdict. Anything more unnecessarily runs the risk of an unwanted new trial.
873 S.W.2d at 349.
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In other appeals, this Court has reviewed the trial court’s comments and
determined that the judge properly performed his or her duty as thirteenth juror. See In re
Estate of Link, 542 S.W.3d 438, 467-68 (Tenn. Ct. App. 2017) (declining to remand for a
new trial when the trial court judge expressed satisfaction with the jury’s verdict and
found sufficient material evidence to support it); Washington v. 822 Corp., 43 S.W.3d
491, 494-95 (Tenn. Ct. App. 2000) (same); Shivers v. Ramsey, 937 S.W.2d 945, 947
(Tenn. Ct. App. 1996) (declining to remand for a new trial because the trial court
“repeatedly stated that his duty was to weigh the evidence and to determine if it
preponderated against the verdict.”); Wells Fargo Bank, N.A. v. Lockett, No. E2018-
00129-COA-R3-CV, 2019 WL 417998, at *4 (Tenn. Ct. App. Feb. 4, 2019) (declining to
remand for a new trial because the judge stated that sufficient evidence supported the
jury’s verdict); Deatheridge v. Barksdale, No. M2003-00032-COA-R3-CV, 2003 WL
22999431, at *5 (Tenn. Ct. App. Dec. 23, 2003) (determining that a new trial was not
warranted inasmuch as the trial court had made “no comments that could be construed as
an inappropriate deferral to the jury’s verdict or an unwillingness to invade the province
of the jury.”).
With these precedents in mind, we now review the chancellor’s comments
expressed during the motion hearing. Following Plaintiffs’ filing of a motion for new
trial, the trial court entertained oral argument from the parties’ attorneys. During that
hearing, the trial court engaged in the following exchange with Plaintiffs’ counsel:
COUNSEL: I think we have a case where Mr. Walker and Mr.
Johnson are clearly committing perjury with regard to
this Kevin Watts, Jose Lorenzo, and certificate of
authenticity nonsense that they put in front of the jury.
And [] then we have Mr. Walker adding to that when
he was committing perjury regarding his suspension
from the Board of Professional Responsibility.
So from our perspective, Your Honor, how can a Court
be satisfied with a verdict that was obtained, in part,
with perjured testimony? We submit it can’t.
THE COURT: Well, the first that I ever heard of Mr. Watts and Mr.
Lorenzo was at trial. I don’t remember that ever
coming up in all the dispositive motions. And I wasn’t
exactly sure where all that was going. And I know you
cross-examined on those issues and about the lack of
ability to provide contact information. But, you know,
I don’t know that a jury would have but one
conclusion that they didn’t exist.
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And it’s hard sometimes, too, for the Court because, of
course, I’ve heard so much leading up, and you
develop impressions and so forth. But the jury is
hearing, you know—my job as the 13th juror is only to
combine my knowledge to what I heard at trial.
And, you know, I don’t know what the conclusion
would be about those two. It certainly seems suspect,
but I don’t know that I could say any reasonable juror
would have to assume those two gentlemen don’t exist.
I don’t know. But I understand that’s the plaintiffs’
position, that that was a shammed up –
COUNSEL: Sure.
THE COURT: —story to explain the notary issues.
COUNSEL: But, I mean, I think that doesn’t completely state what
the question should be, Your Honor. The question is
not whether a reasonable jury would have found that to
be perjurious. The question this morning is, does Your
Honor believe Mr. Johnson and Mr. Walker’s story
that certain of these forged instruments were obtained
by the deceased Kevin Watts and the fictitious Jose
Lorenzo? That’s a question for this Court. That’s a
live question this morning.
And we submit that when the Court weighs the
evidence independently, just based on what the Court
saw at trial, it’s clear[] they were both committing
perjury.
And, certainly, Your Honor, with regard to Mr.
Walker’s testimony that he had the originals of all
these documents and that somehow they were just lost
or handed back to these fictitious persons, that also is
perjurious.
So we had a trial that was infected at numerous stages
with perjured testimony. And it’s for the Court to
make that decision, not to just ask whether a
reasonable jury would have believed it or not. This
Court is obviously a very reasonable court. And the
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Court’s obligation under the 13th juror rule, and Rule
59.06 and 59.07, is to weigh this evidence and decide
whether the Court believes that these gentlemen
committed perjury. And if the Court determines that,
yes, they did, how can the Court be satisfied with the
result, with a verdict that is based on that kind of
perjured testimony? That’s why we raised that issue in
the memorandum.
THE COURT: Because from an evidentiary standpoint—and you all
will recall very well, we—you know, I took a break
and looked at it and looked at the sort of prior bad acts
and how to put it [] on. And I feel like the evidentiary
ruling was right, and it—and it puts—it creates a
situation where the question can be asked but the
documents can’t be put in. And the assumption is that
people are going to tell the truth under oath. And
that’s why it sort of works.
And in this case when Mr. Walker answered the way
he did, that’s why I had the side bar because I was not
confident he was answering—he was answering
truthfully.
But, so your position is the fact that he did that—and
your argument is on more than one occasion that that
in and of itself—or that cumulatively, I guess, should
invalidate the jury verdict?
COUNSEL: In our argument, it should cause the Court to be
dissatisfied with the jury verdict. Because if this Court
makes a decision that Walker and Johnson
intentionally testified falsely, how could it be satisfied
with a verdict based on that false testimony?
We submit that it’s not possible for a court to be
satisfied with a verdict that was procured through
perjured testimony.
Upon the conclusion of the hearing, the trial court took the matter under
advisement, declaring that a written order would be forthcoming. On October 21, 2021,
the trial court entered an order concerning the motion for new trial, stating in pertinent
part:
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Plaintiffs base their motion on their assertion that the evidence presented at
trial preponderates and overwhelmingly weighs against the jury verdict.
For relief, Plaintiffs ask the Court to act as a Thirteenth Juror and, based
upon perjury committed by Defendant Charles Walker, vacate the
judgment.
In response, Defendants object to the motion and assert that
Plaintiffs were likely unsuccessful because of a defect in their case
Defendants have highlighted throughout the case—that they did not suffer
damages. Further, that Plaintiffs have identified no error or other basis for
their request other than a general dissatisfaction with the verdict.
The Court does not find that Plaintiffs have presented a sufficient
basis for it to vacate the jury verdict. No error has been identified and, the
Court finds, a reasonable jury could have and did reach a result of no
liability on the claims at issue.
IT IS THEREFORE ORDERED, ADJUDGED and DECREED that
Plaintiffs’ motion for a new trial is DENIED.
Considering the trial court’s comments articulated during the motion hearing along
with the statements included in its written order denying Plaintiffs’ motion for new trial
in light of the above-referenced authorities, we conclude that the trial court improperly
deferred to the judgment of the jury concerning the credibility of witnesses and the
weight to be afforded to the evidence presented. After questioning the truthfulness of Mr.
Walker’s testimony and whether he might have committed perjury, the chancellor
appeared to defer to the jury’s decision, relying on the fact that “no error ha[d] been
identified” and that the jury had ruled in a “reasonable” manner. Carefully reviewing the
trial court’s comments as a whole, it does not appear that the trial court had
independently assessed the credibility of the witnesses, see Michelsen, 893 S.W.2d at
945, or that the trial court had “independently weighed the evidence, had passed on the
issues presented to the jury, and reached the same verdict as the jury did.” See Miller,
873 S.W.2d at 349. Rather, the trial court’s comments in the case at bar are akin to those
made by the trial court in Jakobik, 554 S.W.2d at 615-16, that “there was some evidence
to support the verdict” and that “the verdict was not unreasonable.”
We further determine this Court’s opinion in Blackburn v. CSX Transp., Inc., No.
M2006-01352-COA-R10-CV, 2008 WL 2278497, at *7 (Tenn. Ct. App. May 30, 2008),
to be instructive concerning this issue. In Blackburn, this Court compared and contrasted
the federal standard governing motions for new trial with the standard applicable in
Tennessee, discerning them to be “quite different.” Id. As the Blackburn Court
explained, in contrast to the standard applied in Tennessee, federal courts analyze
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whether the jury’s verdict was “unreasonable” or against the “clear weight” of the
evidence. Id. As such, the Blackburn Court observed that “under federal law if a
reasonable juror could have reached the verdict, the trial court is to defer.” Id.; see also
Boyd v. BNSF Railway Co., 596 S.W.3d 712, 719 (Tenn. Ct. App. 2018). The Blackburn
Court further recognized that the differences between the federal and Tennessee
standards were both “apparent and significant.” Id.
The Blackburn Court’s ruling underscores the error in the case at bar. By stating
that “a reasonable jury could have and did reach a result of no liability on the claims at
issue,” the trial court did not sufficiently fulfill its duty as thirteenth juror under
Tennessee law. Specifically, the trial court did not confirm that it had independently
assessed the credibility of the witnesses and independently weighed the evidence to
determine whether it would have reached the same verdict. See Miller, 873 S.W.2d at
349; Michelsen, 893 S.W.2d at 945. By merely concluding that the jury verdict was
reasonable, a trial court does not fulfill its thirteenth-juror duty in Tennessee state courts.
See Jakobik, 554 S.W.2d at 615-16. Rather, the trial court must determine that it would
have “reached the same verdict as the jury after independently weighing the evidence and
passing upon the issues.” Holden, 682 S.W.2d at 905-06.
We emphasize that the trial court’s proper fulfillment of its duties as thirteenth
juror is necessary to meaningful appellate review of the verdict. As this Court has
elucidated:
On appeal the evidence cannot be weighed as in the trial court. As has been
said so often, a verdict in a civil case approved by the trial judge cannot be
overturned if there is any credible material evidence to support it. In view
of the finality of his determination of the weight of the evidence as the
thirteenth juror, it will not do to weaken the rule by implying approval by
the trial judge from countervailing and irreconcilable remarks. To do so
would be to strike at the very foundation of our judicial system as it
pertains to jury trials.
Sherlin, 551 S.W.2d at 701; see Michelsen, 893 S.W.2d at 945 (“The proper disposition
of a motion for a new trial by the court is essential in order to afford the litigants
appellate review.”). For the foregoing reasons, we conclude that the chancellor’s denial
of Plaintiffs’ motion for new trial should be reversed. We remand this matter to the trial
court for a new trial.
V. Unjust Enrichment
Plaintiffs assert that the trial court erred by dismissing their claims of unjust
enrichment prior to trial. We acknowledge that Defendants filed pre-trial motions
seeking judgment on the pleadings with respect to certain of Plaintiffs’ claims. In its
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April 22, 2020 memorandum and order, the trial court granted those motions regarding
Plaintiffs’ claims of unjust enrichment, concluding that Plaintiffs could not sustain such
claims based on the facts alleged in the Fourth Amended Complaint.4 The trial court
found that unjust enrichment claims typically arose when one party provided valuable
goods or services to another without an enforceable contract, when there was an
expectation of payment that was not fulfilled, and when allowing the receiving party to
retain the benefit would be unjust. See generally In re Estate of Ross, No. M2013-02218-
COA-R3-CV, 2014 WL 2999576, at *3-4 (Tenn. Ct. App. June 30, 2014).5
When granting judgment on the pleadings concerning Plaintiffs’ unjust
enrichment claims, the trial court further relied upon this Court’s opinion in B & L Corp.
v. Thomas & Thorngren, Inc., 162 S.W.3d 189, 217 (Tenn. Ct. App. 2004), stating that a
“[q]uasi-contractual theory of recovery . . . is contraindicated when the benefit alleged is
involuntarily conferred.” Plaintiffs urge, however, that because the B & L Court cited no
authority for this statement and because other binding precedent suggests that unjust
enrichment claims can arise in situations involving the involuntary conferral of a benefit,
the trial court erred by relying upon B & L. Upon our thorough review, we disagree with
Plaintiffs’ contentions.
B & L involved an action initiated by an employer, B & L, against its former
employees, alleging claims of breach of fiduciary duty, violation of covenants not to
4
In their appellate brief, Defendants contend that Plaintiffs have abandoned their unjust enrichment
claims by failing to plead such claims in their most recent and, therefore, operative complaint. We note,
however, that Plaintiffs’ most recent complaint was filed following the trial court’s order dismissing
certain causes of action, including the claims of unjust enrichment. In such a situation, this Court has
previously held that a party maintains the right to appeal those claims that were involuntarily dismissed.
Lemon v. Williamson Cnty. Sch., No. M2018-01878-COA-R3-CV, 2019 WL 4598201, at *4 (Tenn. Ct.
App. Sept. 23, 2019), rev’d in part on other grounds, 618 S.W.3d 1 (Tenn. 2021).
5
As our Supreme Court recognized more than fifty years ago, actions “brought upon theories of unjust
enrichment, quasi contract, contracts implied in law, and quantum meruit are essentially the same.”
Paschall’s, Inc. v. Dozier, 407 S.W.2d 150, 154 (Tenn. 1966). These types of claims require a
demonstration of the following elements:
(1) There is no existing, enforceable contract between the parties covering the same subject
matter;
(2) The party seeking recovery proves that it provided valuable goods or services;
(3) The party to be charged received the goods or services;
(4) The circumstances indicate that the parties to the transaction should have reasonably
understood that the person providing the goods or services expected to be compensated;
and
(5) The circumstances demonstrate that it would be unjust for a party to retain the goods or
services without payment.
Doe v. HCA Health Servs. of Tenn., Inc., 46 S.W.3d 191, 198 (Tenn. 2001).
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compete, conversion, unfair competition, and unjust enrichment after the former
employees left their jobs with B & L, began a competing business, and solicited B & L’s
clients. Id. at 189-195. B & L averred that the defendant employees had benefitted from
their knowledge of B & L’s trade secrets, business techniques, and other confidential
information. Id. at 197. In support, B & L specifically predicated its unjust enrichment
claim on the allegation that the defendant employees had “conferred upon Defendants a
benefit and advantage of tremendous and incalculable value, without compensation to [B
& L], and therefore Defendants were enriched unjustly, at the expense of [B & L].” Id. at
197-98. The trial court granted a judgment in favor of B & L on its unjust enrichment
claims, and the employees appealed. Id. at 217.
On appeal, the B & L Court concluded that the trial court had erred in granting
judgment in favor of B & L because, in essence, the benefit obtained by the defendant
employees was not willingly conferred by B & L. Id. at 217. The B & L Court
expounded in pertinent part:
We are unaware of any case applying an unjust enrichment theory of
recovery under circumstances similar to those in the case at bar. Quasi-
contractual theory of recovery involves the willing conferring of a benefit
by one party to the other and is contraindicated when the benefit alleged is
involuntarily conferred.
Id. This Court accordingly determined that the trial court had erred in awarding a
judgment in favor of B & L on its claim for unjust enrichment. Id. at 218.
Plaintiffs herein posit that the B & L Court’s pronouncement that the conferral of a
benefit must be voluntary in order to recover for unjust enrichment is “dicta” or has been
called into question by other opinions of this Court or our Supreme Court. Upon our
thorough review of the authorities relied upon by Plaintiffs, however, we disagree.
For example, Plaintiffs cite our Supreme Court’s opinion in Freeman Indus., LLC
v. Eastman Chem. Co., 172 S.W.3d 512, 516 (Tenn. 2005), wherein the defendant
corporations, producers of sorbates used for preserving food products, had pled guilty to
price fixing, and the plaintiff was an end-use purchaser of food products containing
sorbates. The plaintiff alleged that the defendants should be held liable for, inter alia,
unjust enrichment, and the defendants moved for summary judgment relative to that
claim, arguing that the plaintiff had conferred no direct benefit upon them inasmuch as
the plaintiff had purchased the food products from a supermarket. Id. at 524-25. On
appeal, the Freeman Court instructed:
Freeman may bring a cause of action for unjust enrichment against the
defendants even though Freeman did not purchase the items containing
sorbates directly from the defendants. The defendants, however, contend
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that Freeman must establish that it conferred a direct benefit, rather than an
indirect or incidental benefit, upon the defendants. A benefit is any form of
advantage that has a measurable value including the advantage of being
saved from an expense or loss. The underlying principle of the doctrine of
unjust enrichment is that a party who receives a benefit that he or she
desires, under circumstances rendering retention of the benefit without
providing compensation inequitable, must compensate the provider of the
benefit. In accordance with this underlying principle, we conclude that to
recover for unjust enrichment, a plaintiff need not establish that the
defendant received a direct benefit from the plaintiff. Rather, a plaintiff
may recover for unjust enrichment against a defendant who receives any
benefit from the plaintiff if the defendant’s retention of the benefit would
be unjust.
Id. at 525 (internal citations omitted). Significantly, the query addressed by the Freeman
Court was whether the benefit received by the defendant must be directly conferred from
the plaintiff to the defendant, not whether the benefit was voluntarily or involuntarily
conferred.
Similarly, in Wells v. Chattanooga Bakery, Inc., 448 S.W.3d 381, 391 (Tenn. Ct.
App. 2014), this Court was not asked to determine whether the conferring of a benefit
must be voluntary in order to recover for unjust enrichment. Instead, the Wells Court was
presented with the question of whether the plaintiff’s claims against the defendants
concerning their use of the plaintiff’s photograph in their advertising campaigns were
essentially claims asserting violation of the federal Copyright Act of 1976 and were thus
preempted by federal law.6 Id. at 387. The Court determined that all of the plaintiff’s
claims, including his claim for unjust enrichment, met the subject matter and equivalency
requirements of the preemption analysis, such that those claims were preempted. Id. at
393. Wells contains no discussion of whether a valid claim of unjust enrichment requires
that the benefit conferred be voluntary or involuntary.
Likewise, this Court’s opinion in Orlando Residence, Ltd. v. Nashville Lodging
Co., 104 S.W.3d 848, 853 (Tenn. Ct. App. 2002), contains no discussion of whether a
valid claim of unjust enrichment requires that the benefit conferred be voluntary or
involuntary. In fact, the reference to unjust enrichment in Orlando and relied upon by
Plaintiffs is found within an analysis concerning the appropriate statute of limitations to
be applied to a fraudulent conveyance claim and provides no treatment of the law
respecting unjust enrichment. Id. at 853.
6
The Copyright Act of 1976 is codified at 17 U.S.C. § 301(a).
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Plaintiffs further seek to rely on cases involving imposition of constructive trusts.
However, Plaintiffs did not allege imposition of a constructive trust in their Fourth
Amended Complaint. As such, we conclude that such arguments are waived.
Having determined that the cases cited by Plaintiffs are unavailing with respect to
the issue of voluntary conferral of a benefit, we discern no reason to depart from this
Court’s holding in B & L. We therefore affirm the trial court’s determination that
judgment on the pleadings was appropriate concerning Plaintiffs’ claims of unjust
enrichment due to the absence of a benefit voluntarily conferred upon Defendants.
VI. Intentional Interference with the Right of Redemption
Plaintiffs also contend that the trial court erred by declining to recognize a
common law action for intentional interference with the right to redeem property
following a tax sale. Plaintiffs posit that because the legislature created statutory rights
of redemption, the court should have recognized a common law tort cause of action for
the intentional intrusion upon or interference with those rights.
In their Fourth Amended Complaint, Plaintiffs alleged a claim of “theft of the right
of redemption.” In that complaint, Plaintiffs specifically averred:
The Defendants and their Confederates, by their actions described herein,
have intentionally misappropriated rights of redemption in real property
rightfully belonging to the Plaintiffs and absent members of the plaintiff
classes, in violation of Tennessee Code Annotated Section 39-14-103.
As a direct and proximate result of this misconduct, the Plaintiffs and the
absent members of the plaintiff classes have suffered injuries. This count is
asserted for the express purpose of distinguishing previous authority
declining to recognize a claim for conversion of intangible property,
including B & L Corp. v. Thomas & Thorngren Inc., 917 S.W.2d 674
(Tenn. Ct. App. 1995).
(Paragraph numbering omitted.) We note that Tennessee Code Annotated § 39-14-103
(2018) is a criminal statute concerning theft of property.
Respecting this particular claim, the trial court stated the following in its April 22,
2020 order granting dismissal thereof:
Defendants assert that there is not a cause of action for theft of an
intangible property right, and specifically not for a right of redemption . . . .
Plaintiffs rely on a criminal case, State v. Gentry, for the proposition that
theft of title or ownership through improper means, although of something
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intangible, is actionable. 538 S.W.3d 413, 421-27 (Tenn. 2017). In that
case, the Tennessee Supreme Court recognized it was appropriate to
criminally charge the defendant with theft of real property not because she
was an unauthorized squatter, but because she filed documents with the
Register of Deeds Office attempting to exclude the rightful property owner
of its interest. Id. at 427.
Civil cases that have analyzed the tort of conversion have
consistently held that it is actionable for the appropriation of tangible
property only and this Court is aware of no case in which conversion has
been recognized as actionable for an intangible property right, including the
right of redemption. See PNC Multifamily Capital v. Bluff City, 387
S.W.3d 525, 553 (Tenn. Ct. App. 2012). In fact, there are a number of
cases applying Tennessee law specifically holding that conversion of
intangible property is not recognized in Tennessee. See B & L Corp., 917
S.W.2d at 679-680 (citing H.J. Inc. v. International Tel. and Tel. Corp., 867
F.2d 1531 (8th Cir. 1989) and Unlimited Screw Products, Inc. v. Malm, 781
F. Supp. 1121 (E.D. Va. 1991)); Intera Co., LTD. v. Dow Corning Corp.,
No. 92-6324, 1994 WL 69582, *4 (6th Cir. Mar. 7, 1994); Federal Express
Corp. v. Accu-Sort Systems, Inc., No. 01-2503 Ma/A, 2005 WL 8156707,
*20 (W.D. Tenn. Mar. 30, 2005); Stratienko v. Cordis Corp., No. 1:02-CV-
005, 2003 WL 23471546, *6 (E.D. Tenn. Dec. 4, 2003); Ralph v. Pipkin,
183 S.W.3d 362, 368 (Tenn. Ct. App. 2005); River Park Hosp., Inc. v.
BlueCross BlueShield of Tenn., Inc., 173 S.W.3d 43, 60 (Tenn. Ct. App.
2002).
The Operative Complaint relies solely on the theft of intangible
property, e.g. redemption rights, for its theft claims. This Court does not
read the Tennessee Supreme Court’s holding in Gentry to change
Tennessee law regarding the civil claim of theft/conversion, and finds that
the law does not support the Plaintiffs’ claim in that regard. That claim is
therefore dismissed.
Upon thorough review, we agree with the trial court’s conclusion concerning this claim.
As the trial court properly concluded, Tennessee has not recognized a civil claim
of theft or conversion7 of the intangible right of redemption. The intentional tort of
conversion is defined as “the appropriation of tangible property to a party’s own use in
exclusion or defiance of the owner’s rights.” PNC Multifamily Cap. Institutional Fund
XXVI Ltd. P’ship v. Bluff City Cmty. Dev. Corp., 387 S.W.3d 525, 553 (Tenn. Ct. App.
7
Inasmuch as Plaintiffs’ claim in their Fourth Amended Complaint was styled as one for theft, known as
conversion in the civil realm, we will address it as such herein.
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2012) (emphasis added). In Tennessee, tangible personal property “includes personal
property such as goods, chattels, and other articles of value that are capable of manual or
physical possession . . . and the value of which is intrinsic to the article itself.” Tenn.
Code Ann. § 67-5-501(13) (2022) (within chapter respecting property taxes). In other
words, tangible personal property “can be seen, felt, weighed and measured.” Corporate
Catering, Inc. v. Corporate Catering, LLC, No. M1997-00230-COA-R3-CV, 2001 WL
266041, at *5 (Tenn. Ct. App. Mar. 20, 2001). By comparison, intangible personal
property is defined as including “personal property, such as money, any evidence of debt
owed to a taxpayer, any evidence of ownership in a corporation or other business
organization having multiple owners, and all other forms of property, the value of which
is expressed in terms of what the property represents rather than its own intrinsic worth.”
Tenn. Code Ann. § 67-5-501(5).
As this Court explained in Corporate Catering: “Although many jurisdictions
hold otherwise, Tennessee is among the jurisdictions that have declined to recognize a
civil cause of action for conversion of intangible personal property.” See 2001 WL
266041, at *5 (citing B & L Corp. v. Thomas & Thorngren, Inc., 917 S.W.2d 674, 680
(Tenn. Ct. App. 1995)); see also Ralph v. Pipkin, 183 S.W.3d 362, 368 (Tenn. Ct. App.
2005) (holding that a civil action for conversion is not recognized in Tennessee for the
appropriation of intangible personal property); B & L Corp., 917 S.W.2d at 680 (holding
that there is no authority in Tennessee for a claim of conversion of intangible property).
In Corporate Catering, the plaintiff filed suit against the defendant, seeking
damages for conversion and copyright infringement. See 2001 WL 266041, at *1-2. The
plaintiff alleged, inter alia, that the defendant had copied names and descriptions from
his catering menu and had used those in her own catering business. Id. The trial court
directed a verdict dismissing the conversion claim, and this Court affirmed that ruling on
appeal. Id. at *5. In doing so, this Court reasoned that because the menu names and
descriptions were characterized as intellectual property, which is a type of intangible
personal property, the tort of conversion would not apply inasmuch as Tennessee had
declined to recognize a civil cause of action for conversion of intangible property. Id. As
this Court elucidated in Corporate Catering: “The trial court properly declined to send to
the jury a claim that our law does not recognize.” Id.
Similarly, in this action, the statutory right of redemption is a species of intangible
property, see Tenn. Code Ann. § 67-5-501, because the right of redemption cannot be
“seen, felt, weighed and measured.” Corporate Catering, 2001 WL 266041, at *5.
Given that Tennessee has declined to recognize a claim of conversion regarding
intangible property, we conclude that the trial court reached the proper result when it
granted judgment on the pleadings concerning Plaintiffs’ conversion claim.
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VII. Claim Based on Tennessee Code Annotated § 66-22-113
Finally, Plaintiffs contend that the trial court erred by granting summary judgment
in favor of Defendants respecting claims against Mr. Johnson that were predicated on
Tennessee Code Annotated § 66-22-113 because, according to Plaintiffs, Mr. Johnson
“notarized certifications used to falsely attest that forged instruments were genuine.”
With reference to this claim, the trial court stated in its August 6, 2021 order:
[Tennessee Code Annotated § 66-22-113] establishes liability for any
notary public who fails to comply with and discharge the duties associated
with that position. Since none of the REO Defendants acknowledged the
documents in this capacity, the Court finds that this statute does not apply.
The Court therefore dismisses these claims.
Tennessee Code Annotated § 66-22-101, et seq. (2022), governs the requirements
for acknowledgment of legal instruments and authentication of signatures through the
notary process. Tennessee Code Annotated § 66-22-106 provides in pertinent part that a
notary or other officer who takes an acknowledgment should either be personally
acquainted with the person acknowledging the instrument or should establish that
person’s identity by the use of “satisfactory evidence,” such as a driver’s license,
passport, military identification card, or other means of acceptable identification. That
statutory section further provides that a notary or other officer “who has taken an
acknowledgment pursuant to this section shall be presumed to have operated in
accordance with this chapter.”
The statutory section under review here, Tennessee Code Annotated § 66-22-113,
provides:
If the clerk or other officer who takes the probate or acknowledgment of a
deed or other instrument fails or refuses to comply with and discharge the
duties required of the clerk or officer, the clerk or officer shall forfeit and
pay the sum of one hundred dollars ($100) for the use of the county in
which the clerk or officer resides, which may be recovered by action of
debt, in the name of the trustee of the county, in the circuit or chancery
court; and the clerk or officer shall, moreover, be liable to the party injured
for all damages the clerk or officer may sustain by such failure or refusal,
together with costs, to be recovered by action on the case in the circuit or
chancery court.
In addition, Tennessee Code Annotated § 66-22-106(e) states that a party “who files an
action for damages based on the failure of the officer to establish the proper identity of
the person making the acknowledgment shall have the burden of proof in establishing the
negligence or misconduct of the officer.”
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In the instant cause, it is undisputed that Mr. Johnson was a notary public and that
he did notarize Mr. Walker’s signature on certain documents, which Plaintiffs claim to
have been forged or fraudulent. Specifically, Plaintiffs assert that Mr. Johnson notarized
Mr. Walker’s signature on various “True Copy Certification” pages that were attached to
forged/fraudulent documents. Plaintiffs argue that Mr. Walker stated in his deposition
that he kept copies of the “True Copy Certification” pages, apparently filled out and
notarized in isolation, which he then attached to numerous documents before recording or
filing them. Moreover, Plaintiffs urge that because Mr. Johnson notarized the “True
Copy Certification” in isolation, without viewing or having knowledge of the document
to which it would be attached, Mr. Johnson should be held liable inasmuch as the notary
statement recites that Mr. Walker had acknowledged that “this certification of an
electronic document is true and correct.”
Plaintiffs also point to Mr. Johnson’s verification of Mr. Walker’s signature on an
“Oath of Consideration” appearing on Ms. Irvin’s quitclaim deed. They submit that the
signature page of this deed was altered after it was signed. Plaintiffs therefore postulate
that “based on Mr. Johnson’s intimate involvement in the various real-estate ventures
undertaken” by REO, his notarization of Mr. Walker’s signature on the oath contained on
this deed, which facilitated its registration, was accomplished with knowledge that the
deed had been altered.
We reiterate that the trial court granted summary judgment in favor of Defendants
prior to trial concerning possible violations of Tennessee Code Annotated § 66-22-113.
As such, our standard of review is de novo with no presumption of correctness. See Rye
v. Women’s Care Ctr. of Memphis, MPLLC, 477 S.W.3d 235, 250 (Tenn. 2015). This
Court must therefore “make a fresh determination of whether the requirements of Rule 56
of the Tennessee Rules of Civil Procedure have been satisfied.” Id. As our Supreme
Court has explained respecting the requirements for a movant to prevail on a motion for
summary judgment pursuant to Tennessee Rule of Civil Procedure 56:
[W]hen the moving party does not bear the burden of proof at trial, the
moving party may satisfy its burden of production either (1) by
affirmatively negating an essential element of the nonmoving party’s claim
or (2) by demonstrating that the nonmoving party’s evidence at the
summary judgment stage is insufficient to establish the nonmoving party’s
claim or defense. We reiterate that a moving party seeking summary
judgment by attacking the nonmoving party’s evidence must do more than
make a conclusory assertion that summary judgment is appropriate on this
basis. Rather, Tennessee Rule 56.03 requires the moving party to support
its motion with “a separate concise statement of material facts as to which
the moving party contends there is no genuine issue for trial.” Tenn. R.
Civ. P. 56.03. “Each fact is to be set forth in a separate, numbered
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paragraph and supported by a specific citation to the record.” Id. When
such a motion is made, any party opposing summary judgment must file a
response to each fact set forth by the movant in the manner provided in
Tennessee Rule 56.03. “[W]hen a motion for summary judgment is made
[and] . . . supported as provided in [Tennessee Rule 56],” to survive
summary judgment, the nonmoving party “may not rest upon the mere
allegations or denials of [its] pleading,” but must respond, and by affidavits
or one of the other means provided in Tennessee Rule 56, “set forth specific
facts” at the summary judgment stage “showing that there is a genuine issue
for trial.” Tenn. R. Civ. P. 56.06. The nonmoving party “must do more
than simply show that there is some metaphysical doubt as to the material
facts.” Matsushita Elec. Indus. Co., 475 U.S. [574,] 586, 106 S. Ct. 1348,
[89 L. Ed. 2d 538 (1986)]. The nonmoving party must demonstrate the
existence of specific facts in the record which could lead a rational trier of
fact to find in favor of the nonmoving party. If a summary judgment
motion is filed before adequate time for discovery has been provided, the
nonmoving party may seek a continuance to engage in additional discovery
as provided in Tennessee Rule 56.07. However, after adequate time for
discovery has been provided, summary judgment should be granted if the
nonmoving party’s evidence at the summary judgment stage is insufficient
to establish the existence of a genuine issue of material fact for trial. Tenn.
R. Civ. P. 56.04, 56.06. The focus is on the evidence the nonmoving party
comes forward with at the summary judgment stage, not on hypothetical
evidence that theoretically could be adduced, despite the passage of
discovery deadlines, at a future trial.
Rye, 477 S.W.3d at 264-65. “Whether the nonmoving party is a plaintiff or a
defendant—and whether or not the nonmoving party bears the burden of proof at trial on
the challenged claim or defense—at the summary judgment stage, ‘[t]he nonmoving party
must demonstrate the existence of specific facts in the record which could lead a rational
trier of fact to find in favor of the nonmoving party.’” TWB Architects, Inc. v. The
Braxton, LLC, 578 S.W.3d 879, 889 (Tenn. 2019) (quoting Rye, 477 S.W.3d at 265).
In this matter, Defendants showed that Mr. Johnson was personally acquainted
with Mr. Walker and thus would have satisfied his duties pursuant to the notary statute
when notarizing Mr. Walker’s signature insofar as Mr. Walker’s identity had been
established. Therefore, according to Defendants, the fact that Plaintiffs demonstrated that
Mr. Johnson notarized Mr. Walker’s signature on pages that were attached to documents
that Plaintiffs alleged to be fraudulent and/or forged was of no consequence. This issue
therefore turns on this Court’s interpretation of Tennessee Code Annotated § 66-22-113
and the remaining provisions of Tennessee Code Annotated § 66-22-101, et seq.
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As our Supreme Court explained more than 100 years ago, although the “functions
of a notary public are not to be lightly assumed,” the notary’s duty is to act in a
reasonably prudent manner to “ascertain the acknowledger’s identity.” Figuers v. Fly,
193 S.W. 117, 120 (Tenn. 1917). However, the notary is “not an insurer of the truth of
[the acknowledger’s] recitals.” Id.; see also Peltz v. Peltz, No. M1999-02299-COA-R3-
CV, 2000 WL 1532996, at *2 (Tenn. Ct. App. Oct. 18, 2000). As such, in accordance
with the statute, a notary has a duty to “verify the identity of a signor through either
personal knowledge or acquaintance with the individual, or examination of an
identification document such as a driver’s license, passport, or military service ID card,
where circumstances exist to cast doubt upon the identity of the signor.” Knighton v.
Hayes, No. W2003-00837-COA-R3-CV, 2004 WL 250903, at *6 (Tenn. Ct. App. Feb.
10, 2004); see Tenn. Code Ann. § 66-22-106. Notwithstanding, as this Court has
declared, “the cases in Tennessee dealing with a notary’s duties generally find only a
duty to make sure the person executing a document is the person he/she purports to be.”
Battles v. First Union Bank, No. 01A01-9809-CH-00497, 1999 WL 675126, at *2 (Tenn.
Ct. App. Sept. 1, 1999).
Plaintiffs rely upon this Court’s opinion in State ex rel. Marquis v. U.S. Fid. &
Guar. Co., 424 S.W.2d 199 (Tenn. Ct. App. 1966), in support of their postulate that
“where a notary has actual knowledge of the falsity of an instrument, he acts improperly
by notarizing an acknowledgment of it.” However, in Marquis, the notary had notarized
his own signature on a fraudulent bill of sale for an automobile. Id. at 203. As a result,
the Marquis Court held that the surety on the notary’s official bond was liable for the
notary’s actions, stating:
While it is true that Ben Clarke might have perpetrated his fraud
upon Mr. and Mrs. Marquis without a notarization on the bill of sale or by
having the document notarized by a disinterested and honest Notary Public,
yet the fact remains he did not do so. Instead, he elected to use his de facto
office of Notary Public to notarize his own bill of sale to complete his fraud
upon Mr. and Mrs. Marquis. Mrs. Marquis testified that she accepted and
relied upon the notarization appearing on the bill of sale given her by Ben
Clarke as a part of the transaction whereby she purchased from Ben Clarke
the Oldsmobile F-85.
We can see no reasonable way to separate the fraud of Ben Clarke as
automobile salesman from the fraud of Ben Clarke as Notary Public. He
initiated a dishonest transaction when he contracted to sell the Oldsmobile
without title thereto. He furthered his fraud when he drafted and signed the
bill of sale. He completed the fraud when he notarized the bill of sale and
delivered it and the automobile to Mrs. Marquis in exchange for a trade-in
worth $600 and a check for $700. The notarization by Ben Clarke was an
official act done by him as a part of his fraudulent sale of the automobile
- 29 -
and the notarization is inseparable from the remainder of the transaction.
While the act of Ben Clarke as a Notary Public was not by any means the
sole cause of relators’ loss and was not even the major cause of their loss,
we agree with the Trial Judge that the notarization of the bill of sale by Ben
Clarke was a proximate cause of the loss sustained by Mr. and Mrs.
Marquis.
Id.
We determine Plaintiffs’ reliance on the Marquis case to be unavailing. Here,
Plaintiffs have shown that Mr. Johnson notarized Mr. Walker’s signature on various
documents. It is undisputed that Mr. Johnson and Mr. Walker were well acquainted and
that Mr. Walker’s identity was not unknown or even questionable to Mr. Johnson.
Plaintiffs did not demonstrate that Mr. Johnson notarized his own signature on a
fraudulent document, as was accomplished in Marquis.
We conclude that Plaintiffs’ reliance on In re Crim, 81 S.W.3d 764 (Tenn. 2002),
is similarly misplaced. In Crim, the notary executed a certificate of acknowledgment
representing that both signees of a deed of trust had “personally appeared” and
“acknowledged the execution of the” document. Id. at 766-67. However, the document
bore the signature of only one signee, who appeared alone and signed for herself and for
her husband as purported power of attorney. Id. at 766. Because of this, the Crim Court
determined that the acknowledgment was improper and that the deed of trust was null and
void as to subsequent creditors or bona fide purchasers without notice, as concerning the
interest of the spouse who did not appear or sign the document. Id. at 770. Crim did not
discuss Tennessee Code Annotated § 66-22-113 or liability of the notary public.
Considering that Defendants demonstrated that Mr. Johnson notarized the
signature of a person with whom he was well acquainted and whose identity was not in
question, we determine that Defendants affirmatively negated an essential element of
Plaintiffs’ claim of liability pursuant to Tennessee Code Annotated § 66-22-113. In their
responses, Plaintiffs failed to “demonstrate the existence of specific facts in the record
which could lead a rational trier of fact to find in” their favor. See Rye, 477 S.W.3d at
265. Accordingly, we conclude that the trial court did not err in granting summary
judgment in favor of Defendants concerning this claim.8
8
Although the trial court granted summary judgment concerning this claim on a different basis, this Court
can affirm the trial court even if it reached the correct result for the wrong reason. See Torres v.
Bridgestone/Firestone N. Am. Tire, LLC, 498 S.W.3d 565, 577 (Tenn. Ct. App. 2016); Biles v. Roby, No.
W2016-02139-COA-R3-CV, 2017 WL 3447910, at *6, n.3 (Tenn. Ct. App. Aug. 11, 2017).
- 30 -
VIII. Remaining Issues
Having addressed the issues presented for review by Plaintiffs, we now turn to the
additional issues raised on appeal by Defendants. The first question concerns whether the
trial court erred by denying Green Wise’s pre-trial motion to dissolve the lien lis pendens
entered by the trial court regarding real property that allegedly had nothing to do with Mr.
Chambers or the underlying litigation.
The record establishes that Mr. Chambers filed a lien lis pendens on August 1,
2019, affecting parcels of real property owned by Green Wise. In the abstract relative to
the lien that Mr. Chambers filed in the trial court, he reported that he sought to secure
payment of any damages awarded to him in this action. Mr. Chambers further asserted in
the lien abstract that Mr. Walker and Mr. Johnson had fraudulently transferred the parcels
of property to Green Wise in order to avoid paying damages to Mr. Chambers.
In response, Green Wise filed a motion the following day seeking to have the lien
dissolved. For support, Green Wise urged that because the real property that was subject
to the lien was not related to the underlying litigation, the lien could not stand. Green
Wise argued that Mr. Chambers had attempted to “unlawfully use the lien lis pendens as
a prejudgment attachment.” Mr. Chambers filed a response, stating in pertinent part:
The Fourth Amended Complaint seeks to set aside the fraudulent
conveyance of the real property described in paragraph 314 of the
Complaint. Because the Complaint seeks to set aside the transfer of the real
property described in paragraph 314 of the Fourth Amended Complaint as
fraudulent, Section 20-3-101 permits plaintiffs to file a lien lis pendens as
to such property.
On August 15, 2019, the trial court entered an order concerning Green Wise’s
motion, providing in relevant portion:
The text of Tenn. Code Ann. § 20-3-101 is explicit. Section 20-3-
101 on its face provides “When any person . . . seeks to fix a lien lis
pendens on real estate . . . in furtherance of the setting aside of a fraudulent
conveyance . . . that person shall file for record in the register’s office of the
county an abstract, certified by the clerk, containing the names of the
parties to the suit, a description of the real estate affected, its ownership and
a brief statement of the nature and amount of the lien sought to be fixed.”
Plaintiff Carl Chambers seeks in this action to set aside as fraudulent the
transfer of the fifteen parcels of real property described in paragraph 314 of
the Fourth Amended Complaint. The claims for fraudulent transfer he
asserts in the Fourth Amended Complaint fit within the language of Section
- 31 -
20-3-101. Plaintiff’s claims for fraudulent transfer provide a sufficient link
for the filing of the lien lis pendens pursuant to Section 20-3-101.
A second basis for the Court’s ruling is that the Plaintiff has filed a
lien lis pendens only as to the fifteen parcels of real property alleged in
paragraph 314 of the Fourth Amended Complaint to have been fraudulently
transferred. The Plaintiff has separately sought a prejudgment attachment
with respect to six (6) other parcels of real property that defendant Charles
E. Walker continues to own. Those parcels are distinct from the 15 parcels
as to which plaintiff has filed the lien lis pendens. Plaintiff’s request for a
prejudgment attachment of those parcels will be resolved in accordance
with this Court’s Order filed July 31, 2019. Because Plaintiff has only filed
a lien lis pendens as to the real property that is the subject of the fraudulent
transfer claim asserted in the Fourth Amended Complaint, the lien lis
pendens complies with Section 20-3-101.
Green Wise Homes, LLC argues that there is a difference between a
fraudulent transfer and a fraudulent conveyance. The Court finds, however,
that the fraud claims Plaintiff Carl Chambers asserts in the Fourth
Amended Complaint fit squarely within the language of Section 20-3-101,
and provide a sufficient link for the filing of the lien lis pendens.
The Motion to Dissolve Lien Lis Pendens is accordingly DENIED.
(Paragraph numbering omitted.)
Defendants also posit that the trial court erred by failing to dissolve the lien
because the properties to which the lien applied were neither connected to Mr. Chambers
nor the underlying litigation. As this Court determined in Boyd v. Green Farmers Co-
op., Inc., No. C.A. 142, 1990 WL 198249, at *3 (Tenn. Ct. App. Dec. 11, 1990):
The defendants in this action had no underlying claim or interest, legal or
equitable, in and to the realty upon which they sought to impose a lien lis
pendens, asserted none in their complaint, and further, the realty was not
the subject-matter of the suit. Under these circumstances, as at common
law, a lien lis pendens was inappropriate and unavailable for the
defendants’ intended purposes and did not attach to the realty in question.
Reviewing the allegations contained in the Fourth Amended Complaint, however, it
appears that Plaintiffs did claim that Mr. Walker and Mr. Johnson had fraudulently
transferred certain parcels of real property owned by them to Green Wise in order to
“hinder, delay, and defraud plaintiff and other creditors in the collection of amounts owed
to them,” in violation of Tennessee Code Annotated § 66-3-305 (part of the Uniform
- 32 -
Fraudulent Transfers Act). Plaintiffs further asserted that under Tennessee Code
Annotated § 66-3-308, the trial court could avoid the transfers to the extent necessary to
satisfy Plaintiffs’ claims. Moreover, Plaintiffs propounded that pursuant to Tennessee
Code Annotated § 66-3-309, the court could issue a judgment against each defendant for
the value of the asset transferred or the amount necessary to satisfy Plaintiffs’ claims,
whichever is less. We note that the parcels enumerated in the Fourth Amended
Complaint as having been allegedly fraudulently transferred to Green Wise are the same
parcels that are referenced in the lien lis pendens abstract.
Tennessee Code Annotated § 66-3-305 (2022) provides in pertinent part:
(a) A transfer made or obligation incurred by a debtor is fraudulent as to
a creditor, whether the creditor’s claim arose before or after the
transfer was made or the obligation was incurred, if the debtor made
the transfer or incurred the obligation:
(1) With actual intent to hinder, delay, or defraud any creditor of
the debtor[.]
The statute further provides that one of the factors that may be considered in determining
“actual intent” is whether the debtor retained possession or control of the property
transferred after the transfer. See Tenn. Code Ann. § 66-3-305(b)(2). Furthermore,
Tennessee Code Annotated § 66-3-308 (2022) does allow a fraudulent transfer of
property to be voided by the creditor “to the extent necessary to satisfy the creditor’s
claim.”
Upon review of the Fourth Amended Complaint, we conclude that Plaintiffs
properly stated a claim of fraudulent transfer with respect to the real properties referenced
therein. Because the lien lis pendens was filed concerning these same properties, we
further conclude that the trial court did not err by refusing to dissolve the lien until the
litigation was finally concluded. We acknowledge that such timeframe would include the
remand following this appeal. See, e.g., Oliver v. Upton, No. 01A01-9705-CH-00197,
1998 WL 151388, at *5 (Tenn. Ct. App. Apr. 3, 1998) (holding that a lien lis pendens
terminates upon the conclusion of the underlying lawsuit); Figlio v. Shelley Ford, Inc.,
No. 88-15-II, 1988 WL 63497, at *4 (Tenn. Ct. App. June 22, 1988) (explaining that the
“suit out of which the original lis pendens arose did ‘finally’ terminate when the plaintiff
did not appeal”).
Finally, Defendants argue that Ms. Irvin presented no material evidence to support
the jury’s finding that Mr. Walker should be held liable to Ms. Irvin for misrepresentation
by concealment and the jury’s award of monetary damages for that claim. However,
inasmuch as we have determined that this action must be remanded to the trial court for a
new trial, we conclude that this issue is pretermitted as moot.
- 33 -
IX. Conclusion
For the foregoing reasons, we reverse the trial court’s denial of Plaintiffs’ motion
for new trial. However, we affirm the trial court’s determination that judgment on the
pleadings was appropriate concerning Plaintiffs’ claims of unjust enrichment and “theft”
of the right of redemption. We further affirm the trial court’s grant of summary judgment
in favor of Defendants concerning Plaintiffs’ claim based on Tennessee Code Annotated
§ 66-22-113 and the court’s denial of Green Wise’s motion to dissolve the lien lis
pendens on its property. Defendants’ remaining issue is pretermitted as moot. We
remand this matter to the trial court for a new trial consistent with this Opinion. Costs on
appeal are assessed to the appellees, Green Wise Homes LLC, Charles E. Walker, and
Jon Paul Johnson.
s/Thomas R. Frierson, II
_________________________________
THOMAS R. FRIERSON, II, JUDGE
- 34 - | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488393/ | UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
JILL SCHWARTZ,
Plaintiff/Counter-Defendant,
v. Civil Action No. 1:19-cv-00340 (CJN)
ALEXANDRA THOMAS SCHWARTZ,
Defendant/Counter-Plaintiff.
ORDER
A jury found Counter-Defendant Jill Schwartz liable for defaming her former colleague,
Alexandra Thomas Schwartz (“Thomas”). The matter is now before the Court on Schwartz’s
Motion for Judgment as a Matter of Law or, in the Alternative, for a New Trial (“Counter-Def.’s
Mot.”), ECF No. 118. For the reasons that follow, the Court denies the Motion.
“The legal standard for granting a renewed motion for judgment as a matter of law is the
same under Rule 50(b) as it is for a motion before entry of the verdict under Rule 50(a).” Rice v.
D.C., 818 F. Supp. 2d 47, 54 (D.D.C. 2011). Such relief is appropriate when “a party has been
fully heard on an issue during a jury trial and the court finds that a reasonable jury would not have
a legally sufficient evidentiary basis to find for the party on that issue.” Fed. R. Civ. P. 50(a). A
new trial is warranted “when a manifest error of law or fact is presented.” In re Lorazepam &
Clorazepate Antitrust Litig., 467 F. Supp. 2d 74, 87 (D.D.C. 2006). This “demanding standard
reflects the principle that Rule 59 is not a vehicle for relitigating old issues, presenting the case
under new theories, or securing a rehearing on the merits.” Morris v. Pruitt, 308 F. Supp. 3d 153,
159 (D.D.C. 2018) (cleaned up).
1
Schwartz makes four arguments in support of her Motion. First, she argues that the Court
erred in declining to instruct the jury on the common interest privilege to defamation. See Counter-
Def.’s Mot. at 3–6. But the Court previously held that Schwartz forfeited the privilege—which is
an affirmative defense to defamation—by failing to assert it in her original Answer. See Minute
Order, June 5, 2022. 1 And under the law-of-the-case doctrine, “the same issue presented a second
time in the same case in the same court should lead to the same result.” LaShawn A. v. Barry, 87
F.3d 1389, 1393 (D.C. Cir. 1996) (en banc). Courts should depart from this principle only when
there are “extraordinary circumstances,” such as when the prior decision is “clearly erroneous and
would work a manifest injustice.” Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 817
(1988) (quotations omitted). Schwartz has not shown that the Court’s prior ruling was clearly
erroneous—true, Schwartz raised the privilege in response to Thomas’s Amended Counterclaim,
but that doesn’t excuse her from having failed to assert the defense when she filed her original
Answer.
Second, Schwartz contends that the Court erred in allowing Thomas to offer “self-diagnosis
testimony” about damages. See Counter-Def.’s Mot. at 6–8. Schwartz argues that expert
testimony is required on the damages question because Thomas, if injured at all, was injured at
two distinct points in time—first, around September 2018 when Thomas learned about one of the
defamatory emails; and later, around August 2020 when Thomas learned of three more defamatory
emails. According to Schwartz, expert testimony is therefore needed to prove a causal connection
between the emails and the injury—Thomas cannot, says Schwartz, rely on an exception that
1
The Court also held that the privilege is inapplicable because Schwartz and Thomas were
competitors at the time Schwartz made the relevant statements. See Minute Order, June 5, 2022
(citing Restatement (Second) of Torts § 594 cmt. g (1977)).
2
allows lay testimony to establish causation for injuries that occur shortly after the tortious act. See
Lightfoot v. Rosskopf, 377 F. Supp. 2d 31, 33 (D.D.C. 2005).
But Thomas did not testify about—and the jury did not award damages for—any injuries
resulting from her learning of the three emails in August 2020. See 6/3/22 Trial Tr. 4:13–5:20 2;
see also Verdict Form, ECF No. 117. Indeed, the Court excluded such testimony. See 6/3/22 Trial
Tr. 5:8–10. Thomas’s testimony instead centered on the harm that she suffered upon learning
about the September 11, 2018 email, which is the email that she discovered shortly after it was
published. See 6/2/22 Trial Tr. 204:16–205:21; see also Lightfoot, 377 F. Supp. 2d at 33
(explaining that lay testimony is permitted “when the injury develops within a reasonable time
after the accident”).
Third, Schwartz argues that the defamatory statements added to Thomas’s Amended
Counterclaim in May 2022—which are based on the three emails that Thomas discovered in
August 2020 during discovery—should have been excluded from trial under the District of
Columbia’s one-year statute of limitations for defamation claims. See Counter-Def.’s Mot. at 9;
see also Lin v. Ministry of State Sec., 254 F. Supp. 2d 61, 68 (D.D.C. 2003) (“In the District of
Columbia, the statute of limitations for defamation claims is one year from the date of first
publication.”). But even when the statute of limitations period has expired, “Federal Rule of Civil
Procedure 15(c) allows allegations in an amended complaint to relate back to the date of the
original complaint if the claims or defenses asserted in the amended pleading ‘arose out of the
conduct, transaction, or occurrence set out—or attempted to be set out—in the original pleading.’”
Philogene v. D.C., 864 F. Supp. 2d 127, 133 (D.D.C. 2012) (quoting Fed. R. Civ. P. 15(c)(1)(B)).
In determining whether a claim relates back, “[t]he underlying question is whether the original
2
Rough Draft Trial Transcript
3
complaint adequately notified the defendants of the basis for liability the plaintiffs would later
advance in the amended complaint.” Meijer, Inc. v. Biovail Corp., 533 F.3d 857, 866 (D.C. Cir.
2008).
Thomas’s original Counterclaim provided such notice. In it, Thomas alleged that Schwartz
made a series of defamatory statements between August 2018 and October 2018. And in her
Amended Counterclaim, Thomas added more particularity to this allegation by identifying several
of the specific statements (beyond the one previously included in the original Counterclaim). In
other words, the specific allegations in Thomas’s Amended Counterclaim fall within the language
of her original Counterclaim and amplify its general allegations—they do not raise a new theory
of liability or otherwise exceed the scope of what Thomas had already pleaded. See Morton Grove
Pharmaceuticals, Inc. v. Nat’l Pediculosis Ass’n, Inc., 525 F. Supp. 2d 1039, 1047 (N.D. Ill. 2007)
(“The criterion of relation back is whether the original complaint gave the defendant enough notice
of the nature and scope of the plaintiff’s claim that he shouldn’t have been surprised by the
amplification of the allegations of the original complaint in the amended one.” (quotations
omitted)). Schwartz was therefore on notice of “the basis for liability [that Thomas] would later
advance in the amended complaint.” Meijer, 533 F.3d at 866. Accordingly, the new claims relate
back to the date of the original Counterclaim and are not time-barred by the statute of limitations.
Fourth, Schwartz claims that four of the defamatory statements submitted to the jury were
neither statements of fact nor actionable statements of opinion. See Counter-Def.’s Mot. at 10–
11. Those statements are:
• “Her business model is to steal the JillSchwartz group Listings that I secured.”
• “As you even agreed and said, ‘this is stealing.’”
• “Who does that? Cheat, liars, thieves.”
4
• “[…] that is stealing.”
Id. at 10. For essentially the same reasons the Court gave when it denied Schwartz’s Motion for
Summary Judgment, see Mem. Op. at 12–13, ECF No. 78, the Court concludes that a reasonable
jury could have determined that each of these statements is actionable as defamation, see id. at 12
(“And while statements of opinion regarding matters of public concern cannot be defamatory if
they do not contain or imply a provably false fact, they are actionable if they imply a provably
false fact or rely upon stated facts that are provably false.”).
Accordingly, it is
ORDERED that Counter-Defendant’s Motion for Judgment as a Matter of Law or, in the
Alternative, for a New Trial, ECF No. 118, is DENIED.
DATE: November 21, 2022
CARL J. NICHOLS
United States District Judge
5 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488395/ | 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 by 15 F.4th 222 (2d
Cir. 2021); Leland v. Ford, 223 N.W. 218, 223 (Mich. 1929) (“In the early day 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 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488394/ | COURT OF CHANCERY
OF THE
STATE OF DELAWARE
PATRICIA W. GRIFFIN CHANCERY COURTHOUSE
MASTER IN CHANCERY 34 The Circle
GEORGETOWN, DELAWARE 19947
Date Submitted: May 17, 2022
Draft Report: August 22, 2022
Final Report: November 21, 2022
John J. Foster, Jr. Raymond E. Tomasetti, Jr., Esquire
32502 Sea Oak Lane Tomasetti Law, LLC
Millsboro, Delaware 19966 1100 Coastal Highway, Unit 3
Fenwick Island, Delaware 19940
RE: In the Matter of The Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
Dear Mr. Foster and Mr. Tomasetti:
Pending before me is a petition for an accounting and related relief regarding
a Florida trust. A trust beneficiary alleges that the co-trustees of the trust, who are
also beneficiaries under the trust, improperly reduced his distributions from the
trust and failed to provide trust accountings. After trial, I determine that the co-
trustees did not furnish the required accountings to the beneficiary but that further
remedy for an accounting is not needed. I also find that the smaller distributions to
the beneficiary were justified, in part, under the trust’s terms and due to the setoff
of monies owed by the beneficiary to the trust. But, I conclude that the co-trustees
did not fully comply with the trust’s terms and, as a result, failed to give the
beneficiary his full share. I recommend that the Court grant judgment in favor of
the beneficiary in part, and against him in part, and impose a constructive trust
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
upon prior distributions made to the co-trustees under the trust to provide the
beneficiary’s full share. This is my final report.1
I. Background2
Doris J. Foster (“Settlor”) executed the Doris J. Foster Intervivos
Declaration of Trust (“Trust”) on March 13, 1989. 3 The Trust was subsequently
amended by the First Amendment of the Doris J. Foster Intervivos Declaration of
Trust dated May 23, 1997;4 completely amended and restated by the Doris J. Foster
Intervivos Declaration of Trust dated January 28, 2000 (“Restatement”);5 amended
by the Amendment of the Doris J. Foster Intervivos Declaration of Trust dated
May 2, 2003 (“Second Amendment”);6 amended by the Amendment of the Doris J.
Foster Intervivos Declaration of Trust dated January 6, 2005 (“Third
Amendment”);7 amended by the Amendment of the Doris J. Foster Intervivos
Declaration of Trust dated October 5, 2005 (“Fourth Amendment”);8 and amended
1
This report makes the same substantive findings and recommendations as my August,
22, 2022 draft report to which no exceptions were filed. See Docket Item (“D.I.”) 32.
2
I refer to the transcript of the trial on May 17, 2022 as “Trial Tr.” and to Respondent’s
trial exhibits as “Resp’t Ex.”
3
Resp’t Ex. 1, at 1.
4
Id., at 31.
5
Id., at 40.
6
Id., at 70.
7
Id., at 77.
8
Id., at 84.
2
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
by Amendment to the Doris J. Foster Intervivos Declaration of Trust dated March
22, 2007 (“Fifth Amendment”). 9 The Trust is a Florida trust and is governed by
Florida law.10 After Settlor’s death (if her spouse does not survive her), the Trust
provides that its assets will be distributed among Settlor’s children – John J. Foster,
Jr. (“John”), Caroline D. Wilt, Patricia S. Foster (“Patricia”), Mark A. Foster
(“Mark”), Martha A. Conover (“Martha”), and Mary J. Cannon, subject to
specified adjustments to John’s and Patricia’s shares.11
Settlor died on December 2, 2014.12 Under the terms of Settlor’s Last Will
& Testament (“Will”), Settlor’s estate largely passed to the Trust.13 Under the
Trust’s terms, Martha and Mark were appointed successor co-trustees of the Trust
upon Settlor’s death.14 Martha and Mark undertook the duties of winding up the
9
Id., at 92.
10
Id., at 41 (Restatement, §2.2).
11
Id., at 84-86 (Fourth Amendment, §9.3). I use first names in pursuit of clarity and
intend no familiarity or disrespect.
12
D.I. 1, ¶ 5.
13
Resp’t Ex. 1, at 97-98 (Will, arts. IV, V). Although the memorandum is not a part of
the court record, trial testimony indicated that there was a memorandum addressing
specific devises of Settlor’s personal property. See Trial Tr. 80:4-19; Resp’t Ex 1, at 97
(Will, art. IV); id., at 45 (Restatement, §7.6).
14
Resp’t Ex. 1, at 93 (Fifth Amendment, §13.2).
3
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
Trust and making distributions to themselves and the Settlor’s other children.15
Martha and Mark wound up the Trust at the end of 2016.16
On August 8, 2018, John filed the Petition for Accounting and other Relief
(“Petition”), naming Martha and Mark as Respondents.17 The Petition alleges that
John did not receive an equal share of the distributions as required by the Trust and
that Martha and Mark failed to provide information about the Trust to him.18 The
Petition seeks an accounting of the Trust and an equal distribution to John either
from Trust funds or a surcharge against Martha and Mark.19
On August 31, 2018, Martha and Mark filed their Answer, contending that
Settlor and her husband, John J. Foster, Sr. (“Father”), advanced considerable
funds to John during their lifetime in the form of loans that were assigned to the
Trust.20 Martha and Mark indicated that, when making the Trust’s final
distribution, they set off the loans payable to the Trust from John’s distribution. 21
15
See Resp’t Ex. 2.
16
See Resp’t Ex. 9; Trial Tr. 69:11-70:11.
17
D.I. 1.
18
Id., ¶¶ 6-8.
19
Id., at 2.
20
D.I. 4.
21
Id., ¶¶ 6-7.
4
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
The parties then engaged in discovery.22 John’s attorney withdrew in
October 2020.23 This matter was scheduled for a hearing on multiple occasions
and rescheduled due to COVID and John’s repeated continuance requests.24 Trial
occurred in this matter on May 17, 2022.25 I then issued a draft report on August
22, 2022, and no exceptions were filed.
II. Analysis
A. Accountings
Under the terms of the Trust, Martha and Mark were required to provide
annual accountings to the beneficiaries after Settlor’s death.26 Additionally, under
Florida law, the trustee of a Florida trust must keep the beneficiaries of a trust
“reasonably informed of the trust and its administration,”27 and “provide a trust
22
See D.I. 6; D.I. 10; D.I. 12.
23
See D.I. 16.
24
See D.I. 17; D.I. 18; D.I. 19; D.I. 20; D.I. 24; D.I. 25.
25
See D.I. 30. On May 6, 2022, John filed a request for a continuance. See D.I. 26. I
denied that motion for a continuance on May 9, 2022, finding that adequate grounds did
not exist to continue the trial again. See D.I. 28. On May 16, 2022, John filed a letter
seeking either reconsideration of my decision to deny the motion for a continuance or
making a renewed motion for a continuance. See D.I. 29. At the beginning of trial, I
addressed this letter request as a motion for reargument and denied it. See Trial Tr. 10:23-
13:2.
26
Resp’t Ex. 1, at 54 (Restatement, §13.3).
27
Fla. Stat. §736.0813.
5
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
accounting … to each qualified beneficiary at least annually”28 in the form of “a
reasonably understandable report.”29
The uncontroverted evidence presented at trial showed that Mark and
Martha did not provide annual accountings. John testified that he did not recall
receiving any information about the Trust’s administration from Settlor’s death
until the Petition was filed.30 Martha testified that she did not communicate with
John regarding the administration of the Trust.31 Thus, the evidence indicates that
Martha and Mark did not fulfill this duty as trustees.
But, I find a further accounting remedy, as John has requested, is not
warranted in this matter. Here, Martha and Mark provided John with the relevant
28
Fla. Stat. §736.0813(d).
29
The report should detail trust assets and significant transactions affecting trust
administration during the reporting period. Fla. Stat. §736.08135.
30
Trial Tr. 20:9-14; id. 28:11-13. John also seemed to take issue with the actions of
Settlor and Father, contending that they had given him no information about their estate
plans since the mid-1990s. See id. 8:18-20; id. 18:13-16; id. 19:24-20:2; id. 80:20-81:8.
John’s frustration is understandable but provisions of the Trust were revocable while
Settlor was alive, so Settlor had no obligation as trustee, during her lifetime, to advise her
contingent beneficiaries regarding the status of the Trust. See Resp’t Ex. 1, at 40
(Restatement, §1.2); see also Fla. Stat. §736.0603(1) (“While a trust is revocable, the
duties of the trustee are owed exclusively to the settlor.”); Hilgendorf v. Est. of Coleman,
201 So. 3d 1262, 1264-65 (Fla. Dist. Ct. App. 2016); Brundage v. Bank of Am., 996 So.
2d 877, 882 (Fla. Dist. Ct. App. 2008) (“[D]uring the settlor/beneficiary’s lifetime, a
trustee owes a fiduciary duty to the settlor/beneficiary and not the remainder
beneficiaries, who not only have no vested interest but whose contingent interest may be
divested by the settlor prior to her death.”).
31
Trial Tr. 70:12-71:7.
6
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
Trust information during discovery.32 Because the requested remedy would
provide no additional benefit beyond what was obtained through discovery, I
recommend that the Court deny the requested relief of an accounting. 33
B. Setoffs from John’s Share of the Trust
In the Petition, John alleges that Martha and Mark made unequal
distributions to him out of the Trust.34 At trial, evidence was presented about two
transactions that were set off against John’s share of the Trust and led to an
unequal distribution among beneficiaries – first, a $211,561.00 loan assigned to the
Trust and, second, an adjustment related to an $100,000.00 advancement. I
address each in turn.
1. The $211,565.00 Loan Assigned to the Trust
32
Trial Tr. 65:19-66:2; see also D.I. 6; D.I. 10; D.I. 12. Although John testified that his
accountant was still lacking some information, he did not identify the accountant nor the
missing information, and the accountant did not testify. See Trial Tr. 92:9-17. In
contrast, Martha and Mark’s attorney represented to the Court that those documents were
produced during discovery. See id. 89:2-11. Considering the evidence as a whole, I am
persuaded that the trust information was produced in discovery. See D.I. 6; D.I. 12.
33
See N. River Ins. Co. v. Mine Safety Appliances Co., 105 A.3d 369, 385 (Del. 2014)
(where a remedy sought would be useless, equity will not award the remedy because
“equity will not do a useless thing”); Hendry v. Hendry, 2008 WL 484019, at *10 n. 89
(Del. Ch. May 30, 2006) (suggesting that, given the availability and liberal allowance of
modern discovery, a further accounting remedy would be unnecessary); see also Fla.
Gaming Corp. of Del. v. Am. Jai-Alai, Inc., 673 So.2d 523, 524 (Fla. Dist. Ct. App. 1996)
(holding that discovery of financial information in an accounting case was proper).
34
D.I. 1, ¶ 7.
7
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
John executed a note (“Note”), dated November 1, 2006, in which he
promised to repay monies loaned to him by Settlor and/or Father, along with
interest at 5% per year.35 It appears that Settlor or Father gave John $3,500.00 per
month between November 2006 and April 2008 and $2,600.00 per month from
May 2008 until about January 2011 under the Note.36 John promised to pay the
35
D.I. 4, ¶ 4; Resp’t Ex. 3. Unlike the Trust, the Note does not state which state’s law
governs it. I turn to Delaware’s conflict of laws principles. “Delaware follows the
Second Restatement’s ‘most significant relationship’ analysis when considering choice of
law in contract disputes.” Certain Underwriters at Lloyds, London v. Chemtura Corp.,
160 A.3d 457, 464 (Del. 2017). For contracts, the Court will assess five factors in
determining which state has the most significant relationship: (1) the place of contracting;
(2) the place of negotiation of the contract; (3) the place of performance; (4) the location
of the subject matter of the contract, and (5) the domicile, residence, nationality, place of
incorporation and place of business of the parties. See Restatement (Second) of Conflicts
of Laws §188 (1971). Applying these factors, I consider that the Note was executed in
Fenwick Island, Delaware, see Resp’t Ex. 3, and the underlying agreement has largely
been performed in Delaware. See, e.g., D.I. 4, Ex. A. Therefore, I apply Delaware law
related to the Note.
John argues that the Note cannot be enforced against him because it was not
notarized and was not signed by Settlor or Father. Tr. 85:22-86:8. Delaware’s Statute of
Frauds only requires that a writing memorializing a contract be signed by the person
against whom enforcement is sought. 6 Del. C. §2714(a). Therefore, the Note can be
enforced against him. John further asserts that the signature was not his, contending,
alternatively, that he was not capable for medical reasons of signing the Note in the fall
of 2006, or that he would not have signed the Note without it being notarized. Tr. 93:10-
14; id. 40:1-8. To the extent that John contends that the signature was forged, John bears
the burden of proof. See Clymer v. DeGirolano, 2021 WL 2181377, at *4 (Del. Ch. May
27, 2021). He did not present any evidence to show a forgery or that the Note is invalid.
Comparing the signature on the Note and John’s signature in a recent court filing, I note
both signatures contain distinctive “J”s and I find them to be sufficiently similar to
conclude that John has not met his burden to show that the Note was a forgery. Compare
Resp’t Ex. 3 with D.I. 29; see also D.R.E. 901(b)(3) (providing that a writing and
signature may be authenticated through a comparison made by the finder of fact).
36
Resp’t Ex. 3; see also Trial Tr. 41:20-24.
8
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
loan (principal and interest) back in a balloon payment at (1) the death of both
Settlor and Father “with the unpaid balance being deducted from the share of
[John’s] estate under the Will and or Trust of the last of the Lenders [Settlor or
Father] to die,” or (2) when John returned to gainful employment. 37 It is
undisputed that John received the money, and John produced that he paid Settlor or
Father back for the loan.38 Settlor assigned the Note to the Trust on June 3, 2010.39
When Martha and Mark were administering the Trust, they set off the amount of
principal and interest due on the Note against John’s beneficiary interest in the
Trust.40
37
Resp’t Ex. 3.
38
See Trial Tr. 40:9-11; id. 45:23-24; id. 46:12-14. John contends that the monies he
received were not a loan but repayment for monies owed to him by Father and,
alternatively, that Settlor wanted the loan changed so that the monies he received were
for taking care of her. First, John claims that Father owed him for using John’s academic
trust fund for other purposes. Id. 23:18-20; id. 26:19-24; id. 37:8-9. But, he admitted that
he has no documentation to support his claim. Id. 29:1-3; id. 32:7-11. And, neither
Martha nor Mark knew anything about an academic trust for John. Id. 64:15-20; id.
75:17-22. I find John’s testimony unpersuasive. Second, John asserts that, in April or
May 2008, Settlor made an oral modification to the loan so that the amounts paid
represented payments for services rendered to her for her care. Id. 33:9-12; id. 41:18-
42:2. I find John’s self-serving testimony to be unconvincing and rely on the evidence
showing that Settlor assigned the Note (unmodified) to the Trust in 2010 – two years
after the modification allegedly occurred. See Resp’t Ex. 4.; see also D.I. 4, Ex. A (March
9, 2011 letter from Raymond E. Tomasetti, Jr. and Settlor (“Tomasetti Letter”) regarding
“Loans for John J. Foster, Jr.,” discussing the Note and the amount due from John under
the Note as of January 31, 2011). I conclude that John has not proven monies paid to him
were not under the Note, or that the Note was subsequently modified to eliminate his
repayment obligation.
39
Resp’t Ex. 4.
40
Trial Tr. 59:11-60:8; id. 67:16-68:4; Resp’t Ex. 2.
9
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
I consider whether, under Florida law, Martha and Mark were entitled to set
off a beneficiary’s debt to the Trust against that beneficiary’s share of the Trust.
“If the trustee holds a claim against the beneficiary he has a duty to collect it, and
to use the beneficiary’s interest in the trust as a source of collection.”41 Therefore,
Martha and Mark were entitled to set off the loan debt that John owed to the Trust
under the Note against John’s share as a Trust beneficiary. Indeed, the Note shows
that deducting the “unpaid balance” of the loan from John’s share was explicitly
agreed to by the parties.42
2. $100,000.00 Advancement
The Trust provides that, at Settlor’s death, the remaining Trust assets will be
split among Settlor’s children, with John receiving a one-sixth share, subject to an
adjustment. The adjustment provision for John’s share provides:
(1) Adjustment to Share of John J. Foster, Jr. For purposes of
this subsection, the term “adjustment amount” shall refer to (i) the
sum of One Hundred Thousand Dollars ($100,000.00), less (ii)
aggregate transfers relating thereto from JOHN J. FOSTER, JR. to
[Settlor] and/or [Father] as of the date of the survivor of [Settlor or
Father], with the difference between (i) and (ii) then being divided by
41
Bogert Trusts & Trustees § 592 (2d ed. 1980). See also Cnty. Nat’l Bank & Tr. Co. of
Santa Barbara, 288 P.2d 880 (Cal. App. 1955); Sec. Tr. Co. v. Boyd, 32 A.2d 779 (Del.
Ch. 1943); Sheridan v. Riley, 32 A.2d 93 (N.J. Ch. 1943). While I found no Florida
caselaw addressing this point, this represents the majority view. “A trustee who has a
duty to pay or distribute property to a beneficiary should be able to set off a sum due (1) a
debt of the beneficiary to a settlor, [or] (2) a liability of the beneficiary to a trustee in
their representative capacity …” Bogert Trust & Trustees § 814 (3d ed. 2020).
42
Resp’t Ex. 3, §3(A)(1).
10
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
two (2). … The adjustment amount shall be subtracted from the share
created for JOHN J. FOSTER, JR., and allocated equally among the
shares created in Subsections (a) through (f) of this Section entitled
“Division Upon Death”, including the share created for JOHN J.
FOSTER, JR.
(“Adjustment Provision”). 43 Martha and Mark believed that the Adjustment
Provision addressed a loan, or monies provided in advance of Settlor’s death, by
Settlor to John.44 Similar to his argument regarding funds paid under the Note,
John asserts that the $100,000.00 was not an advancement but compensation for
Father’s improper use of funds from a separate trust.45 Unlike the Note, however,
there is no written documentation related to this $100,000.00.46 Considering the
evidence as a whole, I find that the $100,000.00 was likely an advancement but,
regardless, the Trust provides for adjusting John’s share based on that
43
Resp’t Ex. 1, at 85 (Fourth Amendment, §9.3(a)(1)).
44
See Resp’t Ex. 2; D. I. 4, ¶¶ 4, 7. Martha testified that she believed the reason for the
Adjustment Provision was that John had already received the $100,000.00, representing
the minimum amount the Settlor/Father wanted all of the children to receive from the
Trust, before Settlor’s death. Trial Tr. 54:20-55:5; see also D.I. 4. Ex. A (Tomasetti
Letter discussing that the Trust acknowledges “the $100,000 that [Settlor] had previously
given to [John]”).
45
See Trial Tr. 25:10-12; id. 29:10-31:10; id. 38:3-9. John repeatedly acknowledged that
he had no documentation of any debts that Father owed him. See, e.g., id. 33:16-34:1.
Further, there was some confusion in John’s testimony as to whether Father had paid
back the funds he owed him earlier. Trial Tr. 38:8-39:13. Martha and Mark disclaimed
knowledge of any academic trust for John or any debts that Father owed John. See id.
64:15-20; id. 65:12-16; id. 75:17-76:1. I do not credit John’s testimony because it was
self-serving and not corroborated by other evidence. And, the evidence provides no basis
to understand the nature or amount of the alleged debt and whether it was enforceable.
See supra note 38.
46
Cf. Resp’t Ex. 3.
11
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
$100,000.00.47 Martha testified that, in determining John’s share from the Trust,
she and Mark distributed the Trust funds according to the Trust’s terms as her
“parents wanted [them] to do,” and they argue that they complied with the
Adjustment Provision in setting off the $100,000.00 advancement against John’s
beneficiary share so that John’s share is equal “in a situation where he got [some
of] his before his parents died.”48
There is an issue, however, with Martha and Mark’s interpretation of the
Adjustment Provision regarding the calculation of John’s adjustment amount. 49
Under Florida law, “the polestar of trust interpretation is the settlor’s intent.”50 “If
the language in the trust is unambiguous, the settlor’s intent as expressed therein
controls and the court cannot rely on extrinsic evidence.”51 “To determine the
settlor’s intent, the court should construe the instrument as a whole, taking into
account the general dispositional scheme.”52
47
See Resp’t Ex. 1, at 85 (Fourth Amendment, §9.3(a)(1)).
48
See Trial Tr. 66:3-7; id. 66:18-24; id. 89:12-21; id. 90:13-14.
49
Although John did not bring up this issue specifically, he seeks to have his share of the
Trust equalized and Martha and Mark effectively raised it when they testified that they
had properly administered the Trust. Trial Tr. 66:3-7; id. 90:14-18; see also D.I. 1, at 2.
50
Vigliani v. Bank of Am., N.A., 189 So.3d 214, 219 (Fla. Dist. Ct. App. 2016) (cleaned
up).
51
Id. (cleaned up).
52
Id. (cleaned up).
12
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
The Adjustment Provision provides that the “adjustment amount” should be
subtracted from John’s share, divided by six, and one-sixth of the adjustment
amount added to each beneficiaries’ share, including into John’s.53 The
“adjustment amount” is $100,000.00, less any amount that John paid to Settlor or
Father during their lifetimes, divided by two.54 No evidence was presented that
John ever transferred any of the $100,000.00 to Settlor or Father during their
lifetimes. So, the “adjustment amount” should have been $50,000.00 ($100,000.00
divided by two), and $50,000.00 should have been deducted from John’s share,
divided into six, and $8,333.33 ($50,000.00 divided by six) should have been
added into each beneficiaries’ share, including John’s. But this was not the process
followed by Martha and Mark – they set off the entire $100,000.00 against John’s
interest in the Trust.55
In their administration of the Trust, Martha and Mark included the full
$100,000.00 from John and $20,000.00 from Patricia as Trust assets for a total of
$3,816,000.00, and a $636,000.00 distribution from the Trust. 56 Applying the
53
See supra note 43 and accompanying text.
54
Id.
55
Resp’t Ex. 2.
56
Id. The Trust provides for the same calculation to determine Patricia’s adjustment
amount for her $20,000.00 as it did for John’s $100,000.00. Compare Resp’t Ex. 1, at 85
(Fourth Amendment, §9.3(a)(1)) with id., at 85-86 (Fourth Amendment, §9.3(c)(1)).
$636,000.00 represents a one-sixth share of $3,816,000.00. The additional $219,000.00
13
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
Adjustment Provision, they should have included only the adjustment amounts – or
$50,000.00 from John and $10,000.00 from Patricia – making the total Trust assets
$3,756,000.00, and $626,000.00 a one-sixth share of the Trust assets.57 And, under
the Adjustment Provision, they should have deducted $50,000.00 from John’s
$626,000.00 share, and added $8,333.33 for his one-sixth share of his adjustment
amount and another $1,666.66 for his one-sixth share of Patricia’s adjustment
amount, or $586,000.00 for John.58 Then, as Martha and Mark did, John’s
$211,561.00 loan memorialized in the Note would be set off from John’s share,
which results in John being entitled to a distribution of $374,439.00 from the
Trust.59 John received $324,439.00 from the Trust.60 Therefore, John should
receive an additional $50,000.00 in distributions from the trustees.
that each beneficiary received from Father’s trust is not addressed in this Report. See
Resp’t Ex. 2.
57
Since Martha and Mark included the full $20,000.00 from Patricia in Trust assets, I
assume that Patricia did not compensate Settlor/Father for any of the $20,000.00 and her
adjustment amount would be $10,000.00 ($20,000.00 divided by 2), and $1,666.66 (1/6th
of the adjustment amount) would be added into each beneficiary’s share. However, any
change in the distribution related to the incorrect adjustment amount calculated for
Patricia’s share is not addressed here, since she has filed no claim in this Court regarding
her Trust distribution.
58
I rounded up the total of $585,999.99.
59
See supra notes 35-42 and accompanying text.
60
Ex. 2; Ex. 6; Ex. 8; Ex. 9. At trial, Martha and Mark’s Counsel indicated that John
actually received an additional $300.00. Trial Tr. 68:21-24; see Resp’t Ex. 6. I decline to
include that $300.00, which represented 1/6 of the cash found, since there is no proof that
the cash found was included as a Trust asset for distribution purposes. See Resp’t Ex. 2.
14
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
Under Florida law, as trustees, Martha and Mark are required to “administer
the trust in good faith, in accordance with its terms and purposes and the interests
of the beneficiaries …”61 They “shall administer the trust as a prudent person
would, by considering the purposes, terms, distribution requirements, and other
circumstances of the trust. In satisfying this standard, the trustee shall
exercise reasonable care, skill, and caution.”62 The Trust provides that trustees
shall act in a “fiduciary capacity,” and “shall not have the power, either directly or
indirectly, to enlarge or shift any of the interests of any beneficiary in the
[Trust].”63
Martha and Mark, in taking on the role of trustees of the Trust, were
required to fulfill the terms of the Trust in a prudent manner – with reasonable
care, skill and caution. I find that they misinterpreted the Trust and, in doing so,
failed to properly distribute John’s share of the Trust funds in violation of the
Trust’s terms. Their actions do not reflect the “diligence and care which a prudent
man ordinarily uses in his own concerns”64 and represent a breach of their duties as
fiduciaries. Under the Trust, they did not have the power to shift John’s interests
61
Fla. Stat. §736.0801.
62
Fla. Stat. §736.0804.
63
Resp’t Ex. 1, at 52 (Restatement, §10.21).
64
Thomas v. Carlton, 143 So. 780, 784 (Fla. 1932) (“trustees are held merely to that
diligence and care which a prudent man ordinarily uses in his own concerns”).
15
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
to other beneficiaries in contravention of the Trust terms. Accordingly, they are
liable for restoring John to the correct value of his share as determined by the
Trust.65 Given that the Trust distributions were made and the Trust was wound up
by the end of 2016, it is unlikely that undistributed Trust funds remain to
compensate John for the $50,000.00 shortfall. If no Trust assets remain, Florida
law allows a court to impose a constructive trust over wrongfully disposed of trust
property to the extent that the trust property is traceable, or to order other
appropriate relief.66 I recommend that the Court impose a remedy of a constructive
trust in the amount of $50,000.00 upon prior Trust distributions Martha and Mark
made to themselves to be held for John’s benefit.67
65
Fla. Stat. §736.1002 (if a trustee commits a breach of trust, they are liable for “[t]he
amount required to restore the value of the … trust distributions to what they would have
been if the breach had not occurred”).
66
Fla. Stat. §736.1001(2)(i),(j); see also id. §736.1018.
67
If a constructive trust cannot be established from prior Trust distributions to Martha
and Mark, the Court shall revisit the remedy and consider other equitable remedies to
make John whole. Further, in the Petition, John sought attorneys’ fees. See D.I. 1, at 2.
This request was not renewed at trial and John was no longer represented by counsel.
Delaware follows the American Rule, which provides that each party is normally
responsible for their own attorneys’ fees, whatever the outcome of the litigation, absent
express statutory language to the contrary or an equitable doctrine exception, such as the
bad faith exception. See Shawe v. Elting, 157 A.3d 142, 149 (Del. 2017) (citation
omitted); see also ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 558 (Del.
2014). Delaware courts have awarded attorneys’ fees for bad faith when “parties have
unnecessarily prolonged or delayed litigation, falsified records or knowingly asserted
frivolous claims.” Kaung v. Cole Nat. Corp., 884 A.2d 500, 506 (Del. 2005) (quoting
Johnston v. Arbitrium (Cayman Islands) Handels AG, 720 A.2d 542, 546 (Del. 1998))
(internal quotation marks omitted). “The bad faith exception is applied in ‘extraordinary
circumstances’ as a tool to deter abusive litigation and to protect the integrity of the
16
In the Matter of the Doris J. Foster Inter Vivos Declaration of Trust
C.A. No. 2018-0589-PWG
November 21, 2022
III. Conclusion
For the reasons set forth above, I recommend that the Court enter judgment
in John J. Foster, Jr.’s favor as to his claim for an equal distribution of the Trust
assets and that Martha and Mark be directed to distribute an additional $50,000.00
in Trust funds to John. If insufficient Trust funds exist, a constructive trust in that
amount shall be imposed upon prior distributions Martha and Mark made to
themselves from Trust funds. I recommend that the Court enter judgment in
Martha and Mark’s favor as to the remainder of John’s claims. This is a Master’s
Final Report and exceptions may be taken under Court of Chancery Rule 144.
/s/ Patricia W. Griffin
Master Patricia W. Griffin
judicial process.” Montgomery Cellular Holding Co. v. Dobler, 880 A.2d 206, 227 (Del.
2005) (citation omitted). Even if John has incurred attorneys’ fees in this litigation, I find
no basis to justify fee shifting in this case and that each party should bear their own fees.
17 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488401/ | UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
ANGELA CLEMENTE,
Plaintiff,
v. Case No. 1:20-cv-1527 (TNM)
FEDERAL BUREAU OF
INVESTIGATION, et al.,
Defendants.
MEMORANDUM OPINION
Plaintiff Angela Clemente submitted a broad Freedom of Information Act request to the
Federal Bureau of Investigation seeking records related to Jeffrey Epstein and his alleged
criminal activities. The FBI located thousands of responsive records, released some in full and
others with redactions, and withheld the vast majority under various FOIA exemptions. The FBI
now moves for summary judgment, submitting exhaustive declarations and Vaughn indices.
Clemente’s counsel never responded. Without arguments or evidence to the contrary, the Court
will grant the FBI’s motion.
I.
Clemente submitted a FOIA request to the FBI essentially seeking all records it had about
Jeffrey Epstein and his alleged criminal activities. See generally Compl., ECF No. 1; see also
id., Ex. 1, ECF No. 1-5 (letter requesting records under FOIA). The FBI searched for responsive
records, initially locating 11,571 responsive pages. See Def.’s Mot. for Summ. J. (Def.’s MSJ) at
3–4, ECF No. 34-2; Decl. of Michael G. Seidel (Seidel Decl.) ¶ 5, ECF No. 34-4; see also Exs. S
& T (Vaughn Indices), ECF Nos. 34-6, 34-7. The FBI advised Clemente that some responsive
1
records were accessible in the FBI’s FOIA Library (the “Vault”) using the search term “Jeffrey
Epstein,” and directed her to that online repository. See id. ¶ 7. And it informed her that other
records are located within an investigative file exempt from disclosure under FOIA Exemption
7(A), which shields law enforcement records pertaining to a pending or prospective enforcement
proceeding when release of the information could reasonably be expected to interfere with those
proceedings. See id.
The FBI then released 181 pages of the Vault records in full and 1,051 pages in part. See
id. ¶ 5. It withheld 10,339 pages in full under Exemptions 1, 3, 5, 6, 7(A), 7(C), 7(D), and 7(E).
See id. The FBI then processed 1,505 additional responsive pages, releasing 665 in full and 743
in part. See id. It withheld 97 of these pages in full because they were either duplicates of other
pages processed elsewhere in the production or exempt under Exemptions 1, 3, 5, 6, 7(A), 7(C),
7(D), and 7(E). See id.; see also id. ¶ 31.
The FBI also issued Clemente two Glomar responses. See id. ¶ 7. The FBI explained
that even acknowledging the existence of records about third-party individuals could reasonably
be expected to invade personal privacy under Exemptions 6 and 7(C). See id.; see also id. ¶ 171.
Similarly, the FBI argued that acknowledging the existence of records about confidential human
sources could jeopardize its ability to investigate and fight criminal behavior and could subject
the sources to reprisal under Exemption 7(D). See id. ¶ 7; see also id. ¶¶ 172–74. Finally, the
FBI argues that it released all non-segregable material. See id. ¶ 164.
II.
Courts resolve the “vast majority” of FOIA cases at summary judgment. Brayton v. Off.
of the U.S. Trade Rep., 641 F.3d 521, 527 (D.C. Cir. 2011). To prevail on a motion for summary
judgment, a party must show that “there is no genuine dispute as to any material fact.” Fed. R.
2
Civ. P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986). A dispute is
genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving
party.” Id. at 248. And a factual dispute is material if it could alter the outcome of the suit under
the substantive governing law. See id.
An agency is entitled to summary judgment in the FOIA context if it shows that it has
conducted a search reasonably calculated to uncover all relevant documents, see Morley v. CIA,
508 F.3d 1108, 1114 (D.C. Cir. 2007), and that each relevant record has been produced or is
exempt from disclosure, see Students Against Genocide v. DOS, 257 F.3d 828, 833 (D.C. Cir.
2001). FOIA requires “disclosure of documents held by a federal agency unless the documents
fall within one of nine enumerated exemptions[.]” U.S. Fish & Wildlife Serv. v. Sierra Club,
Inc., 141 S. Ct. 777, 785 (2021).
The agency bears the burden to show that the claimed exemptions apply. See ACLU v.
DOD, 628 F.3d 612, 619 (D.C. Cir. 2011). Courts construe FOIA exemptions narrowly, see
Milner v. Dep’t of Navy, 562 U.S. 562, 565 (2011), and consider their applicability de novo, see
King v. DOJ, 830 F.2d 210, 217 (D.C. Cir. 1987). An agency need not produce a record if a
court has enjoined its disclosure, because the agency has no discretion to exercise in such cases.
See Judicial Watch, Inc. v. DOJ, 813 F.3d 380, 383 (D.C. Cir. 2016).
An agency may submit “sufficiently detailed affidavits or declarations, a Vaughn index
of the withheld documents, or both, to demonstrate that [it] has analyzed carefully any material
withheld and provided sufficient information as to the applicability of an exemption[.]” Brennan
Ctr. for Justice v. DOS, 296 F. Supp. 3d 73, 80 (D.D.C. 2017); see also Shapiro v. DOJ, 893
F.3d 796, 799 (D.C. Cir. 2018). If no record evidence contradicts this information and there is
no evidence of agency bad faith, then summary judgment is appropriate. See ACLU, 628 F.3d at
3
626; see also Ancient Coin Collectors Guild v. DOS, 641 F.3d 504, 509 (D.C. Cir. 2011)
(“Uncontradicted, plausible affidavits showing reasonable specificity and a logical relation to the
exemption are likely to prevail.”).
III.
Recall that Clemente failed to respond to the FBI’s motion for summary judgment. 1 The
Court may therefore treat the FBI’s Statement of Material Facts Not in Dispute (SMF) as
admitted. See LCvR 7(h)(1). But the Court still must conduct an independent analysis of
whether the FBI’s search was adequate, whether it properly asserted exemptions, whether it
properly provided Glomar responses, and whether it met its segregability burden. See Winston &
Strawn, LLP v. McLean, 843 F.3d 503, 506–07 (D.C. Cir. 2016) (explaining that district courts
cannot treat a motion for summary judgment as conceded for want of opposition because “[t]he
burden is always on the movant to demonstrate why summary judgment is warranted”); see also
McGehee v. DOJ, 362 F. Supp. 3d 14, 18 (D.D.C. 2019) (granting summary judgment after
independent analysis in FOIA case when same counsel failed to oppose motion).
A.
The FBI’s search was adequate. To obtain summary judgment, the FBI must show “that
it made a good faith effort to conduct a search for the requested records, using methods which
can be reasonably expected to produce the information requested.” Oglesby v. U.S. Dep’t of
Army, 920 F.2d 57, 68 (D.C. Cir. 1990). An agency need not uncover every existing document;
rather, it must show that its search has been adequate and reasonable. See SafeCard Servs., Inc.
v. SEC, 926 F.2d 1197, 1201 (D.C. Cir. 1991). The Court’s inquiry therefore centers on the
1
Clemente is represented by James H. Lesar, Esq., who has repeatedly failed to zealously
prosecute his cases in this district. See, e.g., McGehee v. DOJ, 362 F. Supp. 3d 14, 18 & n.2
(D.D.C. 2019).
4
method of the search, not its results. See, e.g., Iturralde v. Comptroller of the Currency, 315
F.3d 311, 315 (D.C. Cir. 2003).
The FBI’s primary declarant shows that the FBI’s search was reasonably calculated to
uncover all records responsive to Clemente’s FOIA request. He describes how the FBI organizes
and indexes its files, and how it searches various record-keeping systems. See Seidel Decl. ¶¶
35–48. For Clemente’s request, the FBI searched both its FOIA document processing system
and its Central Records System for responsive records. See id. ¶ 48. And the FBI’s declarant
provides the terms searched and cut-off dates used. See id. The FBI has thus provided a
“reasonably detailed affidavit setting forth the search terms and the type of search performed,
and averring that all files likely to contain responsive materials (if such records exist) were
searched.” Oglesby, 920 F.2d at 68 (cleaned up).
B.
The FBI properly asserted Exemptions 1, 3, 5, 6, 7(A), 7(C), 7(D), and 7(E) for the
withheld records.
1.
First up is Exemption 1. It protects matters “specifically authorized under criteria
established by an Executive order to be kept secret in the interest of national defense or foreign
policy and . . . in fact properly classified pursuant to such Executive order.” 5 U.S.C.
§ 552(b)(1). The FBI here relies on Executive Order 13,526, which prescribes a uniform system
for classifying and safeguarding national security information. See Seidel Decl. ¶¶ 69–70. So
the FBI must show both that the information was classified under the proper procedures and that
the withheld information substantively falls under this Executive Order. See Salisbury v. United
States, 690 F.2d 966, 971–72 (D.C. Cir. 1982).
5
In the national security context, courts “consistently defer[] to executive affidavits
predicting harm to national security, and have found it unwise to undertake searching judicial
review.” Ctr. for Nat’l Sec. Studs. v. DOJ, 331 F.3d 918, 927 (D.C. Cir. 2003). This is so
because courts are generally ill-equipped to second-guess an agency’s opinion in this context.
See, e.g., ACLU, 628 F.3d at 624. The FBI’s burden is therefore “a light one,” id., and its
arguments need only be both “plausible” and “logical” to justify the invocation of a FOIA
exemption in this context. See Wolf v. CIA, 473 F.3d 370, 374–75 (D.C. Cir. 2007).
The FBI’s declarant reviewed the documents and determined that they contain
information properly classified as “secret” under Executive Order 13,526. See Seidel Decl. ¶ 72.
He explained that the withheld information relates to the FBI’s intelligence activities, sources,
and intelligence-gathering methods. See id. ¶ 74. And the information “consists of detailed
intelligence information gathered or compiled by the FBI on a specific individual(s) of national
security interest.” Id. Releasing this information “could reasonably be expected to cause serious
damage to the national security” because criminals could learn about the FBI’s intelligence-
gathering techniques. Id. ¶ 75. More, disclosure would reveal specific targets of national
security-related investigations and the priorities the FBI assigns to such investigations. See id.
The Court finds that it is both plausible and logical that disclosure of the withheld
information could reasonably be expected to damage national security. The FBI persuasively
explains how disclosure of the information at issue would “severely disrupt” its intelligence-
gathering capabilities. Seidel Decl. ¶ 75. And “finding no evidence in the record to support the
6
opposite conclusion, no further investigation is required.” ACLU, 628 F.3d at 625. The Court
thus finds that the FBI has properly invoked Exemption 1. 2
2.
Exemption 3 is next. Exemption 3 protects information “specifically exempted from
disclosure by statute” if the statute neither leaves discretion about disclosure nor establishes
particular criteria for withholding or refers to specific matters to be withheld. 5 U.S.C. §
552(b)(3). The FBI asserted this exemption to withhold in part or in full information that four
statutes shield from disclosure. See Def.’s MSJ at 17; Seidel Decl. ¶¶ 77–84.
First, the FBI attests that it properly withheld names, images, and other identifying
information of child witnesses and victims under the Child Victims’ and Child Witnesses’ Rights
Act, 18 U.S.C. § 3509. See Def.’s MSJ at 17; Seidel Decl. ¶ 77. Other courts in this district
have held that this Act “qualifies as an Exemption 3 withholding statute.” See, e.g., Rodriguez v.
Dep’t of Army, 31 F. Supp. 3d 218, 237 (D.D.C. 2014). The Court is satisfied that this statute
justifies the FBI’s withholding of information related to minor victims and witnesses as part of
the sexual abuse investigation involving Jeffrey Epstein. See Seidel Decl. ¶ 77. 3
2
For Exemptions 1 and 3, no foreseeable harm analysis is required. See Rosenberg v. DOD,
342 F. Supp. 3d 62, 73 n.1 (D.D.C. 2018) (explaining that the foreseeable harm analysis only
applies to exemptions under which discretionary disclosures are possible, which does not include
Exemptions 1 or 3 because disclosure is prohibited by law). Even if foreseeable harm analysis
were required, the Court finds that the FBI easily meets its burden as to its Exemption 1 and 3
withholdings because it asserts many harms in a focused and concrete way. See Reps. Comm. v.
FBI, 3 F.4th 350, 371 (D.C. Cir. 2021); see also Reps. Comm. for Freedom of the Press v. CBP,
567 F. Supp. 3d 97, 120 (D.D.C. 2021) (noting that an agency’s foreseeable harm burden may be
more easily met when “the risk of harm through disclosure is more self-evident and the potential
for agency overuse is attenuated”).
3
The FBI asserts that it also withheld some of this information under Exemptions 6, 7(C), and
7(D) too. See Seidel Decl. ¶ 77.
7
Second, the FBI withheld grand jury materials falling within Federal Rule of Criminal
Procedure 6(e), which protects matters before the grand jury. The D.C. Circuit has explained
that even though “a rule is not generally considered to be a statute, it qualifies as one under
FOIA because the Congress has enacted it into positive law.” Murphy v. EOUSA, 789 F.3d 204,
206 (D.C. Cir. 2015). And the Circuit has also held that an agency may withhold information
related to a grand jury matter under Exemption 3 “if the disclosed material would tend to reveal
some secret aspect of the grand jury’s investigation, including the identities of witnesses.” Id.
The FBI withheld the names of subpoena recipients, specific records it sought via subpoena, and
records provided in response to its subpoenas. See Seidel Decl. ¶ 78. The Court agrees that
disclosure of this information would violate the secrecy of grand jury proceedings, including the
identities of witnesses, and that the FBI properly withheld this information.
Third, the FBI withheld documents pertaining to arrests and the criminal history of third-
party juveniles under the Juvenile Justice and Delinquency Act, 18 U.S.C. § 5038. See Def.’s
MSJ at 18; Seidel Decl. ¶ 79. This Act shields from disclosure all information related to any
juvenile delinquency proceeding, with a few exceptions. See 18 U.S.C. § 5083(a)(1–6). Because
Clemente’s request does not qualify for any of the Act’s exceptions, the Court finds that the FBI
properly withheld these records under Exemption 3. 4
Fourth, the FBI withheld information in two documents under the National Security Act,
50 U.S.C. § 3024(i)(1). See Seidel Decl. ¶ 80. It asserts some of these withholdings alongside
Exemption 1. See id.; see also id. ¶ 83. As the FBI explains, this Act affords absolute protection
to intelligence sources and methods. See 50 U.S.C. § 3024(i)(1). And the FBI determined that
4
The FBI asserts that it withheld some of this information under Exemptions 6 and 7(C) too.
See Seidel Decl. ¶ 79.
8
information in the two withheld documents “would reveal intelligence sources and methods”
allowing criminals to develop and implement countermeasures, all to the detriment of the
nation’s security. Seidel Decl. ¶ 83; see also id. ¶ 82 n.35. To bolster its assertions, the FBI
submitted a classified ex parte declaration. See id. ¶ 84. The Court has reviewed this declaration
and finds that it supports the FBI’s assertion of Exemption 3 under this Act. The FBI therefore
properly withheld these records.
3.
Next up is Exemption 5. This exemption shields from disclosure “inter-agency or intra-
agency memorandums or letters that would not be available by law to a party other than . . . in
litigation with the agency[.]” 5 U.S.C. § 552(b)(5). In other words, this exemption protects
materials that would be privileged in the civil discovery context, including materials covered by
the deliberative process and attorney work product privileges.
The deliberative process privilege “shields documents that reflect an agency’s
preliminary thinking about a problem, as opposed to its final decision about it.” Sierra Club, 141
S. Ct. at 785. To qualify for the privilege, a document must be both predecisional and
deliberative. See Reps. Comm. for Freedom of the Press v. FBI, 3 F.4th 350, 362 (D.C. Cir.
2021). A document is predecisional if the agency generated it before its final decision on a
matter. See, e.g., Coastal States Gas Corp. v. DOE, 617 F.2d 854, 866 (D.C. Cir. 1980). A
document is deliberative if the agency prepared it to “help the agency formulate its position.”
Sierra Club, 141 S. Ct. at 786. There is one final step. The FBI must also provide a “focused
9
and concrete” explanation of why disclosure will cause foreseeable harm “in the specific context
of the agency action at issue.” Reps. Comm., 3 F.4th at 370.
The FBI withheld two categories of information under the deliberative process privilege:
FOIA processing records and emails discussing FOIA search decisions. See Seidel Decl. ¶¶ 90–
91. The FBI explains that the first category includes “search slips, electronic surveillance search
slips, and internal FBI administrative tracking forms.” Id. ¶¶ 88–89. It argues that these are
predecisional because they catalog how the FBI formulates a final FOIA search decision. See id.
¶ 91. And the FBI asserts that they are deliberative because they show the way search avenues
are discussed and revised. See id. The Court agrees. Cf. Machado Amadis v. DOJ, 388 F. Supp.
3d 1, 18–19 (D.D.C. 2019) (finding that similar documents qualify for the deliberative process
privilege), aff’d sub nom., 971 F.3d 364 (D.C. Cir. 2020).
As for foreseeable harm, the FBI explains that disclosure of the FOIA processing records
would “curtail[] proper deliberations during the processing of FOIA requests” and lead to
“public confusion as to the FBI’s final decisions” because it would “show considered decisions
never adopted and actions never taken and cause doubt as to the FBI’s final decision or action.”
See id. Without evidence from Clemente to the contrary, the Court finds that the FBI carries its
foreseeable harm burden as to this information. See Reps. Comm. for Freedom of the Press v.
CBP, 567 F. Supp. 3d 97, 121–22 (D.D.C. 2021) (explaining that similar rationales coupled with
assertions about public confusion can suffice).
Now for the emails discussing FOIA search decisions. The FBI withheld correspondence
between the FBI’s Records Management Division, FBI field offices, and DOJ’s Office of Public
Affairs about the pending status of an investigation and the status of processing records
associated with the investigation. See id. ¶¶ 92–93. The FBI explains that these emails are
10
deliberative and predecisional because they discuss whether information pertaining to an
investigation can be released to the FOIA requester and contain “strategy development on how to
handle” FOIA responses, including whether expedited processing is warranted. Id. ¶ 92. The
Court agrees that these emails qualify for the deliberative process privilege. Cf. Machado
Amadis, 388 F. Supp. 3d at 18–19 (finding that an agency’s impressions and analysis of its FOIA
searches and corresponding recommendations qualify for the deliberative process privilege).
As for foreseeable harm, the FBI asserts that releasing the information in these emails
would allow FOIA requesters to judge “the nature of certain FBI law enforcement
investigations,” chill internal discussions about how to respond to FOIA requests, and “create
public confusion because [the information] predates final agency decisions.” Id. ¶¶ 93, 95. The
FBI has thus provided a “focused and concrete demonstration of why disclosure of the particular
type of material” will cause foreseeable harm “in the specific context of the agency action at
issue.” Reps. Comm., 3 F.4th at 370.
The FBI also argues that some documents qualify for Exemption 5 because the attorney
work-product doctrine protects them. This doctrine protects documents and other records
prepared by or for an attorney in anticipation of litigation. See Coastal States, 617 F.2d at 863–
64. The FBI relies on this doctrine to withhold a few documents. See Seidel Decl. ¶ 97. They
include (1) memoranda containing information from an Assistant United States Attorney
(AUSA) about the timing of Epstein’s indictment and seizure of his assets; (2) a memorandum
sent to an AUSA about the value of an asset Epstein owned for consideration of its seizure; and
(3) memoranda describing actions the FBI is taking at the direction of an AUSA related to a
potential forfeiture action for Epstein’s assets and the potential prosecution of Epstein and others.
See id. The FBI explains that it created these memoranda “in reasonable anticipation of
11
litigation” and that they contain the “AUSA’s prosecutorial strategy and the information the
AUSA was gathering to either support an indictment of Jeffrey Epstein or a civil forfeiture action
or both.” Id. The Court agrees with the FBI that these documents fall squarely within the
attorney work-product doctrine. See Coastal States, 617 F.2d at 864–65.
As for foreseeable harm, the FBI notes that releasing this type of information would
impede prosecutors’ ability to properly prepare legal theories and would hinder their ability to
effectively represent the United States in any future litigation related to Epstein’s co-
conspirators. See Seidel Decl. ¶ 97. The Court agrees that this is a reasonably foreseeable harm
articulated with sufficient contextual specificity. Cf. Reps. Comm., 567 F. Supp. 3d at 120. So
the FBI properly withheld these memoranda under Exemption 5.
4.
The FBI also claims Exemptions 6 and 7(C). Though the two exemptions are similar,
7(C) “provides broader privacy protections” and “thus establishes a lower bar for withholding
material.” CREW v. DOJ, 854 F.3d 675, 681 (D.C. Cir. 2017). So when agencies rely on both
Exemptions 6 and 7(C) for the same material, the Court need not “consider Exemption 6
separately[.]” Roth v. DOJ, 642 F.3d 675, 681 (D.C. Cir. 2017). Exemption 7(C) protects
information compiled for law enforcement purposes if disclosure “could reasonably be expected
to constitute an unwarranted invasion of personal privacy.” 5 U.S.C. § 552(b)(7)(C). The FBI
always invokes the two exemptions in tandem. See Seidel Decl. ¶¶ 103–14. The Court thus
considers only Exemption 7(C).
Exemption 7(C) protects from disclosure law enforcement records that “could reasonably
be expected to constitute an unwarranted invasion of personal privacy.” 5 U.S.C.
§ 552(b)(7)(C); see also Shapiro, 893 F.3d at 800. “To determine whether an invasion of
12
privacy is unwarranted, courts balance the privacy interest against the public interest in
disclosure, including any potential interest in airing governmental misconduct.” Prot. Demo’cy
Project, Inc. v. NSA, 10 F.4th 879, 889 (D.C. Cir. 2021). The relevant public interest here is
whether the withheld information “sheds light on an agency’s performance of its statutory
duties.” DOJ v. Reps. Comm. for Freedom of the Press, 489 U.S. 749, 773 (1989).
The FBI withheld the names and identifying information of several categories of people
under Exemption 7(C). They are: (1) third parties of investigative interest; (2) FBI special agents
and professional personnel, including victim specialists; (3) third-party victims; (4) local law
enforcement personnel; (5) third parties mentioned as part of the FBI’s investigative efforts or
who provided information; (6) non-FBI federal government personnel; and (7) state and local
government personnel. See Seidel Decl. ¶¶ 103–114. The FBI attests that it “scrutinized” each
piece of information it withheld “to determine the nature and strength of the privacy interest of
each individual whose name or other identifying information appears in the records at issue.”
Seidel Decl. ¶ 101. And the FBI explains that it balanced each individual’s privacy interest
against the public’s interest in disclosure. See id.
The FBI also asserts that foreseeable harm would result from disclosure of these
individuals’ names or identifying information. The FBI explains that the individuals whose
identities are released could be “targeted for reprisal” or may “become targets of inquiries for
unauthorized access to investigative information.” Id. ¶ 106; see also id. ¶¶ 103, 109, 112. So
too for victims, who could also suffer embarrassment if their names were released. See id. ¶ 108.
And the FBI fears that releasing certain names “could lead to harassment, intimidation by
investigative subjects, legal or economic detriment, physical harm, or even death.” Id. ¶ 114.
13
The FBI has thoroughly described the risk of foreseeable harm in the specific context of the
agency action at issue. See Reps. Comm., 3 F.4th at 369.
Nothing in the record suggests that the withheld information clarifies the FBI’s
performance of its statutory duties. See Reps. Comm., 489 U.S. at 773. And given the FBI’s
uncontradicted, plausible declaration showing a logical relationship to the exemption and
foreseeable harm, the Court find that the FBI has properly invoked Exemption 7(C). See Ancient
Coin Collectors Guild, 641 F.3d at 509.
5.
The FBI also asserts Exemptions 7(A), (D), and (E), all of which protect “records or
information compiled for law enforcement purposes.” 5 U.S.C. §552(b)(7). To properly assert
Exemption 7 at all, the FBI must first show that the records relate to “anything that can fairly be
characterized as an enforcement proceeding.” See Jefferson v. DOJ, 284 F.3d 172, 177 (D.C.
Cir. 2002). Courts typically give criminal law enforcement agencies deference when they assert
that records were compiled for law enforcement purposes. See, e.g., Pratt v. Webster, 673 F.2d
408, 416 (D.C. Cir. 1982). The FBI need only rationally show that the information relates to the
agency’s enforcement functions. See Tax Analysts v. IRS, 294 F.3d 71, 79 (D.C. Cir. 2002).
It does so here. The FBI explains at length that it compiled the records “in furtherance of
the FBI’s investigation of child prostitution and sex trafficking involving Jeffrey Epstein and
other individuals of investigative interest.” Seidel Decl. ¶ 54. Though Epstein died soon after he
was indicted, the FBI explains that its investigation is ongoing because “it includes other
individuals of investigative interest.” Id. Because the records it withheld under Exemption 7
“were compiled to document the FBI’s investigation of potential federal crimes,” see id., the
14
Court agrees that they satisfy Exemption 7’s threshold requirement. The Court next analyzes the
FBI’s assertion of Exemption 7’s subsections.
First, Exemption 7(A). To justify its application of this exemption, the FBI must show
that a law enforcement proceeding is pending or prospective and that disclosure of the
information could harm the proceeding. See Mapother v. DOJ, 3 F.3d 1533, 1540 (D.C. Cir.
1993). The FBI asserts this exemption to protect information related to an ongoing criminal
investigation of Jeffrey Epstein and others for sex trafficking and child prostitution, and to
protect any prospective prosecution of potential co-conspirators. See Def.’s MSJ at 12–13;
Seidel Decl. ¶¶ 55–59. The FBI’s declarant describes the types of documents exempt from
release, including emails, interview forms, interview notes, documents from state and local law
enforcement agencies, documents implementing sensitive investigative techniques, grand jury
subpoenas, evidence logs, and more. See Seidel Decl. ¶ 59.
And the FBI determined that releasing these documents “would provide criminals with
information about the government’s investigation and enforcement strategies in ongoing matters,
allow them to predict and potentially thwart these strategies, and allow them to identify and
tamper with witnesses or otherwise destroy evidence.” Id. ¶ 57. It also confirmed that release of
the records would harm at least one active investigation and any prospective prosecutions of
Epstein’s potential co-conspirators. See id. The FBI properly asserts Exemption 7(A) because it
identifies the pertinent investigations and explains how release of the withheld information could
imperil them. Cf. Mapother, 3 F.3d at 1540.
Second, Exemption 7(D). It protects “records or information compiled for law
enforcement purposes” when release of the information “could reasonably be expected to
disclose the identity of a confidential source.” 5 U.S.C. § 552(b)(7)(D). To invoke Exemption
15
7(D), an agency must show either that a source provided the information to the agency under
express assurances of confidentiality or that the circumstances support an inference of
confidentiality. See DOJ v. Landano, 508 U.S. 165, 172 (1993). The FBI withheld information
from both types of sources.
First up are sources operating under express assurances of confidentiality. To meet its
burden, the FBI must present “probative evidence that the source did in fact receive an express
grant of confidentiality.” Campbell v. DOJ, 164 F.3d 20, 34 (D.C. Cir. 1998). The FBI asserts
that it found evidence while processing the records that certain individuals “either requested that
their identity not be revealed” or that FBI investigators “would have, by standard practice,
expressly promised them that their identity and the information provided (outside of its
investigative use) would remain confidential.” Seidel Decl. ¶ 121. More, the FBI explains that
the designation “CW” (cooperating witness) or “CHS” (confidential human source) on certain
files indicates that these sources provided information under an express grant of confidentiality.
Id. ¶ 122. The FBI therefore offers probative evidence that these sources received express
assurances of confidentiality. See Campbell, 164 F.3d at 34. So the FBI withheld their names
and identifying information and the information they provided. See id. ¶¶ 121–23. As for
foreseeable harm, the FBI explains that releasing this information would “display an
unwillingness by the FBI to honor its assurance of confidentiality to current and future sources,”
causing “great detriment to the FBI’s ability to recruit and maintain reliable confidential
sources.” Id. ¶¶ 122–23. The FBI properly asserted Exemption 7(D) as to this information.
Next up are sources operating under implied confidentiality. The FBI argues that for
certain sources, the circumstances in which they provided information support an inference of
confidentiality. See id. ¶¶ 116, 118–20, 124–26. These circumstances include the unique
16
position of the sources, their inside knowledge of investigative subjects, and the detailed
information they provided about the trafficking and prostituting of children. See id. The Court
agrees that these circumstances support a finding of implied confidentiality. Cf. Landano, 508
U.S. at 179. The FBI thus properly withheld the names and other identifying information of
these sources and the information they provided. See Seidel Decl. ¶¶ 118–20, 124–26. As for
foreseeable harm, the FBI explains that disclosing the information these sources provided could
jeopardize the FBI’s ability to ask these sources for help going forward and could subject the
sources to reprisal. See id. The FBI properly asserted Exemption 7(D) as to this information.
Third, Exemption 7(E). That exemption protects “information compiled for law
enforcement purposes” when its release “would disclose techniques and procedures for law
enforcement investigations or prosecutions, or would disclose guidelines” for the same. 5 U.S.C.
§ 552(b)(7)(E). The FBI applied this exemption to protect the non-public investigative
techniques and procedures it uses. See Seidel Decl. ¶ 128. The D.C. Circuit has explained that
this exemption sets “a relatively low bar for the agency to justify withholding.” Blackwell v.
FBI, 646 F.3d 37, 42 (D.C. Cir. 2011). The key is whether disclosure “could reduce or nullify
[the] effectiveness” of the investigative techniques and procedures. Judicial Watch, Inc. v. Dep’t
of Commerce, 337 F. Supp. 2d 146, 181 (D.D.C. 2004).
The FBI easily clears that low bar. Its declarant explains that the FBI withheld collection
methods, analysis of investigative information, sensitive file numbers, types and timing of
investigations, information about targets, dates, and the scope of surveillance, and more. See
Seidel Decl. ¶¶ 129–55. The FBI adequately explained that it applied this exemption to non-
public investigative techniques and procedures that it uses to enforce laws. See id. And the FBI
articulates a context-specific foreseeable harm: releasing investigative techniques could help
17
criminals evade the law, employ countermeasures, and avoid criminal activities in a particular
area to evade detection. See id. More, this Court has recognized that the sensitive context in
which Exemption 7(E) claims often arise suggest a finding of foreseeable harm. See Reps.
Comm., 567 F. Supp. 3d at 129–31. The FBI has properly asserted Exemption 7(E).
C.
The FBI also withheld 38 pages in full because they are sealed by court order. See Def.’s
MSJ at 30; Seidel Decl. ¶ 158 (citing case number 08-mj-08068-LRJ (S.D. Fla.)). To assess
whether the FBI properly withheld sealed records, this Court looks to whether the seal prohibits
the agency from disclosing the records. See Judicial Watch, 813 F.3d at 383; see also Morgan v.
DOJ, 923 F.2d 195, 197 (D.C. Cir. 1991). The FBI’s declarant attests that the FBI searched for
an unsealing order within the case file on the Public Access to Court Electronic Records
(“PACER”) system but found none. See Seidel Decl. ¶ 158. The FBI also contacted the U.S.
Attorney’s Office to ask about the seal. See id. That USAO informed the FBI that the court
order was sealed under Federal Rule of Criminal Procedure 6(e). See id. Most importantly, the
FBI asserts that it withheld records and information “pursuant to court order” in its statement of
undisputed material facts, see SMF ¶ 21, ECF No. 34-3, which the Court finds admitted because
Clemente failed to oppose them. See LCvR 7(h). Given all of this, the Court finds that summary
judgment is proper as to these records. 5
5
Had Clemente disputed the FBI’s assertions, this would have been a closer call. For the D.C.
Circuit has made clear that courts cannot rely on the “mere existence of the seal,” but must
“inquir[e] into its intended effect.” Morgan, 923 F.2d at 197. This Court does so by evaluating
four factors: (1) any explicit sealing order from the court, if one exists; (2) extrinsic evidence
about the intended scope of a purported sealing order; (3) orders of the same court in similar
circumstances; and (4) the issuing court's general rules or procedures. See id. at 197–98; accord
Judicial Watch, 813 F.3d at 383. But given the FBI’s uncontroverted statement that these
documents are sealed by court order, the Court finds that summary judgment is proper.
18
D.
The FBI properly issued a Glomar response. 6 An agency may issue a Glomar response
in circumstances where even acknowledging the fact of a record’s existence would result in harm
under one or more FOIA exemptions. See 5 U.S.C. § 522(b)(7)(A). The FBI issued two Glomar
responses to Clemente. One pertained to her request for documents about certain third parties
and another to her request for confidential human source records. See Seidel Decl. ¶¶ 166, 172.
The FBI refused to confirm or deny the existence of records pertaining to certain third parties
because doing so would violate privacy interests that Exemptions 6 and 7(C) protect. See id. ¶
166. And the FBI refused to confirm or deny the existence of certain confidential human source
records because doing so would harm interests related to its confidential source program that
Exemption 7(D) protects. See id. ¶ 172. Clemente has not challenged these Glomar responses,
and the Court finds that they are proper. Cf. Roth, 642 F.3d at 1178.
E.
The Court finds that the FBI properly satisfied its segregability burden. The FBI must
show “with reasonable specificity” why a document cannot be further segregated. Armstrong v.
Exec. Off. of the President, 97 F.3d 575, 578–79 (D.C. Cir. 1996). And the FBI is “entitled to a
presumption that [it] complied with the obligation to disclose reasonably segregable material.”
Sussman v. U.S. Marshals Serv., 494 F.3d 1106, 1117 (D.C. Cir. 2007). The FBI’s declarant
explains that the agency reviewed each record to identify information exempt from disclosure
and determined that there is no meaningful, non-exempt information that can be reasonably
6
The phrase “Glomar response” derives from Phillippi v. CIA, 546 F.2d 1009 (D.C. Cir. 1976),
in which the CIA refused to confirm or deny the existence of records relating to the
“Hughes Glomar Explorer,” a ship allegedly deployed by the U.S government to raise a sunken
Soviet submarine for analysis by the U.S. military and intelligence community. See Roth, 642
F.3d at 1171.
19
segregated and released. See Seidel Decl. ¶ 164. So the burden is on Clemente to offer contrary
evidence to rebut the applicable presumption. See Sussman, 494 F.3d at 1117. She has not done
so. The Court therefore finds that the FBI disclosed all reasonably segregable, non-exempt
information. See id.
IV.
For these reasons, the Court will grant the FBI’s motion for summary judgment. A
separate Order will issue.
2022.11.21
16:26:06 -05'00'
Dated: November 21, 2022 TREVOR N. McFADDEN, U.S.D.J.
20 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488402/ | Filed 11/21/22 (unmodified opinion attached)
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
BARBARA MORGAN et al., D079364
(Super. Ct. No. 37-2019-00052045-
Plaintiffs and Appellants, CU-OR-CTL)
v. ORDER MODIFYING OPINION
AND DENYING REHEARING
YGRENE ENERGY FUND, INC. et al.,
Defendants and Respondents. NO CHANGE IN JUDGMENT
JANET ROBERTS et al., D079369
(Super. Ct. No. 37-2019-00059601-
Plaintiffs and Appellants, CU-OR-CTL)
v.
RENEW FINANCIAL GROUP, LLC
et al.,
Defendants and Respondents.
THE COURT:
It is ordered that the opinion filed November 1, 2022 be modified as
follows:
1. On page 10, at the end of the top paragraph, after the words “ ‘and
possibly the entire balance if the violation is found to have been “willful,” ’ ”
add the following sentence:
In what plaintiffs have styled as their “fourth cause of
action” alleging violations of Financial Code section 22750,
and the “fifth cause of action” invoking Business and
Professions Code section 7159.2, plaintiffs seek “public
injunctive relief”—that is, an order (1) prohibiting
defendants from “engaging in the business of making
consumer loans unless and until each is property licensed
as a Finance Lender,” and (2) requiring each program
administrator to include a joint check requirement in any
future agreement.
2. The last paragraph on page 14 and ending on page 15, after the
words “ ‘No other persons may bring such an action . . . .’ (Ibid.)”—insert the
following paragraph:
This same analysis applies to what plaintiffs have
labeled as their fourth and fifth causes of action for public
injunctive relief. The underlying premise of each is that
defendants are either sellers of home improvement services
or are engaged in the business of making loans. Public
injunctive relief is, as its name suggests, a remedy, not a
theory of liability. These remedial requests are based on
the same legal theories, arise from the same alleged
operative facts, and involve the same alleged primary
rights as the first three causes of action. The only
difference is the nature of the remedy sought. (See McGill
v. Citibank, N.A. (2017) 2 Cal.5th 945, 961 [public
injunctive relief is a remedy under the Unfair Competition
Law].) “Injunctive relief is a remedy, not a cause of action.
[Citations.] A cause of action must exist before a court may
grant a request for injunctive relief.” (Allen v. City of
Sacramento (2015) 234 Cal.App.4th 41, 65.) Here, because
the first three causes of action fail as a matter of law, the
fourth and fifth, seeking additional remedies, necessarily
fail as well.
2
The petition for rehearing is denied.
There is no change in judgment.
McCONNELL, P. J.
Copies to: All parties
3
Filed 11/1/22 (unmodified opinion)
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
BARBARA MORGAN et al., D079364
Plaintiffs and Appellants,
v. (Super. Ct. No. 37-2019-00052045-
CU-OR-CTL)
YGRENE ENERGY FUND, INC., et al.,
Defendants and Respondents.
JANET ROBERTS et al., D079369
Plaintiffs and Appellants,
v. (Super. Ct. No. 37-2019-00059601-
CU-OR-CTL)
RENEW FINANCIAL GROUP, LLC,
et al.,
Defendants and Respondents.
APPEALS from judgments of the Superior Court of San Diego County,
Richard S. Whitney, Judge. Judgments affirmed. Requests for judicial notice
denied.
James Swiderski for Plaintiffs and Appellants.
Buckley, Fredrick S. Levin and Ali M. Abugheida for Defendants and
Respondents Ygrene Energy Fund, Inc., GoodGreen 2016-1, GoodGreen 2017-
1, GoodGreen 2017-2, GoodGreen 2018-1, GoodGreen 2019-1, GoodGreen
2015 LLC, GoodGreen 2016-1 LLC, GoodGreen 2016-1 Trust, GoodGreen
Holdings 2016-A Trust, GoodGreen 2017-1 Trust, GoodGreen Funding 2016-1
LLC, GoodGreen Funding 2017-1 LLC, GoodGreen 2017-2 LLC, GoodGreen
Funding 2017-R1 LLC, GoodGreen Funding 2018-1 LLC, GoodGreen
Holdings 2016-A Trust, Renew Financial Group LLC, Renew 2017-1, Renew
2017-2, and Renew 2018-1.
Reed Smith, Jesse L. Miller, David J. de Jesus and Emily F. Lynch for
Defendants and Respondents Wilmington Trust, N.A., as Trustee of Hero
Funding Trust 2015-2, Hero Funding Trust 2015-3, Hero Funding Trust
2016-1, Hero Funding Trust 2016-2, Hero Funding Trust 2017-1, Hero
Funding Trust 2017-3, and Hero Funding Trust 2018-1.
Akin Gump Strauss Hauer Feld and Neal R. Marder for Defendants
and Respondents Golden Bear 2016-1, LLC, Golden Bear 2016-2, LLC, and
Golden Bear 2016-R, LLC.
2
The issue in these consolidated appeals is not an unfamiliar one—
whether plaintiffs were required to first exhaust administrative tax remedies
before filing this lawsuit. But it arises in a novel context where property tax
and home improvement financing intersect.
In 2008, California enacted a Property Assessed Clean Energy program
(PACE) as a method for homeowners to finance energy and water
conservation improvements. Like an ordinary home equity loan, a PACE
debt is created by contract and secured by the improved property. But like a
tax, the installment payments are billed and paid as a special assessment on
the improved property, resulting in a first-priority tax lien in the event of
default.
The named plaintiffs in these putative class actions are over 65 years
old and entered into PACE contracts. Barbara Morgan, for example,
borrowed over $100,000 for “reflective coating” and “energy efficient”
windows. Her resulting 20-year special tax assessment bears 8.49 percent
interest, increasing her property taxes by nearly $15,000 annually.
Similarly, plaintiff John Brown borrowed over $100,000 for a new air
conditioner, a “cool roof,” and “permeable ground cover,” a fancy name for
concrete pavers. The annual percentage rate on his PACE loan is 9.29
percent. His property taxes increased by over $11,400 annually for 20 years.
The defendants are private companies who either made PACE loans to
the plaintiffs, were assigned rights to payment, and/or administered PACE
programs for municipalities. The gravamen of the complaint in each case is
that PACE financing is actually, and should be treated as, a secured home
improvement loan. Plaintiffs allege that defendants engaged in unfair and
deceptive business practices by violating consumer protection laws, including
3
Civil Code section 1804.1 subdivision (j), which prohibits taking a security
interest in a senior citizen’s residence to secure a home improvement loan.
The liability theories are intriguing, but we need not and do not
address them here. The appeals turn instead on a procedural issue.
Generally, a taxpayer may not pursue a court action for a refund of property
taxes without first applying to the local board of equalization for a reduction
and then filing an administrative claim for a refund. (Rev. and Tax. Code, 1
§§ 1603, 5097; see Steinhart v. County of Los Angeles (2010) 47 Cal.4th 1298,
1307‒1308 (Steinhart).) “[S]trict legislative control over the manner in which
tax refunds may be sought is necessary so that government entities may
engage in fiscal planning based on expected tax revenues.” (Woosley v. State
of California (1992) 3 Cal.4th 758, 789.)
Here, defendants demurred to the complaints on the sole ground that
plaintiffs failed to allege they first exhausted administrative remedies. The
trial court agreed, sustained the demurrers without leave to amend, and
entered a judgment of dismissal in each case.
On appeal, plaintiffs primarily contend they were not required to
pursue administrative remedies because they have sued only private
companies and do not challenge “any aspect of the municipal tax process
involved.” (Italics omitted.) But as we will explain, the complaints seek tax
refunds, an injunction against future tax assessments, and removal of tax
liens. Despite their assertions to the contrary, plaintiffs do challenge their
property tax assessments. And although they have not sued any government
entity, the “consumer protection statutes under which plaintiffs brought their
action cannot be employed to avoid the limitations and procedures set out by
1 Undesignated statutory references are to the Revenue and Taxation
Code.
4
the Revenue and Taxation Code.” (Loeffler v. Target Corp. (2014) 58 Cal.4th
1081, 1092 (Loeffler).)
Plaintiffs also contend that the exhaustion rule should not apply
because their liability theories involve legal issues that an assessor’s board
lacks expertise to resolve. The Legislature, however, has given such boards
“ ‘jurisdiction over nonvaluation issues.’ ” (Williams & Fickett v. County of
Fresno (2017) 2 Cal.5th 1258, 1271 (Williams & Fickett).) Thus, we conclude
that plaintiffs were required to submit their claims through the
administrative appeals process in the first instance. Their failure to do so
requires the judgments to be affirmed.
FACTUAL AND PROCEDURAL BACKGROUND
Because the appeals challenge a judgment of dismissal entered upon
the sustaining of a demurrer without leave to amend, we draw the operative
facts from the complaints. (Steinhart, supra, 47 Cal.4th at p. 1304, fn. 1.)
A. PACE Programs
In 2008, the Legislature determined that promoting energy efficient
improvements to real property was “necessary to address the issue of global
climate change.” (Stats. 2008, ch. 159 (Assem. Bill No. 811) § 2; Former Sts.
& Hy. Code, § 5898.14, subd. (a)(1).) Recognizing that the cost “prevents
many property owners from making these improvements,” it authorized “the
legislative body of any city” to “finance” the installation of energy efficiency
improvements that are permanently affixed to real property. (Former Sts. &
Hy. Code, § 5898.14 (Stats. 2008, ch. 159, § 2).) The Legislature envisioned
that municipalities would borrow money by selling bonds to private investors.
In turn, local government would lend the money to homeowners, who would
use it to pay contractors for installing energy and/or water conservation
5
upgrades. (Sts. & Hy. Code, § 5898.22, subd. (d).) The PACE loan would be
repaid by an assessment added to the homeowner’s annual property tax bill,
and thus secured by a priority tax lien that runs with the land.
As enacted in 2008, PACE seemingly offered many benefits for
homeowners. Expensive improvements, such as solar energy panels could be
purchased with no down payment. And because the maximum amount
financed would be based on the property’s value—not the borrower’s net
income or ability to repay—there was no need to verify employment or
require good credit. PACE offered other benefits too. Anticipated energy
savings were expected to at least in part offset the increase in property tax,
and the improvements were expected to increase the property’s market value.
When it first enacted PACE, the Legislature anticipated that local
governments would operate their own programs, as they did with other
aspects of municipal finance. This may explain why the 2008 legislation “did
not provide any mechanism for disclosure of loan terms or regulation of the
conduct of lenders.”
But despite the public financing envisioned, private companies (with
profit motives) soon offered turn-key solutions to local governments
interested in establishing a PACE program. These companies, known as
PACE program administrators (Administrators), contracted with local
governments to handle the program on their behalf. Administrators screen
contractors to work under the program, ensure construction permits are
obtained, spot check the work, set price guidelines and, working through the
contractors, solicit homeowners to borrow. In short order, Administrators
were running almost all of the PACE programs throughout the state.
6
Administrators market municipal bonds to third parties, the proceeds
of which fund the home improvements. Alternatively, Administrators buy
the municipal bonds themselves—in effect becoming the PACE lender too.
The complaints allege that each of the Administrator/defendants “chose
the more lucrative option of buying all of the bonds itself.” Plaintiffs
maintain that in economic substance, this is a two-party transaction
consisting of the homeowner/borrower and the Administrator/lender.
According to the complaints, the only difference between this type of
financing and an ordinary home improvement loan is that the PACE debt is
in the form of a municipal bond instead of a promissory note. 2 The economic
reality is that government does not fund the project or otherwise provide any
financial subsidy. It is involved solely to provide tax exempt interest for
investors who purchase the bonds and thereby fund the private work.
Essentially, the government’s issuance of bonds provides a “ ‘conduit’ ” for
private financing to “ ‘pass through’ ” to the recipient of the bond proceeds.
(See California Statewide Communities Development Authority v. All Persons
Interested etc. (2007) 40 Cal.4th 788, 794.) According to the complaints, “In
bond parlance, this has long been recognized to be indistinguishable, in
substance, from a two-party loan, one lender, one borrower.” Plaintiffs insist
2 Why finance through a municipal bond and not a promissory note from
homeowner to lender? Because interest payments on municipal bonds are
generally tax exempt, making it an attractive investment (as well as giving
borrowers the benefit of a lower interest rate). Moreover, because the debt is
secured by a property tax lien, “the PACE bondholders are able to default the
homeowner on their missing a single payment and commence foreclosure
proceedings promptly thereafter.”
7
that, in substance, “the PACE loans were privately funded home
improvement loans, consumer loans in every sense of the word.” 3
B. The Morgan and Roberts Complaints
In 2020, Barbara Morgan, Marcia Bordine, and Arlene Hill filed a first
amended putative class action complaint against Renovate America, Inc.,
Ygrene Energy Fund, LLC, and Renew Financial Group, LLC (collectively
Lenders), which they allege are “engage[d] in the business of lending money
for the purpose of financing home improvement loans” and acted as
Administrators (the Morgan Complaint). Plaintiffs further state they are
each over the age of 65, and were “solicited and signed up for home
improvement services” with financing provided by Lenders. They maintain
that “[e]ach was confused by the process, and did not comprehend that they
would be putting their homes in jeopardy by agreeing to unaffordable loan
obligations that they had no hope of being able to pay off according to the
terms of repayment.” 4 In a separate action and represented by the same
3 The Complaint acknowledges that since PACE’s inception in 2008,
“efforts were made to reform the program.” Most recently in 2019, for
example, the Legislature prohibited PACE program administrators from
approving an assessment contract without first making a “reasonable good
faith determination that the property owner has a reasonable ability to pay
the annual payment obligations for the PACE assessment.” (Fin. Code,
§ 22686.)
4 The Morgan Complaint also names as defendants: Ygrene Energy
Fund, Inc., GoodGreen 2016-1, GoodGreen 2017-1, GoodGreen 2017-2,
GoodGreen 2018-1, GoodGreen 2019-1, GoodGreen 2015 LLC, GoodGreen
2016-1 LLC, GoodGreen 2016-1 Trust, GoodGreen Holdings 2016-A Trust,
GoodGreen 2017-1 Trust, GoodGreen Funding 2016-1 LLC, GoodGreen
Funding 2017-1 LLC, GoodGreen Funding 2017-2 LLC, GoodGreen Funding
2017-R1 LLC, GoodGreen Funding 2018-1 LLC, and GoodGreen Holdings
2016-A Trust. Morgan and Bordine allege that their repayment obligations
8
lawyer who filed the Morgan Complaint, another group of plaintiffs, Janet
Roberts, Alfonso Robinson, John Brown, Joan Banks, Lyn Ramskill, and
Evigildo Lamitar, filed a virtually identical lawsuit against Renew Financial
Group, LLC and several “Renew” and “Golden Bear” entities they allege
“came to own security interests” in plaintiffs’ homes. 5
The complaints do not allege fraud. Nor do plaintiffs challenge the
quality of the improvements their PACE loans purchased. Rather, plaintiffs
allege they were “confused about the terms of the loans they were being
solicited for” and did not appreciate “the financial burden that would result”
and the risk of foreclosure.
Plaintiffs assert causes of action under the Unfair Competition Law
based on alleged violations of (1) Civil Code section 1804.1, subdivision (j)
[prohibiting taking a security interest in a senior citizen’s home under a
home improvement contract]; (2) Civil Code section 1803.2 [failing to
admonish, “IF YOU SIGN THIS CONTRACT, YOU WILL BE PUTTING UP
YOUR HOME AS SECURITY”]; (3) Financial Code section 22750 [requiring a
finance lender license]; and (4) Business and Professions Code section 7159.2
[requiring contractors to be paid by joint check]. They claim that as a result
of these violations, Lenders are prohibited from collecting interest, finance
were assigned to one of more of these defendants “as part of a common plan of
sequential securitization of the loan receivable.”
Hill also sued Renovate America, Inc. and named as additional
defendants: Wilmington Trust, NA, as Trustee of Hero Funding Trust 2015-
2; Hero Funding Trust 2015-3; Hero Funding Trust 2016-1; Hero Funding
Trust 2016-2; Hero Funding Trust 2016-3, 2016-4, 2017-1; Hero Funding
Trust 2017-2; Hero Funding Trust 2017-3; Hero Funding Trust 2018-1.
5 Specifically, these defendants are Renew 2017-1, Renew 2017-2, Renew
2018-1, Golden Bear 2015-1, LLC , Golden Bear 2016-1, LLC, Golden Bear
2016-2, LLC, and Golden Bear 2016-R, LLC.
9
charges, “and possibly the entire balance if the violation is found to have been
‘willful.’ ”
C. The Demurrers and Ruling
In December 2020 the defendants demurred to both the Morgan and
Roberts complaints on the grounds that plaintiffs failed to “exhaust
administrative remedies.” 6 The trial court sustained the demurrers without
leave to amend and entered a judgment of dismissal in each of the actions.
On defendants’ unopposed motions, we consolidated the two appeals for
argument and decision.
DISCUSSION
A. Plaintiffs Were Required to Exhaust Administrative Remedies
Generally, “ ‘a party must exhaust administrative remedies before
resorting to the courts.’ ” (Plantier v. Ramona Municipal Water Dist. (2019)
7 Cal.5th 372, 383.) This rule advances two policies. It allows an agency to
decide matters within its expertise without court interference. (Ibid.)
Second, administrative proceedings “aid[ ] judicial review by allowing the
agency to draw upon its expertise and develop a factual record for the court’s
consideration.” (Ibid.) Even where the administrative remedy “ ‘may not
resolve all issues or provide the precise relief requested by a plaintiff, the
exhaustion doctrine is still viewed with favor ‘because it facilitates the
development of a complete record that draws on administrative expertise and
promotes judicial efficiency.” ’ ” (Sierra Club v. San Joaquin Local Agency
Formation Commission (1999) 21 Cal.4th 489, 501.)
6 Defendants sued by Hill and those sued by Morgan and Bordine filed
separate demurrers raising the same issues. The court resolved both
demurrers in a single minute order.
10
The California Constitution gives the Legislature exclusive control over
the procedure under which a taxpayer may recover certain tax payments.
Article XIII, section 32 provides: “After payment of a tax claimed to be
illegal, an action may be maintained to recover the tax paid, with interest, in
such manner as may be provided by the Legislature.” 7 It also specifies that
“[t]he Legislature shall pass all laws necessary to carry out [its] provisions.”
(Cal. Const., art. XIII, § 33.)
The county assessor is responsible for preparing the local tax roll and
assessing all taxable property in the county. (§ 401.) Taxpayers have the
right to challenge an inaccurate or illegal tax assessment and to claim a
refund of taxes. The county board of supervisors meeting as a board of
equalization, or an assessment appeals board (board) hears those challenges.
(§§ 1601, subd. (a), 1603.)
The process is initiated by an application for assessment reduction
under section 1603, subdivision (a), which provides: “A reduction in an
assessment on the local roll shall not be made unless the party affected
. . . files with the county board a verified, written application showing the
facts claimed to require the reduction and the applicant’s opinion of the full
value of the property.” Under section 1610.8, the board may “cancel[ ]
improper assessments.” An order for refund cannot be made unless a verified
claim is filed under section 5097. The taxpayer may file an action in the
7 Although by its terms, the California Constitution, article XIII, section
32 applies to state-imposed taxes (see Conolly v. County of Orange (1992)
1 Cal.4th 1105, 1114; but see Neecke v. City of Mill Valley (1995) 39
Cal.App.4th 946, 962), it has been held to also apply to local taxes as a matter
of public policy. (California State University, Fresno Assn., Inc. v. County of
Fresno (2017) 9 Cal.App.5th 250, 262.)
11
superior court to recover a tax that the board has refused to refund after a
duly filed claim. (§ 5140.)
Here, the complaints do not allege (and apparently cannot be amended
to allege) compliance with these statutes. Plaintiffs contend, however, that
they were not required to do so because they have sued private entities and
“do[ ] not . . . challenge any aspect of the municipal tax process involved . . . .”
Relying on Oakland v. California Construction Co. (1940) 15 Cal.2d 573
(Oakland), plaintiffs assert that a “request by private party property owners
for the return of money paid out on a void contractual obligation [is] not a
challenge to an assessment lien” and, therefore, does not require that they
first exhaust administrative remedies.
These arguments fail because they mischaracterize the complaints. For
purposes of applying the exhaustion rule, the PACE assessments can only be
treated as taxes. This is because PACE assessments are collected “in the
same manner as ordinary ad valorem property taxes are collected.” (Gov.
Code, § 53340, subd. (e).) Under Revenue and Taxation Code section 4801,
“taxes” include “assessments collected at the same time and in the same
manner as county taxes.” (§ 4801; see Kahan v. City of Richmond (2019) 35
Cal.App.5th 721, 737 [administrative procedure for seeking a tax refund
applies to garbage collection fees that are collected at the same time and
manner as county property taxes].)
Moreover, plaintiffs seek injunctive relief (1) requiring “property tax
payments” to “municipal taxing authorities” as “PACE tax assessments” to be
“released back” to each property owner; and (2) prohibiting defendants from
initiating collection procedures on delinquent accounts. Plaintiffs ask that
these orders remain in place until defendants successfully “request[ ] that the
local governments remove the voluntary tax assessments on the properties.”
12
Using “released back” instead of “refund” does not change the objective
reality that plaintiffs seek court orders to cancel property tax obligations and
obtain a refund of taxes they have already paid.
We also find the Supreme Court’s decision in Oakland to be materially
distinguishable. That case did not involve a challenge to any tax. Rather,
the city of Oakland sought to void street improvement contracts based on a
contractor’s alleged fraud during the bidding process. (Oakland, supra, 15
Cal.2d at pp. 574‒575.) The work was financed by a special assessment on
the properties benefited by the improvement. The defendants in Oakland
asserted that the action was time-barred under a 30 day period for
challenging special property tax assessments. (Id. at p. 578.) The Supreme
Court rejected that argument because the city was not seeking to void any
tax assessment, but rather the contract for the work of improvement. (Ibid.)
Thus, Oakland holds that a government entity can seek to void a public
works contract between itself and a contractor without challenging the tax
assessments that were made to pay for it. But here, plaintiffs are not
governmental entities. And they are challenging their tax assessments—they
want the assessment cancelled and tax payments refunded. Indeed, they
allege that defendants’ statutory violations render “void any security
interest” in plaintiffs’ homes—i.e., the property tax liens.
In a related argument, plaintiffs contend that the exhaustion rule only
applies to lawsuits against government. Because they seek restitution of tax
payments remitted to private entities, plaintiffs maintain there are simply no
administrative remedies to exhaust. They find support for this view in
section 5140, which provides that the “person who paid the tax” is authorized
to bring a refund action against “a county or a city” to recover tax the county
or city has refused to refund. By negative implication, they argue that since
13
they are not suing “a county or a city,” the administrative refund process does
not apply.
This argument is undermined if not foreclosed by the Supreme Court’s
decision in Loeffler. In that case, the court held that consumers had to first
exhaust administrative tax remedies before bringing an action under the
Unfair Competition Law to challenge a retailer’s alleged misrepresentation
about whether a sale of hot coffee was subject to sales tax. (Loeffler, 58
Cal.4th at pp. 1092, 1134.) The Loeffler plaintiffs asserted they were not
required to exhaust administrative remedies because they were not suing the
government, nor were they seeking a tax refund. 8 (Loeffler, at p. 1102.) The
Supreme Court disagreed, explaining that the question of taxability had to be
first decided administratively, followed by judicial review of the agency’s
decision. (Id. at p. 1127.) An injunction prohibiting retailers from collecting
sales tax “could indirectly reduce the flow of tax revenue in the future” and
thus involved policies the exhaustion rule was intended to address. (Id. at
p. 1131.)
Similarly here, plaintiffs’ PACE assessments undoubtedly would be
affected by the adjudication of the complaints. They allege that the PACE
loans are “void at inception for illegality” and the resulting security interest
(i.e., a property tax lien) is also unlawful and “void.” Because the tax rests
exclusively upon the validity of the PACE financing, a judgment that the debt
and security interest are illegal and void would seem to negate the sole basis
of the tax assessment. Under Loeffler, it is the nature of the relief sought and
the availability of an administrative remedy to achieve it—not whether the
8 The legal incidence of sales tax is on the seller, not the consumer. (See
First American Title Ins. Co. v. California Dept. of Tax & Fee Administration
(2021) 71 Cal.App.5th 603, 611.)
14
defendant is a private or public entity—that triggers the exhaustion rule.
Here, the net result or effect of the liability theories in the complaints would
be to absolve plaintiffs of a tax liability (although not a contractual liability). 9
Because an administrative procedure exists to resolve that issue in the first
instance, plaintiffs were required to invoke it. Moreover, contrary to
plaintiffs’ contention, section 5140 addresses standing, not exhaustion. It
provides in part: “The person who paid the tax . . . may bring an action only
in the superior court . . . against a county or a city to recover a tax which the
board of supervisors . . . has refused to refund on a claim . . . . No other
person may bring such an action . . . .” (Ibid.)
B. Plaintiffs Have Not Alleged Facts Triggering An Exception 10
Even if exhaustion of administrative remedies is generally required, a
second question is whether the facts alleged in the complaints, deemed true
on demurrer, trigger an exception to the exhaustion requirement. Plaintiffs
ask us to apply a broad exception to exhaustion on the grounds that “no
purpose would be served” by requiring the board to consider a pure legal
issue—whether consumer protection statutes apply to these PACE loans.
A limited exception to the exhaustion rule has generally been
recognized where “ ‘the administrative agency cannot provide an adequate
remedy’ and ‘when the subject of a controversy lies outside the agency’s
9 Whether a judgment in this case would have claim or issue preclusion
effect in some other action is not before us and we express no opinion on it.
We merely acknowledge the practical reality of a potential final judgment
determining the tax liens are illegal and void.
10 After oral argument, we asked the parties to file additional briefs,
which we have considered, on whether the complaints allege facts triggering
any exception to the exhaustion rule.
15
jurisdiction.’ ” (Williams & Fickett, supra, 2 Cal.5th at p. 1274.) But in this
case, an adequate remedy does exist. By statute, the board “shall” refund
property tax that is erroneously or illegally assessed. (§ 5096, subds. (b), (c).)
Plaintiffs are correct that “the central responsibility of county boards is
to decide questions of valuation.” (Williams & Fickett, supra, 2 Cal.5th at
p. 1269.) But the board’s jurisdiction extends to nonvaluation issues as well.
(Id. at p. 1270.) This authority is manifest in section 5142, which provides
that a taxpayer may avoid the assessment appeal process if they and the
assessor stipulate that “only nonvaluation issues” are involved. If the board
accepts this stipulation, it “shall be deemed compliance” with the
requirement to exhaust administrative remedies. (§ 5142, subd. (b).) This
stipulation process “would be meaningless . . . if an exhaustion requirement
did not apply to nonvaluation issues.” (Williams & Fickett, at p. 1271.)
Another exception to the exhaustion rule—the so-called nullity
exception—has been recognized “specific to tax disputes.” (Williams &
Fickett, supra, 2 Cal.5th at p. 1275.) Exhaustion is not required where the
assessment “ ‘is a nullity as a matter of law because, for example, the
property is tax exempt, nonexistent or outside the jurisdiction [citations], and
no factual questions exist regarding the valuation of the property which,
upon review by the board of equalization, might be resolved in the taxpayer’s
favor, thereby making further litigation unnecessary.’ ” (Ibid., italics added.)
In supplemental briefing, Plaintiffs concede that the nullity exception
does not apply in this case. That concession is likely compelled by prior
validation judgments that plaintiffs admit “approved the PACE bonds and
their validity as tax assessments.” 11 Nevertheless, plaintiffs insist that the
11 A validation proceeding is used to secure a judicial determination that
proceedings by a local government entity, such as the issuance of municipal
16
board lacks “any power or competence” to address the issues raised by their
complaints and, therefore, the same policies that underlie the nullity
exception dictate a similar exception should be applied here.
We disagree. To be sure, the board has special competence in
determining the value of real property. (See Stenocord Corp. v. City and
County of San Francisco (1970) 2 Cal.3d 984, 988.) But the exhaustion
doctrine advances other policies too, such as “ ‘easing the burden on the court
system . . . and providing a more economical and less formal means of
resolving a dispute.’ ” (Williams & Fickett, supra, 2 Cal.5th at p. 1268.) It
also facilitates developing a complete record and affords a “ ‘sifting process
[citation], unearthing the relevant evidence and providing a record which the
court may review.’ ” (Ibid.) Here, for example, plaintiffs allege they “did not
comprehend that they would be putting their homes in jeopardy by agreeing”
to the PACE assessments and have “no hope of being able to pay off” the
taxes. They further allege being victimized by “high pressure sales efforts”
from persons acting on defendants’ behalf to “peddl[e] the loan products.”
There are other factual issues on causation, given that plaintiffs admit they
were not defrauded and they obtained financing for home improvements they
contracted for.
The board, is a “constitutional agency exercising quasi-judicial powers.”
(See Notes to Decisions, Cal. Const., art. XIII, § 16; International Medical
Systems, Inc. v. Assessment Appeals Bd. (1997) 57 Cal.App.4th 761, 766.) It
is capable of addressing these questions in the first instance. (See Williams
& Fickett, supra, 2 Cal.5th at p. 1269, fn. 6 [county boards decide “a bevy of
bonds, are valid, legal, and binding. “ ‘ “Assurance as to the legality of the
proceedings surrounding the issuance of municipal bonds is essential before
underwriters will purchase bonds for resale to the public.” ’ ” (City of Grass
Valley v. Cohen (2017) 17 Cal.App.5th 567, 587.)
17
threshold factual questions that are implicit in any assessment”].)
Accordingly, we conclude that the complaint does not allege facts triggering
any exception to the exhaustion rule. 12
C. Not a Merits Determination
Plaintiffs assert that while we “could” reverse the judgment “based on
administrative exhaustion” we “should” also rule on whether they have
“stated a valid claim” on the merits. But the demurrers were limited to
whether plaintiffs had failed to exhaust administrative remedies. So is the
order sustaining the demurrers. Any determination of merits would,
therefore, be an advisory opinion. (See Stockton Teachers Assn. CTA/NEA v.
Stockton Unified School Dist. (2012) 204 Cal.App.4th 446, 464, fn. 11 [“An
appellate court does not ‘inform the litigants what the opinion of the court is
upon a question that has not been raised in the action, or what its decision
would be if the question should be presented’ ”]; see also Crown Oil Corp. v.
Superior Court (1986) 177 Cal.App.3d 604, 613 [appellate review of demurrer
limited to issue(s) raised on demurrer].) Whether plaintiffs’ substantive
claims have merit is not before us, and we express no opinion on such
matters. 13
12 We also reject plaintiffs’ assertion that rather than involving the
exhaustion rule, their claims are more appropriately analyzed as “a primary
jurisdiction challenge.” That doctrine applies only in cases “ ‘ “originally
cognizable in the courts.” ’ ” (Jonathan Neil & Assoc., Inc. v. Jones (2004) 33
Cal.4th 917, 933.) For reasons explained in the body of this opinion,
plaintiffs’ claims are not originally cognizable in court.
13 Plaintiffs’ requests for judicial notice of legislative materials and
Department of Corporations documents pertains to the merits and are
denied. (See People v. Doane (2021) 66 Cal.App.5th 965, 969, fn. 1 [denying
request for judicial notice of documents as “unnecessary to our decision”].)
18
DISPOSITION
The judgments are affirmed. Respondents are entitled to costs on
appeal.
DATO, J.
WE CONCUR:
McCONNELL, P. J.
AARON, J.
Defendants’ requests for judicial notice of a complaint and judgment in a
validation action and other documents are denied on the same grounds.
19 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488400/ | UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
HABIBA RAHMAN,
Plaintiff,
v. Case No. 1:22-cv-01211 (TNM)
FEDERAL BUREAU OF
INVESTIGATION,
Defendant.
MEMORANDUM OPINION
Habiba Rahman sues the FBI on a host of theories. But her complaint is frivolous. And
she points to no valid waiver of sovereign immunity. So the Court will dismiss her complaint for
lack of subject matter jurisdiction.
I.
Rahman alleges that she has suffered grievous abuse: she was “[s]talked in public by
cars, drones, devices, and suspected people,” burned by lasers, electrocuted, and poisoned with
radiation. See Compl. at 5, 12–15, ECF No. 1. Because of that, she has a “[c]onstant feeling of
suffocation,” bleeds from various parts of her body, and struggles to walk. Id.
Rahman reported this abuse to the FBI. Id. at 5–7. But to her dismay, it merely referred
her case to local police. Id. at 7. When the police were of no help, she sued the FBI claiming
age, race, class, and religious discrimination. Id. at 7–8. She also says the FBI invaded her
privacy, violated the Constitution, and handled her case negligently. Id. at 9.
The FBI moved to dismiss her complaint. See Mot. to Dismiss, ECF No. 7. It argues the
Court lacks jurisdiction under Rule 12(b)(1) because Rahman’s claims are frivolous. Id. at 3, 7.
And it says that she fails to state a claim under Rule 12(b)(6). Id.
The Court agrees that it lacks jurisdiction and will thus dismiss Rahman’s complaint.
II.
A.
To defeat the FBI’s motion to dismiss under Rule 12(b)(1), Rahman must show that this
Court has jurisdiction. Georgiades v. Martin-Trigona, 729 F.2d 831, 833 n.4 (D.C. Cir. 1984).
When deciding that motion, the Court presumes that it lacks jurisdiction. Kokkonen v. Guardian
Life Ins. Co. of Am., 511 U.S. 375, 377 (1994).
Because Rahman represents herself, the Court holds her complaint to a “less stringent
standard[].” Haines v. Kerner, 404 U.S. 519, 520 (1972). And the Court must consider not only
the factual allegations in her complaint but also those in any of her “other filings.” Hill v. Smoot,
308 F. Supp. 3d 14, 19 (D.D.C. 2018).
B.
The Court lacks jurisdiction over Rahman’s complaint for two reasons. First, it is
frivolous. And second, she points to no valid waiver of the United States’s sovereign immunity.
1. Frivolousness. The Court has no subject matter jurisdiction over a frivolous
complaint. See Hagans v. Lavine, 415 U.S. 528, 536–37 (1974); Tooley v. Napolitano, 586 F.3d
1006, 1010 (D.C. Cir. 2009).
And Rahman’s complaint fits that bill. For instance, she claims that there were bombs
planted in her room, which she deduced by the bombs’ “smell, temperature, and sounds.” Compl.
at 6. She also says that there is a “static and generator sound” in her ceiling and that causes her
“face and body [to be] pulled when the machine is on.” Id. at 13. And she alleges that “electric
magnetic radiation” has “imitated amputation on [her] leg and body parts.” Id. at 14.
2
The crux of her complaint, allegations of terrible abuse, “rise[s] to the level of the . . .
wholly incredible.” Denton v. Hernandez, 504 U.S. 25, 33 (1992). And thus the Court lacks
jurisdiction.
2. Sovereign immunity. Rahman tries to sue the FBI, but “[a]bsent a waiver, sovereign
immunity shields” federal agencies from lawsuits. FDIC v. Meyer, 510 U.S. 471, 475 (1994).
And Rahman identifies no valid waiver.
She points to Ex parte Young. 209 U.S. 123 (1908). But that case recognized a limited
waiver of state sovereign immunity in suits against state officers, not federal agencies. Id. at
125. And she cites 42 U.S.C. § 1983 as well. But “Section 1983 does not apply to federal
officials acting under color of federal law.” Settles v. U.S. Parole Comm'n, 429 F.3d 1098, 1104
(D.C. Cir. 2005).
Nor could she bring her claim under the Federal Torts Claim Act. To do that, she needed
to “present[] the claim” to the FBI and then wait either for six months or a denial. 28 U.S.C.
§ 2675(a). Yet Rahman admits in her opposition that she mailed her claim to the FBI in October
2022, four months after she sued. Pl.’s Opp’n at 10, ECF No. 10. So the FTCA provides no
waiver.
III.
For these reasons, the Court will dismiss Rahman’s complaint in its entirety. A separate
Order will issue.
2022.11.21
17:49:22 -05'00'
Dated: November 21, 2022 TREVOR N. McFADDEN, U.S.D.J.
3 | 01-04-2023 | 11-21-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494528/ | MEMORANDUM OPINION GRANTING DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT
CRAIG A. GARGOTTA, Bankruptcy Judge.
Before the Court is Defendants’ Motion for Summary Judgment (the “Motion”) filed by Shawn Ferguson and James R. Gotwals & Associates, Inc. on April 18, 2011 (docket no. 11). This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334, and the matter is deemed a core proceeding under 28 U.S.C. § 157(b)(2)(I). This matter is referred to this Court under the district court’s Standing Order of Reference. Venue is proper under 28 U.S.C. §§ 1408 and 1409. A hearing was held on June 15, 2011, to consider the Motion. Having considered the pleadings and the record in this case, the Court finds that the matter is ripe for summary judgment. See Fed.R.Civ.P. 56(c) (made applicable to this adversary proceeding by Fed. R. BanKR.P. 7056).
FACTUAL AND PROCEDURAL BACKGROUND
Rex Dean Hutton and Shawn Ferguson were divorced in Missouri in May 2003 (docket no. 11, ex. 2). The divorce decree awarded Hutton and Ferguson joint legal and physical custody of their daughter and son. Id. Thereafter, the parties and their children relocated to Tulsa, Oklahoma (docket no. 11, p. 3). By the fall of 2003, Hutton had domesticated the Missouri divorce decree in Oklahoma and each party had moved to receive sole custody (docket no. 11, ex. 3).
In the spring of 2005, during the course of the custody dispute, Ferguson filed a Motion for Sanctions and Addendum to Motion for Sanctions in the district court for Tulsa County, Oklahoma, asserting that Hutton’s responses to discovery requests were “essentially useless, disingenuous, evasive and largely non-responsive.” (Docket no. 11, ex. 4, p. 3). The custody trial began on May 24, 2005, and continued over six days (docket no. 11, ex. 5, p. 4). On October 20, 2005, the Tulsa County district court granted Ferguson’s request for sanctions and entered a default judgment in favor of Ferguson, awarding her sole custody of the parties’ children. Id. at 5. These rulings were memorialized in a judgment filed November 18, 2005 (docket no. 11, ex. 6). The judgment provided, inter alia, that Ferguson “submit an application for monetary sanctions to the Court within 30 days from the date of the entry and filing of this Order, and the same shall be set for hearing.” Id. at 5.
On December 19, 2005, Hutton appealed the Tulsa County district court’s judgment (docket no. 11, p. 5). On July 18, 2007, the *823Court of Civil Appeals of the State of Oklahoma affirmed the judgment, noting in footnote three of its opinion that a number of issues remained pending before the Tulsa County district court, including Ferguson’s application for monetary sanctions and her request for attorneys’ fees. Id. at p. 6 n. 3. Hutton’s petitions for rehearing and certiorari were also denied (docket no. 11, p. 5).
On January 25, 2006, Hutton filed for bankruptcy in this Court under Chapter 7 in Case No. 06-10078 (see docket no. 11, ex. 9). Hutton’s “Schedule E — Creditors Holding Unsecured Priority Claims” schedules Ferguson as a creditor for a “domestic support obligation” (see docket no. 11, ex. 10). Hutton’s “Schedule F — ■ Creditors Holding Unsecured Nonpriority Claims” schedules Ferguson as a creditor for “Sanctions” and discloses James R. Gotwals as “ex-wife’s attorney” for “Notice Only.” (Docket no. 11, ex. 11). The case was deemed a no asset case, and no complaints to determine dischargeability were filed (docket no. 11, ex. 12).
On March 2, 2006, Hutton filed a Suggestion of Automatic Stay in the Tulsa County district court, seeking to stop ongoing hearings regarding Ferguson’s application for monetary sanctions and her request for attorneys’ fees (docket no. 11, ex. 13).
On May 1, 2006, Hutton received a discharge in his bankruptcy case (docket no. 11, ex. 14).
On May 4, 2006, Hutton filed a Suggestion of Discharge in the Tulsa County district court, again seeking to stop ongoing hearings regarding the sanctions and attorneys’ fees (docket no. 11, ex. 15). At the hearing, the court ordered a round of briefing relating to the impact of Hutton’s bankruptcy case (docket no. 11, ex. 16). Ferguson addressed the issue in her brief (docket no. 11, ex. 17); Hutton, however, failed to do so (docket no. 11, ex. 18).
On June 27, 2007, the Tulsa County district court heard Ferguson’s applications for attorneys’ fees and costs, including testimony and exhibits, and took the matter under advisement (see docket no. 11, ex. 19). On October 4, 2007, the court entered an order awarding Ferguson $54,283 in attorneys’ fees and $5,195 in costs. Id. After two subsequent hearings in January and February, the district court ordered an additional $56,527.50 in attorneys’ fees and $600 in costs on March 20, 2008 (docket no. 11, ex. 24). On April 23, 2008, Hutton appealed both of these orders (docket no. 11, ex. 29). Hutton did not address the issues of stay or discharge in his appeal. Id. On May 27, 2009, the Court of Civil Appeals of the State of Oklahoma affirmed the orders (docket no. 11, ex. 30).
On August 14, 2009, Hutton moved to reopen his Chapter 7 bankruptcy case, Case No. 06-10078, to obtain a determination with regard to discharge of the two attorneys’ fees judgments owed to Ferguson (see docket no. 11, ex. 9). On November 30, 2009, after a hearing, this Court denied Hutton’s motion with prejudice to his right to refile for 180 days. Id. On May 3, 2010, Hutton filed a voluntary petition for Chapter 13 bankruptcy in this Court in Case No. 10-11215 (see docket no. 11, ex. 31, p. 1). On June 26, 2010, this Court granted Hutton’s motion to voluntarily dismiss the Chapter 13 case (see docket no. 11, ex. 31, p. 6). On July 5, 2010, Hutton filed a second motion to reopen his prior Chapter 7 bankruptcy case (see docket no. 11, ex. 9, p. 8). On December 3, 2010, after another hearing, this Court granted the motion (see docket no. 11, ex. 9, p. 11).
On December 17, 2010, Hutton filed an Adversary Complaint against Ferguson *824and her attorneys, James R. Gotwals & Associates, (“Defendants”) to determine the dischargeability of the two attorneys’ fees judgments (docket no. 1). In his Complaint, Hutton alleged that the judgments do not fall under any exception to discharge under 11 U.S.C. § 523 because (1) the judgments are for sanctions, which would be nondisehargeable only under 11 U.S.C. § 523(a)(6) and Defendants waived this argument; (2) the judgments do not constitute domestic support obligations under § 523(a)(5) because they are for the benefit of Ferguson’s attorneys rather than Ferguson and thus will not affect Ferguson’s ability to support her children; and (S) the judgments do not constitute divorce-related debts under § 523(a)(15) because they are not payable “to a spouse, former spouse or child.” (Docket no. 1, p. 5). Hutton further argued that, even if the attorneys’ fees do constitute domestic support obligations under § 523(a)(5), they may be discharged under an exception for unusual circumstances recognized by the Tenth Circuit. Id.
On January 18, 2011, Defendants filed a Joint Answer, asserting as affirmative defenses that (1) the Complaint fails to state a claim for which relief can be granted under Rule 12(b)(6) of the Federal Rules of Civil Procedure; (2) the judgments are exempt from discharge under either § 523(a)(5) or § 523(a)(15); (3) the debts were not discharged under § 727(b); (¿) the Complaint is barred by res judicata, (i5) estoppel, laches and waiver; and (6) unclean hands due to Hutton’s fraudulent schedules (docket no. 7).
On April 18, 2011, Defendants filed their Motion for Summary Judgment, listing twenty-one material facts not in dispute (docket no. 11). In their Motion, Defendants argue that the awards, even if they are sanctions, are still exempt from discharge either under § 523(a)(5) as domestic support obligations or under § 523(a)(15) as divorce-related debts. Id. Defendants also deny Hutton’s allegation that the awards should be discharged under an exception for unusual circumstances. Id.
On May 23, 2011, Hutton filed his response to the Motion, wherein he objected to only one statement in the Motion’s list of material undisputed facts, and offered additional material facts for the Court’s consideration (docket no. 15). On June 15, 2011, a hearing was held and the issues were taken under advisement.
THE FEE AGREEMENT
On March 24, 2005, Ferguson entered into a fee agreement (the “Agreement”) with James R. Gotwals & Associates, Inc. (docket no. 11, ex. 1). Ferguson is designated as the “Client” under the Agreement. Id. at 6. The Agreement provides that “the term ‘Client’ as used in this Agreement shall also denote the responsible party, (other than any third party guarantors if any), as identified in this Agreement, who, by signing this Agreement, contracts to pay the attorneys’ fees and other charges provided in this agreement.” Id. at 1.
On the last page of the Agreement, Ferguson’s mother agrees “to be the responsible party for paying fees pursuant to the above provisions on behalf of [Ferguson].” Id. at 6. Ferguson also signed a statement on the last page of the Agreement declaring: “I, [Ferguson] being the Client for purposes of the professional relationship created in the above contract, and being advised of my rights, do hereby consent to payment of fees thereunder by [Ferguson’s mother].” Id.
The Agreement contains eighteen separate provisions regarding the payment of attorneys’ fees (docket no. 11, ex. 1). These provisions provide, inter alia, that *825the “fees incurred will be billed to the Client,” that “[t]he Client agrees that all costs expended for this matter will be paid in advance by Client,” and that “[t]he Client agrees to pay all costs expended in this litigation that are not paid in advance.” Id. at 1-2.
Furthermore, two provisions that are particularly relevant to this adversary proceeding are the provision providing credit for payment by an opposing party and the provision providing for an attorney’s lien on the Client’s claim. Id. at 3^1. The provision regarding credit for payment by an opposing party provides that the “Client shall be credited for any payments by an opposing party toward Client’s fees,” and that “[s]hould an opposing party fail to pay the fees and/or costs as ordered by the Court, Attorneys shall not be obligated to collect said fees from the opposing party, but Client shall remain responsible for any monies due Attorneys.” Id. at 3. The provision regarding an attorney’s lien on the Client’s claim states that “Attorneys are hereby given a lien on Client’s claim or cause of action for any sum or property recovered by way of settlement and/or on any judgment that may be recovered for payment of Attorneys!/] fees and costs.” Id. at 4.
SUMMARY JUDGMENT STANDARD
The Court will grant a motion for summary judgment if the moving party shows that there is no genuine dispute as to any material fact and that it is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a) (made applicable to adversary proceedings in bankruptcy by Fed. R. BankrP. 7056); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). All facts are reviewed and all inferences drawn in a light most favorable to the non-moving party. James v. Sadler, 909 F.2d 834, 837 (5th Cir.1990). “The standard of review is not merely whether there is a sufficient factual dispute to permit the case to go forward, but whether a rational trier of fact could find for the non-moving party based upon the record evidence before the court.” Id. (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)). “The mere existence of a scintilla of evidence in support of the [non-moving party’s] position will be insufficient; there must be evidence on which the jury could reasonably find for the [non-moving party].” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
DISCUSSION
The issue before the Court is whether the awards for attorneys’ fees entered in the Tulsa County district court are dischargeable in bankruptcy. As a preliminary matter, Ferguson asserts that the issue of dischargeability has been determined in the Tulsa County district court, and that res judicata would bar this Court from re-determining the matter (docket no. 11, p. 11). While bankruptcy courts are bound by the principle of res judicata, “the contours of res judicata are somewhat different for bankruptcy courts than they are for other courts.” Browning v. Navarro, 887 F.2d 553, 561 (5th Cir.1989). “In only limited circumstances may bankruptcy courts defer to the doctrine of collateral estoppel and thereby ignore Congress’ mandate to provide plenary review of dischargeability issues.” Dennis v. Dennis (In re Dennis), 25 F.3d 274, 278 (5th Cir.1994). “Collateral estop-pel applies in bankruptcy courts only if, inter alia, the first court has made specific, subordinate, factual findings on the identical dischargeability issue in question — that is, an issue which encompasses the same prima facie elements as the *826bankruptcy issue — and the facts supporting the court’s findings are discernible from that court’s record.” Id. Furthermore, “in interpreting § 523(a)(5) courts will generally look beyond the labels which state courts — and even the parties themselves — give obligations which debtors seek to have discharged.” Milligan v. Evert (In re Evert), 342 F.3d 358, 364 (5th Cir.2003). Because this Court is unable to discern from the record any specific, subordinate factual findings in the Oklahoma courts on the dischargeability issue, it is not barred from determining the dis-chargeability of the awards for attorneys’ fees under the doctrines of res judicata or collateral estoppel.
Next, Ferguson argues that the awards are non-dischargeable because they are exempt from discharge as domestic support obligations under 11 U.S.C. § 523(a)(5) or as divorce-related debts under § 523(a)(15). Section 523(a)(5) of the Bankruptcy Code provides that “[a] discharge under section 727 ... of this title does not discharge an individual debtor from any debt — (5) for a domestic support obligation.” 11 U.S.C. § 523(a)(5). The term “domestic support obligation” is defined in § 101(14A) of the Code as follows:
(14A) The term “domestic support obligation” means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable non-bankruptcy law notwithstanding any other provision of this title, that is—
(A) owed to or recoverable by—
(i)a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian, or responsible relative; or (ii) a governmental unit;
(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;
(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of—
(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and
(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.
11 U.S.C. § 101(14A). In sum, for the attorneys’ fees awards to meet the definition of a domestic support obligation, the awards must be (1) owed to or recoverable by a former spouse, (2) in the nature of alimony, maintenance, or support, (3) established by an order of a court of record, and (4) not assigned to a nongovernmental entity. Id. The elements at issue in this proceeding are (1) whether the awards for attorneys’ fees are owed to or recoverable by the debtor’s former spouse and (2) whether the awards are in the nature of alimony, maintenance, or support.
Section 523(a)(15) of the Bankruptcy Code exempts from discharge certain divorce-related debts that do not meet the definition of domestic support obligations. Section 523(a)(15) provides that debts “to a spouse, former spouse, or child of the debtor ... that [are] incurred by the debt- or in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a *827court of record” are exempt from discharge in bankruptcy. 11 U.S.C. § 523(a)(15).
I. The awards are owed to or recoverable by Hutton’s former spouse.
Hutton argues that the awards for attorneys’ fees do not meet the definition of a domestic support obligation because they are not “owed to or recoverable by a spouse, former spouse, or child of the debtor.” 11 U.S.C. § 101(14A)(A)(i). Specifically, Hutton argues that the awards, while nominally awarded to Ferguson, are actually for the benefit of the attorneys. Hutton relies on an opinion from the Bankruptcy Court for the Northern District of Texas for the proposition that awards of attorneys’ fees are not domestic support obligations because a law firm “is not an entity to whom a ‘domestic support obligation’ may be owed under section 523(a)(5).” Leo, Warren, Rosenfield, Katcher, Hibbs & Windsor, P.C. v. Brooks (In re Brooks), 371 B.R. 761, 764 (Bankr.N.D.Tex.2007).
The Court notes that there is a split of authority on the issue of whether an award of attorneys’ fees that otherwise meets the definition of a domestic support obligation, but may be recovered directly by the attorneys, is nondischargeable under § 523(a)(5). See Kassicieh v. Battisti (In re Kassicieh), 425 B.R. 467, 472-79 (Bankr.S.D.Ohio 2010) (describing three lines of authority on the issue of “whether a debt that is in the nature of support and owed directly to a third party ... is exempted from discharge” under § 523(a)(5)). The issue is complicated by the fact that in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) Congress changed the relevant language of § 523(a)(5) and added the § 101(14A) definition of the term “domestic support obligation.” Id. at 468. Thus, even in circuits where the law appeared to be clear prior to the adoption of BAPCPA, courts have differed in their interpretations of Congress’s intent in altering the language of § 523(a)(5). See, e.g., In re Brooks, 371 B.R. at 765-68 (finding that the change in the language of § 523(a)(5) “is intended to further the ability of ‘a governmental unit’ ... to pursue a ‘domestic support obligation,’ not to broaden the category of entities that may assert that debts owed to them are non-dis-chargeable”); Morris v. Allen (In re Morris), 454 B.R. 660, 662-63 (Bankr.N.D.Tex.2011) (concluding that “BAPCPA was meant to expand the universe of divorce related debts excepted from discharge” and that “the true focus ... is on the nature of the debt and not to whom the debt is owed”); In re Andrews, 434 B.R. 541, 546^/7 (Bankr.W.D.Ark.2010) (collecting cases analyzing the effect of BAPCPA on dischargeability under § 523(a)(5)).
Notwithstanding the lack of clarity regarding the post-BAPCPA dischargeability of debts in the nature of support that are payable directly to a third party, Hutton’s reliance on In re Brooks is inapposite. The law firm in In re Brooks had intervened in the divorce proceeding and obtained separate awards against the debtor and his former spouse. 371 B.R. at 762. The debtor was not liable, either to the law firm or to his former spouse, for the award against the former spouse. Id. at 763. Likewise, the former spouse was not liable for the award against the debtor. Id. Thus, it is clear that the award in In re Brooks might not be owed to or recoverable by the debtor’s spouse or former spouse. The award was made directly to the attorneys and only to the attorneys. Id. at 762-63.
By comparison, the attorneys’ fees awards at issue before the Court were awarded to Ferguson, Hutton’s former *828spouse. Furthermore, while the former spouse in In re Brooks was not liable for the award against the debtor, Ferguson remains liable for her attorneys’ fees in the event that Hutton does not pay. The awards are not merely a benefit for Ferguson’s attorneys nominally awarded to Ferguson, as Hutton asserts; they actually benefit Ferguson by relieving her of an obligation for which she would otherwise be liable. The court in In re Brooks declared that “[t]he typical scenario that Congress intended to prevent is when a spouse (the non-debtor) or a child is left out-of-pocket because of a debtor’s bankruptcy filing.” Id. at 767. That is the scenario that the Court is faced with in this case. Therefore, the Court finds that the awards for attorneys’ fees are owed to or recoverable by Hutton’s former spouse.
II. The awards are in the nature of alimony, maintenance or support.
Hutton argues that the awards for attorneys’ fees are not in the nature of alimony, maintenance, or support because they were referred to as sanctions for failure to comply with discovery orders in state court. However, “ ‘[wjhether a particular obligation constitutes alimony, maintenance, or support within the meaning of [§ 523(a)(5) ] is a matter of federal bankruptcy law, not state law.’ ” Joseph v. O’Toole (In re Joseph), 16 F.3d 86, 87 (5th Cir.1994) (quoting In re Biggs, 907 F.2d 503, 504 (5th Cir.1990)). Thus, the Court “must place substance over form to determine the true nature and purpose of the award, regardless of the label used.” Id. at 88.
Whether an award for attorneys’ fees in a divorce proceeding is in the nature of alimony, maintenance, or support depends on the court’s intent in making the award. See Morel v. Morel (In re Morel), 983 F.2d 104, 105 n. 3 (8th Cir.1992) (“Although the inquiry must necessarily focus more upon the intent of the court in a contested proceeding, the issue for the Bankruptcy Court under § 523(a)(5) remains one of intent.”); Pino v. Pino (In re Pino), 268 B.R. 483, 489 (Bankr.W.D.Tex.2001) (“The crucial issue ... is the intent of the parties (or the divorce court) and the function the award was intended to serve at the time of the divorce.”). Furthermore, an award of attorneys’ fees “is deemed nondischargeable if the award itself reflects a balancing of the parties’ financial needs.” In re Joseph, 16 F.3d at 88. “Considerations such as the disparity in earning power of the parties, their relative business opportunities, the physical condition of the parties, their probable future need for support, the educational background of the parties, and the benefits they would have received had the marriage continued, inform this inquiry....”M
If the purpose of the underlying proceedings in which the awards for attorneys’ fees arise is to provide for the benefit, support or best interests of the litigants’ minor children, then the awards are in the nature of support. See Hudson v. Raggio & Raggio, Inc. (In re Hudson), 107 F.3d 355, 357 (5th Cir.1997). For example, “[a] court ordered obligation to pay attorney fees charged by an attorney that represents a child’s parent in child support litigation against the debtor is non-dischargeable.” Id. “Because the ultimate purpose of such a proceeding is to provide support for the child, the attorney fees incurred inure to her benefit and support, and therefore fall under the exception to dischargeability set out in § 523(a)(5).” Id. Where, as here, the underlying proceedings involve child custody litigation, courts have applied the same reasoning. See, e.g., Dvorak v. Carlson (In re Dvorak), 986 F.2d 940, 941 (5th *829Cir.1993) (holding that attorneys’ fees awarded for services during a child custody hearing were non-dischargeable because the hearing was for the child’s benefit and support); Hill v. Snider (In re Snider), 62 B.R. 382, 387 (Bankr.S.D.Tex.1986) (finding an award for attorneys’ fees in a child custody proceeding non-dis-chargeable because the award “was expressly found to be in the best interest of the[ ] child” and “so intertwined with the child support issues so as to make them inseparable when determining discharge-ability of a debt”). See also Hack v. Laney (In re Laney), 53 B.R. 231, 235 (Bankr.N.D.Tex.1985) (finding that “the services rendered by [the attorney] in the state court proceedings were so inextricably intertwined with the welfare of the children during the litigation that it would be unreasonable to characterize the fee award as anything other than an obligation in the nature of support.”).
In this case, the attorneys’ fees awarded to Ferguson were awarded in connection with litigation over the custody of Hutton and Ferguson’s minor children (docket no. 11, ex. 6, ex. 19, ex. 24). The judgment entered by the Tulsa County district court awarded sole legal custody of the minor children to Ferguson, required Hutton to pay child support to Ferguson, and required Ferguson to submit an application for monetary sanctions to the court within thirty days (docket no. 11, ex. 6, p. 3-5). The judgment also explicitly stated that the court found this to be in the best interest of the minor children of the parties (docket no. 11, ex. 6, p. 8).
On October 4, 2007, the district court entered an order containing the first award of attorneys’ fees at issue. The court relied on an Oklahoma statute, which provides that a court in a divorce proceeding may “require either party to pay such reasonable expenses of the other as may be just and proper under the circumstances.” Okla. Stat. tit. 43 § 110(D). The court determined that it was required to consider and “take into account all relevant circumstances when adjudicating motions for fees and costs incurred by a party either prosecuting or defending post-decree enforcement or modification proceedings.” (Docket no. 11, ex. 19, p. 4) (quoting Finger v. Finger, 923 P.2d 1195, 1198 (Okla.1996)). Furthermore, the court declared that awards for attorneys’ fees “must be granted only to that litigant who qualifies for the benefit through the process of a judicial balancing of the equities.” Id. at 4-5 (quoting Thielenhaus v. Thielenhaus, 890 P.2d 925, 935 (Okla.1995)). The court expressly considered various factors in balancing the equities, including the nature of the litigation, the parties’ involvement in causing or contributing to the ongoing disputes about the children, the necessity for the court to resolve even relatively minor child-related disputes, the income of the parties, actions by Hutton which caused protracted litigation, and Hutton’s repeated failure to timely pay child support. Id. at 5. In addition, on March 20, 2008, when the district court awarded Ferguson additional attorneys’ fees and costs, the court examined the relative financial circumstances of the parties, noting specifically the amount expended by Hutton in litigating the custody dispute (docket no. 11, ex. 24).
Hutton appealed both orders to the Court of Civil Appeals of the State of Oklahoma (docket no. 11, ex. 30). In his appeal, Hutton argued that the district court had erred in awarding Ferguson her attorneys’ fees as a discovery sanction because a large portion of those fees were not clearly related to his failure to comply with discovery. Id. at 7. The Court of Civil Appeals agreed, upholding both awards as general awards of attorneys’ *830fees and expenses under title 48, section 110(D) of the Oklahoma Statutes. Id. at 8-9.
Based on the foregoing, the Court finds that the awards for attorneys’ fees to Ferguson are in the nature of alimony, maintenance, or support. The awards arose from a dispute over custody of the parties’ minor children. The judgment specifically stated that the proceeding was for the best interest of the children. Furthermore, one of the factors considered by the Tulsa County district court in awarding the fees was Hutton’s failure to pay child support in a timely manner. Thus, the attorneys’ fees are in the nature of support to the minor children.
Hutton cites various cases finding that certain sanctions are not in the nature of support (docket no. 15, p. 4). In considering these and similar cases, the Court notes that in each case the trial court that awarded the fees made clear that the awards were meant exclusively as sanctions and that the relevant financial circumstances of the parties were not considered. See, e.g., Estate of Mayer v. Hawe, 303 B.R. 375, 378-79 (E.D.Wis.2003) (“[T]he language of the probate court’s order makes clear that the court did not impose attorney’s fees and costs on [the debtor] for the purpose of enforcing her duty to support [her spouse and adult child].”); In re Spence, No. 02-12093-BKC-AJC, 2009 WL 3483741, at *3 (Bankr.S.D.Fla. Oct. 26, 2009) (“Debtor’s misconduct during divorce proceedings was the sole reason given ... for assessing fees as sanctions against Debtor.... [N]either the Strike Order, nor the Master’s Reports I or II, nor the Sanctions Orders I or II contain any language indicating that the assessment of fees was based upon the respective wages or ability of the parties to pay.”) (internal citations omitted); In re Lopez, 405 B.R. 382, 385 (S.D.Fla.2009) (“The State Court Order ... specifically held that ‘[t]his Court’s award of attorney fees and costs in favor of the former Husband is based upon and supported by the bad faith litigation misconduct of the former Wife, and is not based upon the respective wages or ability of the parties to pay.’ ”); Lees v. Lees (In re Lees), Ch. 7 Case No. 2:03-bk-06143-PHX-CGC, Adv. No. 2:03-ap-00851, 2008 WL 192967, at *4 (Bankr.D.Ariz. Jan. 22, 2008) (noting that the trial judge “clearly was of the view that the award ... was not in the nature of support; indeed, he excised any language in the form of the judgment that would have supported such a conclusion”).
Here, the Tulsa County district court explicitly stated that it had balanced the equities, including the financial needs of the parties, in granting the awards. On appeal, the awards were upheld not as sanctions, but as general awards of attorneys’ fees pursuant to the balancing test employed by the district court. While this Court is not bound by the state district court’s reasoning, it is free to consider and even adopt that court’s characterization of the awards. Whipple v. Fulton (In re Fulton), 236 B.R. 626, 630-31 (Bankr.E.D.Tex.1999). Thus, considering the record and the relevant state-court litigation on the issue of whether the awards are properly characterized as discovery sanctions, the Court finds that the awards at issue are in the nature of alimony, maintenance, or support under federal bankruptcy law.
III. Ferguson is liable for her attorneys’ fees.
Hutton argues that, even if the Court finds that the awards for attorneys’ fees are payable to his former spouse and in the nature of alimony, maintenance, or support, they are nonetheless dischargea-*831ble because Ferguson is not liable for their payment in the event that they are discharged. In certain cases, courts have permitted the discharge of an attorneys’ fees award that otherwise qualified as a domestic support obligation where the spouse was not liable for their payment; however, as explained below, the rationale for doing so rests on the idea that a discharge in such circumstances in no way harms the non-debtor spouse. In other words, excluding the debts from discharge would not serve the purpose of § 523(a)(5), which is to prevent former spouses from being “left out-of-pocket because of a debt- or’s bankruptcy filing.” In re Brooks, 371 B.R. at 767; see also Eisen v. Linn (In re Linn), 38 B.R. 762, 763 (9th Cir. BAP 1984) (citations omitted) (“Excluding these debts from discharge will not further the bankruptcy goal of a fresh start unburdened by old debts. Nor will it protect spouses, former spouses, and children from being injured by a debtor’s discharge.”).
For example, courts have typically addressed the issue in the context of an award for attorneys’ fees that is payable directly to the non-debtor spouse’s attorneys. See, e.g., Aldrich v. Papi (In re Papi), 427 B.R. 457, 459 (Bankr.N.D.Ill.2010) (quoting the order of the trial court in the divorce proceedings entering judgment for attorneys’ fees against the debtor and in favor of the non-debtor spouse’s attorneys); Simon, Schindler & Sandberg, LLP v. Gentilini (In re Gentilini), 365 B.R. 251 (Bankr.S.D.Fla.2007) (noting that the state court had ordered “the debtor to pay ... attorneys’ fees to the Law Firm” and that “[o]n that same day ... the state court entered a Final Judgment for Attorneys’ Fees in favor of the Law Firm and against the Debtor”). In such cases, courts have typically focused on the requirement that a domestic support obligation be “owed to or recoverable by a spouse, former spouse, or child of the debtor.” 11 U.S.C. § 101(14A)(A)(i). If the non-debtor spouse would remain liable for the attorneys’ fees if the debt was discharged, then courts typically find that the award is “owed to or recoverable by” the non-debtor spouse. See, e.g., In re Papi, 427 B.R. at 464 (holding that the debtor’s obligation to pay his former spouse’s attorneys was a debt “owed to or recoverable by” his former spouse because she would remain liable for her attorneys’ fees if the debtor failed to pay); In re Andrews, 434 B.R. at 548 (holding that because the debtor’s former spouse remained liable for her attorneys’ fees, the debtor’s obligation to the attorneys could be deemed a debt owed directly to his former spouse). Likewise, if the non-debt- or spouse is not liable for the attorneys’ fees in the event of discharge, some courts have found that the award is not “owed to or recoverable by” the non-debtor spouse. See, e.g., In re Linn, 38 B.R. at 763 (finding an award for attorneys’ fees in a divorce proceeding dischargeable in bankruptcy because the debtor was solely liable for the fees and the former wife and child would not be liable in the event of nonpayment); In re Gentilini, 365 B.R. at 256 (holding an award for attorneys’ fees dis-chargeable because the statute of limitations for enforcement of the obligation against the debtor’s former spouse had run prior to the debtor’s bankruptcy filing).
Hutton argues that Ferguson is not liable for her attorneys’ fees for two reasons. First, Hutton argues that the statute of limitations for the attorneys’ enforcement of the obligation against Ferguson has run (docket no. 15, p. 5). Second, Hutton argues that Ferguson’s mother, rather than Ferguson herself, is the only individual contractually obligated to pay the fees. Id. at 6.
*832A. The statute of limitations has not run on the enforcement of the attorneys’ fees obligation against Ferguson.
Under Oklahoma law, the statute of limitations for an action upon a contract is five years. Okla. Stat. tit. 12 § 95(A)(1); Nichols v. Nichols, 222 P.3d 1049, 1053 n. 9 (Okla.2009). However, under Oklahoma law, “[w]hen an award for an attorney’s fee is made directly to the client who is a party, a constructive trust attaches eo instante by operation of law to the award for the benefit of the lawyer who performed the services for which compensation is allowed” and “[t]he client stands as a constructive trustee and the lawyer as a constructive beneficiary.” Nichols, 222 P.3d at 1054 (footnote omitted). Under Oklahoma’s constructive-trust theory regarding awards of attorneys’ fees, the five-year statute of limitations for action upon a contract is inapplicable. Id. at 1055. Rather, “[t]he continuing trust character of the award operates against the running of any limitation in favor of the [constructive trustee] until she has clearly repudiated the trust and the repudiation has been brought to the attention of the trust beneficiary.” Id.
It is apparent from the record that Ferguson has not repudiated the constructive trust attached to the awards for attorneys’ fees. Under Oklahoma law, repudiation occurs when the constructive trustee “acts in a manner amounting to a denial of the existence of the trust.” Kinzy v. State ex rel. Okla. Firefighters Pension & Ret. Sys., 20 P.3d 818, 822 (Okla.2001); see also Catron v. First Nat’l Bank & Trust Co. of Tulsa, 434 P.2d 263, 273 (Okla.1967) (finding that “a written declaration by the trustee that all property belongs to him and that the beneficiary has no interest therein” was a repudiation of the trust relationship). Furthermore, repudiation does not set the statute of limitations running until the constructive beneficiary receives notice of the repudiation. Catron, 434 P.2d at 273; Goodall v. Trigg Drilling Co., 944 P.2d 292, 294-95 (Okla.1997).
Ferguson has made payments to her attorneys, both with funds received from Hutton and with her own personal funds (docket no. 25, ex. 3). Rather than amounting to a denial of the existence of the trust, Ferguson’s payments of attorneys fees over several years, wherein she receives funds from Hutton and remits them to her attorneys as constructive trustee for her attorneys’ benefit, are evidence that she has not repudiated the constructive trust. Cf. Goodall, 944 P.2d at 294-95 (Okla.1997) (discussing repudiation of a trust relationship involving a failure to pay oil and gas royalties). Thus, the statute of limitations has not run on the attorneys’ ability to recover the fees against Ferguson.
B. Ferguson is contractually obligated to pay her attorneys’ fees.
Hutton also argues that under the terms of the Agreement, it is Ferguson’s mother, rather than Ferguson herself, who is liable for payment of the attorneys’ fees. The Agreement states that “the term ‘Client’ as used in this Agreement shall also denote the responsible party, (other than any third party guarantors if any), as identified in this Agreement, who, by signing this Agreement, contracts to pay the attorneys’ fees and other charges provided in this agreement.” (Docket no. 11, ex. 1, p. 1). Ferguson is identified as the “Client” and her mother is identified as “the responsible party for paying fees pursuant to the above provisions on behalf of [Ferguson].” Id. at 6.
*833In interpreting the Agreement, the Court must look to the intentions of the parties in entering the contract. Pitco Prod. Co. v. Chaparral Energy, Inc., 63 P.3d 541, 545 (Okla.2003). “If language of a contract is clear and free of ambiguity, the court is to interpret it as a matter of law, giving effect to the mutual intent of the parties at the time of contracting.” Id. “Whether a contract is ambiguous and hence requires extrinsic evidence to clarify the doubt is a question of law for the courts.” Id. “A contract is ambiguous if it is reasonably susceptible to at least two different constructions.” Id. at 545-46. “To decide whether a contract is ambiguous, we look to the language of the entire agreement.” Id. at 546. “A contract must be considered as a whole so as to give effect to all its provisions.” Id.
Looking to the language of the Agreement and considering the contract as a whole so as to give effect to all its provisions, it is clear that the intent of the parties was to designate Ferguson’s mother as an additional person from whom the attorneys could seek to recover their fees, not to relieve Ferguson of her liability to pay for the services that she would receive. This intent is clear from the fact that the Agreement gives the attorneys a lien on any monies recovered by Ferguson in the litigation (docket 11, ex. 1, p. 4). Furthermore, the Agreement states that the term “Client ... shall also denote the responsible party.” The Agreement then lists seventeen additional provisions which refer only to the “Client” and her responsibility for payment of fees and costs. In order to give effect to all of these provisions, the Court must interpret the language to mean that the term “Client” means both the client and the responsible party. To interpret the term to mean only the responsible party would render several provisions, such as the provision placing a lien on the “Client’s” claim, without any meaningful effect.
Such an interpretation is consistent both with the language of the Agreement and the behavior of the parties. While Ferguson’s mother initially paid the attorneys’ retainer, Ferguson has made multiple payments to her attorneys, both out of funds received from Hutton and from her own personal funds, over several years (docket no. 25, ex. 3). Furthermore, the Court’s determination that Ferguson remains liable for her attorneys’ fees under the Agreement is consistent with the findings of the Tulsa County district court in its order dated March 20, 2008 (docket no. 11, ex. 24, p. 2).
IV. The award is not dischargeable under an exception for unusual circumstances.
Finally, Hutton argues that even if the Court finds that the attorneys’ fees are non-dischargeable domestic support obligations, they should nonetheless be discharged under an exception for unusual circumstances articulated by the Tenth Circuit in Lowther v. Lowther (In re Lowther), 321 F.3d 946 (10th Cir.2002).
In Lowther, the Tenth Circuit held that an award for attorneys’ fees related to divorce and child-custody proceedings was dischargeable in bankruptcy under an exception first announced in Jones v. Jones (In re Jones), 9 F.3d 878 (10th Cir.1993). In Jones, the Tenth Circuit held that “the term ‘support’ encompasses the issue of custody absent unusual circumstances.” Id. at 883. The exception for unusual circumstances is thus directed at the issue of whether an award for attorneys’ fees incurred during child custody proceedings actually constitutes support under § 523(a)(5). Id. In In re Lowther, the Tenth Circuit applied its unusual circumstances exception for the first time. 321 *834F.3d at 948. Indeed, the circumstances in Lowther were unusual. In the divorce and child-custody proceedings, the Oklahoma state court required the parent who was awarded custody of the child to pay the non-custodial parent’s attorneys’ fees, while the noncustodial parent was ordered to pay $167 per month in child support to the custodial parent. Id. at 947-48. The Tenth Circuit noted that it would take the custodial parent approximately five years to pay the award for attorneys’ fees at a rate of $167 per month, effectively negating the award for child support during that time period. Id. at 949. The court determined that, in light of the custodial parent’s income without the child support, the negation of the child support payments by the award for attorneys’ fees would “clearly affect” the custodial parent’s ability to financially support the child. Id.
The Fifth Circuit has never adopted this exception. Moreover, case law indicates that it would be unlikely to do so. In an unpublished opinion, the Fifth Circuit stated that “in this circuit, [the] Lowther argument has been rejected implicitly.” Rogers v. Morin, 189 Fed.Appx. 299, 303 (5th Cir.2006). The court discussed its earlier decision in Sonntag v. Prax (In re Sonntag), 115 Fed.Appx. 680 (5th Cir.2004), wherein the debtor argued that the Fifth Circuit should adopt the Tenth Circuit’s unusual circumstances exception. Rogers v. Morin, 189 Fed.Appx. at 303. Without addressing the argument, the Fifth Circuit in In re Sonntag deemed the awards for attorneys’ fees non-dischargeable under § 523(a)(5) because they were “awarded in connection with a child custody dispute.” In re Sonntag, 115 Fed.Appx. at 682 (citing In re Hudson, 107 F.3d at 357; In re Dvorak, 986 F.2d at 941). In Rogers v. Morin, the Fifth Circuit explicitly declined to decide whether to endorse or reject the Tenth Circuit’s unusual circumstances exception. 189 Fed.Appx. at 304. Nonetheless, the Court “is not persuaded that the Fifth Circuit, having spoken so plainly in Dvorak and Hudson, would follow the Tenth Circuit.” Id. at 304 (quoting Sonntag v. Prax (In re Sonntag), 2004 WL 764728, at *2 (N.D.Tex.2004)).
Even if the unusual circumstances exception were applicable in this case, Hutton has not established the unusual circumstances necessary for an exception to non-dischargeability. Hutton’s obligation to pay Ferguson’s attorneys’ fees will not negate the payments for child support that Ferguson is entitled to receive under the Tulsa County district court’s judgment of November 18, 2005. To the contrary, were Hutton’s obligation discharged, Ferguson would remain liable for her attorneys’ fees, thus shifting the burden of payment onto Ferguson as the custodial parent. It would be more likely then, if Hutton’s obligation were discharged, that the attorneys’ fees would negate Ferguson’s award for child support.
CONCLUSION
The awards for attorneys’ fees entered in the Oklahoma trial court are not dis-chargeable in bankruptcy because they are domestic support obligations under 11 U.S.C. § 523(a)(5). The awards are “owed to or recoverable by” Ferguson, and she would remain liable for their payment in the event of discharge. The awards are “in the nature of support” because they arose from a dispute regarding custody of the couple’s minor children. Because the awards are domestic support obligations under § 523(a)(5), it is unnecessary to address Ferguson’s argument that the debts may be non-dischargeable as divorce-related debts under § 523(a)(15).
For the foregoing reasons, the Court finds that Defendants’ Motion for Summary Judgment filed April 18, 2011 (dock*835et no. 11) should be GRANTED. A Judgment shall be entered contemporaneously herewith.
IT IS SO ORDERED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494529/ | MEMORANDUM OPINION
ALAN C. STOUT, Bankruptcy Judge.
This matter comes before the Court on the Debtor’s Motion to Avoid Lien of Republic Bank & Trust Company (Doc. No. 29). In the motion, the Debtor seeks to avoid the judgment lien held by Republic Bank & Trust Company (“Republic”) on real property located at 6406 Westwind Way, Crestwood Kentucky 40014 (the “Property”) pursuant to 11 U.S.C. § 522(f)(1) on the basis that the judicial lien impairs the Debtor’s homestead ex*836emption. At issue is the value of the property in question.
FACTS
The Debtor is a home builder with many years of experience in the home construction market. The Debtor filed his bankruptcy petition (the “Petition”) for Chapter 7 relief on December 1, 2009 (the “Petition Date”). The Debtor and his non-filing spouse jointly own the homestead Property-
The Debtor claimed a $20,200.00 homestead exemption in his Schedule C to the Petition and there has been no objection to the Debtor’s homestead exemption. Therefore, the Debtor’s homestead exemption is allowed.
On the Petition Date, the Debtor listed in his sworn Schedule D two mortgages against the Property. The Debtor listed Provident Bank as holding the First Mortgage with a balance due of $818,000.00. The Debtor also listed Republic as holding the Second Mortgage with a balance of $50,000.00.
On the Petition Date, in the Debtor’s sworn Schedule A, the Debtor listed and valued the Property at $435,000.00. However, after the filing of the motion to avoid and almost two years later, on November 16, 2011, roughly two weeks before the hearing on the motion to avoid lien, the Debtor filed an Amended Schedule A, wherein he now states the Property has a value of only $385,000.00.
As stated above, the only point of contention with regard to this motion to avoid lien is the value of the Property. The Debtor contends the Property has a value of $385,000.00, while Republic contends the Property has a value of $455,000.00. To determine the value, the Court scheduled and conducted an evidentiary hearing on November 29, 2011.
The Debtor testified that he believed the value of the Property to be $385,000.00. The Debtor built this house in 2004 for the approximate cost of $300,000.00. While he admitted that he originally believed the Property possessed a value at $435,000.00 as indicated on his sworn Schedule A, he testified that he may have overstated the value of the property. He testified that the new lower valuation of $385,000.00 is more accurate based upon his home building experience, and the selling price of several comparable homes that were sold after the Petition Date.
On cross examination, the Debtor admitted he was not an appraiser and that his work experience is that of a builder rather than an appraiser. He also testified that in 2006, when he applied for the Second Mortgage with Republic, he indicated on the loan application that the Property had a value of $460,000.00. Finally, the Debtor admitted that the property had a tax assessment of $470,000.00, although he now states that he should have challenged that assessment.
Michael A. Wright testified for Republic. He is a Recovery Supervisor for Republic and has been employed by Republic for over six years. He testified that the balance of the judgment lien on the Petition Date was $124,287.57. He also testified that on the Petition Date, the Second Mortgage held by Republic had a balance of $49,727.31.
DISCUSSION
I. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (K), and (O).
II. Avoidance of Lien
Under 11 U.S.C. § 522(f)(1)(A), a debtor may avoid the fixing of a judicial *837lien on an interest of the debtor in property to the extent such lien impairs the debtor’s exemption. Section 522(f)(2)(A) provides as follows:
For the purposes of this subsection, a lien shall be considered to impair an exemption to the extent that the sum of&emdash;
(i) the lien;
(ii) all other liens on the property; and
(iii) the amount of the exemption that the debtor could claim if there were no liens on the property;
exceeds the value that the debtor’s interest in the property would have in the absence of any liens.
11 U.S.C. § 522(f)(2)(A). Lien avoidance is not an “all or nothing matter.” See In re Brinley, 403 F.3d 415 (6th Cir.2005). Rather, a judgment lien may be avoided only to the extent that it impairs the debt- or’s exemption. Id.
While § 522(f) does not specify the operative date for purposes of applying the formula to determine whether a lien impairs an exemption, 11 U.S.C. § 522(a) defines “value” for purposes of § 522 as “fan-market value as of the date of the filing of the petition.... ” Accordingly, the petition date has been held to be the operative date for all § 522(f) determinations, including determinations regarding the value of the debtor’s property and the value of the liens. In re Wilding, 475 F.3d 428, 432 (1st Cir.2007); In re Salanoa, 268 B.R. 120, 123 (Bankr.S.D.Cal.2001) (“The Court must value the residence and the Debtor’s entitlement to an exemption on the petition date.”). Accordingly, the value of the Debtor’s interest in the Property for purposes of § 522(f) should be calculated based upon the fair market value of the Debtor’s interest in the Property determined on the Petition Date.
The parties have not made the Court’s job easy. Neither party submitted an appraisal valuing the property as of the property date. The Debtor submitted his own testimony as to the value of the property, valuing the Property at $385,000.00. While the Debtor possesses extensive experience with home construction, his knowledge and experience with regard to appraising real property is somewhat more limited. Moreover, his current valuation is admittedly based to some degree upon comparable home sales that took place after the Petition Date.
Republic likewise failed to submit an appraisal based upon the Petition Date. Indeed, the only evidence Republic was able to offer as to the Property’s value is the 2006 pre-housing market crash Second Mortgage Loan Application, wherein the Debtor indicated the Property had a value of $460,000.00, the Debtor’s original Schedule A valuing the Property at $435,000.00, and the tax assessment value of $470,000.00. Based upon the evidence presented, the Court concludes that, on the Petition Date, the Property possessed a fair market value of $410,000.00. This figure takes into account the housing market crash as well as the Debtor’s previous estimates of the Property’s value.
As stated above, the language of the § 522(f)(2)(A) authorizes avoidance of judicial liens only to the extent that those liens impair an exemption. An exemption is impaired “to the extent that the sum of [the liens and the exemption] exceeds the value the debtor’s interest in the property” absent the liens. 11 U.S.C. § 522(f)(2)(A). Applying the 11 U.S.C. § 522(f)(2)(A) calculations as instructed by the Sixth Circuit in Brinley yields the following: Prior liens, consensual liens, and Debtor’s exemption total $512,214.88 ($318,000.00 + $49,727.31 + $124,287.57 + $20,200.00). Subtracting the Property’s value of $410,000.00 leaves *838a balance of $102,214.88. Because the amount of the impairment in this case is $102,214.88, Republic’s lien may be avoided only by that amount. Consequently, Republic retains a lien on the Debtor’s property in the amount of $22,072.69 ($124,-287.57 - $102,214.88 = $22,072.69). See In re Brinley, 403 F.3d 415, 421 (6th Cir. 2005). The Court shall enter an Order this same date in accordance with the holding of this Memorandum.
ORDER
Pursuant to the Court’s Memorandum entered this same date and incorporated herein by reference, and the Court being otherwise sufficiently advised,
IT IS ORDERED that, pursuant to 11 U.S.C. § 522(f), $102,214.88 of the $124,287.57 judgment lien held by Republic Bank & Trust Company, of record in Encumbrance Book 86, Page 458, in the property located at 6406 Westwind Way, Crestwood Kentucky 40014 is AVOIDED. Republic retains a lien in this property in the amount of $22,072.69. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494530/ | OPINION REGARDING DEFENDANTS’ MOTIONS TO DISMISS COMPLAINTS WITH PREJUDICE AND PLAINTIFF’S MOTIONS FOR LEAVE TO FILE AMENDED COMPLAINTS
JAMES D. GREGG, Chief Judge.
I.JURISDICTION
This court has jurisdiction over this bankruptcy case. 28 U.S.C. § 1334. This case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a); Local Rule 83.2(a) (W.D. Mich.). These adversary proceedings are statutory core proceedings because the plaintiff seeks to determine, avoid or recover fraudulent conveyances or preferences. 28 U.S.C. § 157(b)(2)(F) and (G).
Notwithstanding the recent Supreme Court decision, Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), this court tentatively believes it is constitutionally authorized to enter final orders in these adversary proceedings. See Tibbie v. Wells Fargo Bank, N.A. (In re Hudson), 455 B.R. 648, 656-57 (Bankr.W.D.Mich.2011) (the Stem decision is extremely narrow; “[ejxcept for the types of counterclaims addressed in Stem v. Marshall, a bankruptcy judge remains empowered to enter final orders in all core proceedings”). However, at this juncture in these adversary proceedings, no final order is contemplated or now necessary and the issue addressed by Stern may be revisited in the future.
II.ISSUES
Do the complaints filed by Thomas Richardson, as Liquidating Trustee of Checker Motors Corporation (and not individually) (“Plaintiff’), plead sufficient plausible facts to survive the defendants’ motions to dismiss? Should one or more of the Plaintiffs complaints be dismissed for failure to state a cause of action? Fed. R. BankR.P. 7012 (incorporating by reference Fed. R.Civ.P. 12(b)(6)). Should the Plaintiff be permitted to amend his originally filed complaints to augment the factual underpinnings of his various asserted causes of action?
III.PROCEDURAL HISTORY
On January 16, 2009, Checker Motors Corporation (“Debtor”) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. On January 23, 2009, the United States Trustee appointed the Committee of Unsecured Creditors (“Committee”).
On November 22, 2010, the Debtor filed its Plan of Liquidation (“Plan”) and a proposed Disclosure Statement. The Disclosure Statement was approved at a hearing on January 7, 2011. The Plan contemplated that all remaining assets of the Debtor, including avoidance actions under Chapter 5 of the Bankruptcy Code1, would be assigned to a Liquidating Trust for the benefit of the creditors of the bankruptcy estate.
On December 29, 2010, the Committee filed a motion seeking approval of a stipu*861lation of the Debtor and the Committee to approve the granting of standing to the Committee to pursue avoidance actions under Chapter 5 of the Bankruptcy Code pending the possible appointment of a Liquidating Trastee under the Debtor’s Plan. On January 11, 2011, this court entered an order granting the Committee the requested standing. On January 12, 2011, this court entered its order approving the Disclosure Statement. (Base case, Dkt. No. 566.)
On January 14, 2011, the Committee filed the four separate adversary proceedings against Checker Acquisition Corp. (“CAC”), Allan R. Tessler (“Tessler”), Christopher Markin (“C. Markin”), and David Markin (“D. Markin”) (collectively “Defendants”) which are now pending. All of the complaints sought to avoid and recover fraudulent transfers pursuant to §§ 548, 544(b), and 550, and the Michigan Fraudulent Transfer Act, Mich. Comp. L. Ann. § 566.31, et seq. The complaints against Tessler, C. Markin, and D. Markin also sought to avoid and recover preferential transfers pursuant to §§ 547 and 550.
On March 11, 2011, a confirmation hearing was held. On March 31, 2011, an order was entered confirming the Debtor’s Plan with modifications. In accordance with the confirmation order, the Committee’s avoidance actions were assigned to the Liquidating Trust established under the Debtor’s Plan, and the Plaintiff succeeded to the Committee’s standing to pursue the four pending adversary proceedings.
On February 17, 2011, the Defendants filed their respective motions to dismiss. Relying upon Federal Rule of Civil Procedure 12(b)(6), they each asserted that the Plaintiffs respective complaint failed to meet the Supreme Court’s new stringent pleading standard. See, Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The Defendants all assert the complaints are fatally defective because they contain no more than formulaic recitations of the statutory elements for avoidance of fraudulent and preferential transfers. Of course, the Plaintiff opposes the motions to dismiss. A hearing on the motions to dismiss was held on May 23, 2011. While not conceding that the complaints are deficient, the Plaintiff requests, both orally and in writing, that he be permitted to amend the complaints. No written motion to amend was filed prior to the May 23, 2011, hearing. Written motions to amend were first filed after the court took the Defendants’ dismissal motions under advisement.2
During July 2011, while the Defendants’ motions to dismiss remained under advisement, the Plaintiff filed written motions for leave to file amended complaints, with attached proposed amended complaints. (A.P. 11-80015, 11-80016, and 11-80018, Dkt. Nos. 12; A.P. 11-80019, Dkt. No. 13.) This court issued a notice of hearing regarding the motions to amend for September 9, 2011. (A.P. 11-80015,11-80016, and 11-80018, Dkt. Nos. 13; A.P. 11-80019, Dkt. No. 14.) The Defendants timely filed objections, claimed reservations of rights, and requested an adjournment of the hearing. (A.P. 11-80015, 11-80016, and 11-80018, Dkt. Nos. 16; A.P. 11-80019, Dkt. No. 17.) Over objection by the Plaintiff, the hearing was rescheduled by the court.
At the adjourned October 21, 2011, hearing, this court expressed concerns because the Plaintiff failed to file written motions to amend prior to the first hearing on the *862Defendants’ motions to dismiss. The Plaintiffs delay resulted in two hearings. This court, therefore, ordered the Defendants’ attorneys to file an itemization of attorney fees and expenses covering the time period from the conclusion of the first hearing on May 23, 2011, to the conclusion of the October 21, 2011, hearing. The plaintiff’s attorney was given an opportunity to object to the reasonableness of the Defendants’ asserted attorney’ fees.3
A. General Substance of the Original Complaints.
In each of his original complaints, the Plaintiff asserted that transfers had been made from the Debtor to the Defendants within six years prior to the filing of the complaint, and that at the time of the transfers the Debtor was “indebted to its pension funds and to employees and retirees under its collective bargaining agreements among other things. Claims against the Debtor, exceeding $40 million, have been filed on behalf of the parties referred to[.] In light of these obligations and others, the Transfer took place while the Debtor was insolvent or Debtor became insolvent shortly after the Transfer was made.” (A.P. Dkt. No. 1.) The Plaintiff then went on to merely recite the statutory elements to avoid fraudulent and preferential transfers. There were almost no operative facts stated in any of the complaints. The only factual allegations asserted were as follows:
1.Checker Acquisition Corporation.
The original complaint against Checker Acquisition Corporation (“CAC”) plead only that CAC is a Delaware corporation and that on December 21, 2007, the Debtor assigned the rights to its trademark flag design to CAC.
2. Allan R. Tessler.
The original complaint against Allan R. Tessler (“Tessler”) asserted only that Tes-sler is resident of the State of Wyoming, and received a number of transfers which were identified on attached exhibits. The attached exhibits simply listed 49 checks made payable to Tessler, one in the amount of $16,666.66, ten in the amount of $6,250, and the remainder in the amount of $8,333.33. The checks were dated from February 20, 2005 to January 13, 2009.
3. Christopher Markin.
The original complaint against Christopher Markin (“C. Markin”) asserted only that he is a resident of Michigan, was an officer and shareholder of the Debtor, and had received a bonus of $50,000 in December 2008.
4. David Markin.
The original complaint against David Markin (“D. Markin”) asserted that he resides in Michigan, was a director and beneficial shareholder of the Debtor, and was an insider of the Debtor as the term is defined by § 101(31). It further asserted that in the six years prior to the filing of the complaint, D. Markin had received numerous transfers which were listed on attached exhibits. Those exhibits listed various payments by checks, as well as payments to various clubs and transportation providers.
*863
B. Contents of the Amended Complaints.
In the proposed amended complaints, the Plaintiff reiterates the statutory elements for avoidance of fraudulent and preferential transfers. However, in his new version, the Plaintiff attempts to summarize the financial condition of the Debt- or beginning in 2001 when it began to experience “severe operational losses” and to the time the Debtor filed its bankruptcy case. Each of the Plaintiffs amended complaints states the Debtor’s yearly losses and profits, as well as the Debtor’s equity per the year-end balance sheets. The proposed amended complaints allege an underfunding of the Debtor’s pension plan for many of its union employees at the end of each calendar year, a claim of $40,799 filed by National Integrated Group Pension Plan (“NIGPP”) for the Debtor’s withdrawal liability from the NIGPP, and a proof of claim filed by Pension Benefit Guaranty Corporation (“PBGC”) in an amount of $1,587,336 for unfunded pension liability. Additionally, each amended complaint asserts that while the Debtor’s schedules show the Debtor’s assets had a net book value of $18,945,524.76, the actual value was substantially less because, among other things, the Debtor’s receivables were subject to approximately $1.9 million in offsetting claims by its customers, and claims exceeding $40 million have been filed against the Debtor in this bankruptcy case. Therefore, the Plaintiff asserts that the value of the Debtor’s assets was less than the amount of its debts and the Debtor was insolvent at the time the transfers were made to the Defendants.
Further, the Plaintiff alleges additional facts regarding the transfers made by the Debtor to each of the Defendants as follows:
1. Checker Acquisition Corporation.
The amended complaint against CAC alleges that D. Markin was an officer, director, beneficial shareholder and person in control of CAC as well as the Debtor, and that the principal places of business of CAC and the Debtor were identical. The amended complaint alleges that prior to December 21, 2007, the Debtor was the sole owner of all right, title and interest in and to U.S. Trademark No. 06049221 which is the CHECKER plus checkerboard flag design mark (“Trademark”), and that on December 21, 2007, the Debtor assigned its entire right, title and interest in the Trademark “together with that part of the good will of the Debtor’s business connected with and symbolized by the Trademark and the right to sue and recover damages and profits for third-party infringements of the Trademark” to CAC. (A.P. 11-80015, Dkt. No. 12, Ex. 1.) The Plaintiff alleges that the Debtor received no consideration from CAC in exchange for the assignment of the Trademark. The Plaintiff also alleges that D. Markin caused the Debtor to make the transfer while knowing that the transfer did not benefit the Debtor. Attached to the amended complaint is the assignment of the Trademark showing that it was signed by D. Markin as President of both the Debtor and CAC.
2. Allan R. Tessler.
The Plaintiffs amended complaint against Tessler alleges that he resides in the State of Wyoming and was an officer and director of the Debtor who was not an employee of the Debtor between 2005 and the Debtor’s bankruptcy filing. According to the amended complaint, Tessler spent little time at the Debtor’s facility in Kalamazoo, Michigan, and he did nothing to benefit the Debtor between 2005 and the petition date, and devoted little or no time to assisting the Debtor during that time period. Notwithstanding the lack of ser*864vices provided by Tessler, it is alleged that the Debtor paid Tessler $395,833.20 between January of 2005 and the bankruptcy filing. These payments, the Plaintiff alleges, were excessive, not for valid business purposes, and did not benefit the Debtor. Similarly to the original complaint, the Plaintiff attached exhibits listing 49 checks made payable to Tessler, one in the amount of $16,666.66, ten in the amount of $6,250, and the remainder in the amount of $8,333.33. The checks were dated from February 20, 2005 to January 13, 2009.
The proposed amended complaint adds a count for alleged breach of fiduciary duties. The Plaintiff asserts that Tessler, as a director and officer of the Debtor, owed fiduciary duties to the Debtor and the Debtor’s creditors at the time he received the transfers. It is also alleged that the transfers were made with no rational business purpose, that Tessler lacked good faith, and that he caused the Debtor to make the transfers for his own personal gain.
3. Christopher Markin.
In the amended complaint against C. Markin, the Plaintiff asserts that he is a resident of Michigan who was an officer, employee and beneficial shareholder of the Debtor, and the son of D. Markin. According to the complaint, the Debtor paid C. Markin $91,379 in 2006, $96,146 in 2007, and $145,971 in 2008. The $50,000 payment increase from 2007 to 2008 is alleged to be a “one-time bonus” that was paid in late 2008.
The amended complaint asserts that C. Markin undertook no additional job responsibilities in exchange for the bonus, he did not provide services to the Debtor beyond those provided in 2007 in exchange for the bonus, he was not a party to a contract which required payment of the bonus and, finally, that payment of the bonus did not benefit the Debtor.
4. David Markin.
In the amended complaint against D. Markin, the Plaintiff alleges that he is and was a resident of Palm Beach, Florida and was an officer and director of the Debtor who controlled the Debtor. D. Markin is alleged to be the Chief Executive Officer, one of two directors, and the majority beneficial shareholder of the Debtor. The complaint alleges that between January of 2005 and the bankruptcy filing, D. Markin was present at the Debtor’s facility in Kalamazoo, Michigan for only one to three days per month. When not present at the Debtor’s business, his contact with the Debtor was limited to phone calls. However, in 2005, the Debtor paid D. Markin $330,454 in wages and $74,115.74 in fringe benefits, $9,250 of which were attributable to an automobile and $64,865.74 for payment of D. Markin’s club dues. During 2006, the Debtor paid D. Markin $199,254 in wages and $66,264.90 in fringe benefits, $9,250 for an automobile and $57,014.90 for payment of club dues. In 2007, the Debtor paid D. Markin $206,539 in wages and $74,905.88 in fringe benefits, $9,250 for an automobile and $65,655.88 for payment of club dues. In 2008, the Debtor paid D. Markin $166,575 in wages and $54,906.43 in fringe benefits, $9,250 for an automobile and $50,616.43 for payment of club dues. (Based upon the court’s calculations, total wages and benefits during the four-year period of 2005 to 2008 equals approximately $1,173,014.95.)
The club dues paid for D. Markin included membership costs and fees for the Kalamazoo Country Club, the Park Club in Kalamazoo, Michigan, a country club in Palm Beach, Florida, and yet another country club in Vermont. The complaint also alleges that these club memberships *865did not benefit the Debtor because D. Markin did not entertain customers or employees of the Debtor at any of the clubs or use the memberships for purpose connected to the Debtor’s business. The complaint alleges that the automobile paid for by the Debtor was not used for any business purpose. The complaint also summarizes other payments made by the Debtor to, or for the benefit of, D. Markin for non-business purposes: an apartment in New York City, the use of a limousine service, the use of a charter airplane, and an office located in Palm Beach, Florida. The complaint and exhibits attached detail $868,080.12 in fringe benefits and additional expenses paid to or on behalf of D. Markin by the Debtor between January of 2005 and December 81, 2008. The Plaintiff asserts that all of these payments constitute avoidable fraudulent transfers or preferential transfers.
Finally, like the amended complaint against Tessler, the amended complaint against D. Markin adds a new count for alleged breach of fiduciary duties. The Plaintiff asserts that as a director and officer of the Debtor, D. Markin owed fiduciary duties to the Debtor and the Debtor’s creditors at the time he received the transfers summarized in the proposed amended complaint.
IV. DISCUSSION
A. The Rule.
Federal Rule of Civil Procedure 12(b)(6) governs motions to dismiss adversary proceedings. See Fed. R. BankrP. 7012(b) (incorporating Fed.R.Civ.P. 12(b)(6) by reference). Rule 12(b)(6) permits a defendant to move for dismissal of a complaint prior to filing a responsive pleading. The rule provides, in pertinent part:
(b) How to Present Defenses. Every defense to a claim for relief in any pleading must be asserted in the responsive pleading if one is required. But a party may assert the following by motion:
(6) failure to state a claim upon which relief can be granted;
A motion asserting any of these defenses must be made before pleading if a responsive pleading is allowed.
“Such a motion challenges the legal theory of the complaint, not the sufficiency of any evidence which may be discovered.” Rogan v. Litton Loan Servicing, L.P. (In re Collins), 456 B.R. 284, 289 (6th Cir. BAP 2011) (citing Advanced Cardiovascular Sys., Inc. v. Scimed Life Sys., Inc., 988 F.2d 1157, 1160 (Fed.Cir.1993)). ‘“The purpose of the rule is to allow the court to eliminate actions that are fatally flawed in their legal premise and destined to fail[.]’ ” Id. (quoting Advanced Cardiovascular Sys., Inc., 988 F.2d at 1160, citing Neitzke v. Williams, 490 U.S. 319, 326-27, 109 S.Ct. 1827, 1832, 104 L.Ed.2d 338 (1989)).
B. The Old Conley v. Gibson Standard.
In 1957, in a class action discrimination case, the Supreme Court established the prior standard for dismissal under Rule 12(b)(6). Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In Conley, the Court held that a “complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley, 355 U.S. at 45-46, 78 S.Ct. 99. The Court explained that the Federal Rules of Civil Procedure “do not require a claimant to set out in detail the facts upon which he bases his claim. To the contrary, all the Rules require is ‘a short and plain statement of the claim’ that will give the defendant fair notice of what *866the plaintiffs claim is and the grounds upon which it rests.” Conley, 355 U.S. at 47, 78 S.Ct. 99. (footnote omitted.) Under the Conley standard it was very difficult (one might say “nearly impossible”) to prevail on a Rule 12(b)(6) motion to dismiss.
C. The New Standard Requiring Assertion of Plausible Facts.
In 2007, in an antitrust case, the Supreme Court adopted a new standard for dismissal under Rule 12(b)(6). Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). In Twombly, the Court acknowledged that Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain statement of the claim showing that the pleader is entitled to relief,” in order to “ ‘give the defendant fair notice of what the ... claim is and the grounds upon which it rests.’ ” Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (quoting Conley, 355 U.S. at 47, 78 S.Ct. 99.) However, the Court stated that “[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, 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[.] Factual allegations must be enough to raise a right to relief above the speculative level[.]” Twombly, 550 U.S. at 555,127 S.Ct. 1955 (internal citations omitted.) Based upon that standard, the Court then concluded that the complaint in Twombly must be dismissed because the plaintiffs had not “nudged their claims across the line from conceivable to plausible[.]” Twombly, 550 U.S. at 570, 127 S.Ct. 1955.
Putting to rest any debate as to whether the new pleading standard was limited to antitrust cases, the Court reiterated the new pleading standard two years later in a case involving an assertion of deprivation of constitutional rights by government officials who relied on the qualified immunity privilege. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In Iqbal, the Supreme Court summarized the pleading requirement as follows: “When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Iqbal, 129 S.Ct. at 1950. The Supreme Court stated that a “claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 129 S.Ct. at 1949.
In the wake of Twombly and Iqbal, the Sixth Circuit Court of Appeals has applied the current pleading standard for dismissal under Rule 12(b)(6). See, e.g., Center for Bio-Ethical Reform, Inc. v. Napolitano, 648 F.3d 365 (6th Cir.2011); Tam Travel, Inc. v. Delta Airlines, Inc. (In re Travel Agent Comm’n Antitrust Litig.), 583 F.3d 896 (6th Cir.2009). In accordance with the new more demanding pleading standard, the Sixth Circuit has explained that when considering a Rule 12(b)(6) dismissal motion, a court must construe a complaint in the light most favorable to the plaintiff, the allegations of the complaint must be accepted as true, and all reasonable inferences must be drawn in favor of the plaintiff. Tam Travel, 583 F.3d at 903. “ ‘[T]o survive a motion to dismiss, the complaint must contain either direct or inferential allegations respecting all material elements to sustain a recovery under some viable legal theory.’ ” Tam Travel, 583 F.3d at 903 (quoting Eidson v. Tenn. Dep’t of Children’s Servs., 510 F.3d 631, 634 (6th Cir.2007)). A court is not required to “accept as true legal conclusions or unwarranted factual inferences, and conclusory allegations or legal conclu*867sions masquerading as factual allegation will not suffice.” Tam Travel, 583 F.3d at 903 (internal citations and quotations omitted). The complaint must state a claim which is plausible on its face; “plausibility is not the same as probability, but rather ‘asks for more than a sheer possibility that a defendant has acted unlawfully.’ ” Center for Bio-Ethical Reform, 648 F.3d at 369 (quoting Iqbal, 129 S.Ct. at 1949).
In another adversary proceeding, this court focused upon alleging “plausible” facts. Lefkomtz v. Mich. Trucking, LLC (In re Gainey Corp.), 447 B.R. 807, 820-21 (Bankr.W.D.Mich.2011). Such a focus is consistent with Supreme Court and Sixth Circuit precedent.
D. The Original Complaints Failed to Meet the New Pleading Standard.
The Plaintiffs original complaints contained virtually no operative facts. The Plaintiff merely formulaically recited the statutory elements of fraudulent and preferential transfer claims. It is easy for this court to determine that each of the Plaintiffs original complaints failed to meet the new pleading standard as set forth by the Supreme Court in Twombly and Iqbal.
E. The Oral “Motion” to Amend.
Federal Rule of Bankruptcy Procedure 9013, which mirrors Federal Rule of Civil Procedure 7(b)(1)4, provides, in pertinent part that a “request for an order, except when an application is authorized by these rules, shall be by written motion, unless made during a hearing. The motion shall state with particularity the grounds therefor, and shall set forth the relief or order sought.” Despite having been made during the first hearing on the Defendants’ motions to dismiss, the court believes that the Plaintiffs oral request to amend his complaints was insufficient.
The requirement for a written motion in Rule 7(b)(1) and Bankruptcy Rule 9013 serves two functions, a record-making function and a notice function. In re Bistrian, 184 B.R. 678, 682-83 (E.D.Penn.1995) (citing Taragan v. Eli Lilly & Co., 838 F.2d 1337 (D.C.Cir.1988); Rauch v. United Instruments, Inc., 405 F.Supp. 435 (E.D.Pa.1975)). The record-making function permits the court and the parties to determine what occurred. Bistrian, 184 B.R. at 682. The notice function permits the opposing party and the court to prepare adequately. Id. “By channeling litigants into a written, rather than oral, discourse with each other and the court, Rule 7(b)(1) assures that parties will know of contentions and requests in a litigation and will have the opportunity to oppose — or at least address — such views and demands.” Id.
Some illustrations of types of requests which need not be in writing include motions to exclude or strike evidence, motions for judgment as a matter of law, and motions for mistrial. 5 Arthur R. Miller & May Kay Kane, Federal Practice and Procedure § 1193 (3d ed. 2011) (citing Hammond-Knowlton v. Hartford-Conn. Trust Co. of Hartford, Conn., 26 F.Supp. 292, 293 (D.Conn.1939)). However, an argument on a motion is not tantamount to a trial or hearing for purposes of the exception in Rule 7(b)(1) and Bankruptcy Rule *8689013 permitting oral motions to be made in certain circumstances. Shapiro v. Freeman, 38 F.R.D. 308, 309 n. 1 (S.D.N.Y.1965) (citing Hammond-Knowlton v. Hartford-Conn. Trust Co. of Hartford, Conn., 26 F.Supp. 292 (D.Conn.1939)). In Hammond, the district court perceptively stated:
An oral argument on a motion previously made is not, in my opinion, the ‘hearing’ at which the necessity for reducing motions to writing may be obviated. Motions made at a hearing are obviously such as are incidental to the hearing itself, such as motions to exclude evidence, or for a directed verdict, or for a mistrial, etc. In other words, they are such motions as are recorded in the minutes of the trial or hearing, and it is for that reason that the motion need not be reduced to writing and notice thereof given.
Any other construction of the rule would lead to chaos in motion procedure. A party, for instance, might make a motion on notice, for the inspection of a document, and at the hearing thereof, and without any notice whatsoever, include a further motion to punish somebody for contempt of court. Therefore, the court will confine itself to the motions as filed.
Hammond-Knowlton, 26 F.Supp. at 293. Likewise, this judge does not favor “sandbagging,” “bushwacking,” or other types of unnecessary litigation surprise, especially in those instances when a written motion could easily have been filed and served prior to the hearing. Cf. Fed. R. BankR.P. 1001 (the bankruptcy rules shall be construed to “secure the just, speedy and inexpensive determination of every case and proceeding.”).
Motions commonly permitted to be made orally, such as those to exclude or strike evidence, are motions which typically require no advance notice to the opposing party and, therefore, obviate the need for a formal, written motion. In other circumstances, however, such as the motions to amend first made during argument on the Defendants’ motions to dismiss, the far better practice is to require motions to be filed in writing. Taragan, 838 F.2d at 1341; Jones v. Uris Sales Corp., 373 F.2d 644, 648 (2d Cir.1967). Given the circumstances and procedural background in these adversary proceedings, if called upon to make a decision, this judge would have denied the Plaintiff’s oral request to amend. However, because of the Plaintiffs subsequent written motions, the court is not required to now make this call.
F. The Written Motions to Amend.
Although the Plaintiffs oral motion to amend his complaints was insufficient, the Plaintiff remedied his procedural oversight or omission by filing formal written motions to amend, with attached amended complaints, before this court issued a ruling on the Defendants’ motions to dismiss. Whether to permit a plaintiff to amend a complaint is within a court’s sound discretion. Winget v. JP Morgan Chase Bank, N.A., 537 F.3d 565, 572 (6th Cir.2008) (“We review a district court’s decision whether to permit a plaintiff to amend its complaint for abuse of discretion.”). Fed. R. Bankr.P. 7015 (incorporating Fed.R.Civ.P. 15) (a court “should freely give leave to amend when justice so requires”).
The Sixth Circuit Court of Appeals has explained that “where a more carefully drafted complaint might state a claim, a plaintiff must be given at least one chance to amend the complaint before the district court dismisses the action with prejudice.” U.S. ex. rel. Bledsoe v. Cmty. Health Sys., Inc., 342 F.3d 634, 644 (6th Cir.2003) (emphasis added); see also Lyon v. Rappaport *869(In re ClassicStar, LLC), 2011 WL 652744, at *5 (6th Cir. BAP Feb. 24, 2011). However, denial of leave to amend may be appropriate where the proposed amendment would be futile. Kottmyer v. Maas, 436 F.3d 684, 692 (6th Cir.2006).
Futility is not an issue with these proposed amended complaints. The buttressed factual allegations result in far more than mere formulaic recitation of the statutory elements for avoidance of the asserted fraudulent and preferential transfer causes of action. Construing the amended complaints in the light most favorable to the Plaintiff, accepting the allegations of the amended complaints as true, and drawing all reasonable inferences in favor of the Plaintiff, as required, the amended complaints state facially actionable claims for avoidance and recovery of fraudulent and preferential transfers. In stark contrast to the original complaints, the amended complaints meet the revised procedural requirement enunciated by the Supreme Court in Twombly and Iqbal. Because this is the first time a proper request was made, the court grants the Plaintiffs written motions to amend his original complaints.
G. Possible Prejudice to Defendants.
Denial of leave to amend may also be appropriate where there is undue delay on the part of the movant. Morse v. McWhorter, 290 F.3d 795, 800 (6th Cir.2002). The Plaintiff did not file his written motions to amend prior to the first hearing on the Defendants’ motions to dismiss and, as previously stated, the Plaintiffs delay resulted in two hearings, rather than one. Therefore, the Defendants’ attorneys traveled to and attended two hearings. The court finds that attendance at one of the hearings should not have occurred.
While this court feels it is inappropriate to deny the motion for leave to amend on the basis of this delay, and declines to do so, the court recognizes the limited prejudice caused by the Plaintiff to the Defendants. To consider possible prejudice, the court requested the Defendants’ attorney file an itemization of fees and expenses incurred between the first hearing on the Defendants’ motions to dismiss and the second hearing on the Plaintiffs written motions to amend. Defense counsel submitted the requested information. Upon reflection, and after careful review of the itemized statement submitted, the court believes it is appropriate to award fees and expenses incurred by the Defendants for travel time and court time attributable only to the second argument that took place on October 21, 2011. Legal services provided to the Defendants between the first and second hearings would have been necessary to prepare for a hearing on the Plaintiffs motions to amend regardless of the Plaintiff’s delay in filing the written motions to amend.
Defendants’ attorney Carlson traveled to court, appeared at the hearing and returned to his office on October 21, 2011. These legal services were necessitated solely by the Plaintiffs, and his attorneys’, unjustified delay in seeking to amend the four complaints. If written motions had been timely filed before the first hearing on May 23, 2011, the Defendants’ attorney would have made only one trip to Grand Rapids to attend one hearing, not two hearings. Relying upon the Defendants’ separate itemization of requested attorneys’ fees, the extra fees are5:
*870
1.Allan R. Tessler.
10/21/11 Eric Carlson — billing attorney.
Prepare for, travel to and appear at Court hearing on Plaintiffs 2.5 $737.50 Motion to Amend the Complaint.
2. David Markin.
10/21/11 Eric Carlson — billing attorney.
Prepare for, travel to and appear at Court hearing regarding 2.5 $812.50 Plaintiffs Motion to Amend the Complaint.
3. Christopher Markin.
No attorneys’ fees requested.
4. Checker Acquisition Corporation.
10/21/11 Erie Carlson — billing attorney.
Prepare for, travel to and appear at Court hearing regarding 1.0 $325.00 Plaintiffs Motion to Amend the Complaint.
Expenses were not pro-rated among the Defendants. Expenses were billed only to Tessler (143 miles) totaling $71.50.
The court finds the fees and expenses summarized above to travel to and attend the second hearing on October 21, 2011, resulted from the Plaintiffs unjustified delay in filing formal written motions to amend. The total fees and expenses to be paid to Defendants’ attorneys are $1,946.50. The Plaintiff shall pay this amount as an expense of administration within fifteen (15) days.6
H. The Plaintiff’s “Relation Back ” Request.
In his motions for leave to amend, the Plaintiff seeks an order that the amended complaints relate back to the date of the original complaints. The court declines to rule on this portion of the Plaintiffs motion because it is premature. If the Defendants file a motion to dismiss the amended complaints, e.g. because the statute of limitations has expired on one or more of the Plaintiffs claims, the issue will be heard and determined at the appropriate time after notice. It is possible that the restated causes of action are timely and the “new” causes of action are untimely. In any event, affirmative defenses are waivable if not asserted.7
*871V. CONCLUSION
The Plaintiffs motions for leave to amend his complaints are GRANTED. The Plaintiff is ordered to reimburse Defendants’ fees and expenses (payable to Defendants’ attorneys) in the amount of $1,946.50 within fifteen (15) days. One combined order shall be entered in each adversary proceeding accordingly.
The Defendants’ motions to dismiss the original complaints are DENIED.
. The Bankruptcy Code is set forth in 11 U.S.C. §§ 101-1532 inclusive. The specific provisions of the Bankruptcy Code are referred to in this opinion as " §-.”
. On May 23, 2011, the parties were advised that because of this court's extremely demanding docket, an opinion would not be issued for approximately 90 to 120 days.
. Defendants have claimed they incurred fees and expenses in the amount of $40,140.45. (A.P. 11-80015, Dkt. No. 19, A.P. 11-80016, Dkt. No. 21, A.P. 11-80018, Dkt. No. 20, A.P. 11-80019, Dkt. No. 22.) The Plaintiff has responded that the fees are much too high. (A.P. 11-80015, Dkt. No. 20, A.P. 11-80016, Dkt. No. 22, A.P. 11-80018, Dkt. No. 21, A.P. 11-80019, Dkt. No. 23.)
. "The Advisory Committee that wrote the Bankruptcy Rules modeled Rule 9013 after Rule 7(b)(1) of the Federal Rules of Civil Procedure.” In re Bistrian, 184 B.R. 678, 682 (Bankr.E.D.Penn.1995) (citing 9 Lawrence P. King, Collier on Bankruptcy ¶ 9013.02[1] (15th ed. rev. 1994)). Rule 7(b)(1) provides that a motion must “(A) be in writing unless made during a hearing or trial; (B) state with particularity the grounds for seeking the order; and (C) state the relief sought.”
. For each Defendant, the amount of the itemized attorneys’ fees differ. The Defendants’ attorneys may have negotiated disparate fee agreements or may have exercised billing discretion resulting in different fees charged to each defendant.
. No issue is presently before the court as to whether these fees and expenses should be paid personally by the Plaintiff or by the Plaintiff's attorneys. Also, in the event that the Defendants have already paid their attorney fees for the services provided, the Defendants and the Defendants' attorneys will decide whether the payment shall be divided and remitted to each Defendant or whether a credit or credits shall be given.
. As of January 1, 2012, the bankruptcy judges of this district will rotate the cities in which they preside over pending and future filed cases. This judge will relinquish cases, contested matters, and adversary proceedings in Kalamazoo and become responsible for the Lansing cases. If, and when, the "relation back” issue becomes ripe for decision, it should be heard by the judge who will preside *871over this case and these adversary proceedings. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494531/ | *898MEMORANDUM of DECISION
RALPH B. KIRSCHER, Bankruptcy Judge.
Pending in this Adversary Proceeding is Defendant Timothy Blixseth’s (“Tim”) “Motion for Reconsideration of This Court’s August 1, 2011 Order Denying Motion to Dismiss Adversary Complaint Pursuant to Fed.R.Bankr.P. 7012(b)” filed August 15, 2011. Tim’s motion is accompanied by a request for judicial notice. On the same date that Tim filed his motion for reconsideration, the Court entered an Order agreeing to hold all matters in this Adversary Proceeding in abeyance pending resolution of a motion to withdraw the reference filed with the United States District Court for the District of Montana (“District Court”). The District Court declined to withdraw the reference. Thus, Tim’s motion for reconsideration is ready for decision. This Memorandum of Decision sets forth the Court’s findings of fact and conclusions of law. For the reasons discussed below, Tim’s request for reconsideration is denied.
BACKGROUND
On October 1, 2010, the Plaintiff Richard Samson (“Samson”) commenced this Adversary Proceeding by filing a complaint against Tim and other parties, alleging certain unlawful acts related to Tim and Debtor Edra Blixseth’s (“Edra”) Marital Settlement Agreement (“MSA”).1 Tim responded to Samson’s complaint on November 11 and 12, 2010, by filing motions to dismiss for lack of personal jurisdiction, for lack of subject matter jurisdiction under Civil Rule 12(b)(1), and for failure to state a claim upon which relief can be granted under Civil Rule 12(b)(6). Tim also filed a motion for mandatory and/or permissive abstention.
Shortly thereafter, on November 19, 2010, Tim filed a pro se “Amended Motion to Disqualify Bankruptcy Judge Kirscher.” Tim, through counsel, filed another “Motion to Disqualify Bankruptcy Judge Kirscher” on December 14, 2010. Following a hearing held January 18, 2011, I entered a decision on February 25, 2011, denying Tim’s request that I disqualify myself from this and various other proceedings.
Following the hearing on Tim’s request for disqualification, a hearing on Tim’s motion to dismiss was held February 14, 2011. After the February 14, 2011, hearing and before the Court entered a ruling on Tim’s request for dismissal, the Court was advised that an involuntary bankruptcy had been filed against Tim in the United States Bankruptcy Court for the District of Nevada. Because of the involuntary bankruptcy proceeding, the Court held Tim’s motion to dismiss in abeyance. Upon later learning that the involuntary proceeding was dismissed, this Court entered a Memorandum of Decision and Order on August 1, 2011, denying Tim’s motion to dismiss Count I (to set aside the MSA), Count IV (preferential transfer), Count V (breach of fiduciary duty), Count VII (constructive trust), and Count VIII (equitable subordination). The Court sua sponte ruled in the same Memorandum of Decision and Order that it would grant *899the motion to dismiss as to Counts II, III, and VI (the fraudulent conveyance claims), but in lieu of dismissal, granted the parties leave to file a motion with the District Court requesting that it withdraw the reference as to all or part of Adversary Proceeding 10-00088.
As instructed, Samson filed a motion to withdraw the reference in District Court. On October 5, 2011, United States District Court Judge Sam E. Haddon entered a brief order denying the motion to withdraw reference.
While Judge Haddon was considering Samson’s request for withdrawal of the reference, Samson filed a motion for leave to file brief regarding procedural status and memorandum in support, which motion the Court granted on October 26, 2011. Thereafter, Tim filed a response to the Trustee’ brief and attached thereto the transcript of a hearing held before Judge Haddon on September 30, 2011, a brief and transcript and the transcript of the hearing held October 21, 2011, before Judge Sharon J. Waters of the Superior Court of California, County of Riverside (“Superior Court”). Tim also filed a suggestion of lack of subject matter jurisdiction over Counts II, III, and VI. Given Judge Haddon’s October 5, 2011, ruling and upon consideration of the recent pleadings filed by the parties, the Court deems it appropriate to now consider Tim’s pending request for reconsideration.2
APPLICABLE LAW
In the pending request for reconsideration, Tim does not seek reconsideration of that portion of the Court’s August 1, 2011, decision finding that it lacked subject matter jurisdiction over Samson’ fraudulent conveyance claims. Rather, Tim seeks partial reconsideration of this Court’s August 1, 2011, Order under F.R.B.P. 7012(b). Rule 7012 sets forth the time and procedures for serving responsive pleadings, for asserting factual and legal defenses and objections, and for making preliminary motions and motions for judgment on the pleadings. Rule 7012 is, by its plain language, not a rule that provides for reconsideration. Tim’s reference to such Rule is thus obviously a reference to the title of Tim’s original motion to dismiss.
Other than F.R.B.P. 7012(b), Tim’s motion for reconsideration cites not a single rule or code section. While it is obvious Tim is requesting that this Court reconsider a portion of its August 1, 2011, ruling, it is not clear whether Tim is requesting relief under F.R.B.P. 9023 or 9024. The Court deems Tim’s motion a request under Rule 59. Rule 59, Fed.R.Civ.P., incorporated into the Federal Rules of Bankruptcy Procedure by Rule 9023, provides in pertinent part: “A new trial may be granted to all or any of the parties and on all or part of the issues ... (2) in an action tried without a jury, for any of the reasons for which rehearings have heretofore been granted in suits in equity in the courts of the United States.” Under Rule 9023, “[a] motion to alter or amend a judgment must be filed no later than [14] days after the entry of the judgment.”3 Rule 59(e) in-*900eludes motions for reconsideration. Backhand v. Barnhart, 778 F.2d 1386, 1388 (9th Cir.1985); 11 Wright, Miller & Kane, FEDERAL PRACTICE AND PROCEDURE: CÍVÍ1 2nd § 2810.1.
In Brandt v. Esplanade of Central Montana, Inc., et al. (“Brandt”), 19 Mont. B.R. 401, 403 (D.Mont.2002), the District Court, in affirming this Court’s decision, discussed amendment of an order under Rule 59(e): “Amendment or alteration is appropriate under Rule 59(e) if (1) the district court is presented with newly-discovered evidence, (2) the district court committed clear error or made an initial decision that was manifestly unjust, or (3) there is an intervening change in controlling law. School Dist. No. 1J, Multnomah County v. ACandS, Inc., 5 F.3d 1255, 1263 (9th Cir.1993).” See also In re Teigen, 11 Mont. B.R. 91, 92 (Bankr.D.Mont.1992). Absent highly unusual circumstances, a motion for reconsideration should not be granted if the above test is not met. 389 Orange Street Partners v. Arnold, 179 F.3d 656, 665 (9th Cir.1999). Finally, a Rule 59(e) motion may not be used to raise arguments or present evidence for the first time when they could reasonably have been raised earlier in the litigation. Kona Enterprises, Inc. v. Estate of Bishop, 229 F.3d 877, 890 (9th Cir.2000).
DISCUSSION
Tim first argues this Court made a factual error when it refused to abstain because this “Court was under the erroneous impression that no parallel action had been commenced in the California Superi- or Court to enforce the terms of the Marital Settlement Agreement entered between Mr. Blixseth and the Debtor, Edra Blixseth.” The Court’s impression, if erroneous, was formed from the argument and evidence presented by Tim’s counsel. In the brief filed in support of the motion to abstain filed November 11, 2010, Tim did not assert the existence of a parallel action but instead argued that the California Superior Court,
specifically retained jurisdiction to adjudicate disputes arising out of the MSA. Moreover, California has a statutory mechanism in place to rapidly adjudicate and enforce settlements, Cal.Code Civ. P. § 664.6. The statutory procedure is “an expeditious, valid alternative statutorily created.” Nicholson v. Barab, 233 Cal.App.3d 1671, 1681, 285 Cal.Rptr. 441 (1991). Finally, the California Superior Court has jurisdiction over the parties pursuant to the MSA.
Brief in support of Motion for Mandatory Abstention or Permissive Abstention, docket entry no. 9, p. 6. Similarly, Tim’s counsel argued at the February 14, 2011, hearing: “[TJhere is an action in state court. Judge Waters specifically retained jurisdiction. And there’s an expedient method by which Mr. Samson can go to California and get answers to the questions that he poses by way of his complaint.”
The statements by Tim’s counsel regarding the California Superior Court’s retained jurisdiction do not establish the existence of a parallel state court action. Indeed, it appeared from other statements made by the parties that as of November 18, 2011, the date Tim filed his motion, and February 14, 2011, the date of the hearing on Tim’s motion to dismiss, that nothing had transpired in Tim and Edra’s California Superior Court divorce proceeding since approximately the date of Tim and Edra’s judgment of dissolution, which was October 7, 2008. Given the absence of any evidence of a parallel state court action, this Court was precluded from exercising *901its discretion to abstain. See Security Farms v. International Brotherhood of Teamsters, 124 F.3d 999, 1009 (9th Cir.1997). As alluded to earlier, this Court did not learn that Tim had filed a request for money judgment in the Superior Court action until after this Court entered its August 1, 2011, decision.
Furthermore, the evidence presented to date does not conclusively establish that the California Superior Court retained jurisdiction to consider the matters at issue in this Adversary Proceeding. Judge Waters commented at the October 21, 2011, California Superior Court hearing that the MSA between Tim and Edra “was, and remains, the most unusual settlement agreement that I never put on the record, because I never heard the terms of the settlement.” Not knowing the terms of the MSA, Judge Waters issued a judgment on October 7, 2008, providing that the Superior Court of California would retain “jurisdiction as provided for in the MSA in accordance with the terms and provisions of the MSA.” Through this Court’s review of the MSA, it found two provisions addressing the California Superior Court’s continuing jurisdiction:
J. Jurisdiction over Tax Matters: The Court shall retain jurisdiction to make further orders as necessary to enforce these tax provisions[; and]
* * *
64. Except as otherwise provided herein, the Court shall not retain jurisdiction to modify or alter this Stipulation in any fashion whatsoever. The Court will retain jurisdiction only to enforce the terms of this stipulation in the event of a breach by either party.
Pages 28 and 41 of the MSA. The relief sought by Samson in his complaint does not appear to fall within either of the aforementioned passages from the MSA. Provided the MSA is not set aside, the Court agrees that the California Superior Court has continuing jurisdiction to consider Tim’s pending request for entry of judgment. However, vague statements regarding retained jurisdiction do not show the existence of a parallel state court action.
Moreover, the Court is not persuaded that Tim’s July 5, 2011, request for money judgment is a parallel proceeding. As noted earlier, unbeknownst to this Court and between the time of the February 14, 2011, hearing and entry of the Memorandum of Decision and Order on August 1, 2011, Tim sought on or about July 5, 2011, a money judgment against Edra in the sum of $999,996, which amount Tim alleges was to be paid “by November 12, 2008 to satisfy his claim for unpaid management fees (relative to BLX Group, Inc.) [paragraph 16.A.(b) of MSA] [.]”
Upon learning of Tim’s July 5, 2011 motion in California, Samson filed a motion in Edra’s main bankruptcy case on September 26, 2011, requesting that this Court issue an injunction to preclude Judge Waters from deciding Tim’s request for money judgment. Before this Court entered a decision on Samson’s request for an injunction, Judge Waters held a hearing on October 21, 2011, after which she entered a decision on November 16, 2011, staying all proceedings with respect to the MSA, including Tim’s request for a money judgment. As a result of Judge Waters’ decision, Samson withdrew his request for an injunction.
Notwithstanding Judge Waters’ decision to stay all proceedings with respect to the MSA, Tim’s request for a money judgment is not the same as Samson’s request to set aside the MSA. Rather, the outcome of Tim’s request for a money judgment is dependent in large part on *902whether the MSA is ultimately upheld or set aside. In any event the Court is not persuaded that a parallel state court action exists even at this time. Absent a parallel state court action, this Court is precluded from exercising its discretion to abstain.
Tim also argues in this request for reconsideration that this Court is precluded from evaluating the validity of the MSA. As this Court explained in its August 1, 2011, Memorandum of Decision in Adversary Proceeding 10-00088, the Rook-er-Feldman doctrine is not an issue because when a state court merely adopts a marital property settlement without adjudicating the property division, such as it appears Judge Waters did with respect to the MSA, subsequent claims alleging misconduct by the former spouse in obtaining that settlement are not barred by Rooker-Feldmcm because the plaintiff is alleging misconduct by the spouse rather than error by the state court. This Court also sua sponte examined the domestic relations exception and concluded such exception did not apply to the Samson’s claims, including Samson’s claim to set aside the MSA.
While apparently not disputing the foregoing, Tim argues this Court committed a legal error by failing to require that Samson plead restitution. In support of such argument, Tim argues “CaLCode Civ. P. § 1691 requires the party seeking rescission to ... restore all consideration or ‘everything of value which he has received’ under the contract. The statute’s language is clear.” Village Northridge Homeowners Assn. v. State Farm Fire & Casualty Co., 50 Cal.4th 913, 921-922, 114 Cal.Rptr.3d 280, 237 P.3d 598 (2010). Without addressing the merit or applicability of such law or argument, the evidence this Court has seen in other related proceedings shows that several of the assets Edra received through the MSA, such as the Yellowstone Club, consisting of Yellowstone Mountain Club, LLC, Yellowstone Development, LLC, Big Sky Ridge, LLC, and Yellowstone Club Construction Company, LLC, along with Big Springs Realty, LLC, and Yellowstone Club World, LLC, were financially insolvent as of the effective date of the MSA. According to Tim’s argument, if the assets had no value, requiring Samson to plead restitution would be a pointless exercise.
Finally, Tim argues this Court erred when it labeled various of his defenses as affirmative defenses which were inappropriate to consider in a motion to dismiss. Tim argues this Court failed to take judicial notice of certain court filings and other matters of public record, which filings and documents, such as the MSA, would establish the absence of a disputed issue of fact. More specifically, Tim argues the MSA is “central to the Trustee’s Claim” and that the MSA, along with the order approving the MSA and the transcript of the July 8, hearing on approval of the MSA “establish res judicata, statutory, equitable and judicial estoppel, as well as waiver and release.” A reading of the Court’s August 1, 2011, Memorandum of Decision shows the Court did consider various filings and documents, such as the MSA. Therefore, the Court finds Tim’s latter argument without merit.
The Court doubts that either Tim or Edra anticipated the volume of litigation their complicated web of corporations, real estate holdings and operating companies, and their subsequent acrimonious divorce, would produce. For instance, the Yellowstone Club entities, consisting of Yellowstone Mountain Club, LLC, Yellowstone Development, LLC, Big Sky Ridge, LLC, and Yellowstone Club Construction Company, LLC sought bankruptcy protection on November 10, 2008. See Bankruptcy Case Nos. 08-61570, 08-61571, 08-61572 *903and 08-61573. The hours of hearings generated by the foregoing bankruptcies was unprecedented in this Court. In addition, the Yellowstone Club entities’ bankruptcy generated eight associated adversary proceedings. Later, the bankruptcy of Big Springs Realty, LLC, see Bankruptcy Case No. 09-61079, produced one adversary proceeding; the bankruptcy of Yellowstone Club World, LLC, see Bankruptcy Case No. 09-60061, generated three adversary proceedings; Edra’s personal bankruptcy produced 24 adversary proceedings; and the bankruptcy of BLX Group, Inc., f/k/a Blixseth Group, Inc.’s bankruptcy, see Bankruptcy Case No. 09-61893, generated three adversary proceedings. This Court’s decisions in the above matters have, in turn, produced numerous appeals.
Notwithstanding the foregoing, Tim argues the California Superior Court is better acquainted with the facts and is better equipped to expeditiously deal with various of the issues raised in this Adversary Proceeding. For instance, Tim argues in a brief that “California has a statutory mechanism in place to rapidly adjudicate and enforce settlements, Cal.Code Civ. P. § 664.6. The statutory procedure is ‘an expeditious, valid alternative statutorily created.’ ” Brief in support of Motion for Mandatory Abstention or Permissive Abstention, docket entry no. 9, p. 6. Additionally, at that hearing, Tim’s counsel stated:
But it’s important to note as well that Counts 1, 5, and 7 are the noncore components of the bankruptcy complaint. They are all based upon the same basic allegation which is that Mr. Blixseth misrepresented facts to Ms. Blixseth, induced her into this agreement, and that the trustee now wants to go back and rescind that agreement.
So California actually has an expedited procedure by which the trustee standing in Ms. Blixseth’s shoes could go to California, ask Judge Waters to entertain these three counts, and get a ruling. And in doing so, one of two things would happen: Judge Waters would either reinforce what she painstakingly set forth and unequivocally set forth in the order on waivers and releases, or she would agree with the trustee.
So with respect to Subpart 5-and I apologize, Your Honor, because it’s all interrelated — there is an action in state court. Judge Waters specifically retained jurisdiction. And there’s an expedient method by which Mr. Samson can go to California and get answers to the questions that he poses by way of his complaint.
* * *
So if the trustee contends that the orderly administration of the estate, which is an element under permissive abstention, is — would be frustrated, that’s not the case. I mean it may be and probably is the case that the trustee could go and file his claim in California and have an adjudication before discovery even closed in these AP proceedings.
The Court agrees with Tim that Judge Waters is fully qualified and capable to rule on various of the issues raised in this Adversary Proceeding. However, the Court questions the ability of any court to fashion an expeditious ruling on any issue until they are fully apprised of the inner workings of Tim and Edra’s business dealings, and the impact thereon caused by the various bankruptcy proceedings.
For instance, Tim is, in the California Superior Court, seeking a money judgment against Edra in the sum of $999,996, yet Tim did not file a claim in Edra’s bankruptcy case for the above debt and would thus not participate in any distribution from her bankruptcy estate. Instead, *904Tim filed Proof of Claim No. 14 in the bankruptcy case of BLX Group, Inc. That claim is listed as an unsecured claim in the amount of $999,996 stemming from “management services.” Tim attached 4 pages and paragraph 16b of the 42-page MSA to Proof of Claim No. 14. Paragraph 16b recites that “[t]he Yellowstone Entities owe BGI management fees that were to be paid for the months from July 2007 to June 2008, at the rate of $83,333 per month, a total of $999,996. The Petitioner shall cause BGI to make said payments to Respondent, for his management services during said month, on or before the 90th day after The Closing. Said payments shall be taxable to Respondent and deductible to BGI. The Petitioner shall have no obligation to contribute money to the Yellowstone Entities or BGI to fund such payments to Respondent.” To date, the Chapter 11 Trustee in the BLX Group, Inc. bankruptcy case has not objected to the allowance of Tim’s Proof of Claim No. 14. A court deciding whether Tim is entitled to a money judgment against Edra may be interested to know that Tim filed a claim against BLX, but not Edra.
Keeping matters in one court also prevents parties from inadvertently misstating events in another court. For instance, in discussing this Court’s scheduling of the hearing on Samson’s motion to stay the California proceedings, Tim’s counsel stated to Judge Waters:
It is a reasonable assumption when bankruptcy Judge Kirscher set the matter in Blixseth for a hearing before this hearing, and then continued it to a hearing after this hearing, that there was a reason for doing that. And the reason, I think, that is logically and reasonably inferable from that is he wanted your input as to whether or not you thought you should hear this matter, and then he would take his cue from that.
While the Court certainly appreciates Judge Waters’ input on the matter, what the record before this Court reflects is that Samson filed his motion for injunction and requested an expedited hearing on September 26, 2011. On September 27, 2011, this Court entered an Order setting the matter for expedited hearing October 4, 2011. On September 30, 2011, Tim, through counsel, filed a request to continue the October 4, 2011, hearing to October 17, 2011, “to enable Mr. Blixseth to properly research and respond to the Trustee’s Motion and to subpoena the Debtor and other key witnesses whose testimony is directly relevant to the Trustee’s Motion. Because there is no hearing scheduled in the state court on Mr. Blixseth’s Motion for a Money Judgment, there is no reason to expedite the hearing at this time.” Because the Court’s schedule would not accommodate Tim’s request to continue the matter to October 17, 2011, the Court entered an Order on October 3, 2011, continuing the hearing on Samson’s motion to November 8, 2011. This Court could not have continued the hearing on Samson’s motion for the purpose of allowing Judge Waters to weigh in on the matter because this Court was not aware that Judge Waters had scheduled a hearing on Tim’s request for money judgment.
For the reasons discussed above, Tim’s motion for reconsideration is denied. However, denial of Tim’s request for reconsideration does not bring finality to the Court’s August 1, 2011, Memorandum of Decision and Order, and this Court must bring finality to such decision so the parties may move forward.
As a court of equity, this Court has broad discretion under Rules 59(e) and 60(b), Fed.R.Civ.P., to sua sponte reconsider, vacate, or modify past orders so long as no intervening rights have become vested in reliance on the order. Meyer v. *905Lenox (In re Lenox), 902 F.2d 737, 739-40 (9th Cir.1990). No party’s intervening rights have vested in reliance on the Court’s initial decision made August 1, 2011. Fed.R.Civ.P. 59(e) refers to “judgments.” “Judgment” is defined in Fed. R.Civ.P. 54(a) as “a decree and any order from which an appeal lies.” In other words&emdash;a “final” order. Fed.R.Civ.P. 60(b) also refers to relief from “final” orders.
As instructed by this Court on August 1, 2011, the parties filed a motion for withdrawal of the reference with Judge Had-don. Judge Haddon denied such request on October 5, 2011, and the matter has sat since that time awaiting a ruling by this Court on Tim’s pending request for reconsideration. Given the state of the record, including Judge Haddon’s comments made September 30, 2011, this Court’s August 1, 2011, decision does not yet constitute entry of a judgment or final order. As such, the court has inherent power to modify, alter, or vacate the August 1, 2011 decision. See United States v. Martin, 226 F.3d 1042, 1048-49 (9th Cir.2000) (authority of district courts to reconsider their own orders before they become final absent some contrary rule or statute allows them to correct decisions based on shifting precedent); Reswick v. Reswick (In re Reswick), 446 B.R. 362, 373 (9th Cir. BAP 2011).
The Court sua sponte amends its August 1, 2011, Memorandum of Decision and Order in accordance with this Memorandum of Decision. In particular, I find the Court erred when it made reference to subject matter jurisdiction in its August 1, 2011, ruling. Subject matter jurisdiction “refers to a tribunal’s ‘ “power to hear a case.” ’ ” Union Pacific R. Co. v. Locomotive Engineers and Trainmen Gen. Comm. of Adjustment, Central Region, 558 U.S.-,-, 130 S.Ct. 584, 596, 175 L.Ed.2d 428 (2009) (quoting Arbaugh v. Y & H Corp., 546 U.S. 500, 514, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006), in turn quoting United States v. Cotton, 535 U.S. 625, 630, 122 S.Ct. 1781, 152 L.Ed.2d 860 (2002)). The Supreme Court in Stem v. Marshall specifically stated its decision did not implicate questions of subject matter jurisdiction:
Section 157 allocates the authority to enter final judgment between the bankruptcy court and the district court. See §§ 157(b)(1), (c)(1). That allocation does not implicate questions of subject matter jurisdiction. See § 157(c)(2) (parties may consent to entry of final judgment by bankruptcy judge in non-core case). By the same token, § 157(b)(5) simply specifies where a particular category of cases should be tried.
Stern v. Marshall, 131 S.Ct. at 2607. The Supreme Court then went on to conclude only that bankruptcy courts lack the constitutional authority to enter final judgments on state law counterclaims that are not resolved in the claims allowance process. Id. at 2620.
Having now had the benefit of more time to reflect on Stem v. Marshall, I find the Court’s August 1, 2011, decision in this Adversary Proceeding was flawed in one respect. The “jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute.” Battle Ground Plaza, LLC v. Ray (In re Ray), 624 F.3d 1124, 1130 (9th Cir.2010) (quoting Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995)). A bankruptcy court’s jurisdiction is, generally, prescribed by 28 U.S.C. § 1334(b). In addition to granting jurisdiction to bankruptcy courts over bankruptcy cases, the statute provides that “the district courts [and by reference pursuant to 28 U.S.C. § 157, the bankruptcy courts] shall have original but not exclusive jurisdiction of all civil pro*906ceedings arising under title 11, or arising in or related to cases under title 11.”
In a 5-4 decision, the Supreme Court in Stern v. Marshall concluded that — even though the proceeding was core under 28 U.S.C. § 157(b)(2)(C) and that the bankruptcy court had the statutory authority to resolve the matter — the bankruptcy court nevertheless lacked the constitutional power to finally decide a state-law counterclaim where the counterclaim was not so closely related to the creditor’s claim that it could be adjudicated as part of the claims resolution process. Shortly after the Supreme Court entered its decision in Stem v. Marshall, this Court entered its August 1, 2011 decision concluding:
Since this Court may not constitutionally hear the fraudulent conveyance claim as a core proceeding, and this Court does not have statutory authority to hear it as a non-core proceeding, it may in no case hear the claim. Therefore, this Court grants the parties fourteen days in which to move the District Court to withdraw its reference, in whole or in part, pursuant to 28 U.S.C. § 157(e), or else it will dismiss the fraudulent conveyance claims for lack of subject matter jurisdiction.
Such decision was flawed. In March of this year, the United States Supreme Court entered a decision that provides in-structful guidance on the matter addressed here. See Henderson ex rel. Henderson v. Shinseki — U.S. -, 181 S.Ct. 1197, 1202, 179 L.Ed.2d 159 (2011). In an attempt to “bring some discipline” to the use of the term “jurisdictional” the Supreme Court in Henderson wrote:
Branding a rule as going to a court’s subject-matter jurisdiction alters the normal operation of our adversarial system. Under that system, courts are generally limited to addressing the claims and arguments advanced by the parties. See Sanchez-Llamas v. Oregon, 548 U.S. 381, 356-357, 126 S.Ct. 2669, 165 L.Ed.2d 557 (2006). Courts do not usually raise claims or arguments on their own. But federal courts have an independent obligation to ensure that they do not exceed the scope of their jurisdiction, and therefore they must raise and decide jurisdictional questions that the parties either overlook or elect not to press. See Arbaugh, supra, at 514, 126 S.Ct. 1235.
Jurisdictional rules may also result in the waste of judicial resources and may unfairly prejudice litigants. For purposes of efficiency and fairness, our legal system is replete with rules requiring that certain matters be raised at particular times. See Sanchez-Llamas, supra, at 356-357, 126 S.Ct. 2669. Objections to subject-matter jurisdiction, however, may be raised at any time. Thus, a party, after losing at trial, may move to dismiss the case because the trial court lacked subject-matter jurisdiction. Arbaugh, 546 U.S., at 508, 126 S.Ct. 1235. Indeed, a party may raise such an objection even if the party had previously acknowledged the trial court’s jurisdiction. Ibid. And if the trial court lacked jurisdiction, many months of work on the part of the attorneys and the court may be wasted.
Because the consequences that attach to the jurisdictional label may be so drastic, we have tried in recent cases to bring some discipline to the use of this term. We have urged that a rule should not be referred to as jurisdictional unless it governs a court’s adjudicatory capacity, that is, its subject-matter or personal jurisdiction. Reed Elsevier [Inc. v. Muchnick], supra, at-, 130 S.Ct., [1237] at 1243-1244 [176 L.Ed.2d 18 (2010) ]; Kontrick, supra, at 455, 124 S.Ct. 906. Other rules, even if impor*907tant and mandatory, we have said, should not be given the jurisdictional brand. See Union Pacific, 558 U.S. at -, 130 S.Ct. at 596.
In Stern v. Marshall, the Supreme Court reiterated:
Because “[bjranding a rule as going to a court’s subject-matter jurisdiction alters the normal operation of our adversarial system,” Henderson v. Shinseki, 562 U.S. -,-, 131 S.Ct. 1197, 1201-03, 179 L.Ed.2d 159 (2011), we are not inclined to interpret statutes as creating a jurisdictional bar when they are not framed as such. See generally Arbaugh v. Y & H Corp., 546 U.S. 500, 516, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006) (“when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character”).
Section 157(b)(5) does not have the hallmarks of a jurisdictional decree. To begin, the statutory text does not refer to either district court or bankruptcy court “jurisdiction,” instead addressing only where personal injury tort claims “shall be tried.”
The statutory context also belies Pierce’s jurisdictional claim. Section 157 allocates the authority to enter final judgment between the bankruptcy court and the district court. See §§ 157(b)(1), (c)(1). That allocation does not implicate questions of subject matter jurisdiction. See § 157(c)(2) (parties may consent to entry of final judgment by bankruptcy judge in non-core case). By the same token, § 157(b)(5) simply specifies where a particular category of cases should be tried. Pierce does not explain why that statutory limitation may not be similarly waived.
Consistent with the above, several courts have recently concluded that Stern v. Marshall does not deprive bankruptcy courts of subject matter jurisdiction. See, e.g., In re Wilderness Crossings, LLC, 2011 WL 5417098, *1 (Bankr.W.D.Mich. Nov 08, 2011); In re Bujak, 2011 WL 5326038, *2 (Bankr.D.Idaho Nov. 03, 2011); In re Sunra Coffee LLC, 2011 WL 4963155, *4 (Bankr.D.Haw. Oct 18, 2011); and In re Citron, 2011 WL 4711942, *2 (Bankr.E.D.N.Y. Oct 06, 2011).
Following the express language of Henderson and Stern v. Marshall, this Court concludes that because the United States District Court for the District of Montana would have the requisite subject-matter jurisdiction to adjudicate the claims in this Adversary Proceeding, so too does this Court. Consistent with the foregoing, the Court will enter a separate order providing as follows:
IT IS ORDERED that Defendant Timothy Blixseth’s Motion for Reconsideration of This Court’s August 1, 2011 Order Denying Motion to Dismiss Adversary Complaint Pursuant to Fed.R.Bankr.P. 7012(b) filed August 15, 2011, at docket entry no. 57 is DENIED.
IT IS FURTHER ORDERED that the Court’s Order of August 1, 2011, is amended to read as follows:
IT IS ORDERED Defendant Timothy Blixseth’s Motion for Mandatory Abstention or Permissive Abstention, filed November 11, 2010 at docket entry no. 9, is denied.
IT IS FURTHER ORDERED that Defendant Timothy Blixseth’s Motion to Dismiss Adversary Complaint Pursuant to Fed.R.Bankr.P. 7012(b), filed November 12, 2010 at docket entry no. 12, is denied.
. Edra filed for divorce in the Riverside Superior Court in December 2006, In re Marriage of Blixseth, Riverside Superior Court Case No. RIDIND091152. As part of the divorce proceeding, Tim and Edra entered into the MSA on June 26, 2008. The MSA consists of 42 pages plus exhibits. The MSA was amended by an Amendment to Marital Settlement Agreement dated July 2, 2008, consisting of 4 pages, and was again amended by a Second Amendment to Marital Settlement Agreement dated August 12, 2008, consisting of 7 pages plus exhibits and certain side letters. Property was transferred pursuant to the MSA on or about August 20, 2008.
. On September 19, 2011, Tim appealed this Court’s February 25, 2011, Order denying his Amended Motion to Disqualify filed December 14, 2010, at docket entry no. 39. Tim has not sought a stay pending appeal, and thus, this Court concludes it can proceed with pending matters in this Adversary Proceeding.
. Rule 59, Fed.R.Civ.P., was amended in 2009 to extend the deadline for filing such actions to 28 days after the entry of judgment. However, in the context of bankruptcy proceedings, the deadline for filing a notice of appeal is 14 days. Thus, Bankruptcy Rule 9023 was amended to shorten the 28 day period in Rule 59 to 14 days so that Bankruptcy Rule 9023 *900would not override the notice of appeal deadline under Rule 8002(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494533/ | ORDER ON OBJECTION TO CLAIM [87] FILED BY IBC DENVER TV, LLC
HOWARD R. TALLMAN, Chief Judge.
This case comes before the Court on Debtor’s Objection to Claim [87] Filed by IBC Denver IV, LLC, Assigned to Lapis Advisers, LP (Docket # 857) (the “Objection”).
I.FACTS
The parties filed their Stipulation of Facts with Respect to Debtor’s Objection to Claim of Lapis Advisers LP (docket # 1097) (the “Stipulation”) and stipulated to the following facts:
1. On or about December 19, 2006, IBC Denver IV, LLC (“IBC”), as lessor, and Shane, as lessee, entered into a Lease Agreement (the “Original Lease”) pursuant to which Shane leased approximately 54,280 square feet of space in a building located at 8532 Concord Center Drive, Centennial, Colorado (“Building One”). The Original Lease provided for a term of 126 months commencing on February 1, 2007.
2. On or about February 14, 2007, IBC and Shane entered into a First Amendment to Lease (the “First Amendment,” and together with the Original Lease, “the Lease”), pursuant to which Shane leased an additional 42,040 square feet of space in a building located at 8530 Concord Center Drive, Centennial, Colorado (“Building Two”) (Building One and Building Two are collectively referred to as the “Leased Premises”).
3. Pursuant to the First Amendment, the term of the Lease was extended from July 31, 2017 to July 31, 2019. The Lease required Shane to pay monthly Base Rent1 for the *35Leased Premises according to the following schedule:
Months 1-6 $0.00
Months 7-18 $54,275.33
Months 19-30 $55,632.22
Months 31-42 $57,023.02
Months 43-54 $58,448.60
Months 55-66 $59,909.81
Months 67-78 $61,407.56
Months 79-90 $62,942.75
Months 91-102 $64,516.32
Months 103-114 $66,129.22
Months 115-126 $67,782.45
Months 127-138 $69,477.02
Months 139-150 $71,213.94
4.In addition to Base Rent, the Lease required Shane to pay IBC on a monthly basis its Proportionate Share of Operating Expenses related to the Leased Premises, including Taxes, Insurance, Common Area Maintenance, Utilities and Management Fees. Based on the square footage of the two Buildings, Building One accounted for 43.646% of the Operating Expenses and Building Two accounted for 56.354% of the Operating Expenses. Under the terms of the Lease, Shane was responsible for payment of 88.725% of the total Operating Expenses for Building One and Building Two.
5.Shane had intended to use the Leased Premises as its corporate headquarters and as a storage facility for its jewelry inventory. However, at some time prior to the commencement date of the Lease, Shane advised IBC that it would not be taking possession of the Leased Premises and instead would explore options to sublease the Premises. With the cooperation of IBC, Shane engaged a commercial real estate broker for the purpose of identifying one or more sub-tenants for the Leased Premises. Those efforts were not successful.
6. Despite its decision not to occupy the Leased Premises, Shane made the required Lease payments through December 2008. Shane did not make the required Lease payments for January 2009.
7. Shane filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on January 12, 2009. Thereafter, Shane filed a motion to reject the Lease, which was approved by Order of the Bankruptcy Court dated February 26, 2009, effective nunc pro tunc as of the petition date. As of the petition date, IBC was owed $86,304.46 by Shane on account of rent due under the Lease.
8. On or about April 20, 2009, IBC filed its Proof of Claim (the “Claim”) (designated as Claim No. 87-1 on the Court’s docket) in the amount of $1,949,052.44 consisting of $86,304.46 in unpaid pre-petition rent and $1,862,747.80 for damages arising by virtue of Shane’s rejection of the Lease.
9. On or about May 17, 2010, IBC transferred and assigned the Claim to Lapis. Lapis is now the owner and holder of the Claim.
10. On or about October 8, 2010, the Debtor filed its Objection to Claim 127 [sic] Filed by IBC Denver IV, LLC, Assigned to Lapis Advisers, LP.
11. On or about November 8, 2010, Lapis filed its Response of Lapis Advisers, LP to Debtor’s Objection to Claim.
12. Subsequent to the rejection of the Lease, IBC engaged Frederick Ross Company (“Frederick Ross”), a commercial real estate brokerage firm, to identify replacement ten*36ant(s) and/or purchaser(s) for the Leased Premises.
13. In February 2010, IBC consummated a sale of Building Two to Case Concord, LP for a gross purchase price of $3,800,000.00. The sale of Building Two closed on February 16, 2010. IBC incurred and paid a sale commission of $184,947.50 to Frederick Ross in connection with the sale of Building Two.
14. On November 1, 2009, IBC entered into a lease with Raceway Partners LLC (“Raceway”) pursuant to which Raceway leased Building One for a 63 month term commencing November 13, 2009 and terminating on February 12, 2015 (the “Raceway Lease”). IBC incurred and paid leasing commissions of $117,651.08 in connection with the lease of Building One.
15. Raceway has an option to extend the Raceway Lease for one additional five year term at the then prevailing market rate. To date, Raceway has not advised IBC whether or not it intends to exercise its option to extend the Raceway Lease.
16.The Raceway Lease provides for payment of monthly Base Rent pursuant to the following schedule:
Months 1-3 $0.00
Months 4-12 $26,913.83
Months 13-24 $27,721.25
Months 25-36 $28,552.89
Months 37-48 $29,409.47
Months 49-60 $30,291.76
Months 61-63 $31,200.51
17. In addition, Raceway is required to pay certain defined Operating Expenses related to Building One.
18. Assuming Raceway fully performs its obligations under the terms of the Raceway Lease, it will pay to IBC over the full initial term the sum of $2,723,568.30 consisting of rent and reimbursement of Operating Expenses.
19. On November 3, 2010, Lapis filed its Motion Pursuant to Bankruptcy Rule 3018(a) For Order Temporarily Allowing Claim for Purpose of Voting on Plan of Reorganization [Docket No. 901-4], In support of that Motion, Lapis filed the Declaration of Brian C. Mott, a principal of IBC (the “Mott Declaration”). The Mott Declaration set forth the following calculation of the Claim:
Unpaid rent plus Operating Expenses (increased by 3% per year) due for remaining term of Lease:
Months 25-30 $ 520,172.52
Months 31-150 $11,898,147.34
Sub-total of gross claim $12,418,319.86
Less: Sale Proceeds (Building Two) $ 3,800,000.00
Rent and Operating Expenses due from Raceway (Building One) $ 2,723,568.30
Net claim, before application of Section 502(b)(6) cap ($12,418,319.86 $ 5,894,751.56 less (a) $3,800,000.00 and (b) $2,723,568.30)
Rent reserved for 3 years of Lease Months 25-60 $ 3,228,811.89
*3715% of gross claim ($12,418,319.86 x 15%) $ 1,862,747.80
Plus: Unpaid pre-petition rent $ 86,304.46
Total: 15% of gross claim plus pre-petition rent $ 1,949,052.44
20. On July 21, 2011, Lapis filed its Motion for Leave to File Amended Proof of Claim (“Motion for Leave”). On July 25, 2011, the Court entered its Order granting the Motion for Leave. The Amended Proof of Claim attached to the Motion for Leave sets forth Lapis’s calculation of IBC’s mitigation of damages resulting from the post-rejection sale of Building One ($3,800,000 gross sale proceeds) and the lease of Building Two ($2,723,568.00 of projected future rental income and reimbursement of operating expenses payable by Raceway Partners, LLC), less brokerage commissions of $302,597.00 paid by IBC in connection with those two transactions According to Lapis’s calculations, the net actual damages resulting from the rejection of the Lease total $6,197,348.86, exclusive of unpaid pre-petition rent. The difference between the actual rejection damages as set forth in the Mott Declaration and in the Amended Proof of Claim is that the Mott Declaration, unlike the Amended Proof of Claim, did not reflect the brokerage commissions incurred by IBC in connection with the sale of Building One and the lease of Building Two.
21. For calendar year 2008, Shane’s share of Operating Expenses for the Leased Premises was $293,589.24, which included $187,579 on account of Real Estate Taxes.
22. For calendar year 2009, Shane’s share of Real Estate Taxes for the Leased Premises was $271,500.
23. The Operating Expenses payable under the Lease and attributable to Building Two for the period from February 2010 through the end of the Lease on July 21, 2019, total $1,846,185.00.
24. The Operating Expenses payable under the Lease constitute additional rent and were “pass through” expenses in that the Lease provided that such Operating Expenses would be paid or reimbursed by Shane without IBC either recognizing a profit or loss with respect thereto.
II. DISCUSSION
A. The Lapis Damages Claim.
Under 11 U.S.C. § 365(g)(1), the Court treats Shane’s rejection of its Lease with IBC as a breach of the Lease occurring immediately prior to the petition date. Thus, Lapis (as IBC’s assignee) is entitled to assert a claim in this proceeding for the damages resulting from the breach. Lap-is’s claim for damages is determined under the terms of the Lease and under applicable non-bankruptcy law. In Re Highland Superstores, 154 F.3d 573, 579 (6th Cir.1998) (citing In re Gantos, Inc., 176 B.R. 793, 795 (Bankr.W.D.Mich.1995); In re Iron-Oak Supply Corp., 169 B.R. 414, 418-20 (Bankr.E.D.Cal.1994); In re Fi*38nancial News Network, Inc., 149 B.R. 348, 351 (Bankr.S.D.N.Y.1993); In re Conston Corp., Inc., 130 B.R. 449, 453 (Bankr.E.D.Pa.1991); In re Goldblatt Bros., Inc., 66 B.R. 337, 346 (Bankr.N.D.Ill.1986)).
The measure of damages in Colorado for breach of a real property lease “is the amount it takes to place the landlord in the position he would have occupied had the breach not occurred, taking into account the landlord’s duty to mitigate.” Schneiker v. Gordon, 732 P.2d 603, 612 (Colo.1987). See, also, Summit Foods, Inc. v. Greyhound Food Management, Inc., 752 F.Supp. 363, 366 (D.Colo.1990); La Casa Nino, Inc. v. Plaza Esteban, 762 P.2d 669, 672 (Colo.1988).
Usually this will be the difference between the rent reserved in the lease and the reasonable rental value of the premises for the duration of the term of the lease, plus any other consequential damages caused by the breach.... If the landlord has avoided any cost by not having to perform, that cost should be deducted from his recovery in order to place him in the position he would have occupied had the tenant performed.
Schneiker, 732 P.2d at 612.
The Court will not undertake to liquidate the full amount of Lapis’s damages claim under the Lease and Colorado contract law. The stipulated facts do not allow the Court to make that determination without the aid of expert analysis to compare the present value of the Lease to the current reasonable rental value of the premises.2
More importantly, for the reasons discussed below, the Court rejects the Debtor’s assertion that the damages cap is calculated based on the state law damages claim after taking mitigation into account instead of being calculated based on the rent reserved in the Lease. Consequently, the Court’s calculation of the damages cap under § 502(b)(6) depends only upon the rent reserved and is not dependent upon the amount of the state law damages claim. In a case like this one, where the § 502(b)(6) cap, calculated on the rent reserved under the Lease, is less than either parties’ estimation of the damages claim, calculating the precise amount of state law damages is unnecessary. Neither party believes that Lapis’s state law claim for damages is less than its estimate of $6,197,348.86.3 Because the Court calculates the § 502(b)(6) cap to be a lesser figure than either the Debtor’s or Lapis’s calculation of actual damages, the precise damages figure is a moot point.
B. Application of 11 U.S.C. § 502(b)(6).
The operation of the cap on landlord damages under § 502(b)(6) is a matter of first impression for this Court.4 The *39Bankruptcy Code sets out the formula for capping a landlord’s claim for lease rejection damages as follows:
(a) A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects.
(b) Except as provided in subsections (e)(2), (f), (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—
(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[.]
11 U.S.C. § 502(b)(6). In summary, Lapis’ Lease rejection damages are capped at the greater of (1) the amount of rent due for the year following the effective date of the rejection or (2) the rent due for 15% of the remaining Lease term up to three years, in addition to delinquent pre-petition rent.
The Court’s reading of § 502(b)(6)(A) is at odds with the majority of courts with respect to calculation of the 15% limitation. Courts frequently calculate the amount of rent due over the remaining term of the lease and multiply that amount times 15%. In re USinternetworking, Inc., 291 B.R. 378, 380 (Bankr.D.Md.2003) (citing In re Today’s Woman of Florida, Inc., 195 B.R. 506 (Bankr.M.D.Fl.1996); In re Gantos, 176 B.R. 793 (Bankr.W.D.Mich.1995); In re Financial News Network, Inc., 149 B.R. 348 (Bankr.S.D.N.Y.1993); In re Communicall Cent., Inc., 106 B.R. 540 (Bankr.N.D.Ill.1989); In re McLean Enter., Inc., 105 B.R. 928 (Bank.W.D.Mo.1989)). That is the method that Lapis used to calculate the limitation on its claim but, in the Court’s view, the language of § 502(b)(6)(A) does not support such an interpretation. When the language pertaining to the one year and three year limitations is omitted, what remains is: “the rent reserved ... for ... 15 percent ... of the remaining term of such lease.... ” Fifteen percent of the remaining term of the lease is plainly a reference to an amount of time not money.
The Court observes the “cardinal rule that a statute is to be read as a whole ... since the meaning of statutory language, plain or not, depends on context.” Conroy v. Aniskoff, 507 U.S. 511, 515, 113 S.Ct. 1562, 123 L.Ed.2d 229 (1993) (citing Massachusetts v. Morash, 490 U.S. 107, 115, 109 S.Ct. 1668, 104 L.Ed.2d 98 (1989); King v. St. Vincent’s Hospital, 502 U.S. 215, 221, 112 S.Ct. 570, 116 L.Ed.2d 578 *40(1991)). Interpreting the 15% calculation as applying to the remaining amount of rent as opposed to a period of time yields a reading of the subsection that is internally inconsistent. It cannot be reasonably argued that the phrase “the rent reserved by such lease ... for ... one year ...” refers to anything other than rent due for a one year period of time. Nor can “the rent reserved by such lease ... not to exceed three years, of the remaining term of such lease ...” be reasonably read to refer to anything other than a limitation based upon the rent due for a three year period of time. To read § 502(b)(6)(A) as referring to 15% of the total rent due over the full remaining term of the lease is inconsistent with the natural reading of the remainder of that subsection. In the Court’s view, “the rent reserved ... for ... 15 percent ... of the remaining term of such lease ...” must be read as referring to rent due for that specified period of time in order to be consistent with the surrounding language.
In practice, by reading the 15% limitation consistently with the remainder of § 502(b)(6)(A) as a reference to a period of time, any lease with a remaining term of 80 months or less is subject to a cap of one year of rent5 and any lease with a remaining term of 240 months or more will be subject to a cap of three years rent.6 Those in between are capped at the rent due for 15% of the remaining lease term. In re Iron-Oak Supply Corp., 169 B.R. 414, 419 n. 8 (Bankr.E.D.Cal.1994).
The Court is not alone in its interpretation. The court in In re Allegheny Intern., Inc., 145 B.R. 823 (W.D.Pa.1992), considering an appeal of a bankruptcy court opinion that put the interpretation of § 502(b)(6)(A) at issue stated:
[W]e agree with the bankruptcy court’s interpretation of § 502(b)(6). As that court explained, § 502 generally speaks in terms of time periods for which rent is due after termination of the lease. Specifically, the statute provides that claims cannot exceed the greater of one year, or 15 percent, not to exceed three years, of the remaining term, following the earlier of the date of the filing of the petition and the date surrendered. The statute is written in terms of time. The bankruptcy court’s analysis of the legislative history demonstrates that Congress intended the phrase “remaining term” to be a measure of time, not rent.
Id. at 828. See, also, In re PPI Enterprises, Inc., 324 F.3d 197, 207 (3rd Cir.2003) (“Under § 502(b)(6), a landlord-creditor is entitled to rent reserved from the greater of (1) one lease year or (2) fifteen percent, not to exceed three years, of the remaining lease term.”). Collier also finds that the minority view as expressed in Allegheny is more consistent with the statutory language:
The apparent majority view, however, does not appear to be in accord with the language of the statute. The 15 percent limitation of section 502(b)(6) speaks in terms of time, not in terms of rent: “the rent reserved, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease.” Grammatically, the “greater of’ phrase contemplates two time periods, one year and 15 percent of the remaining term. But the latter period (15 percent of the remaining term) is further limited to three years, so that if the remaining lease term exceeds 20 years, the allowable damage claim will not increase. The paraphrasing of this provision in the leg*41islative history7 supports this interpretation. This reading therefore appears to be the better view.
CollieR on Bankruptcy ¶ 502.03[7][e] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).
1. The Effect of Mitigation on the § 502(b)(6) Damages Cap
The primary focus of the parties’ dispute with respect to Lapis’s claim as stated by Lapis in its opening brief is “[s]hould the calculation of the lease rejection damages cap under 11 U.S.C. § 502(b)(6) be based upon the gross rent reserved under the lease, or upon the net damages suffered by the lessor after mitigation of its damages?” The Debtor takes the position that the cap on Lapis’s damages claim should be calculated by taking 15% of Lapis’s damages after reducing the damages amount by the value of Lapis’s mitigation efforts. Lapis would restrict the question of mitigation to the calculation of its damages claim under its Lease and under state law. It would not take mitigation into account in calculating the § 502(b)(6) damages cap.
To resolve the dispute, the Court looks first to the case of Oldden v. Tonto Realty Corp., 143 F.2d 916 (2nd Cir.1944). Old-den was decided approximately ten years following the introduction of a landlord damages cap under the Bankruptcy Act. It is an important case in two respects. It is cited in the legislative history to 11 U.S.C. § 502(b)(7)8 (as the landlord damages cap was originally designated in the 1978 Bankruptcy Code), which states that nothing in the new codification is intended to overrule Oldden. Also, it is relevant to the instant dispute because it is an example of a case where the allowable claim calculated under the cap on a landlord damages *42claims was later reduced further by application of the landlord’s damages deposit.
The question in Oldden was “whether a landlord is required to deduct the amount of security held under a lease from the total damages provided by the lease or from the total claim allowable under Sec. 63, sub. a(9) of the Bankruptcy Act”9 (predecessor to the current § 502(b)(6)). Id. at 918. The Second Circuit held that the landlord’s allowable claim, calculated under the damages cap, must be reduced by the amount of the damage deposit. Id. at 920-21 (“The contrary result would mean that a landlord with security would be able to exceed the statutory limit by as much as the security he holds, and that landlords would receive different treatment in bankruptcy proceedings, depending upon the existence and size of the security in their possession.”). Oldden specifically dealt with a security deposit. It did not address the issue currently before this Court of a landlord’s post-termination mitigation efforts.
In the case of In re PPI Enterprises (U.S.), Inc., 324 F.3d 197 (3rd Cir.2003), the Third Circuit relied on Oldden. In that case, the court extended the holding in Oldden to require the proceeds of a standby letter of credit, given as security against the tenant’s default, to be applied to reduce the § 502(b)(6) damages cap. Id. at 209-210 (“we find the parties intended the letter of credit to serve as a security deposit.”).
If a security deposit or a letter of credit is simply a form of mitigation, then the Debtor’s position might be well taken. But they are not. The reported cases have drawn the line at security deposits and analogous forms of security. Even full payments of post-petition rent made by a debtor-in-possession or a chapter 7 trustee do not reduce the allowable portion of the landlord’s damages claim under § 506(b)(6). See, e.g., In re First Alliance Corp. 140 B.R. 531, 533 (9th Cir. BAP 1992); In re Atlantic Container Corp., 133 B.R. 980, 989 (Bankr.N.D.Ill.1991).
The court in In re Atlantic Container Corp. explained the distinction:
It is well-settled that a security deposit held by a lessor on a rejected lease must be applied against the maximum claim for lease termination damages allowed to the lessor under § 502(b)(6). The legislative history of § 502(b)(6) unequivocally supports this treatment of security deposits. Furthermore, this treatment of security deposits is consistent with the security deposit’s traditional function. A landlord is a secured creditor to the extent of any security deposit it holds. As a secured or partially secured creditor, the landlord must satisfy its claim against the lessee out of the security it holds before asserting a claim against the lessee’s general assets.
In contrast, post-petition rent which a landlord receives from a tenant to whom *43the property has been relet is not applied in satisfaction of the landlord’s maximum allowable claim under § 502(b)(6). Instead, such post-petition rent payments are deducted from the landlord’s total actual lease termination damages, before the § 502(b)(6) cap is applied. The primary damage a landlord suffers upon termination of a lease is the loss of the future rental income the landlord expected to receive under the terminated lease. The landlord can mitigate these damages by reletting the property. Any rent the landlord receives from the property’s new tenant reduces the landlord’s total actual lease termination damages.
In re Atlantic Container Corp., 133 B.R. at 989-90 (citations omitted). The legislative history referenced in Atlantic Container comes from H.R. Rep. 95-595, at 318 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6309-10:
By virtue of proposed 11 U.S.C. 506(a) and 506(d), the [landlord’s] claim will be divided into a secured portion and an unsecured portion in those cases in which the deposit that the landlord holds is less than his damages. As under Oldden, he will not be permitted to offset his actual damages against his security deposit and then claim for the balance under this paragraph. Rather, his security deposit will be applied in satisfaction of the claim that is allowed under this paragraph.
Id. at 6309.
The calculation of damages is a separate and distinct question from the cap on those damages. In re USinternetworking, Inc., 291 B.R. 378, 380 (Bankr.D.Md.2003) (“Most courts agree ... that Section 502(b)(6)(A) is not a formula for calculating damages; it is simply a method to cap damages calculated under the terms of the lease and state law.”) (citing Steven Windsor, Inc., 201 B.R. 133, 135 (Bankr.D.Md.1996)). See also C. D. Stimson Co. v. Porter (In re Save-Rite Drug Stores), 195 F.2d 410, 413 (10th Cir.1952) (“The Federal law provides no formula for the ascertainment of the allowable damages. It merely qualifies and limits the lessor’s claim for damages....”).
Oldden and its progeny do not alter that distinction. Under Oldden, once a court has calculated the allowable portion of a landlord’s damages claim under § 502(b)(6), because a landlord with a security deposit is a secured creditor, it must first look to its collateral for satisfaction of its claim. Thereafter, if some portion of its allowed claim remains unsatisfied, it may assert the remainder of its claim against the assets of the estate. In re Atlantic Container Corp., 133 B.R. at 989-90 (citations omitted).
“Courts are obligated to refrain from embellishing statutes by inserting language that Congress has opted to omit.” Root v. New Liberty Hosp. Dist., 209 F.3d 1068, 1070 (8th Cir.2000) (citing Keene Corp. v. United States, 508 U.S. 200, 208, 113 S.Ct. 2035, 124 L.Ed.2d 118 (1993)). The effect of mitigation is an element of the calculation of damages under state law and is properly considered in the calculation of damages. But to import mitigation into the calculation of the cap set out in § 502(b)(6) would be to judicially amend a statute that is plain on its face. The statutory language is devoid of any reference to—or even logical suggestion of—taking mitigation into account in calculating the damages cap under § 502(b)(6).
The statute speaks of “the rent reserved by such lease” for one year or for 15% of the remaining term, whichever is greater, not to exceed three years. The calculations required under § 502(b)(6) are not complicated and may be accomplished solely by reference to the agreement between *44the parties. It is only that agreement that is cited in the statute as the standard by which the damage cap is calculated. If Congress had intended the courts to import mitigation into that calculation, it provided no evidence of that intent in the statutory language it chose.
The Court acknowledges that some confusion exists in the case law. The Sixth Circuit case of In re Highland Superstores, Inc., 154 F.3d 573 (6th Cir.1998) stated
The courts that have applied section 502(b)(6)’s framework for determining the allowable amount of a lessor’s total rejection damage claim generally employ a four-step process. First, the court calculates the total rents due under the lease from the earlier of the date of filing or the date on which the lessor repossessed or the lessee surrendered the leased property. Second, the court determines whether 15% of that total is greater than the rent reserved for one year following the debtor’s filing. Third, the 15% amount is compared to the rent reserved under the applicable lease for three years following the filing. Finally, the court, on the basis of the foregoing calculations, arrives at the total allowable amount of the landlord’s rejection damages.
Id. at 577 (citing In re Financial News Network, Inc., 149 B.R. 348, 351 (Bankr.S.D.N.Y.1993); In re Atlantic Container Corp., 133 B.R. 980, 989 (Bankr.N.D.Ill.1991)).10 The Highland court speaks in terms of “the allowable amount of a lessor’s total rejection damage claim.” Thus, the method set out is for calculating only the “allowable amount,” or § 502(b)(6) cap placed on the damages claim. It does not purport to mix the calculation of the total damages claim with the calculation of the cap. As if to underscore the separate nature of the two inquiries, the court says that “[t]he calculation of rejection damages as outlined above assumes the existence of a claim.” Id. (emphasis added).
The latter case of In re Malease 14FK Corp., 351 B.R. 34 (E.D.N.Y.2006), misquotes Highland—as does the Debtor’s brief. The Malease court states
The Sixth Circuit in In re Highland Superstores, Inc., 154 F.3d 573, 577 (6th Cir.1998), set forth a four step approach under the statute to calculate a lessor’s claim “for damages resulting from the termination of a lease.” 11 U.S.C. § 502(b)(6). First, by applying state law and the terms of the lease, the court calculates the total claim for damages due as of the earlier of the date of filing or the date on which the lessor repossessed or the lessee surrendered the property. In re Highland Superstores, Inc., 154 F.3d at 577; see also In re McSheridan, 184 B.R. 91, 96 (9th Cir. BAP 1995) (explaining that damages are first determined under applicable state *45law). Second, the court determines whether 15% of that total is greater than the rent reserved for one year following the debtor’s filing. Third, the 15% amount is compared to the rent reserved under the applicable lease for the three years following the filing. Finally, the court calculates the total allowable amount of the landlord’s rejection damages, which is the greater of one year’s rent or 15% of the total remaining rent, up to a maximum of three years. Id. (citations and footnotes omitted).
In re Malease 14FK Corp., 351 B.R. at 41. The four step process set out in Highland is limited to calculation of the cap under § 502(b)(6)(A). By contrast, the Malease court includes calculation of the damages claim under state law as its step number one and in step number two it applies the 15% calculation to the damages claim. In this Court’s opinion, the process set out in Malease finds no support in Highland notwithstanding the Malease court’s citation to that case and it finds no support in the statutory language.
2.The Court’s Calculation of the § 502(b)(6) Damages Cap
Based on the stipulated facts, on the Lease between the parties, and on 11 U.S.C. § 502(b)(6), the Court calculates the cap on Lapis’ damages claim as follows:
1. The remaining term of the lease from the petition date of January 12, 2009, through the Lease expiration on July 31, 2019, is 3,853 days.
2. Because that time period—just over 126 months—is greater than 80 months and less than 240 months, the Court calculates 15% of the remaining term to be 578 days from January 12, 2009, through August 12, 2010.
3. Base rent for the 578 day period equals $1,077,708.82 comprised of
a. 20 days11 from 1/12/2009 through 1/31/2009: $36,580.09
b. 2/1/2009 through 7/31/2009 @$55, 632.22/mo.: $333,793.32
c. 8/1/2009 through 7/31/2010 @$57, 023.02/mo.: $684,276.24
d. 12 days from 8/1/2010 through 8/12/2010: $23,059.17
4. Expenses for the 578 day period equal $607,840.84 comprised of
a. 1/12/2009 through 12/31/2009 @$l,041.54/day: $368,705.16
b. 1/1/2010 through 8/12/2010 @$l,067.57/day:12 $239,135.68
*465. By totaling the above amounts, the Court finds that rent (base rent plus expenses) reserved under the Lease for 15% of the remaining term is $1,685,549.66.
6. Unpaid pre-petition rent is $86,304.46.
7. Adding the rent due for 15% of the remaining Lease term and the unpaid pre-petition rent yields a total allowed claim of $1,771,854.12 under 11 U.S.C. § 502(b)(6).
III. CONCLUSION
The remaining issues raised by the Debtor’s objection to the Lapis claim are moot. They either go to the calculation of damages under state law or are issues that would only be of consequence if the Court were to find that the effect of the mitigation efforts could properly be taken into account in calculating the damages cap under § 502(b)(6).
In accordance with the foregoing discussion, it is
ORDERED that Debtor’s Objection to Claim [87] Filed by IBC Denver IV, LLC, Assigned to Lapis Advisers, LP (Docket # 857) is GRANTED IN PART and DENIED IN PART. Lapis’ claim is limited under 11 U.S.C. § 506(b)(6) and allowed in the amount of $1,771,854.12.
. Capitalized terms not otherwise defined have the meaning ascribed to them in the document to which they refer.
. It does appear that Debtor retained an expert to provide an analysis of Lapis' claim. However, Debtor appears to place no reliance on it’s expert’s report.
. According to Debtor's objection to Lapis’s amended proof of claim, its "actual damages under Colorado law are approximately $7,156,199." Lapis's amended proof of claim alleges actual damages of $6,197,348.86.
. Landlord damages claims have been addressed by cases decided in the Tenth Circuit Court of Appeals and in this district but those cases did not address the issues that are currently before this Court. In C. D. Stimson Co., v. Porter (In re Save-Rite Drug Stores), 195 F.2d 410 (10th Cir.1952), the court's focus was on calculation of the landlord’s damages claim under state law. It did not address the operation of the damages cap under the Bankruptcy Act. In the case of In re Storage Technology Corp., 77 B.R. 824 (Bankr.D.Colo.1986), the court held that “the actual damage claim of [the landlord] for termination of the lease, whether for non-payment of rent, taxes, costs, attorney’s fees, or other financial covenants such as the Residual Guarantee, are *39limited by the damage cap in § 502(b)(6)(A)." Id. at 825. It also held that the "rent reserved” under the lease did not include attorney fees and other financial covenants unrelated to the value of the real estate. Id. Thus, its focus was on what damages are subject to the cap and not on how the cap is calculated.
. 15% of 80 months equals 12 months.
. 15% of 240 months equals 36 months.
. See infra note 8 for the legislative history referenced in Allegheny and by Collier.
. Paragraph (7), derived from current law, limits the damages allowable to a landlord of the debtor. The history of this provision is set out at length in Oldden v. Tonto Realty Corp., 143 F.2d 916 (2d Cir.1944). It is designed to compensate the landlord for his loss while not permitting a claim so large (based on a long-term lease) as to prevent other general unsecured creditors from recovering a dividend from the estate. The damages a landlord may assert from termination of a lease are limited to the rent reserved for the greater of one year or ten percent of the remaining lease term, not to exceed three years, after the earlier of the date of the filing of the petition and the date of surrender or repossession in a chapter 7 case and 3 years lease payments in a chapter 9, 11, or 13 case. The sliding scale formula for chapter 7 cases is new and designed to protect the long-term lessor. This subsection does not apply to limit administrative expense claims for use of the leased premises to which the landlord is otherwise entitled.
This paragraph will not overrule Oldden, or the proposition for which it has been read to stand: To the extent that a landlord has a security deposit in excess of the amount of his claim allowed under this paragraph, the excess comes into the estate. Moreover, his allowed claim is for his total damages, as limited by this paragraph. By virtue of proposed 11 U.S.C. 506(a) and 506(d), the claim will be divided into a secured portion and an unsecured portion in those cases in which the deposit that the landlord holds is less than his damages. As under Oldden, he will not be permitted to offset his actual damages against his security deposit and then claim for the balance under this paragraph. Rather, his security deposit will be applied in satisfaction of the claim that is allowed under this paragraph.
H.R. Rep. 95-595, at 318 (1977), reprinted in 1978 U.S.C.C.A.N. 5963 at 6309-10. The provision that originally appeared in § 502(b)(7) was relocated to § 502(b)(6) as a result of changes made in the Bankruptcy Amendments and Federal Judgeship Act of 1984, PL 98-353. The ten percent figure cited in the legislative history to the provision as it originally appeared in the 1978 Bankruptcy Code was later changed to the current fifteen percent.
. The Oldden court quoted the language of Section 63, sub. a(9) of the Bankruptcy Act:
By amendment of the Bankruptcy Act in 1934, now Sec. 63, sub. a(9), 11 U.S.C.A. § 103, sub. a(9), however, there were added to the allowable claims in bankruptcy claims for anticipatory breach of contract, including unexpired leases of realty, but with the limitation that a landlord's claim for damages upon the rejection of an unexpired lease or 'for damages or indemnity under a covenant contained in such lease shall in no event be allowed in an amount exceeding the rent reserved by the lease, without acceleration, for the year next succeeding the date of the surrender of the premises to the landlord or the date of reentry of the landlord, whichever first occurs, whether before or after bankruptcy, plus an amount equal to the unpaid rent accrued, without acceleration, up to such date.’
Oldden v. Tonto Realty Corp. 143 F.2d at 917.
. Under this Court’s interpretation of § 502(b)(6)(A), it would modify the Highland court's statement of the process. First, if the remaining term of the lease is 80 months or less, the court caps the landlord’s damages claim at the amount of rent reserved in the lease for one year following the earlier of the petition date or the date the property was repossessed or surrendered plus delinquent pre-petition or pre-repossession rent. Second, if the remaining term of the lease is 240 months or greater, the court caps the landlord’s damages claim at the amount of rent reserved in the lease for three years following the earlier of the petition date or the date the property was repossessed or surrendered plus delinquent pre-petition or pre-repossession rent. Finally, if the remaining term is greater them 80 months but less than 240 months, the Court calculates 15% of the remaining lease term and caps the landlord’s damages claim at the amount of rent due under the lease for the resulting time period following the earlier of the petition date or the date the property was repossessed or surrendered plus delinquent pre-petition or pre-repossession rent.
. Based on annual rent divided by 365 days.
. The parties stipulated that actual operating expenses for 2008 were $106,010.24. Actual real estate tax expense for 2009 was $271,500.00. The Court projected operating expenses forward for 2009 at $108,660.60 and for 2010 at $111,377.01 by increasing operating expenses by 2.5% per year. This is consistent with the 2.5% annual rent increase agreed to by the parties in their Lease. The Court projected real estate taxes for 2010 at $278,287.50 by increasing the 2009 tax by 2.5%. The resulting total expense figures for 2009 are $380,160.50 and for 2010 are $389,664.51 or $1,041.54 and $1,067.57 per day respectively. Even if the language in § 502(b)(6)(A) could reasonably support calculation of a cap based on 15% of all of the rent reserved over the full lease term, this case highlights the difficulty of that approach. Leases, such as this one, that require reimbursement of the landlord’s tax and maintenance expenses, are the norm in commercial leasing. This Lease runs for YTk years and had a remaining term of 10 ¡4 years at the petition date. Any projection of those future expenses entails a degree of speculation but the farther into the future a court is asked to make the projection, the more speculative the numbers become. See Kuehner v. Irving Trust Co., 299 U.S. 445, 454, 57 S.Ct. 298, 81 L.Ed. 340 (1937) (“It is well known that leases of business properties, particularly retail business properties, commonly run for long terms. The longer the term the greater the *46uncertainty as to the loss entailed by abrogation of the lease.”). By reading the 15% term of § 502(b)(6)(A) consistently with the surrounding terms of that subsection, the Court projects those expenses only 19 months into the future rather than the full 10)4 year remaining term. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494534/ | MEMORANDUM DECISION DENYING FIRST AND FINAL APPLICATION FOR ALLOWANCE OF ATTORNEYS’ FEES AND COSTS FOR WOODBURY & KESLER, P.C., ATTORNEYS FOR SOUTH STATION, LLC
WILLIAM T. THURMAN, Bankruptcy Chief Judge.
The matter before the Court is the First and Final Application for Allowance of Attorneys’ Fees and Costs for Woodbury & Kesler, P.C., Attorneys for South Station, LLC pursuant to 11 U.S.C. §§ 329 and 330 and Fed. R. Bankr.P. 2016 (“Fee Application”). The Chapter 7 Trustee, Kenneth Rushton (“Chapter 7 Trustee”) filed an Objection to the Fee Application (“Objection”) on October 5, 2011 on the grounds that Woodbury and Kesler, P.C. (“Applicant”) failed to comply with the disclosure requirements of Fed. R. Bankr.P. 2016. The United States Trustee (“UST”) joined in the Chapter 7 Trustee’s objection at the hearing.
The Court conducted an evidentiary hearing on this matter on October 17, 2011 and November 9, 2011 and the parties presented evidence and oral argument. At the hearing, David Williams appeared for the Applicant, Michael Zundel and Jennifer Korb appeared for the Chapter 7 Trustee, Scott Cummings appeared for the Chapter 7 Trustee of the JL Building estate, and Laurie Cayton and Vince Cameron appeared for the UST.
At the conclusion of the hearing, the Court took the matter under advisement.1 Based upon the Application, the Objection, the parties’ oral arguments, evidence presented, statutory authority, and review of relevant case law the Court issues the following Memorandum Decision, which will constitute its findings of fact and conclusions of law.
I. Jurisdiction and Venue
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a). Venue is appropriate under 28 U.S.C. § 1408(1). The Court finds that notice of this hearing is appropriate in all respects.
II. Background
South Station filed a voluntary chapter *49112 bankruptcy petition on October 30, 2008. Preceding South Station’s filing, five related business entities sought the bankruptcy counsel and services of Russell S. Walker and the Applicant, Russell S. Walker’s law firm. The related entities included: South Station; JL Building, LLC (“JL Building”); JL Building 2, LLC (“JL Building 2”); HEP Development, LLC; and Dana Point, LLC. Steve and Dee Bates (the “Bates”), brothers and business partners, were the principals of all of the related entities.
The five related entities sought bankruptcy counsel simultaneously because South Station had an outstanding debt with First Interstate Financial that held a collateral interest in all of South Station’s property. The affiliated entities (JL Building, JL Building 2, HEP Development, and Dana Point) pledged their assets to secure the First Interstate Financial loan, although the affiliated entities were not obligors on the loan. The Applicant prepared and filed bankruptcy petitions on behalf of all of the related entities. It was not until April 27, 2009 that the Court authorized the employment of Russell Walker and the Applicant as counsel for the Debtor, South Station.3
III. Facts
The South Station ease was converted to a chapter 7 bankruptcy on January 19, 2010.4 On December 10, 2008 the Applicant filed an Ex Parte Application to Employ Russell S. Walker as Attorney for South Station (“Application to Employ”).5 The Application to Employ stated:
4. Applicant believes, based upon the attached Affidavit, that the employment of Russell S. Walker and the law firm of Woodbury & Kesler, P.C. is appropriate, economically sound, in the best interest of the estate, and does not hold or represent an interest adverse to the estate.
5. Woodbury & Kesler, P.C. and any lawyer of Woodbury & Kesler, P.C. should be compensated at the usual hourly rate set for each attorney of the law firm for legal services provided to the Applicant and should be reimbursed allowable costs advanced to the Applicant or in connection with providing legal services to the Applicant in this case, subject to Court approval.
6. Woodbury & Kesler, P.C. received a retainer of $13,000 for attorney fees and costs to represent the debtor.6
In the Declaration of Russell S. Walker7 that accompanied the Application to Employ, Mr. Walker made further statements relating to his and the Applicant’s disinterestedness with respect to the representation of South Station:
3. The law firm of Woodbury & Kesler, P.C. has conducted a conflict of interest analysis and has determined that neither the law firm of Woodbury & Kesler, P.C., nor any of its shareholders, assoei-*50ates, or employees holds or represents any interest adverse to the bankruptcy estate, and that said persons and said firm are disinterested within the meaning of 11 U.S.C. § 101(14).
4. South Station, LLC has requested Woodbury & Kesler, P.C. represent the corporation in the above-entitled bankruptcy case. Neither I nor Woodbury & Kesler, P.C. has had any connection with the creditors or any party-in-interest, or their attorneys that would create a conflict or prevent Woodbury & Kesler, P.C. from representing South Station, LLC.8
Between December 1, 2008 and August 13, 2010, the Applicant filed four “Disclosure[s] of Compensation of Attorney for Debtor” under Fed. R. Bankr.P. 2016 disclosing amounts paid to the Applicant from Steve and Dee Bates (the “Bates”), owners of Majestic Holdings, the owner of the Debtor. The four disclosures, disclosing a total of $33,000 in postpetition payments, are summarized in the chart below.
DISCLOSURE OF DATE OF
COMPENSATION PAID PAYMENTS_AMOUNT DISCLOSED
Docket 16 (December 1, 2008)_1 year prior to petition_$ 0_
Docket 211 (April 16, 2010) March 19, 2010 $13,000
_April 1, 2010_$ 5,000_
Docket 218 (June 7, 2010) May 5, 2010 $ 5,000
_June 7, 2010_$ 5,000_
Docket 233 (August 13, 2010)_July 20, 2010_$ 5,000_
TOTAL $33,000
As noted above, the Application to Employ stated that the Applicant had accepted $13,000 as a prepetition retainer “to represent the debtor.”9 In regards to why the December 1, 2008 disclosure statement signed by Russell S. Walker stated that $0 had been received by the Applicant prepetition, Mr. Walker testified that the Applicant had recently acquired new software for the preparation of petitions. He explained that the software prepared the disclosure statement but the default for retainers paid was shown as $0 and the Applicant neglected to change that number when in fact $20,000 had been paid prepetition. A payment of $4,000 made by the Bates on January 27, 2010 was not disclosed on any of the Applicant’s filings, including the disclosure of compensation filed December 1, 2008. The Applicant testified that this $4,000 post-conversion payment is being held in trust and the Applicant has not applied or credited the $4,000 to any outstanding legal fees.
There is no evidence that the Applicant held or is holding any of the other post-conversion payments in its trust account. None of the Applicant’s filings, including the Fee Application, provide an accounting of how the $33,000 post-conversion payments were applied to the outstanding legal fees and costs incurred in the case.
South Station’s Statement of Financial Affairs10 filed December 16, 2008, states in response to question 9 that the Applicant received $20,000 in October 2008 for “payment related to debt counseling or bank*51ruptcy.” The Applicant’s response to the Statement of Financial Affairs question 9 does not state the source of the $20,000,11 thus implying that the source was the Debtor. The testimony presented at the hearing showed that all of this $20,000 came directly from the Bates and not from the Debtor, South Station. The Bates signed a promissory note payable to a third party in order to receive the $20,000 that was paid to the Applicant. The parties presented no evidence indicating that these funds were a loan to the Debtor or any form of capital contribution to the Debtor. According to “W & K Exhibit 1” presented at the hearing, portions of the $20,000 retainer were applied in the following manner:
AMOUNT APPLIED TO PREPETITION DESCRIPTION_FEES AND COSTS
Prepetition Legal Services $5,636
Five Chapter 11 Filing Fees_$5,195_
Copy Costs $1.90
Appeal Filing Fee $255
TOTAL $11,087.90
W & K Exhibit 1 outlines the amount held in Applicant’s trust account. The exhibit shows $13,912 (which the Applicant derived from taking the $20,000 prepetition retainer, subtracting the $11,087.90 applied to prepetition legal fees and costs, and adding the $4,000 post-conversion payment of January 27, 2010).12
JL Building filed a chapter 11 bankruptcy petition on November 3, 2008 and on April 29, 2011 the case was converted to one under chapter 7. On January 19, 2010, South Station’s case was converted to a chapter 7 case and Kenneth Rushton was appointed the chapter 7 trustee. After the South Station case was converted, the Applicant applied to represent JL Building in the JL Building case and the Court entered an order granting the Applicant’s employment on May 17, 2010.13
On September 14, 2011 the Bates filed proof of claim number 12 in the JL Building case for $101,884.16, $14,620 of which was identified as “Accounting for the period of December 2008 to September 2011” for “Russ Walker.” 14 The evidence presented showed that although the Bates made payments to the Applicant, the Applicant applied none of the payments toward the JL Building case and all payments were applied to the South Station case. Steve Bates testified that he was willing to withdraw the Bates’ proof of claim to eliminate any request for the attorneys fees paid, however, he stated that he would have to go back and make changes to the company’s tax returns to do so. Dee Bates’ testimony was equivocal when asked if he were willing to withdraw the proof of claim in the JL Building case to the extent it is for attorney’s fees incurred. As of the date of this Memorandum Decision, no withdrawal of the proof of claim or any portion of it has been filed in the JL Building case.
In the South Station case a vast majority of the unsecured proof of claims were filed by entities bearing Steve Bates’s signature as manager. Furthermore, Steve *52Bates individually filed another proof of claim in the South Station case on July 21, 2010 for a $2,551 loan he had made to South Station in 2004. The chart below lists the proof of claims signed by Steve Bates in the South Station case:
PROOF OF SIGNATURE ON CLAIM CLAIMANT_AMOUNT BEHALF OF CLAIMANT
8_JL Building # 2, LLC_$ 23,166.28 Steve Bates, Manager_
9_ WV Building, LLC_$ 386,856.02 Steve Bates, Manager_
10_JL Building # 2, LLC_$ 446,662.47 Steve Bates, Manager_
11_HEP Development. LLC_$1,493,045.74 Steve Bates, Manager_
12_RT Building, LLC_$ 180,749.91 Steve Bates, Manager
13_Steve Bates_$ 2,551.72 Steve Bates_
14_Armtech Construction, LLC $ 123,084.75 Steve Bates, Manager_
15 Home Equity Plan, Inc.$ 41,267.45 Steve Bates, Manager
Accordingly, Steve Bates was involved with these entities which he claims to be creditors and he was an individual putative creditor of South Station as of the date of petition.
IV. The Fee Application and Position of the Parties
In the Fee Application, the Applicant seeks reimbursement for total compensation of $126,770.64 for services rendered and expenses incurred from November 2008 through January 2010.15 The Applicant is seeking an award of $121,382.50 as compensation for professional services rendered and $5,388.14 for reimbursement of costs and expenses. In the Fee Application, the Applicant states that it is holding “approximately $14,000 in a trust account which it received as a retainer for filing this case.” 16
On October 5, 2011, the Chapter 7 Trustee filed his Objection to the Fee Application alleging that the Applicant failed to comply with the disclosure requirements of Fed. R. Bankr.P. 2016 because Russell S. Walker demanded and accepted payment, in cash, throughout the chapter 11 portion of the case from the Bates. The Chapter 7 Trustee requests that the Fee Application be denied in its entirety and the $57,000 in payments made to the Applicant by the Bates be disgorged.
At the hearing on November 9, 2011 the UST joined in the Objection, stating that the Applicant has provided an incomplete disclosure and accounting of the monies paid to the Applicant by the Bates. The UST succinctly stated, “we don’t know where the money went.” Mr. Walker testified that all funds except for those remaining in the trust account had been applied to the South Station account. He also stated that there is time for which he has been paid that does not show on the summary of services provided. The UST pointed out the evidence showing a total of $57,000 paid to the Applicant by the Bates ($20,000 as a prepetition retainer and $37,000 post-conversion) but no accounting of whether and to what the money was applied to, other than the $13,912.10 held in the Applicant’s trust account.
Mary Margaret Hunt, the Chapter 7 Trustee in the JL Building case, represented by Scott Cummings, appeared at the hearing on November 9, 2011 and *53voiced concerns regarding which estate (either JL Building or South Station) the Bates’ payments were applied to. The JL Building Trustee requested that the $57,000 paid to the Applicant by the Bates, if disgorged, be held in escrow pending a determination of which estate the funds should be applied.
V. Discussion
The Fee Application and Objection present two main issues: (1) whether there was a failure to disclose under Fed. R. Bankr.P. 2016 and § 329(a) and (2) whether the Applicant meets the requirements of disinterestedness under § 327(a).
A. Failure to Disclose under Fed. R. Bankr.P. 2016 and § 329(a)
1. Inconsistency and Lack of Disclosures
The first issue is whether the Applicant failed to disclose compensation received under Fed. R. Bankr.P. 2016 and § 329(a) when: (1) Applicant stated that it received $0 prepetition in the December 1, 2008 disclosure statement, even though Applicant received a $20,000 prepetition retainer; and (2) Applicant failed to disclose a $4,000 payment received from the Bates on January 27, 2010.
Section 329 sets forth the obligations incumbent upon a debtor’s attorney to disclose compensation paid within one year prepetition. § 329(a) states:
Any attorney representing a debtor in a case under this title, or in connection with
such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.
Fed. R. Bankr.P. 2016(b) provides the requirements for the statement of compensation paid referenced in § 329(a), stating that:
Every attorney for a debtor, whether or not the attorney applies for compensation, shall file and transmit to the United States trustee within 14 days after the order for relief, or at another time as the court may direct, the statement required by § 329 of the Code including whether the attorney has shared or agreed to share the compensation with any other entity. The statement shall include the particulars of any such sharing or agreement to share by the attorney, but the details of any agreement for the sharing of the compensation with a member or regular associate of the attorney’s law firm shall not be required. A supplemental statement shall be filed and transmitted to the United States trustee within 14 days after any payment or agreement not previously disclosed.
The Court finds the circumstances at issue here similar to the case considered in the Bankruptcy Appellate Panel’s (“BAP”) decision of Jensen v. United States Trustee (In re Smitty’s Truck Stop, Inc.).17 In Smitty’s, the 10th Circuit Bankruptcy Appellate Panel (the “BAP”) found that the failure of a chapter 11 debtor’s attorney to disclose a prepetition retainer alone was an adequate basis to deny all compensation.18 The BAP found that the failure to disclose the receipt of the applicant’s retainer in his 2016 disclosure statement was *54a “clear violation” of § 329 and Fed. R. Bankr.P. 2016(b).19 The BAP stated that “[e]ven if this failure was negligent or inadvertent, it is sufficient, in itself, to deny all fees.”20
Although In re Smitty’s Truck Stop, Inc. involved a debtor attorney’s failure to disclose the receipt of a retainer paid from a creditor’s cash collateral, the holding can be broadly applied to the current situation where the Applicant failed on several occasions to disclose the amount and source of funds received.
In this ease, although the initial 2016 statement filed on December 1, 2008 shows that $0 had been paid to counsel, South Station’s Statement of Financial Affairs stated that in October 2008 $20,000 was paid to the Applicant. The Applicant admits that the December 1, 2008 statement is inaccurate and asserts that the nondisclosure was the result of an error in recently acquired computer software. There may have been a computer glitch in the populating of information in the form for the disclosure statement, however, the disclosure statement bears the signature of Russell S. Walker. Noting the mandates of § 329, Fed. R. Bankr.P. 2016, and the plethora of case law on fee applications, counsel could and should have carefully examined the disclosure statement, discovered the mistaken figure of $0, and immediately corrected the error with an amendment or notice of errata. The Court finds the computer glitch argument unavailing, as attorneys are obligated to review all filings with the Court for accuracy and here, counsel apparently failed to adequately inspect the disclosure statement and signed it as correct.
It could be argued that South Station’s Statement of Financial Affairs qualified as a “disclosure” when in question 9 the Applicant stated that it had received $20,000 in October 2008. However, the Statement of Financial Affairs did not disclose the correct source of the money received. The source of the funds was an important factor to disclose given that the funds did not come from the Debtor, but rather from the Debtor’s principals.
There are other inconsistencies with regard to compensation of the prepetition retainer amount and the amount of the payments being held in the Applicant’s trust account which raise questions as to the completeness of disclosure of all compensation paid. First, the Application to Employ stated that $13,000 was paid as a prepetition retainer to represent the Debt- or. Second, the Statement of Financial Affairs stated that $20,000 was paid pre-petition. Third, the Fee Application itself stated that $14,000 is being held in a trust account as a retainer for filing the South Station case. Lastly, there was an outright failure to disclose $4,000 paid by the Bates post-conversion in January 2010.21 Accordingly, there was an incomplete disclosure of all funds received and the source of those funds.
2. Lack of Accounting Regarding the Application of Payments Received
The Chapter 7 Trustee and the UST have also objected on the basis that there has been an incomplete disclosure of the accounting of the payments made by the Bates to the Applicant. In summary, the *55UST’s main concern is the fact that $57,000 was paid to the Applicant by the Bates, but that only $13,912.10 is asserted as being held in the Applicant’s trust account.22 The UST asks the valid question, “what happened to the other approximately $43,000?”23 The UST points out that there is no accounting of whether the money was applied to outstanding fees, thus posing the question as to why the $43,000 was not presented to the Court for determination of whether it was a reasonable fee for services rendered. It appeared to the UST that based on the evidence presented, the outstanding legal fees were reduced by the application of the $43,000, but there was no indication of what the overall outstanding fees were or when and how the Applicant applied those funds. Finally, the UST agrees with the Chapter 7 Trustee that accepting and applying fees without court permission was inappropriate.
At the hearing, the Applicant stated that it plans to credit amounts it has already been paid to the amount requested in the Fee Application. According to testimony, it appears that the Applicant will take the $121,382.50, credit the $33,000 paid post-conversion, credit the approximately $5,600 paid prepetition, and credit the payments remaining in the trust account. Thus, the balance owing would be the amount owing after those payments are applied or credited. However, Mr. Walker did state that some of the funds paid post-conversion have already been applied to the South Station account, but no credits are shown on the accounting before the Court.
The Court is persuaded by the UST’s arguments. The Court finds and concludes that based on the evidence, there was inadequate disclosure of the accounting applied for at least $43,000 that was received by the Applicant. This lack of accounting falls within the failure to disclose principles of In re Smitty’s Truck Stop, Inc. The Fee Application does not discuss whether the payments were already applied to the outstanding legal fee bill or whether the Fee Application is seeking a reimbursement of fees that have already been paid to the Applicant. Accordingly, the Court cannot make a finding of the reasonableness of the fees requested without an accurate and complete accounting. Based on the above findings, the Court concludes that there is enough evidence to disallow the request for fees and costs.
B. Disinterestedness Requirements of§ 327(a)
Another issue that should be addressed is whether the Applicant is disinterested under § 327(a) and whether this constitutes an independent basis for denial of fees. The evidence presented at the hearing indicated that the $20,000 prepetition retainer and $37,000 in post-conversion payments came from the Bates who were the principals of the Debtor and possibly creditors. This issue was only briefly discussed at the hearing, however, it deserves comment and a ruling as it caught the Court’s attention.
Section 327(a) provides the requirements for the employment of professional pefsons and states:
*56Except as otherwise provided in this section, the trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee’s duties under this title.
Section 101(14)(C) provides the definition of “disinterested person,” stating that a disinterested person “does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.”
Allegiance to the debtor’s estate is paramount in a chapter 11 case. A professional employed under § 327(a) must be disinterested and have no interest that is adverse to the estate at the outset and remain so disinterested throughout the life of the chapter 11 case. Receiving direct payment from the equity owners, a creditor, or even the principals of a creditor at the outset of the case or after conversion neutralizes the disinterestedness requirements mandated by the Code.24
Moreover, this conclusion is consistent with the decisions of In re Cook25 and In re Roberts.26 In re Roberts established the two-part definition of disinterestedness which the court adopted in In re Cook:
(1) to possess or assert any economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant; or (2) to possess a predisposition under the circumstances that render such a bias against the estate.27
Furthermore, Judge Mosier of this Court stated that the “term disinterested is broad enough to exclude an attorney with some interest or relationship that would even faintly color the independence and impartial attitude required by the Code and Bankruptcy Rules.”28
The Court is concerned about the disinterestedness and even the perceived lack of disinterestedness of the Applicant under the standards and case law cited above. The Debtor’s schedules show a number of other entities, with the same mailing address as the Debtor, in which the Bates have an ownership interest, including: JL Building, Point Belleview, RT Building, and WV Building. This interrelatedness of the Debtor, the Debtor’s principals, and creditors of the Debtor should have alerted *57the Applicant to investigate further. This is especially true where a manager of these entities (Steve Bates), as scheduled creditors, was paying the Applicant.29
The Court elects to take notice of other court submissions on its docket, namely proofs of claims filed in this case that are signed by Steve Bates, one of the Debtor’s principals.30 These proofs of claims constitute the vast majority of unsecured claims in this case. It is uncertain whether all of these claims are or have been allowed. Nevertheless, the claims were all signed by Steve Bates in a managerial capacity, or on behalf of himself, and a proof of claim carries with it certain presumptions of its allowability and accuracy. Steve Bates’ involvement with these entities as creditors raises serious concerns as to his personal payment to the Applicant for services rendered on behalf of the Debtor.
The Court again finds In re Smitty’s Truck Stop, Inc. helpful, where the BAP held that the failure to disclose a potential conflict of interest warranted denial of all compensation.31 The BAP commented on the duty of counsel to investigate the source of all payments finding that:
[The applicant] failed to inform the Court of the source of the retainer funds in his 2016(b) statement, his affidavit and application for employment, and his first and amended fee applications. It was not until the hearing on the amended fee application that the Appellant orally recited to the Court the source of the funds.
From this information, the BAP concluded that the bankruptcy court was correct in its holding that, whether the attorney realized it or not, he had received cash collateral belonging to a creditor as a retainer.32 Therefore, the BAP agreed with the bankruptcy court that this failure to investigate and disclose the conflicting claims to the funds required denial of fees.33
Similarly, here the Applicant did not disclose the source of the retainer in its Application to Employ, affidavit accompanying the Application to Employ, initial disclosure statement on December 1, 2008, or Fee Application. Upon a review of the docket, it appears that the retainer amount was not disclosed until the Application to Employ filed December 10, 2008 stated that the Applicant had received a $13,000 retainer to represent the Debtor.34 The Applicant did not disclose that the retainer funds were received from the Bates until *58the first supplemental disclosure statement was filed on April 16, 2010.35
Additionally, the Court finds the Ninth Circuit case Neben & Starrett, Inc. v. Chartwell Financial Corporation (In re Park-Helena Corp.)36 on point and instructive to the case at hand despite its origination from another circuit. In In re Park-Helena Corp., the Ninth Circuit completely denied fees where an attorney failed to reveal that his retainer was paid from the personal account of the debtor’s president rather than from the corporate debtor.37 The Ninth Circuit found that “[rjegardless of whether the funds used to pay the retainer were, in some sense, [debtor’s] funds, the question here is whether [the attorneys’] failure to provide the details of the payment constitutes a violation of the section 329 and Rule 2016 disclosure requirements. We hold that it does.”38 The court held that the attorney’s “failure to describe the transaction and indicate that [the debtor’s president] paid the retainer out of his personal account constitutes a violation of 11 U.S.C. § 329 and Fed. R. Bankr.P. 2016.”39
The Applicant makes the argument that it complied with Utah’s Code of Professional Conduct in receipting and applying all funds from the Bates. The Court is not persuaded that complying with the state law only is sufficient, as federal law governs in this situation. A bankruptcy court in the District of New Jersey stated: “Not only are state ethical laws imposed upon professionals in the bankruptcy context, but the Bankruptcy Code and Federal Rules of Bankruptcy Procedure contain specific references and directives imposing additional ethical obligations upon attorneys and other professionals.”40 The Court is persuaded to apply that holding here. Accordingly, state imposed professional standards underlie all relationships between an attorney and client, and in addition, the Bankruptcy Code and Rules impose standards.
Professionals in bankruptcy cases are placed under the microscope by various sections of the Bankruptcy Code. Here, the Applicant has unfortunately subjected itself to further scrutiny by accepting the initial retainer from the Bates directly. On one hand, the Applicant had court approval to represent South Station. On the other hand, the Applicant was being paid by the Debtor’s equity owners, one of whom was a creditor in the case and both equity owners were controlling owners of creditors of the Debtor which had sizeable stakes in the outcome of this chapter 11 case. As a result, the Court cannot find or conclude that this arrangement meets the test of disinterestedness as mandated by §§ 327(a) and 328(c).
C. Denial of Fees and Costs under § 329(b) and § 328(c)
The Court does not approve the Fee Application due to the Applicant’s failure to fully disclose all compensation received and because the Applicant accepted payment from a creditor in this case, Steve Bates, the co-principal of South Station and manager of numerous related creditor entities. Section 329(b) provides the remedy when compensation requested or paid *59“exceeds the reasonable value of any such services.” Section 329(b) states:
If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive, to—
(1) the estate, if the property transferred—
(A) would have been property of the estate; or
(B) was to be paid by or on behalf of the debtor under a plan under chapter 11, 12, or 13 of this title; or
(2) the entity that made such payment.
Furthermore, “ ‘reasonable compensation for services rendered’ necessarily implies loyal and disinterested service in the interest for whom the claimant purported to act.” 41 An attorney who fails to disclose “forfeits any right to receive compensation for services rendered on behalf of the debtor and may be ordered to return fees already received.”42 “The Court may sanction failure to disclose ‘regardless of actual harm to the estate.’ ”43
Section 328(c) provides the consequences for a finding of a lack of disinterestedness under § 327:
[T]he court may deny allowance of compensation for services and reimbursement of expenses of a professional person employed under section 327 or 1103 of this title if, at any time during such professional person’s employment under section 327 or 1103 of this title, such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed.
Here, the Applicant attached invoices to the Fee Application detailing the work performed on behalf of South Station. However, the Court cannot award the Applicant its fees and costs requested where: (1) the Applicant failed to fully disclose prepetition and post-conversion payments to the Applicant; (2) the evidence provided to illustrate the remaining amount in the Applicant’s trust account is unclear; (3) the Applicant failed to disclose the source of prepetition payments for over a year; and/or (4) a question exists as to the Applicant’s disinterested service to the Debtor. Thus, the Court determines that all fees and costs requested in the Fee Application should be disallowed and denied.
D. Disgorgement of Retainer and Postpetition Payments
The Chapter 7 Trustee argues for the disgorgement of all payments made by the Bates to the Applicant in addition to denying the Fee Application. It appears that the Trustee is relying on § 329(b) for that argument. Section 329(b) provides that “if such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive ...” (emphasis add*60ed). Section 329(b) deals only with the situation where the court finds the fees to be excessive and moreover, it is in the court’s discretion to order disgorgement.
No evidence or argument was made that the requested fees were excessive. Further, the money paid came directly from the Bates and would not have been property of the estate. Accordingly, the Court denies the request to order any disgorgement but will address that issue if the Bates so request.
VI. Conclusion
Based on the foregoing and the Court’s analysis stated, the Fee Application should be denied in its entirety for failure to fully disclose the source and amount of compensation received; failure to provide an accurate accounting of compensation received; and/or failure to adhere to the requirements of disinterestedness mandated by the Bankruptcy Code. A separate order will accompany this Memorandum Decision.
. It is important to note that the evidence and argument presented in this contested matter was also received in the related bankruptcy case of JL Building where another of the Applicant's fee applications is currently pending. Due to the overlap of certain evidence, reference to the JL Building case is made here for context only. A separate ruling will be made in the JL Building case for the professional fees and costs requested by the Applicant.
. All subsequent chapter and section references herein are contained in title 11 of the United States Code, unless otherwise specified.
. Order Granting Ex Parte Application to Employ Russell S. Walker as Attorney for South Station, LLC, Docket # 68. For reasons set forth herein, the Court does not address the delay in appointment and what impact that would have on the total Fee Application if allowed.
. Order Converting Case to Chapter 7, Docket # 190.
. Ex Parte Application to Employ Russell S. Walker as Attorney for South Station, LLC, Docket # 20.
. Id. ¶¶ 4-6.
. Affidavit/Declaration of Russell S. Walker, Docket #21.
. Id. ¶¶ 3-4.
. Ex Parte Application to Employ Russell S. Walker as Attorney for South Station, LLC, ¶ 6, Docket # 20.
.Statement of Financial Affairs and Schedules Amended, Docket # 32.
. Id. question 9.
. The Court notes that the Applicant's calculation on this exhibit is incorrect, as $20,000 minus $11,087.90 plus $4,000 is actually $12,912.10 and not $13,912.10 as the Applicant contended at the hearing in both W-K Exhibit 1 and in oral argument.
. Order Granting Motion to Employ Attorney Russell S. Walker as Attorney for Debtor, In re JL Building, LLC, Case no. 08-27671, Docket # 104.
. Proof of Claim filed by Steven and Dee Bates, In re JL Building, LLC, Case no. 08-27671, Proof of Claim 12-1.
. First and Final Application for Compensation for Russell S. Walker, Docket # 260.
. id. at p. 11, ¶ 52.
. 210 B.R. 844 (10th Cir.BAP1997).
. Id. at 849.
. Id.
. Id.
. While the Applicant disclosed three other post-conversion payments, the $4,000 payment was undisclosed. Fed. R. Bankr.P. 2016(b) does not discriminate among the bankruptcy chapters and the duty to disclose compensation received is a duty that extends to both chapters 7 and 11.
. See note 12 (noting that there is a discrepancy as to whether $13,912.10 or $12,912.10 is being held in trust according to the Applicant’s evidence).
. The Chapter 7 Trustee argues that it is really $47,000 that is unaccounted for, or a difference of $4,000. The Court does not make a finding of whether it was $43,000 or $47,000, but only that in principal, there was an incomplete disclosure of the application of all funds received by the Applicant in this case.
. There may be some situations where accepting fees directly from an equity owner or creditor for representing a business entity in chapter 11 would be acceptable, but these are would be very rare. However, the principal may be the only one willing to contribute payments. One possible method of avoiding this predicament would be to allow the principals to make a well-documented loan or equity contribution to the proposed chapter 11 debtor with full disclosure of the terms and conditions of such arrangement filed with the petition. That was not done in this case.
. 223 B.R. 782 (10th Cir. BAP 1998) (holding that disgorgement of all fees is warranted where the attorney's application for appointment failed to disclose a contingent fee arrangement with a creditor).
. 46 B.R. 815 (Bankr.D.Utah 1985), aff'd in part and rev’d in part on other grounds, 75 B.R. 402 (Bankr.D.Utah 1987) (en banc) (holding that nondisclosure of potential conflicts alone justifies the court’s exercise of discretion to deny all fees).
. 223 B.R. at 789 (quoting In re Roberts, 46 B.R. at 827).
. Rushton v. Woodbury & Kesler, P.C., et al. (In re C.W. Mining Co.), 440 B.R. 878 (Bankr.D.Utah 2010).
. The Bates may not have been as forthcoming as they should have to the Applicant at the initial stages of the case so that the Applicant could have investigated further as to whether taking a retainer from the Bates would affect its disinterestedness. However, there were enough red flags indicating that the Bates had significant involvement with the Debtor which the Applicant could have ascertained.
. See St. Louis Baptist Temple, Inc., v. FDIC. 605 F.2d 1169 (10th Cir.1979); Zimomra v. Alamo Rent-A-Car, Inc., 111 F.3d 1495 (10th Cir.1997). These proof of claims are summarized in the Chart on page 8.
. 210 B.R. 844 (10th Cir. BAP 1997).
. Id. at 850.
. Id. at 850-51.
. Representing a debtor that has converted to a chapter 7 from a chapter 11 case is different than representing the estate in the chapter 11. A trustee is appointed in a chapter 7 case and supplants the debtor in possession's management and generally has his or her own separate and new counsel which must be independently appointed by the Court. Accordingly, being paid by principals following conversion to a chapter 7 may not be as critical as when the case is proceeding in chapter 11. The main issue in the present case relating to disinterestedness is that the Applicant received the initial retainer from the Bates directly for chapter 11 services for this limited liability company.
. Disclosure of Compensation of Attorney for Debtor, Docket #211.
. 63 F.3d 877 (9th Cir. 1995).
. Id. at 880-81.
. Id. at 881.
. Id.
. Baron & Budd, P.C. v. Unsecured Asbestos Claimants Comm., 321 B.R. 147, 164 (Bankr.D.N.J.2005) (quoting 8 Collier on Bankruptcy 11 8.02).
. In re C.W. Mining, Co., 440 B.R. 878, 890 (Bankr.D.Utah 2010) (quoting Gray v. English, 30 F.3d 1319, 1322 (10th Cir.1994)) (internal citations and quotations omitted).
. In re Smitty’s Truck Stop, Inc., 210 B.R. 844, 848-49 (10th Cir. BAP 1997) (internal citations omitted); see also Quiat v. Berger (In re Vann), 136 B.R. 863, 873 (D.Colo.1992) (under abundant case law, noncompliance with Rule 2016(b) will support the total denial of fees); In re Maui 14K, Ltd., 133 B.R. 657, 660 (Bankr.D.Haw.1991) (failure of counsel to obey mandate of § 329 and Rule 2016 concerning disclosure is basis for denying compensation and ordering return of fees already paid).
. In re Smitty’s Truck Stop, Inc., 210 B.R. at 849 (quoting In re Maui 14K, Ltd., 133 B.R. at 660). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494535/ | MEMORANDUM OF DECISION ON DEBTOR’S MOTION TO ADMINISTRATIVELY CLOSE INDIVIDUAL CHAPTER 11 CASE
MELVIN S. HOFFMAN, Bankruptcy Judge.
This matter is before me on the debtor’s unopposed motion to administratively close this case now that the debtor’s Chapter 11 plan has been confirmed and payments to creditors have commenced. The motion seeks relief from a hardship inflicted on individual Chapter 11 debtors by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPC-PA”) with respect to quarterly fees owed to the United States trustee (“UST”). Quarterly fees are due from a debtor until his Chapter 11 case is “converted or dismissed,” 28 U.S.C. § 1930(a)(6), or as courts have recognized, until the case is *64closed.1 In re Sedro-Woolley Lumber Co., 209 B.R. 987, 990 (Bankr.W.D.Wash.1997); In re Burk Dev. Co., 205 B.R. 778, 785 (Bankr.M.D.La.1997). UST fees range from $325 to $30,000 per quarter and are based upon the debtor’s disbursements for the quarter. 28 U.S.C. § 1930(11). The disbursements include not just the debtor’s payments to creditors under a plan but ordinary business expenses of both individual and corporate Chapter 11 debtors, In re Sgaverdea, 377 B.R. 308, 310 (Bankr.D.N.M.2007); In re P.J. Keating Co., 205 B.R. 663, 667 (Bankr.D.Mass.1997) and, for the individual debtor, ordinary household expenses. In re Belcher, 410 B.R. 206, 210 n. 5 (Bankr.W.D.Va.2009); In re Owens, 207 B.R. 520, 526 (Bankr.E.D.Ky.1996). See also In re Postconfirmation Fees, 224 B.R. 793, 799 (E.D.Wash.1998) (“The term disbursements includes all post-confirmation expenditures by the debtor until the case is closed or dismissed or converted.”). Thus quarterly fees can be quite substantial and, in the case of certain pot plans, actually reduce the cash available to pay creditors. In re Johnson, 402 B.R. 851, 857 (Bankr.N.D.Ind.2009).
Entry of a final decree closing a chapter 11 case should not be delayed solely because the payments required by the plan have not been completed. Factors that the court should consider in determining whether the estate has been fully administered include (1) whether the order confirming the plan has become final, (2) whether deposits required by the plan have been distributed, (3) whether the property proposed by the plan to be transferred has been transferred, (4) whether the debtor or the successor of the debtor under the plan has assumed the business or the management of the property dealt with by the plan, (5) whether payments under the plan have commenced and (6) whether all motions, contested matters, and adversary proceedings have been finally resolved.
Bankruptcy Code § 350(a) directs the court to close a case “[a]fter an estate is fully administered and the court has discharged the trustee.” Fed. R. Bankr.P. 3022 instructs the court to issue a final decree closing a case on its own motion or on motion of a party in interest once the case has been fully administered. In this district, once a Chapter II plan is confirmed the case is deemed fully administered unless a matter is pending sixty (60) days following the entry of the final confirmation order. MLBR 3022-l(a).2 Following entry of a final decree closing a case, the case may be reopened “to administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C. § 350(b). The fee to reopen a Chapter 11 case is currently set at $1,000. 28 U.S.C. § 1930(11).
Prior to BAPCPA an individual Chapter 11 debtor’s discharge entered upon plan confirmation. BAPCPA effected a profound change to individual Chapter 11 cases by requiring that in most individual Chapter 11 cases the debtor will be discharged only upon completion of plan payments, 11 U.S.C. § 1141(d)(5), a period that is generally at least five years. 11 U.S.C. § 1129(a)(15). Thus, keeping an *65individual debtor’s Chapter 11 case open until the debtor receives his discharge would burden individuals with UST fees ranging from $325 to $30,000 per quarter during the entire post-confirmation period.
*64The court should not keep the case open only because of the possibility that the court's jurisdiction may be invoked in the future. A final decree closing the case after the estate is fully administered does not deprive the court of jurisdiction to enforce or interpret its own orders and does not prevent the court from reopening the case for cause pursuant to § 350(b) of the Code.
*65In the early years following the enactment of BAPCPA, debtors’ efforts to close cases prior to the entry of discharge generated inconsistent results. Compare In re Necaise, 443 B.R. 483 (Bankr.S.D.Miss.2010) (rejecting debtor’s request for an early discharge but allowing the case to be closed prior to the completion of plan payments); Johnson, 402 B.R. at 857 (overruling United States trustee’s objection and permitting case to be closed before the debtor’s discharge entered) with Belcher, 410 B.R. at 217-18 (debtors’ motion for an early discharge or in the alternative waiver of its obligation to pay quarterly fees denied). United States trustees typically opposed individual debtors’ efforts arguing that “paying quarterly fees is an integral part of what Congress expects a Chapter 11 debtor to do, much like the Chapter 13 trustee’s fee for administering the plan.” Johnson, 402 B.R. at 856-57. For authority they cited In re Ball, 2008 WL 2223865 (Bankr.N.D.W.Va.2008), which held that avoiding payment of the UST’s fees is not a sufficient reason to close the case before a plan has been completed. Id.
In Shotkoski v. Fokkena (In re Shotkoski), 420 B.R. 479 (8th Cir. BAP 2009), the bankruptcy appellate panel, applying an abuse of discretion standard, affirmed the bankruptcy court’s denial of the debtors’ motion for entry of a final decree closing their case. But in doing so the BAP noted that not all individual Chapter 11 cases must remain open for the entire post-confirmation period. Id. at 481. After undertaking an examination of the sections and rules cited by the bankruptcy court as well as the Advisory Committee Note (1991) to Fed. R. Bankr. 3022 and Bankruptcy Code § 350(a), the BAP concluded that
we believe that the decision as to whether an estate is “fully administered” is one that falls within the discretion of the bankruptcy judge. To be clear, by affirming the bankruptcy court in this case, we are not holding that every individual Chapter 11 case must remain open until such time as all long-term plan payments have been completed and a discharge is entered. In fact, since the Bankruptcy Code expressly contemplates the reopening of cases and the exercise of continuing jurisdiction by the bankruptcy court (see 11 U.S.C. § 350(b)), we do not disagree with those courts choosing, for purposes of convenience and efficiency, to close individual Chapter 11 cases prior to completion of payments and entry of discharge. Again, we believe it is a case-by-case analysis best left to the discretion of the bankruptcy judge.
Id. at 483.
A 2010 article by an attorney at the Executive Office of the United States Trustees signaled a policy change whereby the trustee program would no longer “object to an individual chapter 11 debtor’s request to close the case before discharge, subject to reopening for entry of a discharge upon completion of plan payments, if the estate is fully administered and any trustee has been discharged.” Walter W. Theus, Jr. Individual Chapter 11s: Case Closing Reconsidered, XXIX ABI Journal 1, 62-63 (Feb. 2010) (hereinafter “Theus”).
In light of Shotkoski and the UST’s current policy, I am persuaded that an individual Chapter 11 case need not remain open during the entire post-confirmation period only because a discharge has not entered and plan payments have not been completed. Nothing in the Bankruptcy Code or the Rules requires such a *66result. In the instant case the debtor has substantially consummated his plan and there are no motions or adversary proceedings pending. The case is ready to be closed and may be reopened at a later date in accordance with Bankruptcy Code § 350(a) when the debtor is eligible to obtain his discharge.
There are, however, a couple of complicating matters. Under Bankruptcy Code § 362(c)(2)(A), the closing of a case terminates the automatic stay imposed upon the commencement of the case by Bankruptcy Code § 362(a). Pre-BAPC-PA, when discharge and its accompanying discharge injunction entered in individual Chapter 11 cases at the time of plan confirmation, the transition from stay to discharge injunction was seamless. This is no longer the case. Since discharge will not enter for a number of years hence, if the case is closed now, there will be neither a stay nor a discharge injunction in place to protect the debtor. In an attempt to preserve the benefit of the automatic stay, the debtor has requested that the closing of his case be “administrative” only.
Them acknowledges that the stay ends when a case is closed but argues that losing the protection of the automatic stay does not leave a debtor exposed to the whims of his creditors because a confirmed plan is a contract between the debtor and his creditors and creditors are not entitled to take action against the debtor if he is not in breach of that contract. Should a creditor wrongfully attempt to collect on a debt which is treated in the plan, the debt- or may move to reopen his case or avail himself of relief in another court of competent jurisdiction in order to seek appropriate redress. Them at 63.
This analysis fails to consider, however, that termination of the automatic stay also ends the tolling of unexpired nonbankrupt-cy statutes of limitation. 11 U.S.C. § 108(c) (thirty days after the stay under Bankruptcy Code § 362 is terminated, the tolling ends). See also Young v. United States (In re Young), 233 F.3d 56, 59 n. 3 (1st Cir.2000). Once a case has been closed, with the statute of limitations clock winding down, a creditor whose claim is not yet discharged may nevertheless be left with only a contract claim under a confirmed plan paying pennies on the dollar. Thus the termination of the automatic stay upon case closing presents potential harms to both debtors and creditors.
In addition, upon the closing of a case without a discharge, Fed. R. Bankr.P. 4006 instructs the clerk of court to issue a notice of no discharge to all parties in interest. While such, a notice is appropriate when a case is finally closed and the debt- or will never be discharged, it is unsuitable, and indeed would be misleading, when the debtor anticipates a discharge upon completion of his plan payments.
Thus in order to afford the debtor here relief from his ongoing obligation to pay UST fees and not cause more harm than good, I must fashion a remedy which addresses the automatic stay and notice of no discharge issues. Bankruptcy Code § 105(a), which should be invoked only in rare circumstances, provides the basis for such a remedy and I will employ it here. Closing this case administratively, ordering that the automatic stay pursuant to Bankruptcy Code § 362 continue and instructing the clerk of courts not to issue notice under Fed. R. Bankr.P. 4006 will afford all parties the most equitable and all-encompassing relief possible in the circumstances. I take no credit for conceiving this approach. The Jacksonville and Tampa Divisions of the United States Bankruptcy Court for the Middle District of Florida have implemented a series of approved forms which individual debtors *67may use to accomplish precisely the result sought by the debtor in this case. See United States Bankruptcy Court for the Middle district of Florida at www.flmb. uscourts.gov/procedures/ (last visited September 26, 2011).
For ah the foregoing reasons the debt- or’s motion will be allowed. A separate order will issue.
. Prior to 1996, confirmation of a Chapter 11 plan also terminated a Chapter 11 debtor’s obligation to pay UST fees. By amendment to 28 U.S.C. § 1930, effective January 27, 1996, Congress removed confirmation as a termination event. Pub. L. 104-91, 110 Stat. 7, (January 6, 1994).
. Our local rule sets a realistic timeline consistent with the guidance for closing a case found in the Advisory Committee Notes (1991) to Fed. R. Bankr.P. 3022 which provides: | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494536/ | MEMORANDUM OF DECISION
HENRY J. BOROFF, Bankruptcy Judge.
Before the Court is a motion to amend Schedule C filed by Adrian Luckham and Karola Durette-Luckham, the debtors in this Chapter 13 case (the “Debtors”). The Debtors propose to exempt “100% of Equity” in real property constituting their residence, and the Chapter 13 trustee has objected on grounds that the exemption improperly fails to quantify the dollar amount of the claimed exemption, as required by § 522(d)(1) of the United States Bankruptcy Code.1 In response, the Debtors argue that the Supreme Court’s decision in Schwab v. Reilly, — U.S. -, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010), allows them to exempt the property in its entirety, despite the monetary limits imposed by the Code. For the reasons stated herein, this Court now joins the growing number of bankruptcy courts that have considered the Debtors’ argument and found it wanting.
I. FACTS AND POSITIONS OF THE PARTIES
The Debtors filed their Chapter 13 case on December 30, 2010 (the “Petition Date”) and filed the required schedules and statements (the “Schedules”) on January 13, 2011. In their Schedules, the Debtors disclosed their joint interest in real property located in Chicopee, Massachusetts (the “Property”). On Schedule A, the Debtors estimated the value of the Property at $185,000, and on Schedule D, the Debtors listed $200,461 in secured claims against the Property.2
On Schedule C-Property Claimed as Exempt, the Debtors elected the exemptions provided under § 522(d) of the Bankruptcy Code. See 11 U.S.C. §§ 522(b), (d).3 *69On Schedule C, under the column labeled “Description of Property,” the Debtors identified the Property by address, listed the Property’s value as determined by municipal assessment ($167,000) and a broker’s price opinion ($140,000), and stated that the value listed in the Schedules ($185,000) was the “debtors’ opinion of value.” In addition, in the same descriptive column, the Debtors noted parenthetically that the “dollar figure of claimed (d)(1) exemption is $21,600.00.”
Schedule C also requires debtors to specify the law under which each exemption is claimed and to state the “value of [the] claimed exemption.” With regard to the Property, the Debtors specified the law under which they claimed their exemption as “11 U.S.C. § 522(d)(1) 100% of FMV4 per Schwab v. Reilly, — U.S. -, 180 S.Ct. 2652, 2668, 177 L.Ed.2d 234 (2010).” They listed the value of the claimed exemption simply as “100%.”
On February 18, 2011, the Debtors filed a Chapter 13 Plan (the “Plan”) proposing to pay $925 per month over 5 years. The Plan contemplates continued monthly mortgage payments made directly to PNC Mortgage, treats the two judicial liens as unsecured claims (implying that those liens will be avoided), and proposes a 26.0576% dividend to unsecured creditors.
On March 17, 2011, the Chapter 13 trustee (the “Trustee”) filed an “Objection to Confirmation of Debtors’ Amended Chapter 13 Plan and Exemptions” (the “First Objection”). The Trustee’s First Objection was primarily targeted at the Debtors’ claimed exemption in the Property. The Trustee complained that the Debtors’ claimed exemption of “100% of FMV” would exceed the $21,625 maximum amount of the exemption allowed under § 522(d)(1) and would potentially exempt all postpetition equity in the Property, which, if realized upon, should inure to the benefit of unsecured creditors.
The Debtors’ response to the First Objection largely focused on one passage from the Supreme Court’s recent decision in Schwab v. Reilly, — U.S. -, 130 S.Ct. 2652, 2668, 177 L.Ed.2d 234 (2010), which the Debtors said “ ‘blessed’ the debtors’ use of ‘100% of FMV,’ ” “where the debtors desire to exempt the asset itself and not a fixed dollar amount.” Resp. to First Obj., 3, March 18, 2011, ECF No. 36. Acknowledging that the Schwab decision anticipated that an exemption claim of “100% of FMV” would potentially draw objections from the Chapter 13 trustee, the Debtors maintained that the Court should schedule an evidentiary hearing to determine if the exemption as claimed, based on the value of the Property on the Petition Date, actually exceeded the limits imposed by § 522(d). The Debtors also argued that the Trustee’s concern about postpetition accrued equity was a “red herring,” since any additional postpe-tition equity would only be relevant if the Debtors liquidated that equity through a sale or refinance of the Property.5 Ac*70cordingly, the Debtors said the Court should focus only on the value of the Property, and thus the “value” of the claimed exemption, as of the Petition Date.
On April 14, 2011, the Court held a hearing on the Trustee’s First Objection (the “First Hearing”). During that hearing, the Chapter 13 trustee argued that the Debtors, by claiming an exemption equal to the Property’s fair market value, were essentially claiming a “$185,000 exemption,” noting that they had not actually limited their claimed exemption to 100% of the equity. In response, Debtors’ counsel jumped at this statement, agreeing that the Debtors’ intent was to claim 100% of the equity as exempt. But the Court implicitly rejected the notion that changing the exemption to claim 100% of the equity would be permissible. Instead (after struggling with the parties to determine whether the exemptions as claimed were within the monetary limits imposed by § 522(d)) the Court concluded that the Debtors, by claiming a percentage of value as exempt, as opposed to an actual dollar figure, were essentially saying “Trustee, you figure out what [the dollar amount of the exemption] is supposed to be.” First Hr’g Tr. 9:19-21, April 4, 2011, ECF No. 82.
The Court explained that this was not the result the Supreme Court intended in Schwab, and stated that the Debtors:
need to say ... what’s the dollar value that they are exempting. And if they want to add to that that they think that that’s 100 per cent, then that’s fine; but they need to say how many dollars it is. [PJutting the words “100 per cent” under the amount of value ... doesn’t permit the estate to be administered in an appropriate fashion.
Id. at 10:15-21 (emphasis supplied). Accordingly, the Trustee’s First Objection was sustained, and the Debtors were ordered to file an amended Schedule C.6
The Debtors filed the amended Schedule C (the “Amended Schedule C”), together with a motion to amend (the “Motion to Amend”) on April 22, 2011. The Amended Schedule C is identical in all respects to the original schedule, with two exceptions. The value of the claimed exemption in the Property has been changed to “100% of Equity” and the law providing the exemption is now listed as “11 U.S.C. § 522(d)(1) per [Schwab v. Reilly ].” Despite the Court’s admonition at the First Hearing that a dollar value needed to be stated for the claimed exemption, the Debtors now maintain that by including the statement “dollar figure of claimed (d)(1) exemption is $21,600.00” in the description of property, they have provided sufficient information to enable the Trustee to calculate whether the available exemptions have been exceeded.
The Trustee, however, disagrees, as evidenced by the objection to the Amended Schedule C (the “Second Objection”) filed on May 20, 2011. In the Second Objection, the Trustee expresses frustration with the fact that the Debtors have again failed to quantify their exemption in the “value of claimed exemption” column. Despite the Debtors’ description of the exemption’s value as $21,600, the Trustee argues that they are, in fact, still attempting to claim an unlimited exemption in the Property by valuing the exemption at “100% of Equity.” 7 Accordingly, the Trustee says, the *71exemption remains objectionable as potentially exceeding the available exemption under subsection (d)(1) and potentially exempting all postpetition appreciation in the Property’s value. Therefore, the Trustee asks the Court to sustain her Second Objection and order the Debtors to file a further amended Schedule C.
In support of the Amended Schedule C, the Debtors rely primarily on the same arguments contained in their response to the First Objection.8 In the Motion to Amend, the Debtors argue that placing a dollar value in the “value of claimed exemption” column would “preclude their ability to exempt 100% of the equity as of the petition date, in the event there arises a later need to calculate postpetition appreciation.” Mot. to Amend, 2 ¶ 7, April 22, 2011, ECF No. 58. The Debtors continue to maintain that, under Schwab, they can “clai[m] 100% of an asset, whether its full value or its equity,” and that “[a]ny other ruling contravenes the Supreme Court,” Reply Brief, 10, Oct. 6, 2011, ECF No. 74, “evisceratefing] the debtors’ right to exercise the strategy approved by the Supreme Court [in Schwab ],” Resp. to Second Obj., 2. And the Debtors again assert that the Trustee now has the burden of demonstrating, at an evidentiary hearing, that the equity as of the Petition Date exceeds their available exemptions.
Following a hearing on the Second Objection (the “Second Hearing”), the Court took the matter under advisement.
II. DISCUSSION
As a condition of plan confirmation under Chapter 13, section 1325(a)(4) “requires the Court to ‘determine that unsecured creditors are to receive in the Chapter 13 case at least what they would receive in a Chapter 7 case.’ ” In re Watkins, 379 B.R. 403, 406 (Bankr.D.Mass.2007) (quoting In re Walsh, 359 B.R. 389, 393 (Bankr.D.Mass.2007)); 11 U.S.C. § 1325(a)(4). In order to “ascertain whether non-exempt equity would be available for distribution to unsecured creditors, assuming a hypothetical chapter 7 liquidation,” Watkins, 379 B.R. at 406, the Trustee must be able to determine the value of the Debtors’ assets less the total amount of exemptions to which the Debtors would be entitled under Chapter 7, id. at 406 n. 4 (citing In re Walker, 153 B.R. 565, 569 n. 2 (Bankr.D.Or.1993)). The Trustee is thus tasked with reviewing debtors’ exemption claims and timely objecting to those that she believes are inappropriate. See Fed. R. Bankr.P. 4003(b)(1) (objection to exemption must be filed within 30 days after the meeting of creditors is concluded or an amended schedule is filed); In re Massey, 455 B.R. 17, 18 (Bankr.D.Mass.2011) (in order to preserve an objection to plan based on § 1325(a)(4) and grounded in a debtor’s allegedly improper exemption claim, the Chapter 13 trustee must file a timely objection to the exemption under Bankruptcy Rule 4003(b)(1)), recons, on other grounds granted, No. 11-41059-MSH, Order on Mot. to Recons., ECF No. 28 (Bankr.D.Mass. Aug. 1, 2011).
On the Petition Date, the Debtors’ Property became property of their bankruptcy estate, 11 U.S.C. §§ 541, 1306, subject to the Debtors’ right to claim an interest in the Property as exempt. *72Schwab, 130 S.Ct. at 2657; 11 U.S.C. § 522(i)- Absent an objection to the exemption by an interested party, that exempt interest “will be excluded from the bankruptcy estate.” Id. Unless a state has “opted out,” see supra n. 3, section 522(b) allows Debtors to claim either the exemptions set forth in § 522(d), or the exemptions available under relevant non-bankruptcy law. 11 U.S.C. § 522(b). Regardless of their statutory basis, however, most (if not all) exemptions can be categorized as either “in-kind” or (for lack of a better term) “limited-interest” exemptions. In-kind exemptions are those that allow a debtor to exempt “certain property ... in full regardless of value.” Schwab, 130 S.Ct. at 2662-63 (citing, as examples, 11 U.S.C. §§ 522(d)(9) (professionally prescribed health aids), 522(d)(10)(C) (disability benefits), 522(d)(7) (unmatured life insurance contracts)).
Limited-interest exemptions, in contrast, allow a debtor to exempt an “ ‘interest’—up to a specified dollar amount—• in the assets described.” Id. at 2661-62. As the Schwab court explained, and repeatedly emphasized, where the exemption statute provides a limited-interest exemption, only a defined monetary interest in the property is removed from the bankruptcy estate—not necessarily the value of the entire property.9
Here, the Debtors elected to use the exemption provided by § 522(d)(1) to exempt the Property in its entirety. But § 522(d)(1) allows a debtor to exempt only “[t]he debtor’s aggregate interest, not to exceed $21,625 in value, in real property.” 11 U.S.C. § 522(d)(1) (emphasis supplied).10 As in Schwab, the relevant exemption statute thus limits the Debtors’ exemption to only an “interest” in the Property, and does not provide a statutory basis for the Debtors to “exempt the asset itself and not a fixed dollar amount,” Resp. to Second Obj., 3. See Schwab, 130 S.Ct. at *732663. Because the language of § 522(d)(1) clearly limits the Debtors’ claimed exemption in the Property to a specific dollar amount, the Court agrees with the Trustee that neither the language “100% of FMV” nor “100% of Equity” adequately circumscribes the exemption consistent with the requirements of the Bankruptcy Code.11
But the Debtors say that, despite the Schwab Court’s repeated emphasis on the finite nature of limited-interest exemptions, the Supreme Court ultimately “sanctioned” the type of exemption claimed here by giving debtors a tool for converting a limited-interest exemption into an in-kind exemption. Thus, the Debtors assert that requiring them to “state the specific dollar amount in the Value of Claimed Exemption column will eviscerate the debtors’ right to exercise the strategy approved by the Supreme Court.” Resp. to Second Obj., 2. This argument has been raised by debtors in other districts, and has been categorically rejected as a fundamental misinterpretation of Schwab12 This Court agrees that “it is a misreading of Schwab to conclude the Court has blessed the use of a designation such as T00% of FMV’ [or, as here, ‘100% of Equity’] as a valid and unobjectionable scheduling of a claimed exemption value where the relevant exempting statute ... expressly limits the exemption to a maximum cash value.” In re Stoney, 445 B.R. at 552.
At its core, Schwab was not about the validity of any particular exemption claim, id. at 2662 n. 7, but about notice to interested parties as to what exemption in particular property the debtor had actually claimed, and, consequently, whether it “constitute[d] a claim of exemption to which an interested party must object under § 522(l),” id. at 2657. In Schwab, the debtor claimed an exemption in her business equipment in a specific dollar amount, which amount was within the monetary limits set by the applicable § 522(d) provisions. Id. at 2658. The debtor also listed the value of the equipment in an equal amount. Id. When the Chapter 7 trustee moved to sell the equipment (which was actually worth more than the debtor had estimated), the debtor strenuously objected. Id. Apart from its obvious utility, the debtor claimed that the equipment held sentimental value for her, id. at 2658 n. 3, and she had always intended to keep the equipment, id. at 2658.
The debtor argued that, by claiming the exemption in an amount equal to the equipment’s estimated value, she had exempted the equipment in its entirety, removing the equipment from the bankruptcy estate and putting it beyond the reach of her creditors. Id. The trustee, on the other hand, maintained that he had no obligation to object to the claimed exemption in order to preserve for the bankruptcy estate any value in the equipment above the dollar amount claimed as exempt by the debtor, because the amount claimed as exempt fell within the statutory limits. Id. *74at 2660. Accordingly, the trustee argued, the debtor exempted only a limited monetary interest in the equipment and was entitled only to a distribution equal to that dollar amount. Id.
The Supreme Court sided with the trustee, holding that the trustee had no duty to object to the exemption in order to preserve excess value for the estate. The Schwab Court rejected the debtor’s “sentimental value” argument as having no relevance to statutory interpretation, id. at 2658 n. 3,13 and held that the debtor had not, in fact, claimed the asset itself as exempt, id. at 2663. Rather, she had only exempted a specified monetary interest in the equipment, consistent with the dollar limits established by the relevant statutory provisions. Id.
The dispute here arises from a passage found later in Schwab in which the Court again addressed the debtor’s insistence that she had intended to remove the entire asset from the bankruptcy estate and that her Schedule C adequately provided notice of that intent. Id. at 2668. The Court disagreed for the reasons stated earlier in the opinion, and responded by positing, by way of example, the type of language that would put parties on notice that the debtor intended to exempt an entire asset and not just a limited interest in the asset:
Where, as here, it is important to the debtor to exempt the full market value of the asset or the asset itself, our decision will encourage the debtor to declare the value of her claimed exemption in a manner that makes the scope of the exemption clear, for example, by listing the exempt value as “full fair market value (FMV)” or “100% of FMV.”
Id.
The Court’s discussion in this passage has nothing to do with the “proper” way to claim a particular exemption under a particular exemption statute. The Court was merely demonstrating the type of language that may be used to show the world that the debtor is attempting to exempt an asset in its entirety, regardless of its actual value. Id. The Schwab Court was not, as the Debtors have argued, outlining a procedure by which an exemption claimed under a limited-interest exemption statute could be legitimately converted into an exemption in-kind. Thus, to require the Debtors here to amend Schedule C to state a specific dollar value for their claimed (d)(1) exemption does not “eviscerate” any “rights” established under Schwab and does not prevent the Debtors from “employing” any legitimate “strategy” suggested by the Supreme Court.14
*75Indeed, the Schwab Court plainly anticipated that such “100%” exemptions would not be appropriate in every instance (i.e., where the statute limited the exemption to a maximum monetary interest in the asset), which is why the Court immediately followed the above-quoted passage with the following:
Such a declaration will encourage the trustee to object promptly to the exemption if he wishes to challenge it and preserve for the estate any value in the asset beyond relevant statutory limits. If the trustee fails to object, or if the trustee objects and the objection is overruled, the debtor will be entitled to exclude the full value of the asset. If the trustee objects and the objection is sustained, the debtor will be required either to forfeit the portion of the exemption that exceeds the statutory allowance, or to revise other exemptions or arrangements with her creditors to permit the exemption. See Fed. Rule Bkrtcy. Proc. 1009(a). Either result will facilitate the expeditious and final disposition of assets....
Id. (emphasis supplied).
Furthermore, the Supreme Court also expressly refuted the Debtors’ repeated claim here that Schwab permits them to exempt the Property in its entirety because they are entitled to the “certainty of knowing whether or not [the Debtors] may keep [the] exempted property.”15 Schwab, 130 S.Ct. at 2668. This quote adopted by the Debtors is not from the Supreme Court’s explanation in support of its holding in Schwab, but from the Supreme Court’s citation to the Schwab debt- or’s brief. And not only did the debtor’s position (which the Schwab Court called her “clouded title” argument) fail to persuade the Court, but was ultimately determined to be based on faulty assumptions:
[The debtor’s] clouded title argument arises only if one accepts her flawed conception of the exemptions in this case. According to [the debtor], “once the thirty-day deadline passed without objection” to her claim, she was “entitled to know that she would emerge from bankruptcy with her cooking equipment intact.” Brief for Respondent 57. There are two problems with this argument. First, it assumes that the property she claimed as exempt was the full value of the equipment. That assumption is incorrect for the reasons we explain. Second, her argument assumes that a claim to exempt the full value of the equipment would, if unopposed, entitle her to the equipment itself as op*76posed to a payment equal to the equipment’s full value. That assumption is at least questionable. Section 541 is clear that title to the equipment passed to Reilly’s estate at the commencement of her case, and §§ 522(d)(5) and (6) are equally clear that her reclamation right is limited to exempting an interest in the equipment, not the equipment itself. Accordingly, it is far from obvious that the Code would “entitle” Reilly to clear title in the equipment even if she claimed as exempt a “full” or “100%” interest in it (which she did not).
Id. at 2668 n. 21.
Having determined that nothing in Schwab permits the Debtors here to claim 100% of the equity in the Property as exempt—since § 522(d)(1) allows them to exempt only an “interest” in the Property “not to exceed $21,625,” 11 U.S.C. § 522(d)(1)—the question now is, as one Court has put it, “What then?” In re Salazar, 449 B.R. at 898. According to the Debtors, the Court must now conduct an evidentiary hearing to establish the value of the Property as of the Petition Date in order to determine whether their “100% of Equity” exemption actually exceeds the statutory limit (i.e., whether the equity in the Property exceeds the dollar limit imposed by § 522(d)(1)).
In In re Moore, the bankruptcy court, in ruling on a similar exemption objection, concluded that the “next step” was to conduct an evidentiary hearing at which the Debtors would have the “burden of going forward to establish at least a ‘plausible basis for’ ” their exemption claim, and the Trustee would have the “burden of proving that the claimed exemption exceed[ed] the statutory limit.’ ” 442 B.R. 865, 868 (Bankr.N.D.Tex.2010). Most (if not all) courts to have addressed the issue since the In re Moore decision, however, have taken the approach that an evidentiary hearing is unnecessary, since “an exemption claim of ‘100% of FMV’ is a facially valid objection [where] the debtor has failed to claim a set amount as contemplated by the exemption statute allowing the exemption.’ ” In re Salazar, 449 B.R. at 898.16 This Court agrees with the majority and “fails to see the necessity of a hearing under the circumstances.” Id. “A hearing on value is unnecessary if the objection is limited to the manner in which the debtor has claimed the exemption.” Id. at 899.17
Not only is the Debtors’ “100% of Equity” exemption in the Property facially inconsistent with the statutory provision on which the Debtors rely in claiming the exemption (thus obviating the need for any further hearing on the matter), but if the Debtors seek an evidentiary hearing in an effort to remove the Property from the bankruptcy estate at this point in the ease, their efforts are fruitless. Even if the Debtors’ equity in the Property, based on the Property’s value as of the Petition *77date, is not more than the allowable exemption, the Property still remains property of the bankruptcy estate—all that is removed from the estate is the “interest in the property up to the value of the claimed exemption.” In re Evenson, No. 05-37920-svk, 2010 WL 4622188, *2 (Bankr. E.D.Wis. Nov. 3, 2010).18
While the Debtors are correct that their exemptions should be determined with reference to the Petition Date, see Cunningham, 513 F.3d at 324, this does not mean that the Property’s value is for all purposes determined as of the date of filing. As the Trustee points out, and the Debtors concede, in a Chapter 13 case, property acquired postpetition (including any increase in value of prepetition property) is property of the bankruptcy estate. See 11 U.S.C. § 1306(a)(1); Barbosa v. Solomon, 235 F.3d 31, 36 (1st Cir.2000). And while a Chapter 13 debtor cannot be forced to modify a confirmed plan or sell or refinance property due to an increase in equity postpetition, see In re Trumbas, 245 B.R. 764, 765, 767 (Bankr.D.Mass.2000), if a debtor voluntarily chooses to do so, unsecured creditors are entitled to a distribution of the funds exceeding the amount of secured claims and the debtor’s valid exemption in the property. See Barbosa, 235 F.3d at 41; In re Kieta, 315 B.R. 192, 198 (Bankr.D.Mass.2004); see also In re Massey, No. 11-41059-MSH, Order on Mot. to Recons. (Bankr.D.Mass. Aug. 1, 2011). The Trustee’s concern regarding postpetition equity is accordingly well-taken. It may be that the Debtors never refinance or sell the Property to liquidate the Debtors’ equity. And their equity in the Property may never increase above the exemption limits set by § 522(d)(1). But it is no red herring for the Trustee to object to the Debtors’ “100% of Equity” exemption claim now (and especially in light of the Debtors’ stated intent to exempt the Property in kind) in order to preserve for the bankruptcy estate any value that may be realized in the future.19
III. CONCLUSION
For the foregoing reasons, the Court holds that, where the statutory basis for a debtor’s claim of exemption provides only for an exemption of an interest in certain property up to a specific dollar amount, the “value of claimed exemption” must be identified as a monetary value. Nothing in Schwab v. Reilly, — U.S.-, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010), dictates otherwise; indeed, Schwab itself establishes the very principles which compel this conclusion. Accordingly, the Court will issue an order sustaining the Trustee’s Second Objection to the Debtors’ claimed exemption in the Property and will require the Debtors to file a further amended Schedule C.20 An order in conformity with this memorandum shall issue forthwith.
. See 11 U.S.C. § 101 et seq. (the "Bankruptcy Code” or the “Code”). All references to statutory sections are to the Bankruptcy Code unless otherwise specified.
. Schedule D lists three secured creditors relative to the Property: PNC Mortgage with a mortgage against the Property securing a claim of $185,056; Anj Corporation, holding a judgment lien in the amount of $5,001; and "Cap One,” holding a judgment lien in the amount of $10,374.
. Although not defined in the Debtors’ Schedules, the Court has assumed (consistent with the parties' assumptions) that "FMV” was intended to stand for “fair market value.”
. There are at least two other circumstances in which the postpetition accrued equity might have import. The first is where the Debtor seeks to avoid a lien as wholly unsecured. See In re Landry, 462 B.R. 317, 322-24 (Bankr.D.Mass.2011); but see In re Samo, 463 B.R. 163, 165-67 (Bankr.D.Mass.2011). The second is where the Chapter 13 case is converted by the Debtor to Chapter 7 in bad faith. See 11 U.S.C. § 348(f)(2).
. The Trustee’s objection to the Debtors’ Chapter 13 plan was continued generally pending a final resolution regarding the Debtors’ exemptions.
. Indeed, the Debtors have stated that ”[t]he descriptive was added to aid the trustee in ascertaining the arithmetic amount of the (d)(1) exemption being claimed, but it has no legal effect." Resp. to Second Obj., 7 ¶ 4, May *7121, 2011, ECF No. 61 (emphasis supplied). The Court sees no reason why either the Trustee or the Court should give the Debtor’s “description” of the exemption as $21,600 any more weight or import than they do themselves.
. In fact, the Debtors attached their response filed to the First Objection in support of their response to the Second Objection.
. See Schwab, 130 S.Ct. at 2661-62 (“most of the [§ 522(d) ] categories ... define the 'property' a debtor may 'clai[m] as exempt' as the debtor's 'interest'—up to a certain specified dollar amount—in the assets described in the category, not as the assets themselves.”) (emphasis in original); id. at 2662 (“the Code’s definition of the 'property claimed as exempt’ in this case is clear ... [the Code] define[s] the ‘property claimed as exempt' as an 'interest' " in the property, and not as the property "per se ”); id. at 2663 (where "a debtor claims an exemption pursuant to provisions that ... permit the debtor to exclude from the estate only an ‘interest’ in certain property, the 'property' that becomes exempt absent objection, § 522(0, is only the ‘partial interest' claimed as exempt and not 'the asset as a whole' ”); id. at 2664 n. 11 (in rejecting dissent's argument that valuation by debtor plays a greater role in determining what is exempted, court says that that argument "lacks statutory support because the governing Code provisions phrase the exemption limit as a simple dollar amount.”); id. at 2667 ("To help the debtor obtain a fresh start, the Bankruptcy Code permits him to withdraw from the estate certain interests in property, such as his car or home, up to certain values.") (quoting Rousey v. Jacoway, 544 U.S. 320, 325, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005)) (emphasis supplied in Schwab) and (“title to the asset will remain with the estate pursuant to § 541, and the debtor will be guaranteed a payment in the dollar amount of the exemption”) (citing In re Soost, 262 B.R. 68, 72 (8th Cir. BAP 2001)); Gebhart v. Gaughan (In re Gebhart), 621 F.3d 1206, 1210 (9th Cir.2010); Hefel v. Schnittjer (In re Hefel), No. 11-CV-1010-LRR, 2011 WL 3292929, *5 (N.D.Iowa July 29, 2011); Hopkins v. Idaho State Univ. Credit Union (In re Herter), 456 B.R. 455, 466 (Bankr.D.Idaho 2011); In re Wiczek, 452 B.R. 762, 766 (Bankr.D.Minn.2011); In re Salazar, 449 B.R. 890, 899 (Bankr.N.D.Tex.2011); see also In re Massey, No. 41059-MSH, Order on Mot. to Recons. (Bankr. D. Mass. Aug. 1, 2011).
. Because this is a joint case, each of the debtors here are entitled to claim their exemptions up to the limits set forth by the statute. See 11 U.S.C. § 522(m).
. An exemption only protects the Property against liquidation for the benefit of unsecured creditors and does not affect the secured liens on the Property, see Nelson v. Scala, 192 F.3d 32, 33 (1st Cir.1999). As such, there really is no practical difference between the Debtors’ originally claimed exemption of “100% of FMV” and the amended exemption claim of "100% of Equity”—a conclusion with which the Debtors must obviously agree, since the debtors admit their intent continues to be to "exempt the asset itself and not a fixed dollar amount.” Resp. to Second Obj., 3.
. See, e.g., In re Hefel, 2011 WL 3292929, at *5; In re Wiczek, 452 B.R. at 767, 768; In re Stoney, 445 B.R. 543, 552 (Bankr.E.D.Va.2011); In re Salazar, 449 B.R. at 899; In re Winchell, No. 10-05827-PCW13, 2010 WL 5338054, *2 (Bankr.E.D.Wash. Dec. 20, 2010).
. Similarly, here, while the Court sympathizes with the Debtors' desire to keep the Property, that desire alone cannot dictate the Court's interpretation of the Code. Schwab, 130 S.Ct. at 2658 n. 3 (“Because the Code imposes limits on exemptions, many debtors who seek to take advantage of the Code are, no doubt, put to the similarly difficult choice of parting with property of 'extraordinary sentimental value.’ ”).
. The Court is aware of the Administrative Office of the U.S. Courts’ preliminary draft of a proposed amended Schedule C (currently submitted for public comment) that allows debtors the option to check a box under the "value of claimed exemption” column stating "Full fair market value of the exempted property.” See Preliminary Draft of Proposed Amendments to the Federal Rules of Practice and Procedure (August 2011), available at http://www.uscourts.gov/uscourts/RulesAnd Policies/rules/Publication%20Aug%202011/ Brochure.pdf (last visited Jan. 13, 2012); Report of Advisory Committee on Bankruptcy Rules (Revised June 21, 2011), available at http://www.uscourts.gov/uscourts/RulesAnd Policies/rules/Publication%20Aug%202011/ BK_Report.pdf (last visited Jan. 13, 2012). The proposed amended form has "not been submitted to or considered by the Judicial Conference or the Supreme Court.” Committee on Rules of Practice and Procedure of the Judicial Conference of the United States, *75Memorandum to the Bench, Bar, and Public (August 12, 2011), available at http://www. uscourts.gov/uscourts/RulesAndPolicies/rules/ Publication%2 0Aug%20201 l/Memo_to_ Bench_Bar_2.pdf (last visited Jan. 13, 2012). The Court does not see the proposed amended Schedule C as inconsistent with its holding in this case. As noted, some exemptions may be permissibly claimed in kind, and the proposed form recognizes that by providing a clearer method for debtors to indicate an intent to claim an entire asset exempt. And if a debtor checks the box next to "Full fair market value of the exempted property” but the relevant statute creates only a limited-interest exemption, nothing prohibits interested parties from objecting to that exemption claim. The utility of the proposed amended Schedule C is in its ability to provide clear notice of the debtor’s intent and to avoid the type of dispute that arose in Schwab. Furthermore, to the extent the proposed amended Schedule C could be interpreted to allow debtors to legitimately claim an in-kind exemption where the statute provides for a limited-interest exemption, the form would not trump the plain statutory language. See Schwab, 130 S.Ct. at 2660 n. 5 ("The [bankruptcy] forms ... must be read in light of the Bankruptcy Code provisions and must yield to those provisions in the event of conflict.”).
. See Resp. to First Obj., 3; Resp. to Second Obj., 3; Debtors’ Reply Brief, 6.
. See In re Hefel, 2011 WL 3292929, at *4; In re Wiczek, 452 B.R. at 767; see also Schwab, 130 S.Ct. at 2662 n. 8 ("Challenges to the valuation of what the dissent terms 'exemptible assets' are not covered by Rule 4003(b) in the first place.").
. In both the First and Second Objection, the Trustee also quarreled with the amount of the exemptions Mr. Luckham had claimed in the Property and other assets. Neither the objections nor the responses were especially elucidating on the exact nature of that dispute, and the parties did not address that issue directly at either the First or Second Hearings. With the benefit of the Debtors’ forthcoming amended Schedule C, the Trustee’s issues regarding the total dollar amount of exemptions claimed will (hopefully) be better clarified or resolved. If the Trustee's concerns remain, she may file an objection to the further amended Schedule C within 30 days of its filing. See Fed. R. Bankr.P. 4003(b)(1).
. See also In re Herter, 456 B.R. at 466; In re Wiczek, 452 B.R. at 767, 768; In re Salazar, 449 B.R. at 900.
. The concerns raised by the Debtor anent the impropriety of Chapter 7 trustees leaving bankruptcy estates open in hopes that they can eventually realize on a potential postpetition equity increase is not only irrelevant here, but cannot form the basis for ignoring the plain limits on exemptions set forth in the Code. See, e.g., In re Gebhart, 621 F.3d at 1212 & n. 6 (duty to police Chapter 7 trustees falls on the United States Trustee, and debtors may petition the court to compel abandonment of property under § 544(b)).
.The Debtors' Motion to Amend will be allowed, as amendments to debtors’ schedules are generally permitted. See Fed. R. Bankr.P. *781009(a). But granting leave to amend a schedule does not equate to approval of its contents, and does not preclude the Court from sustaining objections to the schedule. See, e.g., Fed. R. Bankr.P. 4003(b)(1) (a party in interest may object to the "list of property claimed as exempt” "within 30 days after any amendment to the list or supplemental schedules is filed”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494537/ | Memorandum
MAGDELINE D. COLEMAN, Bankruptcy Judge.
Introduction
Before this Court for consideration is the Standing Chapter 13 Trustee’s (the “Trustee”) objection to the Amended Claim of Exemptions dated April 14, 2011 (the “Objection”), filed by Robert E. Graves and Mary Lou Graves (collectively, the “Debtors”). The Trustee objects to the claim filed by Mary Lou Graves (“Mrs. Graves”) for an exemption under 11 U.S.C. § 522(d)(ll)(D) (“§ 522(d)(ll)(D)”) for a loss of consortium claim relating to a pre-petition automobile accident involving only Robert E. Graves (“Mr. Graves”).
Following a hearing on the matter and consideration of post-hearing briefs filed by the Trustee and the Debtors, this Court will sustain in part and deny in part the Trustee’s Objection. Mrs. Graves’ loss of consortium claim is property of her estate and for which she may claim an exemption. However, Mrs. Graves has failed to establish that the proceeds from the settlement of Mr. Graves’ automobile accident are property of her estate and subject to a claim for exemption under § 522(d)(ll)(D). Background
The Debtors initiated this bankruptcy case by filing a petition for chapter 13 relief on April 9, 2009. Shortly thereafter, on May 22, 2009, the Debtors filed an Amended Schedule B to add a personal injury claim stemming from an automobile accident involving Mr. Graves that occurred on April 7, 2009, two days before the Debtors filed their joint petition for chapter 13 relief (the “Personal Injury Claim”). The Debtors’ Amended Schedule B identified the Personal Injury Claim to be joint property of the Debtors.
On the same day, the Debtors also filed an Amended Schedule C in which the Debtors valued the Personal Injury Claim in the amount of $62,801 and claimed exemptions in the total amount of $62,802. With regard to the Personal Injury Claim, the Debtors claimed an exemption in the amount of $2,150 pursuant to 11 U.S.C. § 522(d)(5), an exemption in the amount of $20,250 pursuant to 11 U.S.C. § 522(d)(5), an exemption in the amount of $1.00 pursuant to 11 U.S.C. § 522(d)(ll)(E), an exemption in the amount of $1.00 pursuant to 11 U.S.C. § 522(d)(9) and an exemption in the amount of $40,400 pursuant to 11 U.S.C. § 522(d)(ll)(D) (the “Disputed Exemption”). Subsequently, on August 15, 2009, the Debtors filed a second Amended Schedule C. The Debtors did not change the amount or type of their claims exemp*227tions. Rather, the Debtors amended their Schedule C to list the value of the Personal Injury Claim as $200,000.
On June 18, 2009, the Trustee filed his original objection to the Disputed Exemption. A hearing on the Trustee’s original objection was scheduled to occur on July 15, 2009, and was later continued to August 19, 2009. Prior to the hearing scheduled for August 19, 2009, the parties submitted a stipulation extending the time for the Trustee to object to the Disputed Exemption (the “Stipulation”). The Stipulation was approved by this Court on August 21, 2009, and provided that the time for the Chapter 18 Trustee to object to the Debtors’ exemptions was extended for a period of 90 days after the Trustee’s receipt of written notice of any proposed settlement of or judgment on the Personal Injury Claim.
On August 26, 2009, the Debtors’ Chapter 13 Plan (“Plan”) was confirmed. The Debtors’ Plan provided in relevant part that any net non-exempt proceeds from the Personal Injury Claim would be paid into the Plan for distribution to unsecured creditors. A year later on August 26, 2010, the Trustee wrote to Debtors’ bankruptcy counsel regarding the status of the Personal Injury Claim. No response was forthcoming. Several months later, on February 14, 2011, the Trustee wrote to the counsel representing the Debtors’ in connection with the Personal Injury Claim. The next day, the Trustee received a letter from Debtors’ bankruptcy counsel advising, for the first time, that the Personal Injury Claim had been settled for $125,000. Thereafter, on March 3, 2011, the Trustee received from the Debtors’ counsel a copy of a Statement of Distribution dated February 19, 2010 (the “Statement of Distribution”). The parties agree that the Statement of Distribution disclosed that Mr. Graves received a sum of $82,262.18 on or about March 1, 2010 (the “Settlement Proceeds”). The Settlement Proceeds represent Mr. Graves’ share of the total settlement amount of $125,000 less attorneys’ fees and costs.1 Although a copy of the Statement of Distribution was never provided to this Court, counsel for the Debtors admits that the Statement of Distribution and accompanying release of the Personal Injury Claim was only signed by Mr. Graves. The Debtors have not provided any explanation as to why they waited for over a year to report the settlement of the Personal Injury Claim to the Trustee.
Consistent with the Stipulation, the Trustee timely filed his present Objection. In the Objection, the Trustee argued that Mrs. Graves is not entitled to claim any exemption relating to the Personal Injury Claim because the Personal Injury Claim is not property of her estate. The Debtors filed a timely opposition to the Objection contending that Mrs. Graves was entitled to claim an exemption for her loss of consortium claim as a derivative claim of Mr. Graves’ personal injury claim. Arguments with regard to the Trustee’s Objection were heard by this Court at a hearing on August 11, 2011 (the “Hearing”).
At the Hearing, the parties admitted that no facts were in dispute and the only matter to be decided is whether any portion of the Settlement Proceeds may be attributed to Mrs. Graves’ bankruptcy es*228tate.2 Central to this question are the documents evidencing the settlement of the Personal Injury Claim. Debtors’ counsel stated that he was in possession of a copy of the release of the Personal Injury Claim. However, he did not introduce the release into the record because it was the Debtors’ only copy.3 In lieu of introducing the release into this Court’s record, Debtors’ counsel conceded that Mrs. Graves did not sign the release and that the release makes no reference to her alleged loss of consortium claim. In addition, Debtors’ counsel requested that this Court set a post-hearing briefing schedule to allow him to explain why the release, despite not being signed by Mrs. Graves and despite omitting any reference to Mrs. Graves’ claim, implicates Mrs. Graves’ alleged loss of consortium claim. Counsel for the Debtors indicated that he would submit a copy of the release along with his post-hearing brief.
This Court is now in possession of the parties’ post-hearing briefs. Despite his representations to this Court, Debtors’ counsel did not attach a copy of the release to his post-hearing brief. For whatever reason, the parties have not provided to this Court, whether at the Hearing or as a part of their post-trial filings, a copy of the release or any other document relating to the settlement of the Personal Injury Claim. Instead, Debtors attached to their post-trial brief a letter from their personal injury counsel advising that 25% of the Settlement Proceeds could be applied to Mrs. Graves’ loss of consortium claim. Memorandum of Opposition, Exhibit A.
Legal Discussion
The only issue before this Court is whether as a matter of law Mrs. Graves is entitled to apply her § 522(d)(ll)(D) exemption to the Settlement Proceeds. To decide this issue, this Court must determine whether any portion of the Settlement Proceeds constitutes property of Mrs. Graves’ bankruptcy estate.
A. The Debtors’ Bankruptcy Estates
To claim an exemption in property, a debtor must have an interest in the property. “[T]he sine qua non for claiming an exemption is that the item must first be property of the debtor’s estate.” In re Bippert, 311 B.R. 456, 460-61 (Bankr.W.D.Tex.2004) (holding that spouse could not claim exemption in property that was only property of other spouse’s estate) (emphasis in original).
Pursuant to section 541(a)(1), a personal injury tort claim is property of a debtor’s estate. See 11 U.S.C. § 541(a)(1) (“Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.”); see also Rollar v. Miller (In re Kollar), 176 F.3d 175, 178 (3d Cir.1999) (explaining that personal injury claims pending at the time of the filing of a bankruptcy case are property of the estate); In re Clark, 274 B.R. 127, 132 (Bankr.W.D.Pa.2002) (“Personal injury claims pending at the time of the filing of a bankruptcy case are property of the estate.”). In the case of husband and wife debtors, a personal injury tort claim is the exclusive property of the injured spouse’s estate. In re Bippert, 311 B.R. 456, 471 (Bankr.W.D.Tex.2004) (acknowledging that personal injury claim belongs only to estate of injured spouse). Similarly, to the extent an uninjured spouse possess*229es a loss of consortium claim, such claim is the exclusive property of the uninjured spouse’s estate. Darr Construction Co. v. Workmen’s Compensation Appeal Board, 552 Pa. 400, 408, 715 A.2d 1075 (1998) (“acknowledging that Pennsylvania law provides that a loss of consortium claim is personal to the uninjured spouse”).
With this distinction in mind, this Court observes that the Debtors’ scheduling of the Personal Injury Claim as a “joint” asset is improper. The Debtors’ respective claims arising from Mr. Graves’ pre-petition accident should have been listed as separate property. Mrs. Graves’ loss of consortium claim should have been listed on the Debtors’ Schedule B as property of her estate. On the other hand, Mr. Graves’ claims arising from his physical injuries should have been listed on the Debtors’ Schedule B as property of his estate. Unless a portion of the Settlement Proceeds may be attributed to the settlement of Mrs. Graves’ loss of consortium claim, it does not follow that her bankruptcy estate has an interest in the Settlement Proceeds.
B. Mrs. Graves’ Loss of Consortium Claim and the Settlement Proceeds
With regard to the application of an exemption under § 522(d)(ll)(D) to the proceeds of a personal injury settlement, the debtor is also required to have suffered “personal bodily injury.”4 The requirement that a debtor suffer physical injury to claim a § 522(d)(ll)(D) exemption would, on its face, appear to preclude a debtor from claiming a § 522(d)(ll)(D) exemption for a loss of consortium claim. However, courts interpreting the § 522(d)(ll)(D) exemption “have found a loss of consortium to be exempt because it is derived from the spouse’s personal bodily injury.” In re Shumac, 425 B.R. 139, 143 (Bankr.M.D.Pa.2010); see also In re Dealey, 204 B.R. 17, 18 (Bankr.C.D.Ill.1997) (same).
Consistent with this precedent, this Court acknowledges that a spouse may apply a § 522(d)(ll)(D) exemption to a loss of consortium claim. However, as addressed by the Court in In re Shumac, 425 B.R. 139, 144 (Bankr.M.D.Pa.2010) for a debtor to apply a § 522(d)(ll)(D) exemption to specific monies received in satisfaction of a loss of consortium claim, a debtor must have asserted the loss of consortium claim and the monies sought to be exempted must constitute the proceeds of a settlement of or judgment on the loss of consortium claim. In other words, for Mrs. Graves’s application of her claimed § 522(d)(ll)(D) exemption to the Settlement Proceeds to be valid, she must establish that some portion of the Settlement Proceeds were received in satisfaction of her prepetition loss of consortium claim and are thereby property of her bankruptcy estate.
In Shumac, husband and wife debtors claimed individual exemptions under § 522(d)(ll)(D) in the proceeds of auto accident litigation. Prior to filing for chapter 7 relief, the debtor husband was in a car accident that caused him to suffer wrist injuries. Finding that the debtor husband’s injuries were sufficient to meet *230the personal bodily injury requirement of § 522(d)(ll)(D), the Court found his claimed exemption to be proper. The Court then turned to trustee’s objection to the debtor’s wife claimed exemption in the proceeds of her loss of consortium claim. The Court found that the debtor wife could claim a § 522(d)(ll)(D) exemption for her loss of consortium claim because it was derived from the debtor husband’s personal bodily injury claim. In re Shumac, 425 B.R. 139, 143 (Bankr.M.D.Pa.2010). Acknowledging that neither the debtor husband’s personal injury claim nor the debt- or wife’s loss of consortium claim had been reduced to a settlement or judgment, the court still found that the debtor husband and wife’s claimed exemptions remained valid because their respective claims were property of their respective estates and were derived from personal bodily injury. “To the extent a settlement or judgment is entered in favor of the Debtors for both personal injury and loss of consortium, the exemptions are considered valid under 11 U.S.C. § 522(d)(ll)(D), and the Trustee’s objections to those exemptions are overruled.” In re Shumac, 425 B.R. 139, 144 (Bankr.M.D.Pa.2010) (emphasis added).
Here, the Court finds that Settlement Proceeds were not derived from a settlement of Mrs. Graves’ alleged loss of consortium claim. Unlike the debtors in Shumac who had not yet obtained a settlement or judgment of either of the spouse’s claims, In re Shumac, 425 B.R. 139, 144 (Bankr.M.D.Pa.2010), all evidence indicates that the Settlement Proceeds were derived only from the satisfaction of Mr. Graves’ claims arising from his physical injuries. As admitted by Debtors’ counsel, the release was signed only by Mr. Graves and makes no reference to Mrs. Graves’ loss of consortium claim. The Debtors’ only evidence that the release implicates Mrs. Graves’ alleged loss of consortium claim is a copy of a one-page facsimile from the Debtors’ personal injury counsel, issued long after the settlement of the Personal Injury Claim and after the Trustee’s filing of the Objection, and stating that:
In reply to your letter of Feb. 21, 2011, attached is a copy of the Schedule of Distribution dated Feb. 19, 2010. Please be advised that Ms. Graves was retired [and] there would not be any claims for future lost wages. You can apply 25% to the consortium claims. Please feel free to call me if you have any questions.
Memorandum in Opposition, Exh. A.
Because the evidence relied upon by the Debtors is inadmissible hearsay, see e.g., In re Bowen, 46 F.Supp. 631, 636 (E.D.Pa.1942) (refusing to consider as evidence self-serving letters from counsel attempting to construe an agreement), it is insufficient to establish either that Mrs. Graves asserted her loss of consortium claim or that the monies sought to be exempted constitute the proceeds of a settlement of her loss of consortium claim. Debtors’ counsel represented to this Court that he would submit along with his post-hearing papers a copy of the release of the Personal Injury Claim. Despite his representation, the facsimile was the only evidence provided to this Court and is insufficient to establish that any portion of the Settlement Proceeds inured to the benefit of Mrs. Graves’ bankruptcy estate.
Having failed to establish that the release applies to Mrs. Graves’ loss of consortium claim, this Court finds that the Settlement Proceeds are the exclusive property of Mr. Graves’ bankruptcy estate. On this basis, this Court agrees with the Trustee and finds that Mrs. Graves’ application of her claimed § 522(d)(ll)(D) exemption to the Settlement Proceeds is invalid.
*231However, Mrs. Graves bankruptcy estate does include her interest in her loss of consortium claim and that interest remains unliquidated. In essence, Mrs. Graves stands in the same position as the debtor wife in Shumac. If at any time a settlement or judgment is entered in favor of Mrs. Graves for her alleged loss of consortium claim, then she would be able to apply her § 522(d)(ll)(D) exemption to the proceeds of such a settlement or judgment. Accordingly, this Court finds that it would be premature at this time to deny her § 522(d)(ll)(D) exemption as applied to her unliquidated loss of consortium claim. See, e.g., Manzitti v. Amsler, 550 A.2d 537, 588 (1988) (“a claim for loss of consortium is not barred by the settlement and release of the injured spouse’s personal injury claim”).
Summary
This Court finds that the estate of Debt- or Mary Lou Graves does not possess an interest in the Settlement Proceeds. As a result, Mrs. Graves may not apply her claimed § 552(d)(ll)(D) exemption to any portion of the Settlement Proceeds. However, this Court recognizes that Mrs. Graves does possess a prepetition loss of consortium claim. Upon filing for chapter 13 relief, her claim became part of her bankruptcy estate. She may claim a § 522(d)(ll)(D) exemption that she may apply to any monetary recovery, if any, that she may obtain in satisfaction of her presently unliquidated loss of consortium claim.
Accordingly, the Trustee’s Objection will be sustained in part and denied in part.
. This Court also addressed at the Hearing an Application for Compensation and Reimbursement of Expenses Nunc Pro Tunc and for Approval of Employment Nunc Pro Tunc filed by Flager & Yockey, P.C. dated June 23, 2011 [Docket No. 55] (the "Application”). This Court issued an Order dated August 11, 2011 [Docket No. 70] granting the application.
. The Trustee conceded that Mr. Graves suffered personal bodily injury and was therefore entitled to claim an exemption in the amount of $20,200 pursuant to § 522(d)(l 1)(D)'.
. The requirement of "personal bodily injuiy” is imposed by the text of § 522(d)(ll)(D) that reads:
“(d) The following property may be exempted under subsection (b)(2) of this section: (11) The debtor’s right to receive, or property that is traceable to—
(D) a payment, not to exceed $20,200, on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individual of whom the debtor is a dependent; ...”
11 U.S.C. § 522(d)(ll)(D) (emphasis added). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494538/ | *233
MEMORANDUM OPINION
Related to Doc. No. 124
THOMAS P. AGRESTI, Chief Judge.
This is a Chapter 13 case that was filed on October 25, 2006. Presently before the Court for decision is the Final Fee Petition for Main Case 06-25304 (“Fee Application”) filed on August 4, 2011 at Doc. No. 124 by Counsel for the Debtors, David Colecchia (“Colecchia”).1 The Fee Application indicates that Colecchia has already received payments totaling $2,500 from the Debtors, partly from a pre-petition retainer that they paid him directly, and partly through plan payments made during the course of the case. Colecchia seeks an additional $11,080 in fees and $318.40 in expense reimbursement. The total amount of legal fees being sought is therefore $13,580. The Chapter 13 Trustee filed an Objection to the Fee Application on the grounds that it was untimely and excessive. See Doc. No. 129.
A preliminary hearing on the Fee Application was held on August 31, 2011. The Court then issued an Order requiring the Parties to submit briefs. An evidentiary hearing on the matter was held on November 2, 2011. During the evidentiary hearing, Colecchia testified and made repeated assertions in argument that a written fee agreement actually existed between he and the Debtors even though no document was ever offered into evidence. At the conclusion of the evidentiary hearing the Court indicated that it would take the matter under advisement and issue a ruling.
Two days after the evidentiary hearing, Colecchia filed a Motion to Withdraw Final Fee Petition for Case 06-25304. (“Motion to Withdraw”) at Doc. No. 142. Despite the assertions to the contrary that Colecchia had made at the evidentiary hearing, in the Motion to Withdraw he stated that after the conclusion of the evi-dentiary hearing he searched the Debtors’ file but was unable to find any fee agreement between them. As a result, he claimed that he was bound by the Rule 2016(b) Statement he previously filed and therefore not entitled to any additional fees beyond what he had already received. The Chapter 13 Trustee filed a timely Response opposing the Motion .to Withdraw at Doc. No 146.
On November 21, 2011, the Court issued an Order, Doc. No. 161, (“November 21st Order”), explaining that it was necessary to hold a hearing on the Motion to Withdraw to allow Colecchia an opportunity to address a number of “concerns” the Court identified in the November 21st Order regarding the truthfulness of some of his testimony at the evidentiary hearing. The hearing on the Motion to Withdraw was held on December 12, 2011. The next day the Court entered an Order denying the Motion. See Doc. No. 165. The reasons for that denial are explained in this Memorandum Opinion which represents the Court’s findings of fact and conclusions of law as to the Fee Application.
Denial of the Fee Application
The Fee Application must be substantially denied for a number of reasons, although Colecchia will be permitted to retain the monies he has already received. In making this decision, the Court was not restricted only to a consideration of the items raised by the Chapter 13 Trustee in her Objection. In matters such as the present case, the Court is also free to sua sponte raise issues as to the appropriateness of the fee being sought. See, In re Busy Beaver Bldg. Centers, Inc., 19 F.3d 833, 840 et seq. (3d Cir.1994). In that *234regard, the Court made its own concerns known to Colecchia both at the November 2, 2011 evidentiary hearing itself and in the November 21st Order. Although given an opportunity to address those concerns at the December 12th hearing, Colecchia failed to do so to the Court’s satisfaction.
As a starting point for the Court’s decision in this regard, all fees related to the appeal taken by the Debtors in the adversary proceeding of Weisel v. Dominion Peoples Gas Company, Adv. No. 08-2195 must clearly be removed from any consideration, and in fact, were already stricken by oral order of the Court issued during the evidentiary hearing. The reason for this is derived from the testimony of the Debtor Husband given at the evi-dentiary hearing to the effect that he initially informed Colecchia that he did not wish to pursue an appeal because of the expense involved. He further testified that he was persuaded to change his mind and agree to the appeal only after Colecc-hia informed him that the appeal had important legal implications “beyond this case” and would be done at no cost to the Debtors. At the hearing, Colecchia acknowledged that he had indeed made just such a promise to the Debtors, yet inexplicably, he included a substantial amount of time related to the appeal in the Fee Application. Colecchia will be held to his promise. Per the Court’s review, $5,215 in fees are related to the appeal,2 thus the amount of additional requested fees is preliminarily reduced to a total of $5,865.
The remaining amount of fees must be denied in toto for two alternative reasons, either of which would be sufficient in and of itself to justify the denial. First, as indicated above, Colecchia has admitted, albeit belatedly, that he cannot produce a written fee agreement between he and the Debtors. He is thus in violation of the Court’s Chapter 13 Procedure # 3, which stated in relevant part, and at relevant time, that:
Counsel shall enter into a written fee agreement, which may provide for future fees in the event of future complications. To the extent those fees exceed $2500 total, the attorney must file a fee application.
Chapter 3 Procedure # 3 ai ¶ 6. The $2,500 figure referred to in the above quote (a figure that has been periodically changed by the Court over the years3) represents the “no look” fee, the maximum amount that Chapter 13 attorneys are permitted to be paid without being subject to the scrutiny of the fee application process. By failing to enter into a written fee agreement with the Debtors, Colecchia has therefore forfeited his right to seek any fees beyond those stated in the Rule 2016 Statement he filed along with the petition.4
The second reason for a denial of the remaining fees at issue is the misconduct engaged in by Colecchia with respect to the Fee Application. That misconduct will be described more fully below in the next *235section of this Memorandum Opinion but for the moment it will suffice to say that it involved dishonest representations made to the Court.
Counsel, of course, has a duty of candor and forthrightness to the Court. When misrepresentations are discovered there must be consequences, and in this instance the Court finds that an appropriate consequence is a denial of the Fee Application. See, e.g., In re Park-Helena Corp., 63 F.3d 877, 882 (9th Cir.1995) (denial of all fees as sanction for attorney nondisclosure was not an abuse of discretion); In re Parklex Assocs., Inc., 435 B.R. 195, 209-10 (Bankr.S.D.N.Y.2010) (compensation may be denied when attorney misrepresents facts and deceives the court, citing 3 Collier on Bankruptcy ¶ 329.04[l][b]); In re Teknek, L.L.C., 394 B.R. 884 (Bankr.N.D.Ill.2008) (compensation may be denied when attorney misrepresents facts in order to deceive court).
The Court actually considered going beyond a denial of the Fee Application and requiring Colecchia to disgorge the $2,500 in attorney fee payments he has already received. Such an action would be warranted under the facts of this case. The same authority which permits a bankruptcy court to deny fees due to the misconduct of counsel also allows for the disgorgement of fees already received. See, e.g., In re Dental Profile, Inc., 446 B.R. 885 (Bankr.N.D.Ill.2011) (misrepresentation of key facts to court provided grounds for order of disgorgement). However, after giving the matter a good deal of thought, the Court concludes that Colecc-hia will be permitted to retain those fees previously received.
Given that the Court has found Colecc-hia to have made dishonest representations, it is a fair question to ask why he should be permitted any fees in this case. Several reasons persuade the Court to take this approach. First, unquestionably, the Debtors in this Chapter 13 proceeding have benefitted to some extent by legitimate services provided by Colecchia. Second, the fees previously received by Co-lecchia were within the limits of the 2016 Statement, which the Court is willing to view as a surrogate fee agreement limiting compensation to the then in effect no-look fee. Third, Colecchia performed services and received the fees in question before any of the misrepresentations were made and as far as the Court can discern, none of the misrepresentations related to those fees. Although in these circumstances, the Court would be justified in denying all fees, an argument exists that it might be unnecessarily harsh to require disgorgement of previously paid fees in light of the benefit received and substantial fees already denied. Therefore, the Court will not take that step at this time. For similar reasons, the relatively modest expenses sought in the Fee Application will be allowed.5
Misrepresentations by Counsel
The relatively straightforward disposition of the Fee Application does not end the matter. The Court finds that the misrepresentations that were made to it by Colecchia require a judicial response that goes further than the mere denial of a fee. The question of just what this response should be is a vexing one that the Court would much prefer to avoid but in good conscience cannot do so. Given the sensitive nature of the subject, the Court will *236first very specifically set forth its findings as to the misrepresentations by Colecchia6 and then turn to a discussion of the remedy that will be imposed.
The first misrepresentation relates to Colecchia’s assertion, under oath at the evidentiary hearing, that he was unable to calculate the amount of fees that had actually been incurred to date at the time he was preparing and submitting an Amended Plan for the Debtors in December 2009. According to the Fee Application over $13,000 in fees had actually been incurred by then, but Colecchia submitted a figure of only $4,500 for anticipated legal fees in the then-pending Amended Plan. Colecchia testified that the actual figure could not be determined and listed in the Amended Plan because the employee at his office who handled billing records was “out on maternity leave” at the time. See Transcript of 11/2111 hearing at p. 25, l. 22 et seq. (hereinafter “Tr. at_”).
In the November 21st Order the Court set forth facts of record indicating that the employee in question did not have a child until May 2010 or later, and thus would not have been out on maternity leave when the Amended Plan was prepared and submitted. The Court also noted that the Debtor Husband had testified that Colecc-hia gave him a “ballpark figure” of fees incurred to date when the Amended Plan was prepared which total was remarkably close to the actual figure listed in the Fee Application. This line of testimony, which was credible, clearly demonstrated to the Court that Colecchia was in fact able to reasonably determine the incurred amount of fees for purposes of insertion in the Amended Plan he filed in December 2009.
Colecchia was thus put on notice going into the December 12, 2011 hearing on the Motion to Withdraw that the Court did not believe his assertion about the employee being out on maternity leave thereby allegedly causing him an inability to calculate fees. It would have been an easy matter for him to prove that the assertion was true by presenting the testimony of the employee, or submitting records to show she was out on leave at the time in question. He failed to provide any evidence in that regard and the Court concludes that was because he could not do so since the representation was false.
The second misrepresentation relates to whether Colecchia had entered into a written fee agreement with the Debtors. The details of that misrepresentation are set forth above, and in the November 21st Order, and need not be reiterated here. Frankly, the Court is not certain whether Colecchia’s repeated assertions at the evi-dentiary hearing that he had a written fee agreement with the Debtors were deliberate misrepresentations, or merely reckless ones he made “on the fly” without really knowing them to be true or false. Even if the Court gives him the benefit of the doubt and assumes the latter, Colecchia’s conduct is still not acceptable. As Comment 3 to Pa.R.Prof. Cond. 3.3 states in pertinent part:
... an assertion purporting to be on the lawyer’s own knowledge, as in an affidavit by the lawyer or in a statement in open court, may properly be made only when the lawyer knows the assertion to *237be true or believes it to be true on the basis of a reasonably diligent inquiry.
See also, e.g., In re Taylor, 655 F.3d 274 (3d Cir.2011) (to satisfy duty under Fed. R.Bankr.P. 9011 attorney must make inquiry reasonable under the circumstances; Rule 9011 does not recognize a “pure heart and empty held defense”). The assertions which Colecchia made about the existence of a fee agreement were absolute, and not accompanied by any qualifiers such as “I think” or “I believe.” See Tr. at p. 17, l. 10-21, p. 58, l. 10-11, 17-21; p. 61, l. 25 through p. 62, l. 2; p. 68, l. 8-13. The Court was therefore entitled to conclude that Colecchia was speaking after having made a reasonably diligent inquiry, which he clearly had not done. The Court thus views his statements as to the existence of a fee agreement as misrepresentations, whether done intentionally or “only” with reckless indifference to the truth or falsity.
The third area of misrepresentation relates to Colecchia’s attempt to be compensated by the Debtors for time spent on the appeal. As noted above, the Debtor Husband testified at the evidentiary hearing that Colecchia represented to him that there was a “novel legal issue” involved and he would pursue an appeal without charge to the Debtors. Tr. at p. 4-6, l. 16 through p. 17, l. 6. Colecchia admitted that he informed the Debtor Husband that he “would take the case up without further fee.” Tr. at p. 62, l. 5. He also testified under oath that the Fee Application “removes most, if not all, of the money related to the appeal.” Tr. at p. 8, l. 17-18. Despite all that, the Fee Application does in fact contain extensive time entries related to the appeal, now stricken, totaling $5,215.
The existence of this billable time in the Fee Application in direct contravention of Colecchia’s agreement with the Debtors that he would not charge for it, has never been explained away by Colecchia despite his being given an opportunity to do so. The Court does not find it credible that the time was somehow inadvertently, but innocently, included in the Fee Application.
In her Objection to the Fee Application, filed on August 19, 2011 at Doc. No. 129, more than two months prior to the eviden-tiary hearing, the Trustee expressly pointed out that the Fee Application was seeking fees for substantial time related to the appeal. Id. at ¶ 18. The Trustee’s attorney also noted the inclusion of appeal-related time at the initial argument on the Fee Application, commenting that there would be sufficient funds on hand to pay Colecchia if that time and the time related to briefing in this Court were removed. Audio of 8/81/11 hearing at 10:17:25, et seq. Colecchia thus clearly had notice well before the evidentiary hearing that such time was included, yet he failed to take any action to rectify the matter until he was confronted with the Debtor Husband’s testimony at the evidentiary hearing. In fact, but for the testimony of the Debtor Husband at the evidentiary hearing, to the effect that Colecchia had agreed to undertake the appeal without charge, the Court likely would never have known of that circumstance.
In the November 21st Order, the Court advised Colecchia of the following:
Even though the appeal-related fees have been stricken, the Court finds it very troubling that they were included in the Fee Application in the first place when Colecchia admits he had promised his clients they would not be charged for an appeal. An explanation will be required, and if the contention is that, inclusion of the appeal-related fees was merely inadvertent, a further explanation will be required as to why no action was taken to remove them from the Fee *238Application prior to the evidentiary hearing.
See Doc. No. 161 at p. 6. Despite once again being given an opportunity to do so, Colecchia has provided no explanation for the inclusion of the appeal-related time in his Fee Application, or the failure to seek to remove it until after the Debtor Husband’s testimony at the evidentiary hearing. The Court can only conclude that he has no explanation and that the inclusion of the time was a deliberate misrepresentation by him intended to deceive the Court and obtain payment for time for which he knew he was not entitled.
The fourth misrepresentation by Colecc-hia concerned the reason why he took an appeal to the District Court in the matter of Weisel v. Dominion Peoples Gas Company, Adv. No. 08-2195, from this Court’s grant of summary judgment to Dominion. Colecchia testified under oath at the evi-dentiary hearing that there was a “dual objective” in taking the appeal, both to litigate an issue of legal importance under 11 U.S.C. § S66 and to get the Debtors’ natural gas turned on. Tr. at p. 19, l. 2k through p. 25, l. 6. However, the Court pointed out in the November 21st Order that the Debtor Husband had confirmed the Court’s own understanding that in fact the gas had been turned on very early in the adversary proceeding and thereafter, was never turned off. Tr. at p. k2, l. 23 through p. kk, l■ 6. That was in accordance with the agreement that had previously been reached between the Parties confirming that the gas would flow and the Debtor would pay any arrears due in installments. At the December 12th hearing on the Motion to Withdraw Colecchia had an opportunity to show how, under these circumstances, there could have been a “dual objective” as he had testified. Again he failed to do so. The Court therefore finds that Colecchia made yet another misrepresentation when he said concern about restoring the Debtors’ gas service played part in the decision to take the appeal. The Court finds that the only reason the appeal was taken was in furtherance of Colecchia’s own desire to “make new law” on what he considered to be an important legal issue, even though an appeal was senseless from his clients’ standpoint.7
Having found that Colecchia made numerous misrepresentations to this Court, the question then becomes what to do about it. That question must, of necessity, be addressed in the overall context of the Court’s prior experiences with Colecchia.
Were he a “first-time offender,” the Court would be inclined to let matters rest with the denial of the fee and a stern warning against any further misconduct. However, Colecchia is decidedly not a first-time offender. A list of cases in which Colecchia has been sanctioned for various reasons in this Court, primarily for failure to comply with Orders in some respect, includes In re Rosemarie M. Fike, Case No. 05-32446 (Doc. Nos. 48, 53) (repeated failures to attend court proceedings), In re Lee R. Eygabroad and Kristina K. Eygabroad, Case No. 06-24260 (Doe. No. 191) (repeated failures to comply with scheduling orders), In re William M. Morrison, Case No. 06-23520 (Doc. Nos. 38, *23977) (repeated failures to comply with court orders through intentional disregard or reckless indifference; finding of willful bad faith), In re Jeffrey L. Turmo and Sherri L. Turmo, Case No. 05-25581, Turmo v. LaSalle Bank, Adv. No. 06-2394 (Doc. No. 82) (repeated failures to comply with court orders constituting willful bad faith), and within the present case itself, Weisel v. Dominion Peoples Gas Company, Adv. No. 08-2195 (Doc. No. 72) (repeated failures to comply with court orders constituting willful bad faith). To be fair, most of his prior infractions have generally not involved the sort of blatant dishonesty that was evident here, although in at least one other case he was sanctioned pursuant to Fed.R.Bankr.P. 9011(c) for making a misrepresentation. See, In re Scott G. Critchfield and Tracy M. Critchfield, Case No. 03-35715, Critchfield v. Equifirst, Adv. No. 04-2517 (Doc. No. 192).8 Additionally, in In re Chester C. Grabowski and Elaine M. Grabowski, Case No. 05-35105-TPA (Doc. No. 191), the Court found that Colecchia had made false statements concerning the purported waiver of a Chapter 7 discharge, although he was not sanctioned for that representation.
In addition to the above, Colecchia also has a history with some of the other judges of this Court which is pertinent to the matter at hand. For instance, in In re Rebecca R. Black, Case No. 03-21890 (Doc. No. 119), under facts eerily similar to those here, the Hon. Jeffery A. Deller issued an order denying a motion wherein Colecchia was seeking to amend a plan with only a few months left to completion in order to add substantial attorney fees that he had known about for several years. And in the recent case of In re Lillian P. Iannini, Case No. 09-22081 (Doc. No. 144), the Hon. Judith K. Fitzgerald substantially reduced a Chapter 13 fee Application filed by Colecchia, finding, inter alia, that his efforts to keep the Debtor in possession of her residence “when she had no legal or equitable right to be there was not based on any reasonable basis in law or in fact or any principled argument to change the law.”
Balanced against all of these past transgressions of Colecchia are some positive qualities that he possesses, which the Court has observed on occasion. At times he appears to have genuine compassion for his clients and zealously advocates on their behalf. He also appears to take seriously his obligation to stay current on the law and is not reluctant to assert a novel legal position. While the Court obviously does not always agree with the arguments advanced by Colecchia, and while in no event can it countenance the presentation of a novel argument solely as a means of gratifying an attorney’s ego (as appears to have *240been the case in the Weisel v. Dominion appeal), in the right case it is refreshing to interact with an attorney who is creative and willing to look at new approaches to a problem rather than just practice “cookie-cutter” law. Colecchia appears to be intelligent and obviously has some legal ability.
Admirable as some of these traits may be, however, they cannot be viewed in a vacuum or excuse a failure to meet basic standards of the legal profession, such as honesty and candor in dealings with the Court. The Court has employed fines, remonstrations, admonitions, and other tactics over the years in an effort to get Colecchia to “see the light” but they have had no demonstrable effect. His latest misconduct is the most serious yet. The Court therefore finds that it must try a new approach.
Colecchia will be required to serve a copy of this Memorandum, Opinion and related materials on the Disciplinary Board of the Supreme Court of Pennsylvania so that body can determine whether any further sanction should be pursued.
An appropriate Order will follow.
ORDER
AND NOW, this 9th day of January, 2012, for the reasons stated in the accompanying Memorandum Opinion, it is ORDERED, ADJUDGED and DECREED that,
(1) The Final Fee Petition for Main Case 06-25304 (“Fee Application”) filed on August 4, 2011 at Doc. No. 124 by Counsel for the Debtors, David Colecchia (“Colecc-hia”) is GRANTED in part, in that Coleec-hia is allowed a reimbursement of expenses in the amount of $318.40, to be paid from funds being held by the Chapter 13 Trustee but in all other respects the Fee Application is DENIED.
(2) On or before January 19, 2012, Co-lecchia shall serve a copy of this Order, the accompanying Memorandum Opinion, the November 21, 2011 Order (Doc. No. 161) and the transcript of the November 2, 2011 evidentiary hearing (Doc. No. 158) on the Disciplinary Board of the Supreme Court of Pennsylvania, and shall file a Certificate of Service to that effect with the Court, including a copy of the cover letter accompanying the submission, within three days of doing so but no later than January 22, 2012.
. This Court’s jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 was not at issue. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).
. None of the expenses in the Fee Application appear to be related to the appeal.
. Since this case was filed the no-look fee in the Western District was increased to $3,100.
. Were this a case of a “lost” fee agreement, the result might be different. However, as noted in the November 21st Order, the Debtor Husband initially testified that there was no written fee agreement. He only relented and stated that he had perhaps been wrong about that under sharp questioning by Colecchia, who had also repeatedly asserted at the evi-dentiary hearing that such an agreement existed. The subsequent acknowledgment by Colecchia in the Motion to Withdraw that he cannot produce a fee agreement leaves him with no credibility on the issue. The Court must therefore conclude that the Debtor Husband's initial testimony was correct.
. The Court’s disposition of the Fee Application on the grounds indicated renders it unnecessary to consider in any further detail the grounds of timeliness and excessiveness/over-lawyering raised by the Chapter 13 Trustee in her Objection. The Court will note that the Trustee made good arguments in support of her position on those points.
. Although it perhaps should not be necessary to do so, the Court here briefly notes the sources of the duty imposed on counsel appearing before it to be truthful. That duty may be found in such sources as Fed. R.Bankr.P. 9011(b) (representations to the court), Pa.R. Prof. Cond. 3.3(a)(1) (lawyer shall not knowingly make a false statement of material fact to the court) and 18 U.S.C. § 157(3) (false representations in bankruptcy proceedings). See also, e.g., Mon River Towing, Inc. v. Salvage Co., 2010 WL 1337693 *33, f.n. 3 (W.D.Pa.2010).
. On the appeal the District Court sustained this Court’s grant of summary judgment for Dominion, so Colecchia lost the appeal. Nevertheless, in a further indication that the appeal was taken for his own self-aggrandizement rather than out of concern for the protection of his clients’ interests, he boasts of that loss as having established the “National Standard” for post-petition termination of utility service. See Brief in Support of Counsel Fee Application, Doc. No. 140 at p. 3. The Court does not view Counsel’s desire to make a name for himself as a justifiable reason to take an appeal when there is absolutely no client interest to be served in doing so.
. In Critchfield, Colecchia filed a motion to extend the discovery deadline and alleged that necessary depositions had not yet been completed due to the difficulty in coordinating them with the schedules of all parties' counsel, thereby clearly implying that he had made efforts to schedule the depositions. The numerous defendants filed responses in which they denied that Colecchia had ever made any attempt to schedule the depositions. At a hearing on the motion to extend, Colecchia made a statement to the Court that the scheduling of depositions was a “Herculean task” given the number of attorneys involved—again clearly implying he had actually attempted to schedule the depositions. The Court issued a rule to show cause against Colecchia directing him to explain these apparent misrepresentations. Colecc-hia retained counsel to represent him, who responded to the rule to show cause by essentially conceding that misrepresentations had been made but they were "hyperbole” and were not done with the “intent to foster or continue frivolous litigation.” The Court ultimately sanctioned Colecchia pursuant to Fed.R.Bankr.P. 9011(c), giving him the benefit of the doubt, finding that while there may have been no intent to mislead, there was no factual basis for the representations at issue. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494539/ | ORDER
HELEN E. BURRIS, Bankruptcy Judge.
This is a dispute between the official Committee of Unsecured Creditors (“Committee”) and creditor Stonehenge Opportunity Fund II, L.P. (“Stonehenge”) over credit bidding rights under 11 U.S.C. § 363(k).2 The dispute was initiated in the Limited Objection of the Official Committee of Unsecured Creditors to Motion of the Debtors for Entry of an Order (I) Approving Auction and Bidding Procedures in Connection with the Sale of Substantially All of the Debtors’ Assets, (II) Authorizing, but not Requiring, Entry into a Stalking Horse Agreement and Approving Stalking Horse Protections, (III) Approving Procedures Related to the Assumption and Assignment of Executory Contracts and Unexpired Leases, (IV) Scheduling Auction and Sale Approval Hearing an (V) Approving the Form and Manner of Sale Notice (“Objection”) (Doc. No. 226). In its objection, the Committee seeks to prohibit or limit Stonehenge’s credit bidding rights at the auction proposed in the Debtors’ Motion.3 On June 27, 2011, Stonehenge filed its Statement in Support of its Right to Credit Bid under 11 U.S.C. § 863(k) and Response to the Official Committee of Unsecured Creditors’ Limited Objection to the Debtors’ Motion to Approve Bidding Procedures and Related Relief (“Response”) (Doc. No. 245). In its response, Stonehenge contends that it has a right to credit bid under § 363(k) and that any determination of whether a credit bid should be accepted and approved by the Court is premature.4
This Court has jurisdiction pursuant to 28 U.S.C. §§ 157(b) and 1334 and Local *243Civil Rule 83.XI.01, DSC. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2) and venue is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409.
Background & Findings of Fact
These Chapter 11 cases were filed on May 17, 2011, by The Merit Group, Inc. (“Debtors”). From the first day of the bankruptcy cases, the Debtors have advised the Court and creditors of their intent to sell substantially all of their assets at a sale pursuant to § 363. On June 10, 2011, this intent resulted in the filing of Debtors’ Motion for Entry of an Order (I) Approving Auction and Bidding Procedures in Connection with the Sale of Substantially all of the Debtors’ Assets, (II) Authorizing, but not Requiring, Entry into a Stalking Horse Agreement and Approving Stalking Horse Protections, (III) Approving Procedures Related to the Assumption and Assignment of Executory Contracts and Unexpired Leases, (IV) Scheduling Auction and Sale Approval Hearing, and (V) Approving the Form and Manner of the Sale Notice (“Bidding Procedures Motion”) (Docket No. 169) along with the Motion of Debtors for Entry of an Order Approving (A) the Proposed Sale of Substantially All Assets of the Debtors Free and Clear of All Liens, Claims, Encumbrances and Other Interests and (B) Assumption, Assignment and Sale of Certain Executory Contracts and Unexpired Leases (“Sale Motion”) (Docket No. 170). A hearing on the Bidding Procedures Motion was held on June 28, 2011.
Debtor Merit Group, Inc., is a South Carolina corporation headquartered in Spartanburg. It is the parent company of five wholly-owned subsidiaries. Four of those are also South Carolina corporations. Its other subsidiary, Five Star Products, Inc., has its own wholly-owned subsidiary, Five Star Group, Inc., both of which are Delaware corporations. As of the petition date, the Debtors have 320 employees and serve collectively as one of the leading paint sundries distributors in the United States, also serving Mexico, the Caribbean Islands, Central America and South America. The Debtors’ inventory is supplied by over 750 manufacturers and the Debtors maintain distribution centers in South Carolina, Florida, Kentucky, New Jersey, New York, Texas, California and Utah. The Debtors’ customer base consists of more than 10,000 independent, regional and national paint store chains as well as large retailers, hardware stores, lumber yards, home centers, drywall yards and auto trim shop distributors. Debtors’ 2010 annual revenues were approximately $200 million and as of the filing date, Debtors anticipated that they have approximately 1,160 creditors (excluding current and former employees) and approximately $100 million in debt.
The Debtors have represented to the Court that the bankruptcy results from The Merit Group, Inc.’s, acquisition of Five Star Products, Inc., in January 2010. The acquisition resulted in the companies spending far more than anticipated for the consolidation of warehouses and the integration of the organizations. Consequently, there was substantial stress on the Debtors’ liquidity.
After significant first day Motion activity, on May 19, 2011, the Court entered an Interim Order Pursuant to 11 U.S.C. Sec. 105, 361, 862, 363, 86h, and 507(1) Approving Postr-Petition Financing, (II) Authorizing Use of Cash Collateral, (III) Grant*244ing Liens and Providing Superpriority Administrative Expense Status, (IV) Granting Adequate Protection, (V) Modifying the Automatic Stay, and (VI) Scheduling A Final Hearing (“Interim Order”) (Doc. No. 30), with financing funded by the Debtors’ pre-petition lender, Regions Bank (“Regions” or “DIP Lender”). The Committee was appointed on May 23, 2011, and its counsel became active in the case shortly thereafter.
The Final Order Pursuant to 11 U.S.C. Sections 105, 861, 362, 363, 36k, and 507(1) Approving Post-Petition Financing, (II) Authorizing Use of Cash Collateral, (III) Granting Liens and Providing Superpri-ority Administrative Expense Status, (IV) Granting Adequate Protection, and (V) Modifying the Automatic Stay (“Final Order”) (Doc. No. 163) recites the following regarding Regions’ outstanding debt, secured by a lien on substantially all of the Debtors’ assets:
Pre-Petition Obligations. As of the Petition Date, there was outstanding under the Pre-Petition Loan Facility or was otherwise owed to the Pre-Petition Lender (a) revolving credit loans in the approximate principal amount of $47,286,000 (the “Pre-Petition Revolver Loans ”), (b) term loans in the approximate principal amounts of $916,679, $794,428 and $455,113 (the “Pre-Petition Term Loans ”), (c) reimbursement obligations for any draws made upon letters of credit issued by the Pre-Petition Lender, for the account of the Debtors, in the aggregate face amount of approximately $590,000 (collectively, the “Pre-Petition LCs”), (d) interest rate hedging obligations having an aggregate exposure to the Debtors of approximately $120,000, $413,000, and $987,700, and (e) corporate credit card debt in amounts that fluctuate daily (the “Pre-Petition Credit Card Debt ” and, together with the Pre-Petition Revolver Loans, Pre-Petition Term Loans, Pre-Petition LCs, and all other obligations of any Debtor to the Pre-Petition Lender on the Petition Date, including, without limitation, all indebtedness associated with cash management system services or products and all interest, fees, legal expenses and other amounts heretofore or hereafter accruing on any of the foregoing or at any time chargeable to any of the Debtors in connection therewith, referred to as the “Pre-Petition Obligations ”).
Id. at 5, § (C)(ii). The Final Order also recognized certain other secured obligations owed to Stonehenge and The Vals-par Corporation (“Valspar”). Neither Stonehenge nor Valspar objected to any provisions of the Interim or Final Order and are parties to Intercreditor Agreements that, among other things, subordinate all of their respective liens to those of Regions.
The Final Order provided the Debtors with financing of up to $55 million from Regions. Prior to entry of that Final Order, the Committee renegotiated certain terms of Debtors’ interim financing arrangement, and the Final Order included a provision stating that the objections were overruled subject to certain concessions therein (including but not limited to): (1) the exclusion of certain assets and claims from the DIP Lender’s collateral; (2) reservation of certain rights by the Committee; (3) a carve-out for an initial plan funding commitment for unpaid professional expenses, certain fees and expenses (not to exceed $800,000 for fees and $200,000 for expenses) and United States Trustee fees5; (4) the DIP Lender agreed *245to make a loan of $500,000 to the Debtors if an Acceptable Sale6 closes, to be used by the Debtors in connection with confirmation of a Chapter 11 plan. This amount was referred to as the “Initial Plan Funding Commitment.” The Final Order expressly reserved Regions’ right to credit bid at any sale pursuant to § 363(k), and the Committee expressly reserved its right to object to any proposed sale of the Debtors’ assets, evidencing the parties’ anticipation of further negotiation.
Committee’s Bidding Procedures Objection & Stonehenge’s Response
After the June 28, 2011, hearing, the Court entered an Order approving the Bidding Procedures Motion (“Bidding Procedures Order”) (Doc. No. 270), with some modifications to alleviate most of the objections. The Bidding Procedures Order also scheduled an auction for July 20, 2011, and a final sale hearing for July 21, 2011, to determine whether any resulting bidder and sale should be approved. In the Bidding Procedures Order, with the agreement of the objecting parties and other parties in interest, the Court reserved for future determination the issue that is the subject of this Order: Whether Stonehenge may credit bid pursuant to § 363(k) at the auction over the objection of the Committee, and if so, on what terms. In their objection, the Committee asks, inter alia, that the Court require the full amount of the credit bid portion of any Stonehenge credit bid be secured by immediately available funds to be deposited in an escrow account. The Committee further requests that such posted collateral be held in an escrow account pending a determination by the Court as to the validity and enforceability of Stonehenge’s claims against the estates. (Doc. No. 226).
The approved Auction and Bidding Procedures in the Bidding Procedures Order provide the following bid requirements:
1. Only bids for the Assets that constitute “Qualified Bids” will be considered by the Debtors. A “Qualified Bid ” is an offer to purchase the Assets that: (i) identifies the Assets to be purchased and any Excluded Assets; (ii) identifies the price to be paid for the Assets to be purchased, an amount at least equal to (x) the price identified in the Stalking Horse Agreement (if applicable) plus (y) any Break-Up Fee ($500,000) and Expense Reimbursement ($750,000) plus (z) $500,000 (such amount shall be referred to as the “Initial Overbid Amount”), provided however, that all Qualified Bids, including any credit bids by Regions Bank, as pre-petition and post-petition lender to the Debtors (in such capacities, the “Lender”) or Stonehenge, shall include sufficient cash to fund payment of amounts owed to Morgan Joseph as a “Sale Transaction Fee” and the Break-Up Fee and Expense Reimbursement if the Successful Bid is not the Stalking Horse Bid ...
(Doc. No. 270, Ex. 1 at § C) (emphasis added). The Auction and Bidding Procedures also include the following provision regarding credit bids:
*246Notwithstanding anything else herein, the right of Stonehenge to credit bid at the Action shall be subject to and determined by further order of this Court, which is presently under advisement. At or before the conclusion of the Auction, Lender (or Stonehenge, subject to further order of the Court) may submit a credit bid for some or all of such Assets to the fullest extent permitted under section 368(k) of the Bankruptcy Code. The Lender shall be deemed a Qualified Bidder upon its submission of a credit bid pursuant to and in compliance with the terms hereof and may assign any credit bid at any time prior to the closing, to a third party who thereupon will be entitled to close, and any such assignment shall relieve the Lender of any continued responsibility or duties with respect to any such assigned credit bid (but not under the DIP Order). Any credit bid by Lender or Stonehenge must include at least enough cash to pay any fees owed to Morgan Joseph [Morgan Joseph Triartisan LLC, the sales broker] and pay any Break-up Fee and Expense Reimbursement. The failure of the Creditors’ Committee to object to a bid put forth by Lender shall not (a) impair the rights any interested party may have under paragraph 21 of the DIP Order; or (b) release Lender from any causes of action which can be brought on behalf of the Debtors’ estates pursuant to said paragraph 21. If Stonehenge is permitted to credit bid by subsequent order of the Court, Stonehenge’s right to credit shall not (a) prejudice or impair the rights of the Creditors’ Committee to challenge the nature, extent, priority, validity, perfection or amount of Stonehenge’s alleged liens, security interest and claims, in accordance with its existing challenge deadline; or (b) release Stonehenge from any causes of action which can be brought by or on behalf of the Debtors’ estates relating to any of the foregoing.
Id. at § F.
The sale in question is proposed as a sale of substantially all of the Debtor’s assets pursuant to § 363 free and clear of all liens, outside of a Chapter 11 plan, and without a disclosure statement on file. The Sale Motion contemplates a sale price to a Stalking Horse Bidder, MG Distribution, LLC, in the amount of $46 million plus other assumed liabilities, cure amounts, etc., with an auction on July 20 to entertain higher and better offers. The sale contemplates a transaction fee to Morgan Joseph of $750,0007 and recites secured liens on assets to be sold as follows:
LIENSIMORTGAGES/SECURITY INTEREST ENCUMBERING PROPERTY: (A) Regions Bank, in the approximate amount of $53,500,000 secured by a first priority lien on all of the Assets, including prepetition and post-petition Assets; (B) Stonehenge, in the approximate principal amount of $12,000,000, secured by a lien on all of the Assets, including pre-petition and post-petition Assets, which lien is subordinate to the lien of Regions Bank pursuant to an intercreditor and subordination agreement; (C) The Valspar *247Corporation, in the approximate amount of $350,000, secured by a lien on certain inventory, which lien is subordinate to the lien of Regions Bank and Stonehenge, pursuant to an intercreditor and subordination agreement; (D) Utah State Tax Lien filed in Salt Lake County against Strategicl d/b/a The Merit Group, Inc. on 12/6/10 for $1,223.19, which amount is disputed; (E) Utah State Tax Lien filed in Salt Lake County against Merit Paint Sundries, LLC d/b/a Lancaster on 2/7/11 for $41,732.93, which amount is disputed; (F) Spartan-burg County, South Carolina Tax Assessor, for outstanding real and personal property taxes in the amount of $59,239.84; (G) Mesquite Tax Fund payable to Mesquite, Texas for outstanding taxes in the amount of $94,554.62; and (H) Dallas County Tax Office for outstanding taxes in the amount of $31,186.02.
(Doc. No. 271 at 4). The first lien listed clearly exceeds the proposed sale price, although the Debtors are hopeful that holding an auction will increase the price.
The benefit to the bankruptcy estate from the sale of the property is set out in the Notice as follows:
PROCEEDS ESTIMATED TO BE PAID TO THE ESTATE: The Debtors and the Unsecured Creditors’ Committee will request permission to set aside an undetermined amount of funds from the Sale Proceeds for payment of administrative expense claims and unsecured creditors, including both priority and non-priority unsecured claims, to be paid before the payment of the secured creditors set forth above. Although the ultimate resolution of this request is uncertain and no agreement has yet been reached, the Debtors, the Unsecured Creditors’ Committee and the Lender could negotiate such an amount and other terms and conditions at the Auction and seek approval of such terms and conditions at the Sale Hearing. Any such resolution could involve release of claims or payment of funds by the parties involved. Without a consensual resolution, the Debtors may seek approval of the sale, from which all sale proceeds will be paid first to the secured creditors. Based on the present purchase price, absent an agreement, there will be little or no proceeds available to pay unsecured creditors out of this sale, which, if approved by the Court, involves substantially all of the Debtors’ assets.
Id.
The Auction and Bidding Procedures proposed by the Debtors and approved by the Court give considerable discretion to the Debtors, in consultation with Regions and the Committee, to alter the procedures as necessary and to determine the successful bid and back-up bid. (Doc. No. 270, Ex. 1 at § K). Further, despite approval of the Auction and Bidding Procedures—and even after the Debtors, in consultation with others, select their choice bid—the sale of the Debtors’ assets to any bidder on any terms is not approved until the Court approves the same, applying applicable law to the facts as they develop. Id. at § N.
Stonehenge argues that it has a right to credit bid at the auction under § 363(k) as provided in and subject to the limitations of Sections C and F of the approved procedures. See supra at 6-7. In addition, Stonehenge contends that any determination of whether any credit bid should be accepted and approved by the Court is premature until Stonehenge actually utilizes § 363(k) at any sale. (Doc. No. 245). The Committee argues that cause exists, prior to any auction, to deny or limit Stonehenge’s right to credit bid because, inter alia, a bona fide dispute exists as to *248whether Stonehenge’s loans should be re-characterized as equity, making a credit bid inappropriate.
In its proposed order8 submitted after the hearing, the Committee alleges the following in support of its position:
1. Prior to these bankruptcy filings on May 17, 2011 (the “Petition Date”), Merit entered into a Stock Purchase Agreement dated as of November 24, 2009 with National Patent Development Corporation (the “Stock Purchase Agreement”). Committee Ex. 1 at ¶ 2, ¶ A. Pursuant to the Stock Purchase Agreement, Merit agreed to acquire the stock of Debtor Five Star Products, Inc., and its subsidiary, Debtor Five Star Group, Inc. See Declaration of Mitch Jolley in Support of First Day Motions [Docket No. 18], at ¶ 12.
2. As part of closing on the Stock Purchase Agreement in January 2010, Regions Bank (“Regions”) restructured its loan with Merit and became the senior lender for all of the Debtors, including the Five Star entities whose stock was acquired under the Stock Purchase Agreement. See Committee Ex. 1 at 2, ¶ B. Pursuant to an Amended and Restated Loan Agreement dated as of January 15, 2010, by and between Regions and the Debtors, Regions agreed to provide the Debtors, on a revolving credit basis, up to a maximum aggregate principal amount of $65,000,000 at any one time outstanding, and a term A loan to Merit in the original principal amount of $1,000,000, a term B loan to Merit in the principal amount of $3,000,000 (collectively, the “Regions Loan”). Id. The Regions Loan is secured by a first priority security interest on the Debtors’ assets. Id.
3. Contemporaneously upon closing on the Regions Loan, the Debtors and Stonehenge entered into a Senior Subordinated Note and Option Agreement (the “Purchase Agreement”). Id. The Debtors executed certain other documents in connection with closing on the Purchase Agreement, including but not limited to (i) a Senior Subordinated Note due January 15, 2010 in the original principal amount of $7,500,000 (the “Alleged Note”) (Committee Ex. 2), (ii) an Option agreement dated January 15, 2010 (the “Option”) (Committee Ex. 3), and (iii) a Voting Agreement dated January 15, 2010 (the “Voting Agreement”) (Committee Ex. 5).
4. Section 2 of the Purchase Agreement (entitled “Purchase and Sale of the Securities”) provides that after the Debtors execute and deliver the Note and Option, Stonehenge shall purchase the Note for $7,500,000 (the face amount of the Note) and shall purchase the Option for $100.
5. Pursuant to the Option Agreement, Stonehenge was given the right to require the Debtors to pay Stonehenge an option price based, in part, on the enterprise value of the Debtors. Committee Ex. 3 at 5, § 2.1. If the Debtors failed to pay the option price when required under the Option, the Option imposed certain additional obligations on the Debtors, including the obligation to execute an option note for the outstanding amount of the option price. Id. at 8 (¶ 3.4(e)). The Option further required that, if such an option note remained outstanding, or within 12 months after the option price were paid in full, Stonehenge could be entitled to a higher option price upon a change in control or a *249sale of the Debtors’ business. See id. at 9 (§ 3.4(e)).
6. Pursuant to the Voting Agreement, for so long as Stonehenge holds the Option or is owed any amounts under the Option, Merit was required to (i) elect a Stonehenge representative to the board of directors (the “Board”); (ii) fix and maintain the number of directors on the Board at three (3); and (iii) nominate and appoint the Stonehenge director to each committee on the Board. Committee Ex. 5 at 1-2 (§ 1.1). Mr. Thomas R. Utgard was appointed as the initial representative for Stonehenge on the Board. Id. at 2 (§ 1.1(c)).
7. The Voting Agreement further required that each certificate representing shares of Merit’s capital stock bear the following legend:
THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT BY AND AMONG THE COMPANY AND STONEHENGE OPPORTUNITY FUND II, L.P. (A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL PROVISIONS OF THE VOTING AGREEMENT.
Id. at 2-3 (§ 2.2).
8. As part of closing on the Stock Purchase Agreement, Stonehenge also entered into an Intercreditor and Subordination Agreement (the “Intercreditor Agreement”) with Regions. Committee Ex. 4. Pursuant to the Intercreditor Agreement, Stonehenge subordinated to Regions’ first priority interest. See id.
9. On or about February 18, 2011, Stonehenge agreed to advance another approximately $4.5 million to Merit, and the Purchase Agreement and related documents were amended to account for this new money. See Committee Ex. 6. Like the initial $7.5 million, Stonehenge again agreed to advance this money on a subordinate basis to Regions. See id. Stonehenge acknowledged in the Stonehenge Statement, and again during argument at the hearing, that the $4.5 million was used to pay down the Regions Loan. Stonehenge Statement at ¶ 7. While sitting on the Board, Mr. Utgard executed the amended Stonehenge documents on behalf of Stonehenge as its Principal. Committee Ex. 5 at 19 (Amendment No. 1 to Senior Subordinated Note and Option Agreement).
10. On May 17, 2011 (the “Petition Date”), the Debtors filed their voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. See Docket No. 1. The Board, including Stonehenge’s des-ignee, Mr. Utgard, unanimously consented to and authorized the filing of the voluntary petitions for relief. See Docket No. 1, at 19-21.
11. On June 21, 2011, the Debtors filed their Schedules of Assets and Liabilities (the “Schedules”), which identified Stonehenge as a secured creditor on Schedule D thereto. See Docket No. 212. On June 21, 2011, the Debtors also filed their Statements of Financial Affairs (the “SOFA”). See Docket No. 213. In response to question 19(c) of the SOFA, however, the Debtors identified Stonehenge as an “investor.”
12. It was acknowledged by counsel for Stonehenge at the hearing that Mr. Ut-gard continues to serve on the Board pursuant to the terms of the Voting Agreement.
*250(Doe. No. 282 at 4-8). The Committee’s proposed order suggests that the Court should find that Stonehenge:
shall only be permitted to credit bid pursuant to Section 363(k) of the Bankruptcy Code if (a) it posts an irrevocable letter of credit in the amount of Stonehenge’s credit bid, pending a final determination by the Court as to the nature of Stonehenge’s claim; (b) it submits a Qualified Bid as part of a joint venture or other arrangement with a third party acceptable to the Debtors and the Committee; and (c) Mr. Utgard resigns from the Board prior to submitting a Qualified Bid involving Stonehenge.
Id. at 19. The Committee believes these measures are necessary “to protect the estates and to minimize the risk of Mr. Utgard using his position on the Board to influence the outcome of the auction.” Id.
Conversely, Stonehenge’s proposed order focuses the Court’s attention on, inter alia, the fact that Schedule D of each of the Debtors’ Schedules of Assets and Liabilities indicates that: (i) Stonehenge has a secured claim; (ii) the date of Stonehenge’s lien is January 15, 2010; (iii) Stonehenge’s lien is “secured by all property of the Debtor”; (iv) the amount of Stonehenge’s claim is $12,276,642.00; and (v) Stonehenge’s claim is not contingent, un-liquidated or disputed. (Doc. No. 278 at 6, ¶ 11) (citing Stonehenge, Ex. A). Stonehenge also mentions that, in their Bidding Procedures Motion, the Debtors contemplated that Stonehenge would have the right to credit bid at the Auction. Furthermore, Stonehenge points out that there are no pending objections to the claims of Stonehenge and no adversary proceedings or formal challenges have been initiated that call into question the validity, priority, or extent of the Stonehenge’s liens. Id. at 7. Stonehenge also presented documentary evidence to further support the existence of its liens. (Stonehenge, Ex. B, C).
DisCüssion and Conclusions of Law
At the time the auction is scheduled to be conducted (July 20, 2011), this case will be barely two months old, with the Committee formed for an even shorter period. In addition, the Debtors’ schedules were only filed a few weeks ago. Despite the fact that the sale as proposed contemplates a sale of the assets of the jointly administered cases together, one must consult the individual cases for the schedules of assets and liabilities of each Debtor to attempt to gather details of the sale package of substantially all of the assets of the various Debtors.9 The Bidding Procedures Motion was filed approximately twenty (20) days after the case was commenced. Furthermore, the Debtors, the Committee, Regions, Stonehenge and other parties are still in the early stages of sharing and reviewing documentation to assess the rights and positions of all parties.
The Debtors (without great opposition from other parties in interest) have demonstrated that moving with great speed is a priority in this case to increase the likelihood that asset values will be maximized and creditor distributions will result. Similar matters often move very quickly in bankruptcy proceedings to the advantage of all those involved. However, as in this *251ease, urgency can raise significant challenges for the Court and the parties involved. These challenges can be problematic when the case involves a sale of substantially all of the Debtors’ assets without the formality of a plan and a disclosure statement. In addition, there has not been sufficient time for the parties to conduct adequate discovery, to review and analyze their positions, to present then-cases to the Court, and for the Court to leisurely deliberate over, and finally determine, significant controversies essential to a just resolution of the case, preserving the bargained for and statutory rights of all parties. As observed at the hearing on the Bidding Procedures Motion, thus far, the Court has only had evidence of and time to determine that the Debtors have met their burden of showing that it is more likely than not that continuing on the proposed path will preserve the chance of some distribution to creditors, other than Regions. As the case moves forward, greater evidence, certainty, and persuasion will likely be required. Whether any sale will ultimately be approved on any terms remains to be seen, as the complete proposed sales terms and benefit to the estate are not yet known.
South Carolina courts have “formally adopt[ed] the sound business purpose test as the standard to be used in determining the appropriateness of pre-confirmation sales of substantially all of a debtor[’]s assets in a Chapter 11 case.” In re Taylor, 198 B.R. 142, 157 (Bankr.D.S.C.1996). Pursuant to the sound business judgment rule, the Court must find that: “(1) a sound business reason or emergency justifies a pre-confirmation sale; (2) the sale has been proposed in good faith; (3) adequate and reasonable notice of the sale has been provided to interested parties; and (4) the purchase price is fair and reasonable.” In re WBQ P’ship, 189 B.R. 97, 102 (Bankr.E.D.Va.1995).
Historically, bankruptcy courts do not view themselves as an alternative to a state court foreclosure process. That is to say if the DIP or Trustee is proposing a sale where the only parties to benefit are the secured creditors and the professionals, the court will generally disapprove the sale. To that end, sellers should propose a “carve out” for priority or unsecured creditors. This carve out can range from 1% (See In re Renaissance Park Hotel, LLC, Case No. 06-04893 (Bankr.D.S.C. Nov. 19, 2007)) to over 20% (See In re Pulliam Motor Company d/b/a Pulliam Ford, Case No. 07-01555-dd (Bankr.D.S.C. Apr. 17, 2007)) ... One can also reasonably anticipate that in sales where there are significant issues about employee retention, courts may be sympathetic to a reduction in the proposed carve out {See In re StarTrans Inc., Case No. 09-07468 (Bankr.D.S.C. Nov. 5, 2009)).
G. William McCarthy, Jr. & William H. Short, Jr., South Carolina Bankruptcy Law Association Annual Convention, What You Need to Know Before Your Next 363 Sale, Seminar Materials at 7-8 (May 8, 2010).10 In addition, this Court has indicated that “filing [a disclosure statement and plan] before a sale better informs all creditors of what to expect in the case, including the details of their treatment and anticipated distribution.” In re Bellwright Indus., Inc., C/A No. 08-01597-JW, slip op. at 2 (Bankr.D.S.C. June 18, 2008).
In this case, thus far, only the Bidding Procedures have been approved and there are many unknown terms of sale that must *252be established before this Court could consider approval, and before creditors will have sufficient information to decide whether to support or oppose any sale. Within this environment, and with great haste, the Court must decide whether to deny or condition Stonehenge’s right to credit bid.
In its relevant part, Bankruptcy Rule 3003(b)(1) provides that “[t]he schedule of liabilities filed pursuant to § 521(a)(1) of the Code shall constitute prima facie evidence of the validity and amount of the claims of creditors, unless they are scheduled as disputed, contingent, or unliquidated.” Fed. R. Bankr.P. 3003(b)(1). Therefore, in Chapter 11 cases, “only unscheduled creditors and those listed as disputed, contingent, or un-liquidated are required to file a proof of claim in order to participate in voting and distribution.” In re Webb Mtn, LLC, 414 B.R. 308, 356 (Bankr.E.D.Tenn.2009). Currently Stonehenge holds an allowed claim because Debtors have scheduled the claim without condition or challenge and have not objected to the claim.
Section 363(k) provides that:
At a sale under subsection (b) of this section of property that is subject to a lien that secures an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property.
The intent of § 363(k) is to permit only those with valid security interests in property to be sold to claim a setoff. See Bank of Nova Scotia v. St. Croix Hotel Corp. (In re St. Croix Hotel Corp.), 44 B.R. 277, 279 (Bankr.D.V.I.1984). Without a valid interest, the property would be transferred to a putative secured creditor using a credit bid as part of the consideration, only to have that creditor’s lien subsequently deemed invalid. Recognizing this purpose, some courts have found “cause” to deny the opportunity to credit bid when a sufficient dispute exists regarding the validity of the lien forming the basis for a credit bid. See In re Daufuskie Island Properties, LLC, 441 B.R. 60, 63 (Bankr.D.S.C.2010) (holding that a creditor was not entitled to credit bid when its mortgage was in dispute. Both the Trustee and another creditor filed adversary proceedings, which included actions to invalidate and/or subordinate the asserted mortgage and claim, challenges pursuant to §§ 547(b) and 550, and claims for equitable subordination of the claim and mortgage); see also Nat’l Bank of Comm. v. McMullan (In re McMullan), 196 B.R. 818, 835 (Bankr.W.D.Ark.1996) (involving individual debtors who filed bankruptcy after a foreclosure was filed in state court, removed the foreclosure to bankruptcy court, and formally disputed the lien on various grounds. One year later, after trial on a portion of the issues, the court found that a secured creditor’s lien was disputed, but the proceedings not yet concluded. Therefore, the court found that the secured creditor could not credit bit should there be any sale by the estate’s trustee).
“Cause” to deny or condition credit bid rights under § 363(k) is not a defined term in the Bankruptcy Code. Instead, courts decide on a case-by-case basis if “cause” exists. In re N.J. Affordable Homes Corp., No. 05-60442(DHS), 2006 WL 2128624, slip op. at *16 (Bankr.D.N.J. June 29, 2006). The Committee argues that there is cause in this case if the Court finds that there is an objective basis for either a factual or legal dispute as to the validity of the debt. See In re Octagon Roofing, 123 B.R. 583, 590 (Bankr.N.D.Ill.1991) (describing “bona fide dispute” un*253der § 863(f)(4)11 as requiring “some factual grounds to show that there is ‘an objective basis’ for the dispute” and rejecting the argument that “merely alleging a dispute is enough”); see also Taylor, 198 B.R. at 162 (“The phrase ‘bona fide dispute’ is not defined in the Bankruptcy Code. Courts applying § 363(f)(4) have developed a standard for determining whether a ‘bona fide dispute’ exists; that is whether there is an objective basis for either a factual or legal dispute as to the validity of the asserted interest. This standard does not require that the Court resolve the underlying dispute or determine the probable outcome of the dispute, but merely whether one exists.”)12
The Committee argues that the evidence in the record, together with its assertion that it may be appropriate to recharacterize Stonehenge’s claim from debt to equity, demonstrate sufficient cause. See Doc. No. 282 at 8-9 (citing In re Atlas, 986 F.2d 709, 716 (4th Cir.1993) (discussing the objective test for an involuntary bankruptcy petition, “[t]o determine bad faith [in filing an involuntary petition], a court examines whether a reasonable person would have filed the petition (objective test) as well as the motivations of the petitioner (subjective test).”); In re Taylor, 198 B.R. 142; In re Collins, 180 B.R. 447 (Bankr.E.D.Va.1995)). “Re-characterization is a theory, adopted by the overwhelming majority of courts to have considered the question, that bankruptcy courts may place the proper label of ‘claim’ (generally, debt) or ‘interest’ (equity) on an advance of funds, regardless of what the parties call it.” In re Airadigm Commc’ns, Inc., 616 F.3d 642, 653 (7th Cir.2010).13
In the Bankruptcy Code, the distinction between creditors (who hold “claims” against the estate) and equity investors (who hold “interests” in the estate) is important, for holders of claims receive much more favorable treatment than holders of interests. Equity investment brings not a right to payment, but a share of ownership in the debtor’s assets—a share that is subject to all of the debtor’s payment obligations. Thus, if a filed claim is rejected on the ground that it is not a claim at all, but an interest, then the holder of that interest is relegated to the end of the line, where any recovery is unlikely.
In re Insilco Tech., Inc., 480 F.3d 212, 217-18 (3d Cir.2007) (footnotes omitted). “In a case in which a creditor has contributed capital to a debtor in the form of a loan, but the loan has the substance and character of an equity contribution, the court may recharacterize the debt as equity regardless of whether other requirements of equitable subordination have been satisfied.” In re Kids Creek Partners, L.P., 212 B.R. 898, 931 (Bankr. N.D.Ill.1997) (citing Diasonics, Inc. v. Ingalls, 121 B.R. 626, 630 (Bankr.N.D.Fla.1990)).
*254In the Fourth Circuit, a party challenging the claim would have to convince the Court that recharacterization is appropriate by considering the eleven (11) factors set forth in In re Official Committee of Unsecured Creditors for Dornier Aviation (North America), Inc., 453 F.3d 225 (4th Cir.2006):
(1) the names given to the instruments, if any, evidencing the indebtedness; (2) the presence or absence of a fixed maturity date and schedule of payments; (3) the presence or absence of a fixed rate of interest and interest payments; (4) the source of repayments; (5) the adequacy or inadequacy of capitalization; (6) the identity of interest between the creditor and stockholder; (7) the security, if any, for the advances; (8) the corporation’s ability to obtain financing from outside lending institutions; (9) the extent to which the advances were subordinated to the claims of outside creditors; (10) the extent to which the advances were used to acquire capital assets; and (11) the presence or absence of a sinking fund to provide repayments.
Id. at 233 (citing Bayer Corp. v. Masco-Tech, Inc. (In re AutoStyle Plastics, Inc.), 269 F.3d 726, 749-50 (6th Cir.2001)).
The Committee asserts that Stonehenge’s claim is in question. Therefore, it asks that the Court at least condition Stonehenge’s right to credit bid on posting collateral in the amount of any Stonehenge credit bid, arguing that this remedy is consistent with those imposed by other Courts when the secured creditor’s claim is the subject of a dispute. Id. at 8-9 (citing Octagon Roofing, 123 B.R. at 592; In re St. Croix Hotel Corp., 44 B.R. at 278-79; In re Diebart Bancroft, Bankr.No. 92-3744, 92-3745, 1993 WL 21423 (E.D.La.1993)). The Committee argues that the opportunity to credit bid is a right that is within the discretion of the Court and is not absolute. See N.J. Affordable Homes Corp., 2006 WL 2128624, at *16; see also In re Theroux, 169 B.R. 498, 499 n. 3 (Bankr.D.R.I.1994) (cited by the Committee for the assertion that “there is no absolute entitlement to credit bid.”)
In the Theroux case:
[t]he taxing authorities argue that the Trustee and MRA [the secured creditor/purchaser] are effectively engaging in a form of collusion, and manipulating the Bankruptcy laws to deprive them of revenue to which they are entitled under the law, with little if any benefit to the Bankruptcy Estate. They suggest that the correct procedure would be for MRA to obtain relief from stay and then hold a public foreclosure sale ...
169 B.R. at 498. The court declined to approve a sale because it found that the sale benefitted only the secured creditor, the price was inadequate as a mere fraction of the fair market value, and the “questionable alliance does not appear to be based upon any specific provision of the Bankruptcy Code.” Id. at 499. Furthermore, the court stated that:
[w]e believe this is precisely the type of situation in which the Court would find that cause exists to deny MRA’s right to credit bid, i.e. there is no absolute entitlement to credit bid, as MRA suggests, and that option would not be available where the sale price is so clearly inadequate.
Id. at 499 n. 3. The Theroux case is distinguishable from the matter at hand because it presents far stronger facts that justify the court’s exercise of its discretion to limit a right to credit bid. Therefore, it is not particularly helpful when applied to the facts in the instant case.
Likewise, the cases cited in support of a limitation on credit bidding seem to involve *255a clearly defined (both factually and procedurally) existing dispute to a claim or lien. See supra at 252 (citing Daufuskie Island Properties, LLC, 441 B.R. at 63; In re McMullan, 196 B.R. at 835). In addition, many of the authorities cited to persuade the Court that a more formal dispute is not necessary involve challenges to the status of a petitioning creditor’s claim when an involuntary petition for relief was filed, see supra at 252-53 (citing In re Atlas, 986 F.2d at 716), or a determination of whether property can be sold free and clear of a lien that is in “bona fide dispute” under § 363(f)(4), see id. (citing In re Octagon Roofing, 123 B.R. at 590; Taylor, 198 B.R. at 162)—which are wholly different contexts. After a review of those cases and the evidence in this matter, the Court is not convinced that there is an adequate basis for depriving Stonehenge of an unlimited right to credit bid14 at this time. While the Committee may have suspicions and has offered allegations in its Objection, at this point, these allegations, together with the facts provided in support thereof, do not convince the Court that an adequate challenge to Stonehenge’s claim exists that rises to the level of the disputes set forth in the cited cases.
The Court notes that In re St. Croix Hotel Corp., 44 B.R. 277, was helpful in making its determination. In that case, a limitation of credit bid rights was deemed inappropriate. In the bankruptcy forum, the court found that the bank purchasing the debtor’s property by auction at a sale was required to post the purchase price of $1 million in cash rather than offset the purchase price by the amount of its secured claim pursuant to § 363(k). Id. at 279. The creditor had filed a proof of claim, which the debtor had objected to, and an adversary proceeding on the matter was pending and scheduled for a jury trial; thus, the dispute was formal and clearly defined. Id. at 278. On appeal, the district court disagreed with the bankruptcy court’s application of § 363(k) even though the claim was clearly and formally in dispute. The court pondered the “fair” result and noted that:
The Debtor did object to the bank’s proof of claim. The matter went to trial on one occasion and a jury verdict was entered. However, it was vacated on appeal and a new trial was ordered by the Third Circuit. Therefore, up to this date, whether the bank had an allowed claim has not been finally determined.
On the face of the statute, since at the time of the sale the bank did not have an “allowed claim”, it should not be entitled to an offset. But this ignores the fact that the bank continues to this day to assert a secured claim and, without the fault of the bank, that issue has not yet been resolved.
The bank promptly filed its notice of a secured claim in an amount far in excess of the bid price of one million dollars. Its claim of a lien is a public record against the hotel property.
The intent of Section 363(k) is clearly to permit only those persons with a valid security interest in property to be sold to claim a setoff. And the issue of whether such a security interest actually existed was obviously intended to be resolved prior to the date of sale of the property. In this case that determination was not made prior to sale.
If the bank were required to pay the one million dollars in cash, notwithstanding its assertion of a secured claim, that fund would be available for other expenses of the bankrupt estate. If, in the future, that claim was validated as an “allowed claim”, the bank would have *256the right to recoup the amount paid in cash, without any assurance that the full amount of the fund would still be in existence. The possibility of depletion of the million dollars by administrative and other expenses, while the issue of the bank’s claim was still pending, was conceded by counsel for the debtor at oral argument.
This would be an elemental unfairness to the bank.
Id. at 279. The district court thereafter found that the “fair” thing to do was to allow the bank to offset its claim on an intermediate basis despite the dispute, with the offset to become permanent or to be negated, depending on whether the bank’s claim was later found to be an “allowed claim.” Id. The Court notes that the dispute in that case was clearly defined and well underway; however, any limitation on credit bidding was found inappropriate.
Even if this Court were to find that a sufficient dispute exists to constitute “cause” to deny or limit credit bid rights, “fair” conditions on bidding would be difficult to determine on this record. The Court has no evidence as to the effect on Stonehenge if it is denied the right to credit bid or if that right is conditioned as requested. The Court does not view this as an evidentiary burden not met by Stonehenge because § 363(k) gives it the credit bid right unless cause is found. The Court also has no evidence or indication that the estate will suffer measurable harm if Stonehenge does credit bid without additional safeguards.15 As the Committee is the party requesting that the right be denied or conditioned “for cause,” the Court does view the lack of evidence as a weakness in the Committee’s position.
For guidance, the Court consulted Morgan Stanley Dean Witter Mortg. Capital, Inc. v. Alon USA L.P. (In re Akard St Fuels, L.P.), No. 3:01-CV-1927-D, 2001 WL 1568332, (N.D.Tex. Dec. 4, 2001), which was relied upon by the Committee to support credit bid denial; however, the Court found little help from it. In that case, the district court stated that:
The [bankruptcy] court ... concluded that the challenge to Morgan Stanley’s alleged liens constituted a bona fide dispute, that a rapid sale of estate assets was necessary to prevent a sharp decline in the value of the estate, and that a comparatively lengthy period of time would be necessary to resolve the complex dispute surrounding the challenged liens. These findings of fact, adequately supported by record evidence, formed the basis for the bankruptcy court’s legally permissible conclusion that cause existed to deny Morgan Stanley the right to credit bid. The bankruptcy court, acting within its discretion, found without clear factual error or legal error that because Morgan Stanley (who did not yet have an allowed claim) was capable of bidding cash at the auction and later recovering the cash if it proved its liens, it would not be unduly prejudiced by the sale procedure.
Id. at *3. The district court recognized that the bankruptcy court’s decision was made “by oral on-the-record findings and conclusions, and by minute order entered *257... [that] confirmed the sale over Morgan Stanley’s objections.” Id. at *1. Furthermore, the district court characterized the precedential effect of its opinion on the appeal as follows:
In this expedited appeal, where the need for a prompt ruling outweighs the need for a detailed one, the bankruptcy court’s decision is being affirmed, and the opinion decides issues that are controlled by their specific facts and thus lacks precedential value outside the context of this case, the court need not write at length.
Id. at *2. That court’s decision is helpful because it indicates that some bankruptcy court was not in error when it denied a right to credit bid based on some sort of dispute. Unfortunately, the specific facts of that case are not readily available to the Court; therefore, the Court cannot determine whether the instant case is distinguishable or similar to the facts surrounding that case.
In In re Diebart Bancroft, 1993 WL 21423, the bankruptcy court required the secured creditor to pay in cash instead of allowing an offset. Id. at *2. The case involved an issue of “confusion” over the priority of liens when property was to be sold, so the bankruptcy court conditioned a lienholder’s ability to bid its lien on the requirement that it pay cash. Id. On appeal, the district court found only that: “[t]he Bankruptcy Court’s decision to require that $270,000 be paid in cash, with a ten percent (10%) cash deposit was ... not clearly erroneous or contrary to law. [Section] 363(k) allows a lienholder to bid its lien, unless the court for cause orders otherwise.” Id. at *5. Unfortunately, the opinion gives little guidance on when a court should impose such a requirement.
The cases cited by the Committee certainly do not impose on the Court an obligation to deny or condition the credit bid right at this point in time on these facts. Further, after a careful examination of the facts of each case, comparing them to the facts of this matter, the Court is not convinced that it should exercise its discretion to do so at this time.16
The Committee argues that its ability to officially challenge Stonehenge’s position is hampered by the speed of the case. Conversely, Stonehenge argues that any § 363(k) limitation at this point is premature. Both arguments have some merit; therefore, after the auction is held and the selected bidder and final sales terms are presented to the Court for approval, the Court reserves the right to revisit the appropriateness of any credit bid and to consider any conditions or safeguards requested by the Committee or any other party that may be in the best interest of the estate.
IT IS THEREFORE, ORDERED:
That the Committee’s Objection (Doc. No. 226), which seeks to preclude or further condition Stonehenge Opportunity Fund II, L.P. from credit bidding at the July 20, 2011 auction is OVERRULED.
*258This decision does not prejudice the rights of the Committee or any other party to bring any matter to the Court’s attention or object to the Debtors’ proposed sale after the auction is held and the selected bidder and final sales terms are presented to the Court for approval. In addition, the Court reserves the right to revisit the appropriateness of any credit bid by Stonehenge and to consider any conditions or safeguards requested by the Committee or any other party that may be in the best interest of the estate at that time.
. Further reference to the Bankruptcy Code, 11 U.S.C. § 101 et seq., will be by section number only.
. Debtors’ Motion for Entry of an Order (I) Approving Auction and Bidding Procedures in Connection with the Sale of Substantially all of the Debtors’ Assets, (II) Authorizing, but not Requiring, Entry into a Stalking Horse Agreement and Approving Stalking Horse Protections, (III) Approving Procedures Related to the Assumption and Assignment of Executory Contracts and Unexpired Leases, (TV) Scheduling Auction and Sale Approval Hearing, and (V) Approving the Form and Manner of the Sale Notice (Docket No. 169).
.At the hearing, the Court took this matter under advisement and the parties submitted competing proposed orders (Doc. Nos. 278 & *243282), further clarifying and asserting their positions. However, after a review of both proposed orders, the Court prepared this order with the assistance of the parties' submissions.
. A complete statement of carve-out terms is set forth in the Final Order. See Doc. No. 163 at 26, ¶ 10.
. “Acceptable Sale” is defined in the Final Order to mean:
a sale of all or substantially all of the assets of the Debtors under section 363 of the Bankruptcy Code (i) to which DIP Lender affirmatively consents, (ii) that is made pursuant to bid procedures (if any), an asset purchase agreement, sale approval order and other documentation that is in form and substance satisfactory to DIP Lender in its sole discretion, and (iii) that actually closes.
Id. at 18, ¶ 6(b).
. Exact terms of the sale are set forth in the Notice of (A) the Proposed Sale of Substantially All Assets of Debtors Free and Clear of All Liens, Claims, Encumbrances and Other Interests; (B) Bidding Procedures, Auction, and Hearing on the Sale; (C) Deadline to Object to Sale; (D) Deadline to Object to Assumption of Executory Contracts and Unexpired Leases and Establishment of Cure Amounts and Extension of Time to Assume or Reject Certain Unexpired Leases; and (E) Hearing on Assumption of Executory Contracts and Unexpired Leases and Cure Amounts and Extension of Time to Assume or Reject Certain Unexpired Leases (Doc. No. 271).
. The Court required competing proposed orders from Stonehenge and the Committee. See Doc. Nos. 278 & 282.
. The Court acknowledges that the evidence and arguments indicate that significant amounts of information are available to and shared with potential buyers, creditors, the Committee and parties in interest outside of the Court’s docket as this case develops. The public record, however, does not contain this information and it is not found in any easily accessible and digestible form available to the Court, the average creditor, or a party in interest. A clearer form of such information is typically provided in a Chapter 11 disclosure statement.
. In the instant case, Mr. McCarthy, McCarthy Law Firm, LLC currently serves as local counsel for the Committee and Mr. Short, Haynsworth Sinkler Boyd, P.A., currently serves as local counsel for Stonehenge.
. Section 363(f) provides that "[t]he trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if ... such interest is in bona fide dispute ...” 11 U.S.C. § 363(f)(4).
. Section § 363(k) does not use the term "bona fide dispute.”
. In bankruptcy cases:
[fit is common practice ... for parties-in-interest to attack the validity and priority of the claims of creditors higher in the pecking order than they. Two of the most common attacks are 'recharacterization' (seeking to treat an asserted debt as an equity interest) and 'equitable subordination' (seeking to subordinate a claim's priority because of inequitable conduct).”
In re Insilco Tech., Inc., 480 F.3d 212, 214 (3d Cir.2007).
. Subject to the terms set forth in the approved Auction and Bidding Procedures.
. In fact, at the hearing, Committee counsel hinted that Stonehenge should have no trouble with the credit bid conditions because of its available assets. If true, this would likely mean that Stonehenge also has assets available to satisfy any subsequent liability to the estate. Also, with regard to the issue of Stonehenge’s credit bid to be relevant to this sale, bidding would have to exceed the total of Regions' claimed liens, plus costs of sale, fees, and carve out amounts, etc., which total amount is far in excess of the $46 million price currently proposed.
. The Committee also asserted that the Court should impose conditions to "lessen the risk of Mr. Utgard using his position on the Board, and the confidential and privileged information he has learned, to influence other potential bidders to team up with Stonehenge.’’ (Doc. No. 282 at 19). The Committee also urges that:
in the event Stonehenge does credit bid, Mr. Utgard also must resign from the Board prior to submitting any such qualifying bid. This condition will eliminate the inherent conflict of interest that will arise if Stonehenge credit bids and Mr. Utgard is voting as a member of the Debtors’ Board as to the highest and best proposed contract at the auction.
Id. However, any such facts, should they materialize, can be addressed at the sale hearing if appropriate. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488405/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
STATE OF LOUISIANA NO. 2022 KW 1060
VERSUS
WILLIAM WAYNE LEE, JR NOVEMBER 21, 2022
In Re: State of Louisiana, applying for supervisory writs,
22nd Judicial District Court, Parish of St. Tammany,
No. 370993.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
acd)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8488404/ | STATE OF LOUISIANA
COURT OF APPEAL, FIRST CIRCUIT
STATE OF LOUISIANA IN THE NO. 2022 CW 1089
INTEREST OF J.L., JR.
NOVEMBER 21, 2022
In Re: J.C.-M., applying for supervisory writs, 22nd Judicial
District Court, Parish of St. Tammany, No. 0534-2020.
BEFORE : THERIOT, CHUTZ, AND HESTER, JJ.
WRIT DENIED IN PART, WRIT NOT CONSIDERED IN PART. This
writ application is denied insofar as it seeks review of the
trial court’s April 1, 2022 judgment terminating the parental
rights of relator, J.C.-M. Rule 5-3 of the Uniform Rules of
Louisiana Courts of Appeal provides that when an application for
writs is sought in cases such as this, the trial court shall f1ix
a reasonable time within which the application shall be filed,
not to exceed fifteen days from the date of the ruling at issue.
The judgment was signed on April 1, 2022, notice was mailed on
April 6, 2022, the notice of intent was filed on September Il,
2022, and the writ application was filed on October 7, 2022.
Accordingly, the writ application is untimely as to this
judgment.
Insofar as this writ application seeks review of the trial
court’s June 22, 2022 ruling, this writ application fails to
comply with Uniform Rules of Louisiana Courts of Appeal, Rule 4-
5(C) (6), (7), (8), (9), and (10). Relator, J.C.-M., failed to
include a copy of the signed judgment or ruling complained of, a
copy of the judge’s reasons for judgment (if written), a copy of
the pleadings on which the ruling was founded, a copy of the
opposition and attachments, if any, and the pertinent court
minutes. In addition, this court requires the transcript of the
June 22, 2022 hearing and a copy of the notice of judgment.
Supplementation of this writ application and/or an
application for rehearing will not be considered. Uniform Rules
of Louisiana Courts of Appeal, Rules 2-18.7 & 4-9.
In the event relator seeks to file a new application with
this court, it must contain all pertinent documentation, the
missing items noted above, documentation to show that the
original writ application was timely filed, and must comply with
Uniform Rules of Louisiana Courts of Appeal, Rule 2-12.2. Any
new application must be filed on or before December 21, 2022,
and must contain a copy of this ruling.
MRT
WRC
CHH
COURT OF APPEAL, FIRST CIRCUIT
AS)
DEPUTY CLERK OF COURT
FOR THE COURT | 01-04-2023 | 11-22-2022 |
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